Petroleos Mexicanos Refinacion v. M/T King A, No. 07-3402; Third Circuit; opinion by Aldisert, U.S.C.J.; dissent by Fuentes, U.S.C.J.; decided January 27, 2009. Before Judges Sloviter, Fuentes and Aldisert. On appeal from the District of New Jersey. [Sat below: Judge Cavanaugh.] DDS No. 54-8-2617 [37 pp.]

Petroleos Mexicanos Refinacion (Pemex) chartered a ship, the M/T Tbilisi (now renamed M/T King A ), from Tbilisi Shipping Co. Ltd. to carry diesel oil and unleaded gasoline. After the two cargoes were cross-contaminated during the voyage, Pemex withheld $530,320 of charter hire as security for its anticipated claim for damages.

Four months later, Tbilisi demanded arbitration to recover the withheld hire. Its insurer issued a letter of undertaking (first LOU) which said that in consideration of Pemex’s payment of the withheld fee, it would guarantee payment of damages up to the amount of the withheld fee. Pemex agreed to refrain from arresting the vessel, except to the extent that its claim exceeded the amount secured by the first LOU. The first LOU also specified that it was provided without prejudice to any rights or defenses that the M/T Tbilisi and/or Tbilisi may have “under applicable law.”

During the arbitration, which resulted in a final award against Tbilisi for $950,413.18, Pemex filed a complaint in the District Court naming the M/T King A , which had been sold to King David Shipping Company, as an in rem defendant. The court issued a warrant of arrest for the vessel.

King David sought to vacate the warrant of arrest pursuant to Supplemental Rule E(4)(f) and to dismiss Pemex’s complaint. The District Court held that a valid maritime lien existed, the warrant of arrest was properly issued, and the complaint was not barred by the one-year statute of limitations for cargo damage claims in the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. § 30701. King David appeals.

Held: Construing the language in the first LOU permitting later arrest of the vessel with the reservation-of-rights clause, the first LOU permitted later arrest of the vessel subject to the one-year statute of limitations in the COGSA. As Pemex did not file its in rem complaint within the limitations period, the one-year statute of limitations extinguished the maritime lien on the vessel and the District Court therefore lacked in rem jurisdiction to issue the warrant of arrest. The in rem proceeding did not relate back to the timely filed in personam arbitration proceeding.

The court says that any action in rem to enforce a maritime lien on a vessel must be premised on a valid maritime lien. Here, the breach of the charter agreement through the contamination of the cargo gave rise to a maritime lien.

When a maritime lien exists, it is proper for the district court to issue a warrant of arrest for the vessel. King David argues that the expiration of the COGSA limitation period extinguished any lien that Pemex had on the vessel and, therefore, the court lacked the admiralty jurisdiction to issue the warrant of arrest.

The courts says that, generally, once a LOU is issued, it becomes a complete substitute for the res and the maritime lien transfers from the vessel to the LOU and the ship cannot again be libeled in rem for the same claim. If the security provided by the LOU is insufficient to satisfy a judgment, the court ordinarily may authorize the rearrest of the vessel only if the amount of the original security was obtained through fraud or mistake.

Here, there was no fraud or mistake. However, the first LOU contained an unusual contractual reservation of the right to later arrest the vessel if Pemex’s claim exceeded the amount secured by it. Pemex, however, failed to take such action until nine years had passed. King David contends that Pemex’s claim for additional security was untimely.

The court says resolution of this action depends on the interaction of the language permitting later arrest of the vessel and the reservation-of-rights clause in paragraph six of the first IOU that says it was provided without prejudice to any rights or defenses “under applicable law.” A decision turns on whether the terms of COGSA, including its one-year statute of limitations, come within this “applicable law,” irrespective of the right to later arrest the vessel.

The Third Circuit notes that in determining that Pemex’s complaint was not barred by the statute of limitations, the District Court relied on Thyssen Inc. v. Calypso Shipping Corp., S.A., A.M. , 310 F.3d 102 (2d Cir. 2002). The Third Circuit says that although it agrees with Thyseen ‘s characterization of in rem and in personam claims as often closely linked in the maritime context, its relation-back reasoning is inapplicable here since there is no case law to support the proposition that the mere fact of interrelation provides a basis for relation back or a tolling of the statute of limitations.

Rather, the court agrees with King David that the arbitration and in rem proceeding are separate actions and a close interrelation does not provide a basis for relation back. It says the subsequent in rem proceeding permitted by the first LOU is distinct from the arbitration. The facts underlying both actions are the same, but the parties are different: Pemex and the vessel in the in rem action and Pemex and Tbilisi in the arbitration.

Thyssen illustrates that maritime cases almost always involve both in rem and in personam claims and that in relation to the Federal Arbitration Act, they are particularly closely linked, but it did not sanction relation back of these distinct, albeit related, actions.

The court concludes that COGSA qualifies as “applicable law” because it is undisputed that COGSA was incorporated into the parties’ charter agreement. Thus, reading paragraph six in conjunction with the arrest provision, the first LOU is construed as permitting later arrest of the vessel subject to the one-year statute of limitations. Since Pemex did not file its in rem complaint until nine years had passed, the COGSA one-year statute of limitations extinguished the maritime lien on the vessel and the District Court therefore lacked in rem jurisdiction to issue the warrant of arrest.

The dissenting judge says Pemex’s seizure of the ship was appropriate because the in rem and in personam proceedings were essentially the same claim and the former “relates back” to the latter. Further, the seizure was justified by the specific contract provision in the LOU that reserved Pemex’s right to seize the ship at a later date in the event the amount of its claim exceeded $530,320.

— By Judith Nallin

For appellant — Jeremy J.O. Harwood, of the N.Y. bar (Blank Rome). For appellee — Michael Cohen, Terry L. Stoltz and Kevin J.B. O’Malley, of the N.Y. bar (Nicoletti, Hornig & Sweeney) and Andrew J. Goldstein (Goldstein Isaacson).