United States Bankruptcy Court,

D. Delaware.

In re S-TRAN HOLDINGS, INC., et al., Debtors.

S-Tran Holdings, Inc., Service Transport, Inc. and Dixie Trucking, Inc., Plaintiffs

v.

Protective Insurance Co., Defendant.

Bankruptcy No. 05-11391(KJC).

Adversary No. 07-51341 (KJC).

 

Oct. 5, 2009.

 

MEMORANDUM

 

KEVIN J. CAREY, Bankruptcy Judge.

 

On May 12, 2007, plaintiffs S-Tran Holdings, Inc., Service Transport, Inc., and Dixie Trucking Company, Inc. (the “Debtors”) filed a complaint against Protective Insurance Company (“PIC”) alleging claims for turnover of property of the estate under Bankruptcy Code § 542, violation of the automatic stay of Bankruptcy Code § 362, unauthorized post-petition transfers under Bankruptcy Code § 549, breach of contract, and breach of fiduciary duty. Before the Court is the Debtor’s motion for partial summary judgment (docket nos. 42, 43)(the “Summary Judgment Motion”), in which the Debtors ask the Court to enter judgment in their favor with respect to the claims for (i) turnover of property of the estate, (ii) violation of the automatic stay, and (iii) a return of unauthorized post-petition transfers. PIC filed a response (docket nos. 45, 46) opposing the relief requested in the Summary Judgment Motion, arguing, inter alia, that the letter of credit proceeds and the cash deposit at issue are not property of the estate. The Debtors filed a reply (docket no. 49). The Court heard oral argument on the Summary Judgment Motion. For the reasons set forth herein, the Summary Judgment Motion will be granted, in part, and denied, in part.

 

BACKGROUND

 

The Debtors claim that certain facts alleged in this adversary proceeding are undisputed. PIC’s response, however, contained a counter-statement of facts. The following facts, taken from the parties’ submissions, are largely undisputed and will be considered for the purpose of deciding the Summary Judgment Motion.

 

PIC issued insurance policies for the benefit of the Debtors, including insurance coverage for (i) workers’ compensation claims, (ii) general liability claims, and (iii) cargo compensation claims and liabilities associated with shipments of freight (the “Policies”). In connection with the Policies’ issuance, the Debtors and PIC entered into a General Agreement of Indemnity (the “Indemnity Agreement”) and a related Collateral Agreement (the “Collateral Agreement”) (together, the “Agreements”). Both agreements were dated January 1, 2002. Under the Collateral Agreement, the Debtors provided two forms of collateral to PIC: (i) a $477,000 cash deposit (the “Deposit”), and (ii) letters of credit totaling $3.5 million (the “LOC”).

 

On May 13, 2005 (the “Petition Date”), the Debtors filed chapter 11 bankruptcy petitions in this Court. The Debtors ceased operations on or about the Petition Date.

 

One week prior to the Petition Date, PIC drew on the LOC and held the proceeds of the draw (the “LOC Proceeds”) as collateral for the Debtor’s obligations under the Agreements, along with the Deposit (together, the LOC Proceeds and the Deposit are referred to herein as the “Collateral”). PIC contends that it paid $2,039,494 from the Collateral to third parties after the Petition Date. PIC has held the remaining $1,553,648 of the Collateral in an estimate insurance loss reserve.

 

The Debtors claim that PIC did not obtain Court approval or the Debtors’ consent to use the Collateral. The Debtors demanded the return of the Collateral post-petition, but PIC has not turned over any of the Collateral to the Debtors.

 

STANDARD FOR SUMMARY JUDGMENT

 

Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056. In a motion for summary judgment, the moving party “always bears the initial responsibility of informing the … court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of fact.”   Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

 

Once the moving party has made a proper motion for summary judgment, the burden shifts to the non-moving party, pursuant to Rule 56(e), which states, “[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse patty may not rest upon the mere allegations or denials of the adverse party’s pleading, but the adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.” Fed R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The party opposing the motion “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586, 106 S.Ct. 1348.

 

Before a court will find that a dispute about a material fact is genuine, there must be sufficient evidence upon which a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The court must view the facts and draw inferences in a light most favorable to the non-moving party.   Anderson, 477 U.S. at 255, 106 S.Ct. 2505. “[W]here the non-moving party’s evidence contradicts the movant’s, then the non-movant’s must be taken as true.” Pastore v. Bell Tel. Co., 24 F.3d 508, 512 (3d Cir.1994). It is not the role of the judge to weigh the evidence or to evaluate its credibility, but to determine “whether there is a genuine issue for trial.” Anderson, 477 U.S. at 249, 106 S.Ct. 2505.

 

DISCUSSION

 

A. Is the Collateral property of the estate under § 541?

 

(1) Letter of credit proceeds drawn down pre-petition

 

The law regarding letters of credit in bankruptcy was discussed in detail by my colleague, the Honorable Peter J. Walsh, in the Oakwood Homes case:

 

A letter of credit comprises three separate contracts. The first generally arises between a buyer and a seller; here, the Debtor purchased insurance policies from the defendants. The second arises between the account party, here the Debtor, and the bank or issuer…. Finally the third contract arises between the issuer, …, and the beneficiaries of the letter of credit, the defendants.

 

The relationship between each pair of parties involved in a letter of credit transaction is entirely independent, although each relationship is necessary to support a letter of credit, somewhat like the three legs of a tripod. This rule is predicated on the ‘independence principle’ which seeks to preserve the viability of letters of credit, whose purpose is to allow the beneficiary to draw on the money before obtaining a judgment. This [independence] insulates the letter of credit from disputes over performance of collateral agreements and allows the letter of credit to function as a swift and certain payment mechanism.

 

In light of the fact that each of these three relationships is independent, it is ‘well-established’ that ‘a letter of credit and the proceeds therefrom are not property of the debtor’s estate.’ However, the Third Circuit has stated that ‘the collateral pledged as a security interest for the letter of credit is [property of the estate].’ [Int’l Fin. Corp. v. Kaiser Group Int’l Inc.] (In re Kaiser Group Int’l Inc.), 399 F.3d 558, 566 (3d Cir.2005)(quoting In re Compton Corp., 831 F.2d at 590-91).

 

Property in which a creditor has a security interest in has long been considered property of the estate. However, when this concept is coupled with the independence principle, some confusion results. To clarify, the Third Circuit has stated that “where the claim centers around the collateral pledged to the bank and not the distribution of the proceeds themselves, the ‘the fact that letters of credit themselves are not property of the estate is a red herring.’ ” Kaiser, 399 F.3d at 566

 

OHC Liquidation Trust v. Discover Re (In re Oakwood Homes Corp.), 342 B.R. 59, 67 (Bankr.D.Del.2006) (citations and internal punctuation omitted; emphasis in original).

 

The Debtors argue that the independence doctrine does not apply here because PIC drew down on the letters of credit pre-petition. Therefore, as of the Petition Date, PIC held cash-not letters of credit-as its collateral under the Collateral Agreement. The Debtors argue that they are not seeking to prevent a draw down or otherwise interfere in the contract between the issuers of the letters of credit and PIC, as beneficiary. Instead, the Debtors argue that, on the Petition Date, PIC held cash as security for the Debtors’ obligations under the Indemnity Agreement and Collateral Agreement and that this Collateral is property of the estate. In support of this argument, the Debtors rely, in part, upon the language of Bankruptcy Code § 541, which provides that “property of the estate” is defined as “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 U.S.C. § 541(a)(1). Section 541(a) “is intended to include any property made available to the estate … [even bringing] into the estate property in which the debtor did not have a possessory interest at the time the bankruptcy proceedings commenced.” United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).

 

Courts have recognized the “well-established” rule of bankruptcy law that “a letter of credit and the proceeds therefrom are not property of the debtor’s estate.” Int’l Finance Corp. v. Kaiser Group Int’l, Inc. (In re Kaiser Group Int’l Inc.), 399 F.3d 558, 566 (3d Cir.2005) quoting Kellogg v. Blue Quail Energy, Inc. (Matter of Compton Corp.), 831 F.2d 586, 589 (5th Cir.1987). See also Hechinger Investment Co. of Delaware, Inc. v. Allfirst Bank (In re Hechinger Investment Co. of Delaware, Inc.), 282 B.R. 149, 161 (Bankr.D.Del.2002).

 

In Kaiser, the Third Circuit Court of Appeals considered issues regarding the effect of a bankruptcy filing when a debtor has granted a security interest in its property to secure a letter of credit. In Kaiser, the debtor was a guarantor of a construction agreement between its subsidiary and a company known as Nova Hut. The subsidiary obtained a letter of credit in favor of Nova Hut and, as guarantor, the debtor pledged $11.1 million in cash as collateral for the letter of credit. After the bankruptcy filing, Nova Hut claimed that the subsidiary had failed a performance test, declared a default under the construction agreement, and drew down the letter of credit. The debtor filed a suit against Nova Hut, claiming that it had wrongfully drawn down the letter of credit and sought damages for the amount of cash pledged as collateral for the letter of credit. The Third Circuit held that the collateral posted by the debtor to secure the letter of credit was property of the estate. Kaiser, 399 F.3d at 566. The Third Circuit wrote: “[W]here the claim centers around the collateral pledged to the bank and not the distribution of the proceeds themselves, ‘the fact that letters of credit themselves are not property of the estate is a red herring.’ ” Kaiser, 399 F.3d at 566-67 quoting In re Mayan Networks, 306 B.R. 295, 299 (9th Cir. BAP 2004)(emphasis in original). See also Compton, in which the Fifth Circuit Court of Appeals wrote:

 

It is well established that a letter of credit and the proceeds therefrom are not property of the debtor’s estate under 11 U.S.C. § 541. When the issuer honors a proper draft under a letter of credit, it does so from its own assets and not from the assets of its customer who caused the letter of credit to be issued. As a result, the bankruptcy trustee is not entitled to enjoin a post-petition payment of funds under a letter of credit from the issuer to the beneficiary, because such a payment is not a transfer of debtor’s property.

 

Compton, 831 F.2d at 589-90 (citations omitted).

 

When the issuers of the letters of credit paid the LOC Proceeds to PIC, they did not use the Debtors’ property, but their own property to make payments to third parties. In contrast to the circumstances in Kaiser and Compton, the Debtors here do not allege that any of their own assets were pledged as collateral for the letters of credit. Because the letter of credit proceeds were not paid with or secured by the Debtors’ property, the fact that the proceeds were paid prior to the bankruptcy filing does not transform those entire proceeds into property of the estate.

 

Judge Walsh recognized this distinction in the Oakwood Homes decision. The debtor’s insurer in Oakwood held a bond and letter of credit to secure the debtor’s obligations under a premium loan agreement and indemnity agreement. Post-petition, the insurer in Oakwood drew down a $6.5 million surety bond and a $9.5 million balance on a letter of credit. The insurer paid only $1,460,000 to claimants and continued to hold proceeds of $14.5 million. The Oakwood debtor brought an adversary proceeding which included a count for turnover under Bankruptcy Code § 541 and § 542 of the surety bond and letter of credit proceeds. In dismissing this count, Judge Walsh said:

 

In this case, however, the plaintiff is seeking turnover of the letter of credit’s proceeds-it is not pursuing the pledged collateral. The plaintiff cannot prevail on this claim because, as stated, the proceeds of a letter of credit are not property of the estate and are, therefore, not recoverable under § 542.

 

In addition, “[t]urnover under 11 U.S.C. § 542 is a remedy available to debtors to obtain what is acknowledged to be property of the bankruptcy estate…. It is not a remedy available to recover claimed debts which remain unliquidated and/or in dispute.”

 

Oakwood Homes, 342 B.R. at 67 quoting Hechinger, 282 B.R. at 161.

 

The Debtors also rely upon a decision by the Eleventh Circuit Court of Appeals in which the Court decided that the doctrine of independence does not apply once the proceeds of a letter of credit are issued and, therefore, permitted the debtor to bring a turnover proceeding to recover excess letter of credit proceeds, writing:

 

Once the proceeds of a letter of credit have been drawn down, the underlying contracts become pertinent in determining which parties have a right to those proceeds. In other words, an irrevocable standby letter of credit does not nullify the obligations set forth in the underlying contracts …. Rather the letter of credit serves, among other things, to shift the burden of litigation … [The] beneficiary of the letter of credit holds the stake during the litigation.

 

Two Trees v. Builders Transport, Inc. (In re Builders Transport, Inc.), 471 F.3d 1178, 1186 (11th Cir.2006) quoting Resolution Trust Corp. v. United Trust Fund, Inc., 57 F.3d 1025, 1034-35 (11th Cir.1995). The Builders Transport Court considered which party had the right to the letter of credit proceeds by examining the relevant contract (in that case, a lease) under state law. The Court decided that South Carolina law applies the implied covenant of good faith and fair dealing in every contract and, absent a provision to the contrary, the letter of credit beneficiary (or, in this case its assignee) had a duty to return to the debtor any excess proceeds drawn down from the letter of credit that were not used to secure the debtor’s obligations. Builders Transport, 471 F.3d at 1187. See also Litzler v. Chamblee & Ryan, P.C. (In re TIC United Corp.), 2008 WL 2437868,(Bankr.N.D.Tex. June 17, 2008)(“[T]o the extent a letter of credit is drawn down in an amount in excess of that which the beneficiary of the letter of credit is legally entitled to receive, case law permits the recovery of those wrongfully drawn funds from the beneficiary for the benefit of the estate.” (Emphasis in original)); Phar-Mor, Inc. v. Florida Self-Insurers Guaranty Assoc., Inc. (In re Phar-Mor, Inc.), 344 B.R. 852, 856 (Bankr.N.D.Ohio 2005)(Court denied a motion to dismiss a complaint seeking an accounting and turnover of excess letter of credit proceeds, deciding that “proceeds from a letter of credit in excess of the amount needed to satisfy Debtor’s obligation are part of the bankruptcy estate because such proceeds must be returned to the estate.”). Thus, the Debtors may have a claim for excess LOC Proceeds (the “Excess LOC Proceeds”), which would become part of the Debtors’ estate. However, for the reasons stated by Judge Walsh in Oakwood Homes and Hechinger, the Debtors may not obtain those excess proceeds through a § 542 turnover action before the amount of the claim is liquidated. Oakwood Homes, 342 B.R. at 67 quoting Hechinger, 282 B.R. at 161.

 

I am unable to determine, on this record, whether or how much of the LOC Proceeds have been disbursed (or disbursed properly), or may be reserved to pay potential future claims.

 

(2) Cash deposit

 

The Debtors also argue that the $477,000 Deposit, given to PIC as security for the Debtors’ obligations under the Indemnity Agreement, is property of the estate. A cash deposit in which a debtor continues to have a legal interest and a residual equitable interest is property of the estate.   Canzone v. Hammon (In re Hammon), 180 B.R. 220, 223 (9th Cir. BAP 1995). See also Oakwood Homes, 342 B.R. at 67 (“Property in which a creditor has a security interest in has long been considered property of the estate.”) (citations omitted).

 

In its counter-statement of facts, PIC claims that it already returned $516,319.86 (the “Returned Amount”) from the Collateral to the Debtors by paying, at the demand of the Debtors, third party claimants who asserted cargo claims against the Debtors. (See PIC Response, docket no. 45, Counterstatement of Facts, ¶ 18). I am unable to determine, on this record, when such sums may have been returned to the Debtors or whether the Returned Amount is from the LOC Proceeds or the Deposit.

 

B. Did PIC violate the automatic stay of $362 by using the Collateral to pay claims post-petition?

 

Because the Deposit and any Excess LOC Proceeds are property of the estate, PIC may have violated the automatic stay if it used the either the Deposit or Exceed LOC Proceeds without seeking relief under Bankruptcy Code § 362(d). Until the record is more fully developed so that a determination can be made about the issues discussed in Parts A(1) and (2), supra, I cannot make any further determination.

 

C. Did PIC violate § 549 by paying workers compensation claims without authorization post-petition?

 

Section 549 permits a trustee to avoid a transfer of property of the estate that occurs after the commencement of the case. Because there are issues of material fact regarding the amount of Excess LOC Proceeds and PIC’s disposition of the LOC Proceeds and the Deposit, the Debtors’ request for summary judgment on the § 549 claims will be denied.

 

CONCLUSION

 

The LOC Proceeds paid to PIC prior to the bankruptcy filing are not property of the estate, except to the extent that there are any Excess LOC Proceeds to which PIC is not entitled under the terms of the Collateral Agreement and Indemnity Agreement. The Deposit is property of the estate under Bankruptcy Code § 541.

 

An appropriate order follows.

 

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT

 

AND NOW, this 5th day of October, 2009, upon review of the Plaintiffs’ Motion for Partial Summary Judgment (docket no. 42), the Defendant’s response thereto and related filings, after oral argument, and for the reasons set forth in the foregoing Memorandum, it is hereby ORDERED and DECREED that

 

1. The Plaintiffs’ Motion for Partial Summary Judgment is GRANTED, in part, as follows: Excess LOC Proceeds and the Deposit, as defined in the accompanying Memorandum, are property of the estate pursuant to Bankruptcy Code § 541.

 

2. the Plaintiffs’ Motion for Partial Summary Judgment is hereby otherwise DENIED.

 

3. The parties shall be prepared to discuss their remaining pre-trial needs at the status hearing presently fixed for Tuesday, October 6, 2009, at 4:00 p.m.

 

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(E), (G) and (O).

 

In anticipation of an upcoming scheduled status hearing on this matter, the Debtors submitted a status report dated October 1, 2009 (docket no. 68), in which it says:

 

16. At the time the Motion was filed, Protective [PIC] had expended approximately $2.3 million of the Collateral. While the Motion has been pending, Protective has continued to expend the Collateral, and, as of the end of June 2009, had paid approximately $3 million in satisfaction of (a) bodily injury/property damage claims (approximately $80,000), (b) cargo claims (approximately $500,000), (c) workers’ compensation claims (approximately $2.2 million), and (d) expenses of Protective (approximately $270,000).

 

16. [sic] As of June 2009, Protective continued to hold approximately $1 million in reserve in connection with the Collateral, including approximately $450,000 in connection with bodily injury/property damage claims, $360,000 in connection with cargo claims, $65,000 in connection with workers’ compensation claims, and $150,000 in connection with expenses.

 

17. Upon information and belief, out of that $1 million still held in reserve by Protective from the Collateral, there are very few actual claims asserted against either the Debtors or Protective, the largest of which is a $292,000 cargo claim by Phillips Electronics North America Corporation, filed as a proof of claim in the Chapter 11 Cases but not asserted by suit against Protective.

 

PIC has not responded to the Debtors’ status report and the report is not taken into consideration as part of the record now before me in connection with the disposition of the Summary Judgment Motion.

 

However, PIC asserted that it returned $516,319.86 to the Debtors by paying that amount to third party claimants at the Debtors’ request. PIC does not allege when this occurred. (Affidavit of Craig Morfas, PIC’s Vice President of Claims, p. 7) (docket no. 46). See Part A(2), infra.

United States District Court,

S.D. New York.

In re M/V DG HARMONY and Consolidated Cases.

No. 98 Civ. 8394(DC).

 

Sept. 30, 2009.

 

MEMORANDUM DECISION

 

CHIN, District Judge.

 

This case arises from an explosion and fire aboard the M/V DG HARMONY on November 9, 1998, while it was off the coast of Brazil. Following a bench trial, I held that the explosion and fire originated in cargo hold 3 when a shipment of calcium hypochlorite hydrated (“cal-hypo”) self-heated and went into thermal runaway. In re M/V DG Harmony, 394 F.Supp.2d 649 (S.D.N.Y.2005) (“Harmony I” ). I held that PPG Industries, Inc. (“PPG”), the manufacturer and shipper of the cal-hypo, was liable to the owner and time charterer of the HARMONY and the owners and shippers of other cargo aboard the HARMONY (respectively, the “Vessel Owners” and the “ Cargo Interests”), for strict liability, negligence, and failure to warn.

 

On appeal, the Second Circuit reversed in part, affirmed in part, and remanded for further proceedings. In re M/V DG Harmony, 533 F.3d 83 (2d Cir.2008) ( “Harmony V” ). The Second Circuit reversed my determinations that PPG was liable on strict liability and negligence theories. It affirmed my conclusions that (i) the explosion and fire were caused by PPG’s shipment of cal-hypo, (ii) PPG had a duty to warn plaintiffs of the risks, and (iii) PPG breached that duty. Nonetheless, it vacated and remanded for further proceedings on the sole issue of whether “the absent warning, if given, would have affected the carrier’s stowage decision and thus prevented the explosion.” Harmony V, 533 F.3d at 97.

 

Before the Second Circuit decided the appeal, I issued three other decisions in this case. See In re M/V DG Harmony, 436 F.Supp.2d 660 (S.D.N.Y.2006) (granting summary judgment in favor of PPG dismissing claims of carrier defendants for indemnification) (“Harmony II” ); In re M/V DG Harmony, No. 98 Civ. 8394(DC), 2006 WL 3821851 (S.D.N.Y. Dec. 29, 2006) (granting motion for reconsideration, holding that summary judgment should not have been granted with respect to South American indemnity claims and permitting carrier defendants to proceed with those claims) (“Harmony III” ); In re M/V DG Harmony, No. 98 Civ. 8394(DC), 2007 WL 895251 (S.D.N.Y. Mar. 16, 2007) (clarifying that carrier defendants were 0% at fault for loss of HARMONY) (“Harmony IV” ).

 

On remand, the parties submitted additional papers and arguments. The findings of fact and conclusions of law set forth in Harmony I, to the extent they were affirmed by the Second Circuit in Harmony V, are hereby incorporated. The following constitute my additional findings of fact and conclusions of law, with some of the prior findings and conclusions repeated for context.

 

DISCUSSION

 

1. The Cal-Hypo on the HARMONY

 

Cal-hypo is an unstable substance that decomposes at room temperature. The higher the temperature to which it is exposed, the greater the rate of decomposition. When cal-hypo decomposes, it generates heat and will self-heat.   Harmony V, 533 F.3d at 87; Harmony I, 394 F.Supp.2d at 656. When the decomposition process generates heat faster than the heat can dissipate, cal-hypo goes into thermal runaway, an escalating reaction that continues until the material explodes and a fire ensues. The critical ambient temperature (“CAT”) is the temperature at which the product will retain more heat than it dissipates, leading to thermal runaway. Harmony V, 533 F.3d at 87; Harmony I, 394 F.Supp.2d at 656.

 

In August 1998, just a few months prior to the voyage in question, PPG began shipping-for the first time-cal-hypo in cardboard fiber drums that weighed 136 kilograms (300 pounds) when full. Harmony I, 394 F.Supp.2d at 659, 663, 674. (See Kuhn Tr. 60-61 (300-pound drums first used in 1998); Fast Tr. 121-25 (136-kilogram drums first used in shipment sent August 1998)). PPG shipped the cal-hypo on the HARMONY in these cardboard fiber drums. Four drums were loaded on each wooden pallet. Each pallet, with its four drums, was then shrink-wrapped in plastic. Thirty pallets were then packed into an unrefrigerated, metal container, stacked three-high, so that there were three layers of ten pallets each, for a total of 120 drums in each container. The cal-hypo was placed into the drums by PPG when it was still hot (34°C) and under circumstances that did not permit it to cool down. PPG prepared ten containers in this manner. Harmony V, 533 F.3d at 88; Harmony I, 394 F.Supp.2d at 659-60.

 

This packaging method, with this particular configuration, lowered the CAT of the cal-hypo to below 41°C. Harmony V, 533 F .3d at 95-96; Harmony I, 394 F.Supp.2d at 669. The cal-hypo, packaged in this manner, was less stable than anyone realized. Harmony V, 533 F.3d at 96; Harmony I, 394 F.Supp.2d at 669. The cal-hypo, packaged in this manner, presented dangers about which the carrier and crew could not have reasonably been expected to know and PPG, therefore, had a duty to warn about the risks. Harmony V, 533 F.3d at 83, 95; Harmony I, 394 F.Supp.2d at 673.

 

2. The Warning and Instructions Provided by PPG

 

The transportation of hazardous goods by sea is governed by a complex set of international rules and regulations, which are detailed in Harmony I, 394 F.Supp.2d at 657. See also Harmony V, 533 F.3d at 88-89. The International Maritime Organization (the “IMO”), which is affiliated with the United Nations (the “UN”), has developed a code, the International Maritime Dangerous Goods Code (the “IMDG Code” or the “Code”), to govern the carriage of dangerous goods aboard ships. There is an International Convention for the Safety of Life at Sea (“SOLAS”), to which the United States and other member nations of the UN are signatories. The members of the IMO and the signatories to the SOLAS convention have adopted the IMDG Code. The Code is relied on by shippers, manufacturers, tonnage centers, stowage planners, and ships’ crews to make decisions on the carriage and stowage of dangerous goods. Harmony I, 394 F.Supp.2d at 657.

 

PPG booked the shipment of ten containers with Cho Yang, a member of the Independent Carriers Alliance (the “ICA”). Harmony I, 394 F.Supp.2d at 653. PPG sent a letter of instruction to its agent and freight forwarder, Footner & Co. (“Footner”). (Gutierrez Tr. 46, 68; Shifflet Tr. 9). The letter gave instructions regarding the booking of PPG’s hazardous cargo. (Gutierrez Tr. 43-45, 85; Shifflet Tr. 9-14). PPG provided information about the cargo, including the cargo’s UN designation number (UN 2880), the IMDG Code Class (5.1), and the page of the Code on which stowage instructions could be found (5138). (JX 5; Kennedy Tr. 127-33). The IMDG Code’s stowage instructions for UN 2880 specified only that the cargo be stowed away from sources of heat in excess of 55°C for periods of 24 hours or more. Harmony I, 394 F.Supp.2d at 657, 675.

 

From the information provided by PPG, Cho Yang prepared a hazardous cargo request form that contained the information provided by PPG. (JX 5; Kennedy Tr. 127-30). Cho Yang eventually sent the hazardous cargo request form to the Tonnage Center of the ICA. (Kennedy Tr. 26-31, 44-45, 69-71; Afonin Tr. 181-83, 196-98). The Tonnage Center reviewed the form to ensure the cargo was a permitted cargo, and then it prepared a pre-stow plan for the vessel. (Kennedy Tr. 69-71; Shacham Tr. 151-53, 260; Afonin Tr. 181-83, 196-98). Once the Tonnage Center approved the hazardous cargo request, Cho Yang approved the booking of the cargo, updated the booking information in its system, and relayed the information to PPG. (Miller Tr. 26-31, 43-45; Kennedy Tr. 100-06, 128-35).

 

PPG loaded the containers with its cal-hypo and prepared a dock receipt for each container. (JX 6; Rogers Trial Tr. 699-701; Gutierrez Tr. 55; Shifflett Tr. 8-14; Kennedy Tr. 139-44). The dock receipts included all the hazardous cargo information, including IMDG Code class, UN number, packing group, the page number for the specific entry in the IMDG Code, and the container numbers. (JX 6). PPG signed the dock receipts, certifying that the containers had been packed in accordance with the regulations and that the materials were in proper condition for transportation. Harmony I, 394 F.Supp.2d at 660, 674. PPG then forwarded (through Footner) the receipts to Cho Yang. (Shifflet Tr. 8-14; Kennedy Tr. 139-44).

 

The containers were also accompanied by a Material Safety Data Sheet prepared by PPG. The sheet warned that the product was a “Strong Oxidizing Agent” that could cause fire or explosion with contamination. The sheet also stated that “[p]roduct decomposes at 180 C releasing oxygen gas.” It also stated that the product was to be stored “in a cool, dry, well-ventilated place …, away from heat, sparks, flames, direct sunlight, and other sources of heat.” With respect to stability, it stated that the product was “[u]nstable above 117 C.” It also stated, with respect to transportation information, that the product was a 5.1 oxidizer, UN 2880. Harmony I, 394 F.Supp.2d at 660.

 

Cho Yang prepared, from the information provided by PPG, a load list to be sent to the Tonnage Center. (Schacham 7/11/00 Tr. 155-56, 285-93; Afonin Tr. 172-77; Isenberg Tr. 44-46; Wingfield Tr. 137-42; Carlo Tr. 135-37). The Tonnage Center received load lists from each of the ICA members. (Afonin Tr. 172-74). The Tonnage Center used the load lists and hazardous cargo request forms to prepare the pre-stow plan for the vessel. The Tonnage Center would review the information to determine whether there were any stowage restrictions, and it would select a stowage location for individual containers. (Afonin Tr. 181-83, 193-97; Shacham 7/12/00 Tr. 155-59).

 

In selecting stowage locations, the Tonnage Center was guided by concerns about hazardous cargo. If a cargo could only be stored on deck, for example, then it would provide that the cargo would be stowed on deck only. (Shacham 7/11/00 Tr. 158-59). Once the Tonnage Center prepared the pre-stow plan, it forwarded the plan to the stevedores who actually loaded the containers. (Shacham 7/12/00 Tr. 335-40).

 

The stevedores received a stowage plan for all cargo to be loaded onto the vessel, including hazardous and non-hazardous, and a separate “mini” pre-stow plan showing only the stowage locations for hazardous or other special cargo. (Wingfield Tr. 175-78; Carlo Tr. 153-57). The stevedores received load lists from other ICA members as well. (Isenberg Tr. 44-46, 55; Wingfield Tr. 137-41; Carlo Tr. 135-37). The stevedores would then create a loading plan for the containers (the “load-out stow plan”), using the Tonnage Center stow plan as well as the load lists and other information provided by other ICA members. (Isenberg Tr. 55; Moye Tr. 66-69; Wingfield Tr. 277-78). For hazardous cargo, the stevedores did not deviate from the slots selected by the Tonnage Center unless the Tonnage Center or the vessel’s chief mate was consulted about moving a particular container of hazardous cargo. (Isenberg Tr. 73-74, 138-39; Wingfield Tr. 77, 278-79).

 

Cho Yang also prepared a “Dangerous Goods Summary,” a hazardous or dangerous cargo manifest. (JX 57). The Dangerous Goods Summary here included the information provided by PPG concerning the containers of cal-hypo. (JX 57). The Dangerous Goods Summary was provided to the vessel before the hazardous cargos were loaded in the particular port, and the captain would receive the manifests, sign for them, and then pass them along to the chief mate, who was the head cargo officer. The Summary also contained a column for “stowage” and a column for “remarks.” Harmony I, 394 F.Supp.2d at 650. (Balitzki Trial Tr. 243, 249-50).

 

PPG specifically advised that the cargo was properly designated UN 2880 and could be safely stowed in accordance with the instructions at page 5138 of the IMDG Code for UN 2880. (JX 5; Afonin Tr. 181-83, 190-98). Without any information to the contrary, the Tonnage Center selected a below-deck location for PPG’s containers in bays 25 and 27. (Wingfield Tr. 180-84; Afonin Tr. 190-98, 203; PPG Exh. 386). The stevedores received the pre-stow plan and the load list from Cho Yang, which listed the ten PPG containers by container number and specified the UN number, IMDG Code Class, and page in the IMDG Code for stowage information. (Carlo Tr. 135-44, 153-60; Wingfield Tr. 137-42, 152-53). In accordance with the information provided by PPG and the Tonnage Center, the stevedores created their load-out plan and provided for PPG’s ten containers of cal-hypo to be stowed below deck in hold 3. (Wingfield Tr. 179-81, 237-40).

 

3. The HARMONY Followed Instructions

 

In general, when the HARMONY arrived in a port, the vessel would receive a general loading plan covering all cargo that was going onto or off the vessel in that particular port. When dangerous goods were loaded on board, Balitzki, the captain, would receive dangerous goods manifests. He would sign for them and then pass them on to the chief mate, who was the cargo officer. The chief mate would check the ship’s documents of compliance to ensure the proper stowage of dangerous goods. Once the chief mate determined that the cargo was permitted by the Document of Compliance, he would then check the IMDG Code to determine whether there were any specific stowage restrictions. The captain and the chief mate would also consult the Storck Guide, which set forth guidelines on segregation. Harmony I, 394 F.Supp.2d at 660.

 

The chief mate would also check the location of the dangerous cargo containers by reviewing the load-out stow plan, the Dangerous Cargo Summary provided by each shipping line, and the IMDG Code to ensure stowage location was proper. (Kovshel Tr. 119-21, 127-28, 163, 176-77, 324; Balitzki Trial Tr. 249-50, 254). If the chief mate felt that a stowage location selected for a hazardous cargo was not proper, he could direct the stevedores to change the storage location. (Kovshel Tr. 170, 451-53).

 

The vessel received the stevedore’s load-out plan as well as the Dangerous Goods Summary for PPG’s containers of cal-hypo as well as the dock receipts prepared by PPG. Harmony I, 394 F.Supp.2d at 660. (JXs 57, 84; Balitzki Trial Tr. 244, 249-55; Wingfield Tr. 237-41; Kovshel Tr. 119-28, 176-77, 441-45). The vessel’s chief mate, Yuri Kovshel, used the Dangerous Goods Summary to check and record the stowage location of the PPG cal-hypo containers (as well as other hazardous cargo) to ensure that the location indicated on the pre-stow plan was proper. (Kovshel Tr. 176-77, 398-400; JX 105; Balitzki Trial Tr. 255). If PPG had advised that the cal-hypo could not be stowed below deck, the chief mate would have complied with that instruction. (Kovshel Tr. 240-41, 522-23). In fact, the chief mate asked the stevedores to change the location of certain other non-hazardous containers because he was not comfortable with the stowage location. (Wingfield Tr. 220-23, 283-84).

 

The ten containers of cal-hypo were stowed below deck in hold 3, in bays 25 and 27, in slots 270802, 270602, 270402, 250802, 250602, 250402, 250804, 250604, 250404, and 250406. Both the captain and the chief mate were aware of, and approved, the stowage positions of the cal-hypo near bunker tank 5. The captain explained that he was comfortable with this stowage plan because it was not prohibited. Likewise, the chief mate approved of the location. The HARMONY’S Document of Compliance showed that cargo designated class 5.1 could be stored in hold 3. Harmony I, 394 F.Supp.2d at 661-62. The chief mate and master approved of the stowage location of container 250404 based on the UN number and IMDG Code information provided by PPG and anticipated hold temperatures. (Balitzki Trial Tr. 250-57, 260, 262). The vessel personnel approved the below-deck stowage location of the cal-hypo containers based on the information provided to them. Harmony I, 394 F.Supp.2d at 661-62.

 

The HARMONY had a list of all the dangerous goods containers on board when the vessel departed Miami on October 30, 1998. The vessel also had a bay plan showing the stowage positions of all the dangerous cargo containers. There was no other hazardous material stowed in hold 3. There were some additional hazardous materials stored under deck in holds 1 and 2. Harmony I, 394 F.Supp.2d at 662. Some other hazardous cargo was stowed on deck. (Kovshel Tr. 391-93; JX 28).

 

4. PPG’s Warning Was Inadequate

 

PPG did not adequately warn of the risks associated with shipping the cal-hypo in 300-pound drums, packed when still warm, onto pallets of four drums each, which were then shrink-wrapped and stacked three-high in unrefrigerated, unventilated metal containers, with 120 drums in each container, to be stored in temperatures typically found in the hold of a container ship. Harmony I, 394 F.Supp.2d at 661-62, 674-75.

 

If PPG had given special instructions regarding the containers in question, including any instructions concerning the use of special equipment or the stowage of the containers on deck or below deck, Cho Yang would have relayed those instructions. (Kennedy Tr. 87-88, 132-35, 212-14; Gruelle Tr. 236-37, 244, 248; Swenson Tr. 195). PPG did not advise that its cal-hypo was packed under conditions that had not allowed it to cool properly, or that the ten containers were not safe to be loaded in accordance with the stowage instructions in the IMDG Code for UN 2880, or that the containers should not be loaded under deck, or that the containers should not be exposed to temperatures near 41°C. PPG did not specify that refrigerated containers should be used, and in fact, PPG, itself, had loaded the cal-hypo into unrefrigerated containers. (JX 6; JX 57; Kovshel Tr. 445-49). PPG did not give any warning that the CAT of its cal-hypo, packed in this configuration, was below 41°C. There was no warning on any of the documentation prepared by PPG or from information provided by PPG that the vessel should not follow the IMDG Code or that the ten containers should be stored only in a refrigerated hold or that the containers should only be stowed on deck. (Kovshel Tr. 445-49). To the contrary, PPG only warned that the cal-hypo would be unstable at temperatures above 117°C, and the IMDG Code instructed only that the cargo should be kept away from sources of heat where temperatures greater than 55°C would be encountered for more than 24 hours. Harmony V, 533 F.3d at 95-96; Harmony I, 394 F.Supp.2d at 675.

 

PPG should have warned that the IMDG Code for UN 2880 was not proper for cal-hypo shipped in the manner it was shipped here. By designating the cal-hypo as UN 2880, PPG was representing that the cargo was safe to be loaded below deck. (Gardiner Trial Tr. 997). As the Second Circuit has now agreed, PPG breached its duty to warn by giving warnings that were “ ‘inadequate and misleading,’ “ and by failing to warn the carrier of “the dangers posed by the calhypo it was shipping in this particular configuration.” Harmony V, 533 F.3d at 95-96.

 

5. If PPG Had Given A Proper Warning, The Explosion Would Have Been Averted

 

If PPG had given a proper warning, the carrier would have changed its stowage decision, and the explosion would have been averted. See Harmony V, 533 F.3d at 97; Contship Containerlines, Ltd. v. PPG Indus., Inc., 442 F.3d 74, 78 (2d Cir.), cert. denied, 549 U.S. 1020 (2006). As the Second Circuit held, “PPG’s attestations and the IMDG Code shaped the carrier’s reasonable expectations about the dangers of its calhypo.” Harmony V, 533 F.3d at 95. The stowage decisions here flowed directly from the information provided by PPG. As discussed above, the vessel personnel and stow planners relied on the information provided by PPG. They believed that it was safe to stow the cal-hypo below deck, in temperatures one would ordinarily expect to find in cargo hold 3. See id. 533 F.3d at 95 (“when receiving a cargo like calhypo, the dangerousness of which is not open and obvious, a carrier may rely on a shipper’s attestations as to the cargo’s characteristics”).

 

If PPG had advised Cho Yang that the cal-hypo in this configuration could only be stored above-deck or otherwise required special handling or that it could not be stored in temperatures one would ordinarily find in a cargo hold, that information would have been passed on to the Tonnage Center, the stow planners, and eventually the vessel personnel. If PPG had advised that the cal-hypo could not be stowed below deck or in temperatures in excess of 41°C, the vessel personnel would have complied with those instructions, or rejected the cargo. (See Balitzki Trial Tr. 249-60, 281-83; see also Gardiner Trial Tr. 1005-06). Captain Balitzki, an experienced mariner who was safety-conscious, would not have ignored a proper warning from PPG. If PPG had given adequate, proper warnings, the stow planners and vessel personnel would have acted on those warnings and the explosion would have been avoided.

 

6. PPG’s Arguments Fail

 

PPG argues that the absent warning, if given, would have been ignored, relying principally on the argument that the P & I Club Circular, which gave some warning of the risks presenting by cal-hypo, was ignored by the vessel. As I have already held, the Circular was preliminary in nature and extremely vague, and it did not address the configuration at issue in this case. Harmony I, 374 F.Supp.2d at 670 n. 30. Moreover, the issue presented is not whether an industry informational circular provided sufficient warnings but whether PPG did so, for it is the shipper’s instructions that control. Indeed, PPG surely was aware of the Circular, or its contents, and yet it permitted the cal-hypo to be shipped on the HARMONY in the configuration in question. Id.

 

PPG also argues that the cargo interests and vessel interests have offered only circumstantial evidence to prove that the absent warning would have made a difference if it had been given. Even assuming that is true, there is no reason that circumstantial evidence would not suffice, as long as the circumstantial evidence proved the causal link by a preponderance of the evidence. Here, I find, by a preponderance of the evidence, that if PPG had given a proper warning, the stow planners and vessel personnel would have taken the necessary precautions and the casualty would have been averted.

 

I have considered PPG’s remaining arguments and I reject them.

 

CONCLUSION

 

For the reasons set forth above, judgment will be entered in favor of the Vessel Owners and the Cargo Interests against PPG for the stipulated loss amounts.

 

SO ORDERED.

 

S.D.N.Y.,2009.

In re M/V DG HARMONY

Slip Copy, 2009 WL 3170301 (S.D.N.Y.)

 

END OF DOCUMENT