Oil Shipping (Bunkering) B v. Baytur Trading S.A. The Royal Bank of Scotland Plc Tramp Oil Corporation Pennsylvania Ship Supply Co., Inc. International Marine Fuels of San Francisco, Inc. Tramp Oil and Marine Limited Bridge Oil Limited Moran Towing of Pennsylvania, Inc. v. Sonmez Denizcilik Ve Ticaret A.S. M/v Ziya S, Her Engines, Boilers, Tackle, Etc. Northwest Shipping Corporation K. Dan Dalkiran, International Marine Fuels of San Francisco, Inc.

Citation: 10 F.3d 176Docket: 93-1342

Court: Court of Appeals for the Third Circuit; November 29, 1993; Federal Appellate Court

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International Marine Fuels of San Francisco, Inc. (IMF) appealed a decision from the U.S. District Court for the Eastern District of Pennsylvania regarding lien claims on funds from the judicial sale of the vessel M/V ZIYA S. The district court ruled that IMF, which supplied fuel after the vessel was arrested, did not possess a superior lien to that of The Royal Bank of Scotland plc (the Bank) for the fuel's value.

The court had subject matter jurisdiction under 28 U.S.C.A. § 1333, and appellate jurisdiction under § 1291. IMF argued that the vessel's arrest was "nominal," allowing it to incur obligations, and claimed it had no duty to investigate the vessel's status under the Federal Maritime Lien Act. IMF also contended that the fuel was an in custodia legis expense beneficial to the vessel's creditors, asserting a right to priority in the proceeds from a separate sale of the fuel. Furthermore, IMF claimed the Bank's lien did not cover the bunkers.

The appellate court rejected IMF's arguments, affirming the district court's ruling that the arrest of the ZIYA S effectively placed it in custodia legis, which negated any private party's ability to bind the vessel. It concluded that the presumption of authority to bind the vessel under the Federal Maritime Lien Act was inapplicable once the vessel was in court custody. The court also upheld the district court's discretion in denying IMF's priority claim and confirmed that the Bank's lien extended to the fuel supplied by IMF, thus affirming the lower court's order.

On March 27, 1992, IMF had agreed to provide fuel bunkers to the ZIYA S, with delivery scheduled for March 30, and purchased the fuel necessary for this delivery at a total cost of $200,781.31.

On March 27, 1992, Oil Shipping (Bunkering) B.V. filed a claim against the ZIYA S and its owners in the U.S. District Court for the Eastern District of Pennsylvania for unpaid bunkering services. Two days later, the U.S. Marshal arrested the ZIYA S at Pier 122 in Philadelphia, serving the master with a complaint and allowing the vessel to off-load cargo under court jurisdiction. On March 30, a barge delivered fuel to the ZIYA S, with the master failing to inform the crew of the vessel's arrest. The barge delivered over 2,300 metric tons of fuel, while the ZIYA S already held fuel onboard. IMF, the supplier, was unaware of the arrest until April 29, 1992.

On April 2, 1992, the Bank, holding a preferred mortgage on the ZIYA S, intervened in the case and executed its own arrest warrant. The Bank had previously provided an $11 million loan secured by the mortgage. On May 12, 1992, the ZIYA S was sold at auction for $1,820,000, excluding the fuel supplied by IMF, which was sold separately for $130,000. The district court consolidated the proceeds from both sales into one fund.

Most claims to this fund were settled by stipulation, except for those of IMF, the Bank, and one other entity. The district court awarded the remaining funds to the Bank, leading to IMF filing a timely appeal. Legal principles dictate that once a vessel is arrested, its owners and master cannot create new liens, as the vessel is under judicial custody and any services rendered without court permission are at the risk of the provider.

Courts have recognized exceptions to the general rule regarding vessel arrests. If a vessel's arrest is deemed "nominal" and it continues normal business operations, suppliers of materials to the vessel may retain their liens despite the arrest. For a vessel to escape liens while in custodia legis, the marshal's possession must be actual or constructive, not merely nominal, as established in Taylor v. Carryl. The case of THE YOUNG AMERICA illustrates this, where the vessel operated freely for five months after a nominal arrest without proper oversight, leading the court to conclude that the plaintiff effectively waived the benefits of custody protection against other liens. This principle is reinforced by THE NISSEQOGUE, where a lack of monitoring or notice during an arrest allowed a post-arrest repairer to secure a lien. However, mere innocent supply does not guarantee lien status, as demonstrated in THE COMMACK, where the court ruled against a supplier due to the presence of a custodian on board who had not disclosed the arrest. In the specific case of the ZIYA S, the arrest was deemed more than nominal due to proper notice posted by the marshal, emphasizing the importance of notice in admiralty proceedings, where all parties must be informed of the actions affecting their rights.

Notice of arrest is constructively given to all parties with an interest in a vessel, as established by maritime law. The historical practice of posting arrest notices on ships, traditionally on the mast and currently on the wheelhouse, ensures that any person who could claim title to the vessel is aware of its seizure. In the case of the ZIYA S, the district court took comprehensive actions to secure the vessel, including appointing a caretaker and restricting its movement, confirming that the Marshal's arrest was legitimate. Consequently, when IMF supplied fuel to the ZIYA S, no maritime lien was created in its favor.

The excerpt distinguishes this case from The YOUNG AMERICA, where concerns arose regarding potential manipulation by plaintiffs allowing a ship to incur liabilities post-arrest. In contrast, no such risks are present here. The court notes that the actions of the vessel's master do not create a lien for suppliers if those actions are not linked to the arresting party's conduct.

IMF argued that amendments to the Federal Maritime Lien Act in 1971 relieved suppliers of the duty to verify a ship's status regarding outstanding arrests. However, the court disagreed, clarifying that the amendments aimed to protect suppliers from lien preclusion clauses rather than eliminate the requirement for due diligence in confirming the authority of those requesting supplies. The legislative history emphasizes the amendments' intent to safeguard material suppliers from unfair practices associated with "no lien" provisions.

In Gulf Oil Trading Co. v. M/V CARIBE MAR, the Fifth Circuit addressed the implications of the 1971 amendments to the lien act concerning maritime liens and lien preclusion clauses. The case involved a charter agreement that prohibited the vessel operator from incurring a lien. Gulf Oil entered into a bunker agreement allowing it to retain a lien for bunkers supplied. During the first delivery, the ship's master informed the barge master of the lien preclusion clause but did not notify Gulf Oil. For the second delivery, Gulf Oil received notice of the clause before proceeding. The district court ruled that a valid maritime lien existed for the first delivery but not for the second due to Gulf Oil's knowledge of the clause.

On appeal, the Fifth Circuit upheld this decision, clarifying that the 1971 amendments did not eliminate the effect of lien preclusion clauses. The court noted that the amendments relieved suppliers of the duty to confirm an operator's authority to bind the vessel but did not establish a presumption of such authority. Particularly, if a supplier has actual notice of a lien preclusion clause, no lien for necessaries can attach. The court emphasized that in cases of an arrested vessel, no party can bind the vessel without court permission, contrasting this with vessels under charter where authority to bind may still exist. The amendments reallocated the inquiry burden, allowing suppliers to assume they could obtain a lien without verifying authority unless the vessel was arrested, in which case court permission is necessary. Thus, Congress intended that the ability to create a lien would cease with the arrest of a vessel, terminating any authority of owners or operators.

The IMF's approach would empower masters and shipowners to create liens for suppliers, despite all private parties being deprived of such power, potentially undermining the purpose of vessel arrests aimed at freezing lien positions until court determinations. No authority supports IMF's broad interpretation of the 1971 amendments to the lien act, which the court deems inappropriate. Once a vessel is in custody, only the arresting court can bind the vessel and grant supply liens. Suppliers providing goods to an arrested vessel without court permission do so at their own risk. IMF also argues that the district court erred in not granting priority status for the value of bunkers delivered as in custodia legis expenses. However, such priority arises from the court's equitable powers, not from maritime liens. Payments for goods or services provided under court authority should be prioritized to benefit all interested parties in the fund. To qualify as in custodia legis expenses, costs must be incurred with court authorization for the common benefit of those interested in the fund. Although IMF suggests the custodian's authorization implies court approval, it fails to prove that the delivered bunkers served the common interest of all parties related to the res or its proceeds.

Expenses incurred in custodia legis receive administrative priority due to their necessity in preserving the res, which benefits all creditors. Without such priority, suppliers would be reluctant to provide essential goods and services during judicial proceedings. The district court determined that the fuel supplied by IMF was not essential for the preservation of the ZIYA S, as it already had sufficient fuel for its limited operations allowed by the court. The court referenced prior cases to illustrate that only expenses directly necessary for preservation or enhancing creditors' funds qualify for priority. The mere fact that IMF's fuel later increased the fund available to lien creditors does not justify granting it administrative priority, as not all post-arrest expenses can be classified as in custodia legis. The court emphasized that such classification requires a demonstration that the supplied goods preserved the res, not merely that they added value. The district court did not err in denying IMF's claim for priority for the fuel provided, as it was neither necessary for preservation nor court-ordered. Additionally, IMF's argument that the Bank's lien does not extend to the bunkers supplied, arguing the lien applies only to those ordered by the vessel's owner, was also rejected by the court.

The mortgage on the "Ship" includes all interests, engines, fuel, and appurtenances, without limitation to ownership or acquisition. IMF interprets the mortgage as attaching only to fuel owned or acquired by Northwest, but this interpretation is rejected. The mortgage extends to all fuel on board the ZIYA S at the time of the Bank's arrest, encompassing fuel that is integral to the vessel's operation. The arrest of a ship encompasses not just the hull and equipment but also supplies on board, which become part of the res and cannot be removed post-delivery. The court emphasizes that ownership by the charterer does not prevent maritime liens from attaching. IMF’s claim based on a separate sale of its bunkers is deemed insufficient, as the sale occurred due to the timing of IMF's writ of attachment rather than any acknowledgment of distinct interests. The Bank and other parties allowed the auction to proceed while preserving rights to the proceeds, adhering to maritime principles that prevent the removal of goods from a seized vessel. The district court's ruling is upheld.

The court affirms the district court's decision granting the Bank priority over the funds from the sale of the ZIYA S and denies the priority claimed by IMF. A separate appeal concerning the same vessel arrest will be addressed in another opinion. Under maritime law, a supplier providing "necessaries" ordered by the vessel's owner can obtain a maritime lien against the ship (46 U.S.C.A. Secs. 31341-31342). The court generally defers to district court decisions regarding claims as administrative expenses unless they are arbitrary or unreasonable. In this case, there was insufficient evidence to support IMF's claims, as the district court neither requested nor approved the fuel delivery, and the temporary custodian lacked authority. IMF's delivery did not establish a priority claim, as mere acquiescence does not suffice to create such a priority, as illustrated in case law.