Cornish Shipping Ltd. v. International Nederlanden Bank N.V. (53 F.3d 499, 1995)

JON O. NEWMAN, Chief-Judge.

This appeal in an admiralty case presents a novel question concerning the scope of a shipowner’s maritime hen on subfreights. At issue is whether the hen attaches to funds that were paid to a charterer after the owner gave notice of the hen to the payor. The question arises on an appeal by plaintiff Cornish Shipping Ltd. (“Cornish”) and plaintiff-intervenor Pohang Iron & Steel Co., Ltd. (“POSCO”) from the April 20, 1994, judgment of the District Court for the Southern District of New York (Kimba M. Wood, Judge), which granted the summary judgment motion of garnishee-defendant International Nederlanden Bank, N.V. (“INB”) in an action to recover funds paid to INB in its capacity as agent and assignee of a charterer of a ship owned by Cornish. Because we conclude that a shipowner’s lien on sub-freights does not attach to funds that have been paid to the charterer or its agent, we affirm.

Background

Parties and contractual provisions. This case arose out of an ill-starred voyage of the cargo vessel M/V Filoktitis from United States Gulf ports to Korea. In the Fall of 1991, defendant Ferromet Resources, Inc. (“Ferromet”) contracted to sell and deliver American steel scrap to plaintiff-intervenor POSCO, C.I.F. Korea. POSCO was to pay Ferromet for the scrap, its transport, and insurance under a letter of credit issued on POSCO’s behalf by Shinhan Bank (“Shin-han”). Ferromet could draw down the Shin-han letter of credit upon presentation of specified documents, including bills of lading and original invoices for the scrap. The sales invoice submitted by Ferromet to POS-CO indicated that approximately $1.6 million of the total price for the steel scrap was attributable to the cost of transport (“freight value”).

On its end, Ferromet received financing for this transaction from defendant-garnishee INB, with which it had an established credit relationship. INB advanced $3.3 million to cover the acquisition of the steel scrap and the cost of charter hire. As part of this financing transaction, Ferromet assigned to INB all moneys to become due under its October 10 contract with POSCO and further agreed that INB could apply moneys that it received from POSCO to the repayment of any of Ferromet’s outstanding obligations to INB. A financing statement covering this assignment was filed in Florida at the end of 1991. This security arrangement supplemented security interests that INB had previously acquired in Ferromet’s property, in-eluding its current and future accounts receivable.

To transport the shipment of steel scrap to Korea, Ferromet time-chartered the cargo vessel MTV Filoktitis from its owner, plaintiff Cornish. Under the terms of the charter party, Ferromet agreed to pay freight to Cornish at the rate of $13,750 per day, and Cornish reserved a lien on all subfreights earned by the Filoktitis for amounts due under the charter. In addition to the steel scrap, Ferromet planned to use the Filoktitis to transport a cargo of stainless steel, which it was selling to POSCO under a separate contract and separate financing arrangements.

Voyage of the Filoktitis. In January 1992, the cargoes of stainless steel and steel scrap were loaded onto the Filoktitis at United States Gulf ports, and bills of lading were issued to Ferromet. By the end of the month, Ferromet had delivered to INB the documents required to draw down the Shin-han letter of credit in payment for the scrap shipment. Acting as Ferromet’s collecting bank, INB notified Shinhan on February 3 of certain discrepancies in these documents, which would have to be waived by POSCO before the letter of credit could be drawn down.

These discussions between INB and Shin-han were immediately overtaken by events triggered by the impending insolvency of Ferromet. On February 3, the same day that INB began discussions with Shinhan, Cornish notified POSCO that Ferromet had defaulted on its payment of freight and that Cornish was exercising its lien on any sub-freights due from POSCO to Ferromet. Cornish’s notice of hen also informed POSCO that the Filoktitis had been detained in Panama because Ferromet had not paid Canal dues and because another creditor of Ferro-met had attached the bunkers of the Filokti-tis to secure payment of hire for another ship, the M/V Grigoroussa. ' The next day, Cornish filed in the District Court a complaint against Ferromet, initiating the present action. Pursuant to Rule C of the Supplemental Rules for Certain Admiralty and Maritime Claims, which governs in rem actions for the enforcement of maritime hens, the District Court issued warrants for the arrest of the subfreights of the Filoktitis. These warrants were served on five banks in New York, including INB, on February 4, and again on February 13 and February 21.

As a result of the ensuing negotiations between all parties to the escalating controversy, INB eventually agreed to place $250,-000 in escrow, as a loan to Ferromet, to cover the dispute with the owners of the Grigo-roussa, and POSCO agreed to waive the discrepancies in the documentation required by the Shinhan letter of credit. Thus, on February 20, 1992, INB, acting as Ferro-met’s collecting bank, was able to draw down the letter of credit, including amounts that Ferromet had billed as “[sub]freight” charges; INB immediately credited the proceeds to the outstanding principal of its loan to Ferromet. INB then withdrew from further negotiations regarding the freight installments that Ferromet had failed to pay to Cornish.

Cornish reacted to these events the next day by obtaining an ex parte order from a Panamanian court authorizing arrest of the cargo aboard the Filoktitis. The ship was then detained in Panama for an additional two and one-half months while Cornish and POSCO tried to work out a compromise. During this interval, an involuntary bankruptcy petition was filed against Ferromet. Finally, on May 11, 1992, Cornish and POS-CO entered into an agreement settling their disputes relating to the voyage. Pursuant to this settlement, POSCO agreed to pay Cornish $650,000 and to share other expenses, and Cornish agreed to transport the cargo of the Filoktitis to Korea. The cargo was finally delivered to POSCO on June 30.

District Court proceedings. In the District Court, Cornish argued that approximately $1.6 million of the proceeds that INB had collected from the Shinhan letter of credit represented subfreights subject to Cornish’s maritime lien on subfreights, and that INB violated the Court’s Rule C arrest warrants when it credited those funds to its own account. POSCO, with Cornish’s consent, intervened as plaintiff on a subrogation theory, claiming a stake in any recovery from INB to the extent of the payments POSCO had made to Cornish under their May 11 settlement agreement. In response to the plaintiffs, INB argued that once the proceeds of the letter of credit were transferred to it in its capacity as collecting agent for Ferro-met, those proceeds ceased to be subfreights to which Cornish’s Hen attached. On cross-motions for summary judgment, the District Court upheld INB’s legal theory and, finding that no material facts were in dispute, entered summary judgment dismissing Cornish’s and POSCO’s claims against INB. See Cornish Shipping Ltd. v. Ferromet Resources, Inc., 1995 A.M.C. 235, 1994 WL 171717 (S.D.N.Y.1994) (mem. op. and order). Pursuant to Fed.R.Civ.P. 54(b), the District Court ordered entry of a final judgment on these claims.

Discussion

The primary issue on this appeal is whether a shipowner’s Hen on subfreights attaches to funds that a consignee remits to a charterer after the consignee has received notice that the shipowner is exercising its Hen. Although this precise issue has not previously been resolved, prior eases and important policy considerations favor the view that a.shipowner’s lien on subfreights represents a contingent right to collect a debt directly from a consignee, rather than a right to specific funds that the consignee intends to use or has used to satisfy that debt. In accordance with this view, we conclude that the shipowner’s lien does not give it a right to trace specific funds that the consignee has paid to a charterer.

Most aspects of the law governing a shipowner’s maritime lien on subfreights are well established. To secure payments of freight due from a charterer of its ship, a shipowner may create, by express provision in the charter party, a lien on the subfreights earned by the vessel. Marine Traders, Inc. v. Seasons Navigation Corp., 422 F.2d 804, 806 (2d Cir.1970). Subfreights are amounts that third-party payors — whether sub-charterers, shippers, or consignees (generically: “consignees”) — contract to pay to the charterer for the use of the ship or the transport of goods. If the charterer defaults on its payment of freight or its other obligations under the charter party, the shipowner may exercise its lien on the sub-freights by giving notice to the consignee. Before such notice is given, however, the lien is essentially inchoate. Indeed, the lien is altogether extinguished if the consignee pays the subfreights to the charterer or its agent in good faith prior to receiving notice of the lien. See Tarstar Shipping Co. v. Century Shipline, Ltd., 597 F.2d 837, 839-40 (2d Cir. 1979); Union Industrielle et Maritime v. Nimpex International, Inc., 459 F.2d 926, 929 (7th Cir.1972); Beverly Hills National Bank & Trust Co. v. Compania de Navegacione Almirante S.A., 437 F.2d 301, 304 (9th Cir.), cert. denied, 402 U.S. 996, 91 S.Ct. 2173, 29 L.Ed.2d 161 (1971); Marine Traders, 422 F.2d at 806; Hall Corp. of Canada v. Cargo ex Steamer Mont Louis, 62 F.2d 603, 605 (2d Cir.1933); MCT Shipping Corp. v. Sabet, 497 F.Supp. 1078, 1084-85 (S.D.N.Y.1980); In re North Atlantic & Gulf Steamship Co., 204 F.Supp. 899, 904 (S.D.N.Y.1962), aff'd sub nom. Schilling v. A/S D/S Dannebrog, 320 F.2d 628 (2d Cir.1963).

Cornish satisfied the established requirements for asserting its hen on the sub-freights of the Filoktitis. The hen was created under the terms of the charter party and incorporated into the bill of lading, and Cornish (the shipowner) gave notice to POS-CO (the consignee) that it was exercising its hen before POSCO took the final steps necessary to authorize payment of “freight” charges to INB, the agent of Ferromet (the charterer). Thus, the estabhshed rule that the hen is extinguished if the consignee makes payment to the charterer prior to receiving notice of the hen does not resolve the issue in this case. When a consignee pays ostensible “subfreights” to the charterer after receiving notice of the hen, as occurred here, such payment does not discharge the consignee’s liabihty for the sub-freights to the owner. See Tarstar, 597 F.2d at 839-40; North Atlantic & Gulf, 204 F.Supp. at 904. Thus, precisely because Cornish asserted its hen by giving notice to POSCO before POSCO paid subfreights to Ferromet, Cornish has a cause of action against POSCO that would not otherwise be available to it.

Cornish and POSCO join, however, in seeking an additional remedy against INB. They argue that if a shipowner gives timely notice of its hen prior to payment of the subfreights by the consignee, the hen attaches to the subfreight funds as a res, and the hen then follows those funds into the hands of any recipient who has notice of the hen, including the charterer or its agent. According to this view, Cornish’s primary remedy is against INB, because INB received the subfreight funds after the lien had attached and after INB itself had received notice of the lien via service of Cornish’s Rule C arrest warrant. In response, INB argues that the owner’s lien on subfreights confers no right to follow the subfreight funds after they have been paid to the charterer or its agent, because payment destroys the funds’ character as an independent res to which the hen can attach. In spite of each side’s vigorous insistence that its theory has been clearly established by prior cases, we have found no authority that directly confronts the issue of whether the additional remedy claimed by Cornish and POSCO is available when subfreights are paid after the consignee has received notice. To resolve this dispute, it is necessary to take a broader view of the conceptual underpinnings and policy implications of the parties’ rival theories.

On the surface, Cornish’s and POSCO’s position has substantial plausibility. In American admiralty law, “the existence of a maritime lien is synonymous with the availability of a libel in rem.” Grant Gilmore & Charles L. Black, Jr., The Law of Admiralty 622 (2d ed. 1975); see also 7A James W. Moore et al., Moore’s Federal Practice ¶ C.02, at 609 (2d ed. 1993); Supp.R.Adm. & Mar.Claims C(1)(a) (action in rem may be brought to enforce any maritime lien). It is not unreasonable to assume that in the case of the owner’s lien on subfreights, the pertinent res is the specific funds that the consignee pays or intends to pay to the charterer for transport. See 7A Moore et al., supra, ¶ C.13, at 683 (“freights — which are moneys paid for the transportation of cargo ... — may be lieñed” (emphasis added)). Moreover, we have stated, in an older case involving a different type of lien on freights, that once a hen attaches to such funds, the hen follows the proceeds through all of their traceable transmutations:

The hen created by a maritime pledge of freights follows the freights through all their transmutations, and wherever they can be found. It is familiar doctrine of the admiralty courts that a maritime hen attaches not only to the original subject of the hen, but also to whatever is substituted for it, and that the henholder may fohow the proceeds wherever he can distinctly trace them.