Zim Israel Navigation Co. v. 3-D Imports, Inc.

Citations: 29 F. Supp. 2d 186; 1998 WL 858715Docket: 87 Civ. 8359 (RJW)

Court: District Court, S.D. New York; December 23, 1998; Federal District Court

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Defendant Hatzlachh Supply, Inc. moved for summary judgment, which was granted by the court. Zim Israel Navigation Co. Ltd. (Zim) owned the container ship Zim Montreal, which suffered a fire on November 19, 1981, damaging cargo, including that of Hatzlachh. The bills of lading included a General Average clause, stipulating that in the event of loss or damage, cargo owners must contribute to the General Average Fund. Following the fire, a General Average loss was declared, and Zim hired Richards Hogg, Ltd. to calculate the contributions and distributions related to the Fund. The Adjustment indicated that Hatzlachh owed $137,815.82 for saved cargo but would receive $880,438.91 for lost goods, netting a payment of $742,623.09.

Zim acted as trustee for the Fund, collecting contributions from cargo owners. However, many owners refused to pay, prompting Zim to sue for unpaid contributions, naming Hatzlachh as a defendant. Hatzlachh counterclaimed for its portion of the General Average Fund and for damages under the Carriage of Goods by Sea Act (Cogsa). While Hatzlachh's General Average claim was timely, its Cogsa claim was deemed time-barred by the court. Zim settled with other cargo owners, who paid reduced contributions to the Fund and received full compensation for their losses, while Hatzlachh remained the only defendant not to settle.

Hatzlachh seeks summary judgment, claiming entitlement to the full amount of its claim against Zim, as Zim paid other cargo owners 100% of their claims. Zim counters that it only collected about 70% of the Fund and thus is obligated to pay Hatzlachh only 70% of its share. Summary judgment is warranted when there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law, as established by Fed. R. Civ. P. 56(c). The court must assess whether evidence necessitates a trial or if one party clearly prevails, viewing evidence favorably to the non-moving party. Hatzlachh argues for summary judgment based on General Average rules, a doctrine that redistributes losses among cargo owners based on their respective shares when sacrifices are made for collective safety during maritime ventures. This principle, recognized internationally and governed primarily by the York-Antwerp Rules, mandates that losses be shared proportionately among cargo owners when a General Average event is declared. The York-Antwerp Rules, incorporated into Zim's bills of lading, are binding in this case, obligating the shipowner to ensure that all cargo owners receive their fair share from the General Average Fund, despite the involvement of professional adjusters in the accounting process.

A cargo owner who has not received its entitlement from the General Average Fund possesses a right in personam against the vessel's owner. The parties acknowledge that a General Average event occurred and agree on the calculations in the Adjustment. The dispute revolves around the shipowner's liability for failing to equitably apportion losses among all cargo owners. Hatzlachh contends it should receive the same percentage of its loss as other cargo owners, asserting entitlement to 100% since Zim compensated them fully. However, Zim only collected 70% of what Hatzlachh was owed, arguing that Hatzlachh should receive only 70% of its proportionate share due to not recovering the full amount from the Fund.

General Average is an equitable principle requiring that all parties share losses equally, though it does not mandate full compensation for every loss. Zim is liable for the amount owed to cargo owners if it fails to collect sufficient contributions to meet their General Average claims, irrespective of negligence concerning the incident. Zim compromised the General Average Fund to settle litigation against it, distributing full payments to other cargo owners while demanding only partial contributions from them, ultimately leading to an insufficient Fund to cover Hatzlachh's claim. Consequently, Zim is liable to Hatzlachh for the total proportionate share stipulated in the Adjustment.

Additionally, Hatzlachh alleges Zim breached its fiduciary duties by paying other beneficiaries in full while offering Hatzlachh only 70%. The Court concurs, affirming Zim's role as trustee for the General Average Fund, responsible for its collection and disbursement.

Defendant Hatzlachh submitted a Statement of Uncontested Facts on June 17, 1998, which was met with the Plaintiff's Opposition on July 27, 1998. The legal principles established in Scott on Trusts indicate that when an individual collects funds for another, they are considered a trustee and not a debtor, thereby imposing a fiduciary duty. Zim, as the trustee for the Fund, owed a fiduciary duty to Hatzlachh and other cargo owners. Despite acknowledging this duty, Zim argued that it did not breach it because Hatzlachh's Cogsa claim was time-barred, suggesting this exempted them from treating Hatzlachh equally with other claimants. 

However, the court clarified that the timeliness of Hatzlachh's Cogsa claim does not affect its entitlement to a proportionate share of the General Average Fund. Both claims arise under different legal doctrines, but they share the same context regarding General Average claims. The court determined that Hatzlachh suffered a loss due to a General Average event, entitling it to payment under the Adjustment, akin to the other cargo owners. Zim's failure to offer Hatzlachh 100% of its claim constituted a breach of its fiduciary duty to act impartially.

Additionally, Zim violated its duty of undivided loyalty by engaging in self-dealing during settlement negotiations with other cargo claimants, offering them 100% of their claims while only offering Hatzlachh 70%, based on the timing of their Cogsa claims. The court emphasized that fiduciaries must avoid conflicts of interest, confirming that Zim's actions did not align with its fiduciary obligations.

Zim settled with the owners for the full amount of their General Average claims but only required them to pay 50-75% of their contribution to avoid litigation related to Cogsa claims against Zim. This resulted in Zim using trust funds to meet its personal obligations, leaving insufficient funds in the General Average Fund to fully compensate Hatzlachh. Consequently, Zim prioritized its interests over those of Hatzlachh, breaching its duty of loyalty and impartiality, and is liable to Hatzlachh for its full share as per the Adjustment.

Regarding prejudgment interest, federal courts in admiralty have discretion to award such interest, typically in the absence of exceptional circumstances. Hatzlachh's claim for contribution was deemed timely, as it was filed shortly after the final adjustment was released in 1987. There was no evidence of unreasonable delay in Hatzlachh's actions, as prior refusals of settlement offers by Zim do not constitute undue delay. Therefore, Hatzlachh is entitled to prejudgment interest.

The interest rate awarded should reflect short-term risk-free obligations. Hatzlachh is entitled to simple interest at 9.25% from November 26, 1987, to December 1990, and for the period thereafter until judgment, interest will be calculated based on the average rate of six-month U.S. Treasury Bills, compounded annually. This compensation is intended to restore Hatzlachh to the position it would have been in had Zim not withheld its share of the General Average Fund.

Hatzlachh requests attorneys' fees, arguing for their award based on the bad faith of the opposing party, Zim. The court highlights that attorneys' fees are typically granted only when the opponent has acted in bad faith or for oppressive reasons, as established in Hall v. Cole and Dow Chem. Pac. Ltd. v. Rascator Maritime S.A. However, the court finds no evidence that Zim acted in bad faith or harassed Hatzlachh during litigation. Although Hatzlachh was a net payee under the Adjustment, there is no indication that Zim's lawsuit was intended to cause harm or delay. Therefore, the request for attorneys' fees is denied.

The court grants Zim's motion for summary judgment, awarding Hatzlachh $811,531.00 plus interest and costs, with judgment to be settled on notice. The court addresses evidentiary issues regarding settlement offers, ruling that while offers are generally inadmissible to prove liability, they can be considered for other purposes. Zim's claim that Hatzlachh's evidence regarding settlements with other cargo owners is inadmissible is rejected; the evidence is deemed admissible to show Zim's inconsistent settlement offers.

Lastly, the court clarifies that Hatzlachh should receive the full claim under the Adjustment and only pay 50% of its contribution to the General Average Fund, in line with the treatment of other cargo owners who also suffered losses, thus preventing disproportionate financial burden on Hatzlachh.

Under the Carriage of Goods by Sea Act (Cogsa), cargo owners can recover damages from a shipowner if the damage results from the shipowner's negligence or failure to ensure the vessel's seaworthiness. Unlike General Average claims, cargo owners who prove liability can recover directly from the shipowner, who cannot seek contribution for its own losses in General Average situations. If the cargo owners had successfully established Zim's negligence, Zim would have been liable for the full damages without recourse to the General Average Fund.

Zim acknowledged it did not settle with Hatzlachh on the same terms as other cargo owners due to Hatzlachh's Cogsa claim being time-barred. Zim contended that it offered Hatzlachh the same settlement as other owners, agreeing to pay 100% of Hatzlachh's claim while only accepting 50% of Hatzlachh's contribution to the General Average Fund. However, Zim's offer was limited to paying interest only up to 1990, not through 1994, which the court found indicated that the settlement was not equivalent to those offered to other cargo owners.

Prior to November 26, 1987, the applicable interest rate per the York-Antwerp Rules was 7%, which is included in the Adjustment. The calculation of Hatzlachh's financial figures involved determining the difference between its proportionate share under the Adjustment ($880,438.91) and 50% of its contribution to the General Average Fund ($137,815.82), with further interest calculations outlined in Section III.