LEOPARD MARINE & TRADING, LTD. V. EASY STREET LTD.

We are pleased to report on a recent decision from the United States District Court for the Southern District of New York (the “Court”) in the Leopard Marine & Trading, Ltd. v. Easy Street Ltd. matter, in which we served as counsel for Leopard Marine & Trading Ltd. (“Leopard”). The Court’s holding demonstrates that it is possible to succeed on a laches defense and underscores the necessity of taking timely actions to prevent an otherwise viable lien claim from being dismissed on the basis of laches.

Leopard filed a complaint in the Court seeking a declaratory judgment that Easy Street Ltd. (“Easy Street”) was time barred pursuant to the U.S. general maritime law doctrine of laches from enforcing its lien against Leopard’s vessel known as the M/V DENSA LEOPARD (the “Vessel”). Leopard and Easy Street each filed cross-motions seeking summary judgment on the laches issue. The Court granted Leopard’s motion for summary judgment, denied Easy Street’s motion for summary judgment and declared “enforcement of Easy Street’s lien barred by laches.”

FACTS

In June 2011, Leopard chartered the Vessel to Allied Maritime Inc. (“Allied”) pursuant to a written charter agreement, under which Allied was obligated to pay for fuel for the Vessel while on hire and agreed not to permit the assertion of any liens on the Vessel. During the hire period, on August 23, 2011, Allied procured US$848,847.60 worth of fuel from Easy Street for the Vessel. Contrary to the terms of the charter agreement, Allied’s bunker supply contract with Easy Street granted Easy Street a U.S. maritime lien upon the Vessel to secure payment for the fuel. Easy Street’s invoice to Allied for the fuel fell due on September 26, 2011. However, unbeknownst to Leopard at the time, Allied failed to pay Easy Street’s invoice.

At the end of the hire period, Allied redelivered the Vessel to Leopard on November 4, 2011 with bunker fuel remaining onboard. As required by the charter agreement, Allied was granted a credit against the final hire payment owed by Allied to Leopard in the amount of US$409,853.10 for the value for the remaining fuel onboard the Vessel.

Throughout late 2011 and most of 2012, Allied experienced severe cash flow difficulties and defaulted on its contractual obligations, including Easy Street’s invoice. Numerous creditors of Allied initiated Greek bankruptcy proceedings against it and, ultimately, on November 6, 2012, Allied was involuntarily declared bankrupt by a Greek bankruptcy court. Throughout the time period starting from Allied’s September 26, 2011 default on the invoice to its November 6, 2012 bankruptcy declaration, however, Easy Street took no legal action against Allied for the unpaid fuel invoice and did not make any attempt to assert its lien against the Vessel.

On March 30, 2015, over three-and-a-half years after Allied’s default on Easy Street’s invoice, Easy Street sent Leopard an email demanding payment of the unpaid invoice plus interest and legal fees, totaling US$1,394,807. Soon thereafter, on April 19, 2015, Easy Street arrested the Vessel in Panama on the basis of Allied’s default and to exercise its lien arising under the bunker supply contract. Leopard was compelled to post security in an amount exceeding $2 million to have the Vessel released.

While Leopard has defended against the arrest action in Panama, on April 20, 2015, it also initiated the parallel proceeding in the U.S. District Court for the Southern District of New York, in order to have one of the most active and respected admiralty courts in the U.S. determine whether Easy Street’s asserted lien was barred by the U.S. maritime doctrine of laches. In a preliminary ruling, the Court found that it had personal jurisdiction over Easy Street (a Cyprian entity) as a result of the forum selection clause in the bunker supply contract between Easy Street and Allied.

HOLDING

There is no statute of limitation governing the enforcement of liens under U.S. general maritime law. Instead, the timeliness of a lien enforcement action is determined by the doctrine of laches. Laches is an equitable defense based on the maximum “vigilantibus non dormientibus aequitas subvenit,” which means “equity aids the vigilant, not those who sleep on their rights.” In order to bar the enforcement of a maritime lien under the doctrine of laches, it must be proven that 1) the lien holder inexcusably delayed in enforcing its maritime lien and 2) the party against whom the lien is enforced has suffered prejudice as a result of that inexcusable delay. Here, Leopard successfully proved both elements of laches, namely, that Easy Street inexcusably delayed in enforcing its lien against the Vessel and that Leopard was prejudiced in several ways as a result of that inexcusable delay.

In regard to the first element of laches, Easy Street argued that its three-and-a-half year delay was excusable because 1) it had received and reasonably relied on verbal and written assurances from Allied that the invoice would be paid and 2) that there are legal barriers in most jurisdictions to arrest a vessel for enforcement of a lien for necessaries (i.e., bunker fuel). The Court rejected both of Easy Street’s excuses.

First, the Court held that regardless of whether Easy Street’s reliance upon Allied’s repeated but unfulfilled promises to pay was reasonable, such reliance constituted a choice by Easy Street to pursue its in personam remedies against Allied and to forego its in rem remedies against the Vessel. Thus, the election of a lien holder to not concurrently pursue its in rem lien rights would not serve as an excuse for delay.

Second, the Court agreed with Easy Street’s premise that, as a general rule, most jurisdictions in the world do not recognize maritime liens for necessaries. However, the Court found that exceptions to this general rule do exist and that such exceptions were relevant in this case. During the period of time prior to Allied’s November 2012 bankruptcy, the Vessel called on ports in Canada, Panama, South Korea, Brazil and Nigeria. The Court noted that Canada was one jurisdiction that takes a lex loci approach—it allows enforcement of a foreign maritime lien for necessaries arising under the law of the contract even though Canadian law itself does not create maritime liens for necessaries. Based on the fact that Easy Street admitted having arrested other vessels in Panama, South Korea, Brazil and Nigeria for unpaid fuel, the Court found that, in addition to the Vessel’s call in Canada, during the relevant time period, Easy Street had, but missed, several opportunities to arrest the Vessel at those ports. Accordingly, the Court rejected Easy Street’s claim that it did not have the opportunity to arrest the Vessel prior to April 2015.

In regard to the second element of laches, the Court found that Leopard was prejudiced because it had already paid for a substantial portion of the bunker invoice when it credited Allied for the fuel that remained onboard the vessel at the time of redelivery. The Court further noted that, as a result of Allied’s default of the charter agreement, Leopard had the contractual rights to seize the cargo onboard the Vessel during Allied’s charter of it and to bring an arbitration action against Allied for breach of contract. These rights were lost as a practical matter due to Easy Street’s delay and, therefore, Leopard suffered prejudicial harms that could have been prevented by Easy Street having taken action earlier.

INDUSTRY IMPACT

Although laches is a particularly fact-based determination, the Court’s ruling demonstrates that under the right circumstances, it can be a viable and complete defense to a lien claim. Thus, the ruling is important to both vessel owners and potential lien holders.

The lex loci approach adopted by Canada, which the Court noted in its ruling, appears to be gaining wider acceptance (See, for example, the recent decision of the Federal Court of Australia in Reiter Petroleum Inc. v The Ship “Sam Hawk” [2015] FCA 1005, in which a jurisdictional challenge to the arrest writ brought by the owner was rejected on the basis that jurisdiction could be established by a foreign maritime lien, even though Australian law does not create a lien for necessaries.) Vessel owners should not presume that their vessels will be shielded from arrest for unpaid necessaries so long as they avoid a limited number of jurisdictions, including U.S. ports. Likewise, suppliers of necessaries may benefit from having greater opportunities to exercise liens. However, if such opportunities are missed, there is a risk of lien remedies being extinguished by laches.

Suppliers of necessaries and other potential lien holders should also be cognizant that pursuit of in personam claims against their counter-contract party will not be sufficient by itself to avoid the defense of laches. Instead, such lien holders should concurrently investigate and, if possible, pursue their in rem remedies in order to ensure that its lien will not be barred by laches.