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Atlantic Richfield Co.

February 14, 1986


Appeal by Interstate Oil Transport Co. from a judgment of the United States District Court for the Southern District of New York, Vincent Broderick, Judge, awarding $500,000 plus $420,454.57 in prejudgment interest in favor of Atlantic Richfield Company on its idemnity claim against appellant Interstate. Reversed.

Author: Cardamone


CARDAMONE, Circuit Judge :

This appeal involves a claim for indemnity arising from a marine casualty. A time charterer of a gasoline tank barge that suffered a cargo loss sued a terminal owner claiming that its personnel's negligence in loading the cargo caused the loss. The terminal owner cross-claimed for the millions of dollars of property damages it sustained. During the trial, the time charterer paid the terminal owner $500,000 in settlement of its counterclaim. It then sought indemnity from the party from which it had time-chartered the vessel. Following a trial on the indemnity claim, the district court granted full indemnity to the time charterer reasoning that it did not need to show actual liability to the terminal owner in order to recover the amount it paid in settlement. Instead, the district court believed that the potential liability which it found was all that was required. We reverse.


A. Facts and the Parties

At approximately 6:10 a.m. on October 25, 1972 an explosion occurred aboard the six-year old steel tank barge "OCEAN 80" moored at the General American Transportation Corporation Terminal at Arthur Kill in Carteret, New Jersey. The OCEAN 80 was loading gasoline and fuel oil at the time of the explosion and the subsequent fire destroyed and sank the barge and caused millions of dollars worth of damage to the terminal and nearby facilities. The shock of the explosion broke windows a mile from the scene, but there was no loss of life and only minor injuries.

This appeal involves three of the parties involved in the ensuing litigation: Interstate Oil Transport Company (Interstate), Atlantic Richfield Company (Atlantic), and General American Transportation Company (American). Interstate was the bareboat charterer of the tank barge OCEAN 80, from its owner Ocean 80 Co. Under such charter Interstate was in possession and command of the barge, and stood in the shoes of its owner. See Guzman v. Pichirilo, 369 U.S. 698, 700, 8 L. Ed. 2d 205, 82 S. Ct. 1095 (1962). Several months prior to the October casualty, Interstate orally time-chartered the OCEAN 80 to Atlantic, which had chartered tank barges from Interstate for a number of years. A year earlier, on August 10, 1971, Atlantic leased storage facilities from American, including several tanks at Carteret, where it stored gasoline and fuel oil.

The incident occurred while Interstate and American employees were in the process of withdrawing these commodities from storage and pumping them into the tank barge OCEAN 80. As a result of the explosion, Interstate's tank barge was destroyed, Atlantic's cargo was lost and American's terminal facilities suffered extensive damages as did the property of third parties.

B. Prior Legal Proceedings

In 1973 Interstate and Ocean 80 Co. petitioned for exoneration from, or limitation of, liability. Atlantic filed a claim for $233,699 against Interstate and American for the loss of its cargo. American counterclaimed against Atlantic for $5,000,000 damages to its facility and for indemnification for amounts to third parties to which it might be found liable. American had previously filed an identical claim against Interstate in the limitation proceeding. Interstate and Ocean 80 Co. brought an action against American to recover for the loss of the barge. Additionally, third parties filed claims in the limitation proceedings against both Interstate and American. The central issue in these proceedings was to fix blame for the casualty thereby determining liability.

Central to the resolution of this question were the Findings and Conclusions of the United States Coast Guard (Coast Guard) and the National Transportation Safety Board (NTSB) both of which investigated the loss. In the NTSB's Findings and Conclusions it stated:

[T]he probable cause of the casualty was the ignition, by an unidentified source, of gasoline which spilled from overflowing cargo tanks on the OCEAN 80. A major contributing factor was the failure of the barge tankerman and the terminal dockman to adhere to prescribed cargo transfer procedures.

Neither the tankerman nor the dockman had been directed to be continually present in the area of their responsibility. Their absence, the NTSB report noted, "precluded any attempt to take desired action."

The NTSB report listed the following defects in the loading procedures: the American dockman did not know the gasoline pumping rate and there was no metering device available at the terminal; the absence of qualified fire-fighting personnel at the American terminal delayed initial fire-fighting efforts which "might have prevented some of the extensive damage"; there was no valve status checkoff list maintained at the terminal; and the position of the various valves (open or closed) could only be determined by manual manipulation. Coast Guard regulations then in effect required the terminal to keep the transfer operation under "continuous control and surveillance" and to know the flow rate of the product. 33 C.F.R. 126.15(0).

The Coast Guard Marine Board of Investigation similarly determined that the ignition of gasoline on the barge's deck caused the casualty. Although the ignition source was unidentified, the Coast Guard suspected one of the barge's several non-explosion proof electrical fixtures. The Coast Guard also concluded "that the absence of the tankerman precluded any action on his part to prevent the overflow," which was an "important and a major contributing cause of the casualty." The Coast Guard made several findings of fact concerning the barge's and the terminal's operation: upon its arrival at the American facility the barge was empty but not gas free; the facility had no permanent plant fire department and an insufficient number of personnel to fully man the equipment during the night shift; a search of the barge conducted after the explosion revealed a number of electrical appliances of "questionable approval for marine use"; a discharge valve normally closed during loading operations was found frozen in the open position; there was no guard or other security system in operation during nighttime hours; there was no fire or safety patrol at the facility; there was no means by which a supervisor could be constantly informed as to the status of the valves, equipment and the movement of product at all locations in the facility; and that "[t]estimony of several witnesses responsible for the safety, repair, maintenance and operation of the OCEAN 80 indicate[d] a general lack of understanding as to what constitute[d] Coast Guard 'approval.'"

In December 1976 after discovery had been concluded in the limitation proceeding, Interstate, Ocean 80 Co., Aetna Insurance Company (Aetna), and American reached a settlement agreement. Under its terms: (1) Interstate and Ocean 80 waived any claims against American for the loss of the barge OCEAN 80; (2) American and Aetna waived any claims against Ocean 80 Co. and/or Interstate for damages to American's facility arising out of the fire; (3) Ocean 80 Co. and Interstate paid $1,000,000 to American for its property damage; (4) three of the third-party claims were settled for $900,000 paid by American; with regard to the remaining third-party claims, Interstate agreed to contribute an additional $125,000 if American was required to pay more than $350,000 in settlement of those claims, and American agreed to indemnify Interstate from liability in excess of this amount; (5) Atlantic's claim for cargo loss brought against Ocean 80 Co., Interstate, and American and American's counterclaim against Atlantic were to continue in litigation; (6) in the event Atlantic recovered against Ocean 80 Co. and/or Interstate for its cargo loss, American agreed to indemnify and hold harmless Ocean 80 Co., the barge OCEAN 80, and Interstate for whatever sums may be due to Atlantic for the cargo loss; and (7) in consideration of this indemnification agreement, Interstate agreed to cooperate with American in the limitation proceeding and in the defense of "any and all pending actions arising from the fire and explosion on October 25, 1972 as if petitioning or defending for their own account."

The remaining third-party claims were subsequently settled and in May 1977 an order was entered in the limitation proceeding providing that: all parties except Atlantic having claims against Interstate arising out of the explosion were perpetually enjoined from instituting such suits; Atlantic's claim against American and American's $5,000,000 counterclaim were to proceed; Atlantic's claim against Interstate for the cargo loss was discontinued without prejudice to Atlantic's right to assert any claim it had immediately prior to the entry of the order; and all claims asserted against Interstate were dismissed.

Atlantic's action against American proceeded to trial before United States District Court Judge Conner on November 28, 1977. After three days of trial the parties agreed to settle. An Order was signed on December 2, 1977 embodying the settlement agreement. Under its terms Atlantic waived its claim for cargo loss and agreed to pay $500,000 to American in settlement of American's $5,000,000 counterclaim. The district court judge found this agreement a ...

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