Superior Derrick Services L L C v. Lonestar 203 et al

Filing 124

ORDER AND REASONS ON COUNTER-SECURITY granting 110 Motion for Reconsideration. Superior will not be required to post counter-security; 94 MOTION for Release of Bond Obligation is denied. Signed by Magistrate Judge C Michael Hill on 6/22/2010. (crt,Keifer, K)

UNITED STATES DISTRICT COURT W E S T E R N DISTRICT OF LOUISIANA S U P E R I O R DERRICK SERVICES, LLC. VS. L O N E S T A R 203, ET AL. * C I V I L ACTION NO. 6:09-0484 * M A G I S T R A T E JUDGE HILL * B Y CONSENT OF THE PARTIES

ORDER AND REASONS ON COUNTER-SECURITY Before the court are the Motion to Reconsider Counter-Security filed by Superior D e rric k Services, LLC ("Superior") [rec. doc. 110] and the Motion for Release of Bond O b lig a tio n filed by Lonestar Drilling Nigeria, Ltd. ("Lonestar") [rec. doc. 94]. A hearing o n the former Motion was held on June 4, 2010 and the Motions were taken under a d v is e m e n t. Having considered both Motions, Superior's Opposition to Lonestar's Motion for R e le a se of Bond Obligation, and Lonestar's Reply, as well as the evidence presented at th e hearing on the Superior's Motion to Reconsider Counter-Security, for the reasons w h i c h follow, the Motion to Reconsider Counter-Security [rec. doc. 110] is granted, and a c co rd in g ly , Superior will not be required to post counter-security; the Motion for R e le a s e of Bond Obligation [rec. doc. 94] is denied. I. FACTS T h i s case arises out of the March 27, 2009 arrest of the drilling barges, L O N E S T A R 203 and LONESTAR 204. Plaintiff, Superior, arrested these vessels, a s s e rtin g a maritime lien against the vessels as a result of an alleged failure to pay sums

d u e under Barge Refurbishment Contracts and a Turnkey Agreement entered into b e tw e e n Superior and Lonestar covering refurbishment work on the drilling barges. The s o le purpose of the arrest was to provide security for the original (main) demand. L o n e sta r and Intercontinental Bank, PLC, as operator and owner of the drilling b a rg e s, made a claim to the vessels and filed an Answer. Lonestar additionally filed a C o u n te rc la im against Superior. In its Counterclaim, Lonestar alleges that Superior has b re a c h e d the Barge Refurbishment Contracts and the Turnkey Agreement1 by failing to tim e ly complete work on the drilling barges by the contractually agreed upon date, April 2 6 , 2008. Accordingly, Lonestar alleges that it is owed stipulated damages set forth in th e Turnkey Agreement in the amount of $25,000.00 per day per barge, with the e x c ep tio n of twenty-two days where the delay was beyond Superior's control, for a total a s of March 27, 2009 of $15,650,000.00. Lonestar further seeks other damages resulting fro m the delay, including unspecified damages for loss of two year drilling contracts for e a ch vessel and associated daily lost revenue, as well as demurrage charges of over $ 1 2 ,0 0 0 ,0 0 0 .0 0 on a heavy lift vessel which was waiting to transport the drilling barges to N ig e ria . [rec. doc. 11, Counterclaim, ¶ 2, 3 and 6]. Following an evidentiary hearing, this Court found that there were reasonable g ro u n d s for the issuance of an arrest warrant for the Lonestar vessels, and set security in a n amount sufficient to cover Superior's claim, fairly stated, in the amount of

All three contracts are attached to Superior's Complaint, and were also entered into evidence during the A p r il 3, 2009 evidentiary hearing.

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$ 7 ,2 1 3 ,5 0 3 .3 2 with interest. [rec. doc. 31]. Thereafter, Lonestar posted security in the a m o u n t of $8,050,000.00, to secure release of the vessels. [rec. doc. 74]. T h e re a fte r, Lonestar moved under Admiralty Rule E(7)(a) for an Order of this C o u rt requiring Superior to post counter-security for the damages claimed by Lonestar in its Counterclaim, in an amount at least equal to the amount of security posted by L o n e s ta r. [rec. doc. 77]. S u p e rio r opposed the Motion arguing, amongst other things, that counter-security w a s not warranted in this case, given that Superior is a Louisiana corporation with s u b s ta n tia l assets within this Court's jurisdiction, and that therefore, Lonestar suffers no in se c u rity with respect to satisfaction of any judgment which may be awarded by this c o u rt in its favor. [rec. doc. 83]. B y Reply, Lonestar countered, amongst other things, that on the record presently b e fo re this court, Superior had not shown either its ability to satisfy any judgment or its in a b ility to post security. Accordingly, there was no reason for this court not to follow the d ic ta te s of Admiralty Rule E(7)(a). [rec. doc. 85]. F o llo w in g a status conference, a hearing on the Motion, which had previously been set, was canceled and the matter was deemed taken under advisement on the record before th e court, considering the evidence presented at Superior's Motion to Fix the Amount of S e c u rity . In the event the court found that counter-security was warranted, however, the c o u rt advised that a hearing to determine the amount of counter-security would be set.. [re c . doc. 84]. 3

O n February 5, 2010, the Court found that Superior should be required to post c o u n te r-s e c u rity , and accordingly, an evidentiary hearing to determine the amount of s e c u rity was set. [rec. docs. 88 and 89]. F o llo w in g a telephone status conference, the evidentiary hearing was canceled and S u p e rio r was ordered to post counter-security on or before March 19, 2010, in the total a m o u n t of $8,050,000.00, for the damages claimed by Lonestar in its Counterclaim, that a m o u n t being equal to the security posted by Lonestar on Superior's Original Claim, and th e re b y achieving equality between the parties on the security issue. Superior's right to re q u e st reconsideration of the amount of counter-security to be posted was reserved. [rec. d o c . 92]. W h e n counter-security was not posted by the court's deadline, Lonestar filed a M o tio n for Release of Bond Obligation, arguing that equality between the parties had not b e e n reached because of Superior's failure to post counter-security. Accordingly, to a c h ie v e that result, Lonestar requested that this court vacate the order requiring Lonestar to provide security and cancel Lonestar's vessel release bond. [rec. doc. 94]. S u p e rio r opposed the Motion arguing that by granting the Motion its preferred in r e m rights against Lonestar would be lost, leaving Superior with a right to pursue an in p e r s o n a m action, which is, in essence a right without a remedy, given that the vessels at is s u e are not owned by Lonestar, Lonestar is a Nigerian corporation, with no "visible" a ss e ts in Nigeria, against whom it would be difficult to enforce any judgment. Superior a d d itio n a lly argued that despite its good faith efforts, it had been unable to obtain a surety 4

b o n d because of its inability to provide the collateral necessary to secure the bond. [rec. d o c . 98]. L o n e sta r replied arguing, among other things, that Superior had provided no e v id e n c e to support its claim of financial inability to obtain a surety bond in the amount o rd e re d by this court. [rec. doc. 106]. F o llo w in g a telephone hearing on the Motion, the court passed the Motion for R e lea se of Bond Obligation without date, suspended the court's deadline for Superior to p o st counter-security, and permitted Superior to file a Motion to Reconsider and/or to R e d u c e the Amount of Counter-Security. [rec. doc. 109]. Superior's Motion to Reconsider Counter-Security was filed thereafter, in which S u p e rio r asserts that, given its current financial condition, it is unable to obtain a surety b o n d in the amount ordered by this court. Thus, Superior asserts that its poor financial co n d ition constitutes cause for this case to proceed without the posting of counters e c u rity . [rec. doc. 110]. An evidentiary hearing on the Motion was held on June 4, 2010, and the Motion w as taken under advisement. Testifying at the hearing was Daniel Wayne Alexander, C h ie f Financial Officer for Superior. Mr. Alexander's testimony indicates that Superior h a s a 4 million USD credit line with Chase Bank which is secured by Superior's accounts re c eiv a b le s and inventory (2 million USD each), of which 2.7 million USD is borrowed a g a in st, leaving 1.3 USD million available. However, that sum is not available to post a

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b o n d because Superior needs these funds to operate and meet its payroll and other routine b u s in e s s expenses. Other than furniture, fixtures and equipment, which lenders do not commonly a c ce p t as collateral, and a tract of land valued at $175,000.00, Superior has no other u n e n c u m b e re d assets. Moreover, while there is a possibility of Superior obtaining an a d d itio n a l $250,000.00 on its line of credit, Superior doesn't know if Chase Bank would incre ase its line of credit from 4 million USD to 4.25 million USD as that would require re n e g o tiatio n and underwriting of the loan. While the company was profitable in 2008, it e x p e rie n c ed a loss in 2009, and, thus far in 2010, the company is breaking even. I I . ANALYSIS A d m ir a lty Rule E(7)(a) provides as follows: W h e n a person who has given security for damages in the original action a ss e rts a counterclaim that arises from the transaction or occurrence that is th e subject of the original action, a plaintiff for whose benefit the security h a s been given must give security for damages demanded in the c o u n te rc la im unless the court for cause shown, directs otherwise. Proceedings on the original claim must be stayed until this security is given u n le ss the court directs otherwise. F R C P , Supp. Adm. Rule E(7)(a). As noted by the Fifth Circuit, the rule is straightforward. "When the defendant p o sts security to guarantee payment of an adverse judgment-typically the posting of a b o n d to secure release of a vessel-the complainant may be required to furnish security for th e satisfaction of a counterclaim." Titan Navigation, Inc. v. Timsco, Inc., 808 F.2d 400, 4 0 3 (5 th Cir. 1987). However, "[a]lthough the language of the rule is automatic it is not 6

a b s o l u te , for the original seizing complainant may be excused by the court `for cause s h o w n .'" Id. The determination of "for cause shown" is relegated to the sound discretion of the d is tric t court. Id. The court's "discretion, although broad, is significantly cabined in s o m e cases." Id. For example, "when a party is financially unable to post counters e c u rity , courts often dispense with the requirement of the rule . . . ." Id. citing The B e a u m o n t, 8 F.2d 599 (4th Cir. 1925)2 (other citations omitted). The fact that a party is fin a n c ia lly unable to post counter-security should not result in dismissal of its original c la im . Id. at 403 (citations omitted). In exercising its discretion, the court "weigh[s] the importance of the security in te re st giving rise to the initial seizure, and the burden of posting counter-security, a g a in st the potential injustice of requiring the defendant-counterclaimant to post security w ith o u t affording reciprocal protection".3 Titan Navigation, 808 F.2d at 404.

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In The Beaumont, the Fourth Circuit found: T h e rule never contemplated, . . . that, where the parties to the original libel had established their r ig h ts and obtained security, this should be lost to them, because of their inability, arising from in s o lv e n c y or other good reason, to procure a bond to respond to a large claim asserted in the c ro s s - lib e l, and that as a result their libel should be dismissed. This would not only be unjust, but w o u ld in effect negative and nullify the provision of the rule giving to the trial court full discretion to act upon the very subject involved. 8 F.3d at 601.

Courts in the Fifth Circuit have listed several factors which may be considered including, whether the p o s t i n g of counter-security will prevent the plaintiff from prosecuting its claims, whether the counter-security in v o lv e s the release of seized property, whether the counterclaim is frivolous or so lacking in merit that it was a d v a n c e d "solely to secure a negotiating advantage over the complainant," whether the counter-plaintiff could have p r o c e e d e d in rem, and the potential injustice of requiring one party to post security while the other party does not. S e e Seatrade Group N.V. v. 6,785.5 Tons of Cement, 2006 W L 3741904, *2 (S.D. Tex. 2006) citing Titan, supra., A f r a m Lines Int'l, Inc. v. M/V Capetan Yiannis, 905 F.2d 347, 349-50 (11th Cir.1990) and Result Shipping Co. v. F e r r u z z i Trading USA, Inc., 56 F.3d 394, 400 (2d Cir.1995); Coastal Towing, Inc. v. Barnett Marine Services, Inc., 2 0 0 2 W L 2022549, *1E.D. La. 2002) (citations omitted).

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T h e Fifth Circuit has stated that the "guidon for this analysis is the court's o b lig a tio n to preserve the integrity of maritime liens." Titan, 808 F.2d at 404. A court s h o u ld not order counter-security if it would diminish the utility of the maritime lien by u n fa irly or unreasonably inhibiting the plaintiff's prosecution of its case in admiralty. Id. Courts should therefore not require counter-security in an amount so great that the o rig in a l plaintiff is forced to give up his initial claim because he cannot produce the re q u ire d countersecurity. Id. at 404-05. To do so, would, in effect, require a lien-holder to relinquish a privileged position because of a financial inability. Id. at 405. In this court's prior Ruling, having found no cause shown for this court to excuse S u p e rio r from the express dictates of Rule E(7)(a) on the record before the court at that tim e , this court granted Lonestar's motion for counter-security as to damages claimed in its counter-claim. Superior was thus Ordered to post counter-security in an amount equal to that posted by Lonestar, $8,050,00.00, to place the parties on even ground. That Ruling n o ted that Superior had neither contended, nor shown, any inability to post countersec u rity; hence, the court's right to revisit the issue after receiving evidence of Superior's fin a n c ia l ability to post security was reserved. The issue now before this court is whether S u p e rio r's subsequent submissions show that it cannot do so. B a se d on the present record, this Court finds that Superior has demonstrated that it is financially unable to post counter-security, sufficient to place the parties on even

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g ro u n d , without forcing Superior to give up its in rem claim against Lonestar. The e v id e n c e presented establishes that Superior is unable to comply with the court's prior c o u n ter -se c u rity order. Superior has no unencumbered assets, and its remaining credit is n e e d e d by Superior to meet its operational expenses. Thus, requireing Superior post c o u n ter -se c u rity in an amount sufficient to place the parties on even ground would d e p riv e Superior of its right to prosecute its claim in admiralty, thereby diminishing the u tilit y of its maritime lien. Lonestar seeks counter-security simply as an equitable measure based on the fact that it was required to provide security to Superior in order to release the vessels that are the subject of the main demand. However, while the court has previously noted that there is basis in both law and fact for Lonestar's counterclaim, and as such this court is not p re p a re d to hold that its counterclaim is frivolous or so lacking in merit such that it could b e considered advanced solely to secure a negotiating advantage over Superior, it is clear th a t Lonestar could not have originally brought its claims for breach of contract in rem or q u a s i in rem. Thus, unlike Superior, Lonestar does not enjoy a privileged position. It is th e re fo re not inequitable to deny Lonestar's request for counter-security in this case. For these reasons, Superior has shown "cause" to be excused from posting the c o u n te r- s e c u rity . Titan, 808 F.2d at 403. Superior's motion for reconsideration is granted. These same reasons militate against the grant of Lonestar's motion to release its b o n d posted to secure release of the vessels which were burdened with maritime liens in fa v o r of Superior. Moreover, in Titan Navigation, the Fifth Circuit set forth the "limited 9

c irc u m sta n c e s " the district court may, in its discretion, release the security of a maritime p a rty . See Pontoon Shipping Co., Ltd. v. North American Marine Inc., 110 F.3d 794, 1 9 9 7 WL 119980, *1 (5 th Cir. 1997) (unpublished) citing Titan Navigation, 808 F.2d at 405. More specifically, the Fifth Circuit has noted that the security could be released if th e party claiming the need for security "would be adequately protected by its in p e r s o n a m action", including the notion that the adverse party "could respond in damages s h o u ld it be so cast." Id. The court also noted that the release should not impair "the fu n d a m e n ta l utility of maritime liens." Id. The court held that a district court would not a b u se its discretion in releasing a party's security under factual circumstances that meet th e se requirements, even though the release would "force a lien-holder to relinquish a p riv ile g e d position because of a financial inability to post counter-security." Id. T h e facts of this case do not meet the narrowly defined Titan Navigation criteria fo r release of the security posted by Lonestar. The record does not adequately d e m o n s tr a te that Superior "would be adequately protected by its in personam action" a g a in st Lonestar. There is no evidence before this court demonstrating that Lonestar is th e owner of the drilling barges which are the subject of the original (main) demand. To th e contrary, in its claim to the vessels, Intercontinental Bank, PLC averred that it is the o w n e r of the vessels. Moreover, there has been no evidence presented to establish that L o n e s ta r possesses sufficient assets to satisfy any judgment rendered in favor of Superior. To the contrary, Superior suggests, without contradiction, that Lonestar has no "visible" 10

a s s e ts in Nigeria. Moreover, it is undisputed that Lonestar is a Nigerian corporation. Thus, while Superior may be able to register any judgment rendered by this court in its fav o r in Nigeria, it does not appear clear that Superior would be able to enforce or satisfy th e judgment against Lonestar. Lonestar argues that the security should be released because the value of its claim e x c e e d s that of the claim asserted by Superior, and hence, Superior's claim against L o n e sta r would be in the nature of an offset. However, on the record before this court, th e undersigned cannot determine the value the respective claims of either party. Those d e ter m in a tio n s will be made at trial on the merits. Indeed, as previously noted by this c o u rt in its prior Ruling, the value of Lonestar's claim will require findings as to which p a rty is responsible for delays in completion of the project, the number of days a ttrib u ta b le to each, and the reasons which necessitated the issuance of each change order in the first instance. F in a lly , while this court recognizes that the contracts at issue were the result of n e g o tia tio n s between representatives of corporate parties and that there is no direct proof th a t Superior relied on the credit of the barges in deciding to enter into the agreements, u n d e r the circumstances of this case, the court cannot find that releasing Lonestar's bond o b lig a tio n will not undermine the integrity of maritime liens as Lonestar suggests. Under p re se n t day realities, most maritime contracts are negotiated by corporate parties, who in v a ria b ly do not consciously rely on the credit of the vessel. Thus, to accept this

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a rg u m e n t would, in essence, permit the release of virtually every bond posted in a c c o rd a n c e with Rule E(5) when a party is unable to provide counter-security. As noted by the Fifth Circuit in Titan Navigation, despite the advent of current a d v a n ce s, "the ability of a ship's master to bind his vessel in rem continues to facilitate th e prompt supply of goods and services." Id. at 404. Furthermore, accepting Lonestar's a rg u m e n t would run contrary to the established principles of admiralty jurisdiction, a llo w in g "discharge of a maritime lien because of the lien holder's financial limitations", a result which the Titan Navigation court was "loathe to approve." Id. at 405. F o r these reasons, Lonestar's Motion for Release of Bond Obligation is denied. I I I . CONCLUSION F o r the foregoing reasons, IT IS ORDERED that the Motion to Reconsider C o u n t e r- S e c u r ity filed by Superior Derrick Services, LLC [rec. doc. 110] is GRANTED, a n d accordingly, Superior will not be required to post counter-security. IT IS FURTHER ORDERED that the Motion for Release of Bond Obligation f ile d by Lonestar Drilling Nigeria, Ltd.[rec. doc. 94] is DENIED. S ig n e d at Lafayette, Louisiana on June 22, 2010.

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