* Of the District of Puerto Rico, sitting by designation.



# Un ited Sta tes C our t of A pp eals

For the First C ircuit

No. 03-2625 THE HOME INSURANCE COMPANY, Plaintiff, Appellant,

v. PAN AMERICAN GRAIN MANUFACTURING CO., INC.

and ZORRA TRANSPORT, INC., Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Jay A. García-Gregory, U.S. District Judge ]

Before Boudin, Chief Judge , Torruella, Circuit Judge , and Fusté, * District Judge .

WilliamA. Graffam , with whom Jorge F. Blas ini an d Jiménez, Graffam & Lausell , were on brief, for appellant. Derek A. Walker , with whom Heather J. Valliant and Cha ffe, McCall, Phillips, Toler & Sarpy, L.L.P. , were on brief, for appellees.

February 4, 20051 The ITB ZORRA's prop elle rs hit the embankment, and during

attempts to extr icat e it, a fire broke out in the engine room, resulting in the loss of the vessel. See Pan Am. Grain , 295 F.3d at 113.

2 A vessel is unseaworthy if it is not fit and "is unable to withstandthe perils of an ordinary voyage." Black's Law Dictionary 1539 (6th ed. 1990). This includes a vessel that is not manned by a competent crew. Id. ; see also Usner v. Luckenbach Overseas Corp. , 400 U.S. 494, 517 (1971) (listing "unfit crew" as one form of unseaworthiness). -2-

TORRUELLA, C irc uit Judge . This appeal is a sequel to events that have already been litigated before this court. See Pan Am. Grain Mfg. Co., Inc. v. P.R. Ports Auth. , 295 F.3d 108 (1st Cir. 2002). In that case we ruledthat the loss of the integrated tug and barge ZORRA ("ITB ZORRA") came about because of the negligence of its crew in straying from the charted navigation channel, and not -- as claimed by the ITB ZORRA's owner, the Pan American Grain Company ("Pan American") -- b ecause of underwater obstructions in the docking area. 1

The starting point to the present appeal, however, is the issuance of a mar ine hull insurance policy ("the policy") by plaintiff-appellant the Home Insurance Company ("Hom e") t o Pan American that provided coverage up to $6,500,000 in the event the ITB ZORRA was lost as a result of any of a variety of casualties. Pan American filed a claim on this policy for losses sustainedwhen the ITB ZORRA caught fire on April 24, 1995. Home denied the claim, alleging that the casualty was the result of the vessel's unseaworthiness, 2 a condition which is excepted under the terms of3 The pertinent parts of the H/P Settlement Agreemen t ar e

reproduced as Appendix I of this opinion. -3- the policy. Thereafter, Home filed suit seeking a declaratory judgment of non-covera ge, to which Pan American responded with a counterclaimseeking recovery under the policy for the full amount of $6,500,000, in addition to various other damages. The Home Ins. Co. v. Pan Am. Grain Mfg. Co., Inc. , No 95-1794 (D. P.R. Aug. 21, 1995) ("Answer and Counter-Claim"). Three years of liti gati on followed, at the end of which Home and Pan American entered into a settlement agreement, The Home Ins. Co. v. Pan Am. Grain Mfg. Co., Inc. , No 95-1794 (D. P.R. Ap r. 30, 1998) ("H/P Settlement Agreem ent"), the interpretation of which is the central issue of this appeal. 3

Pursuant to the term s of the H/P Settlement Agreement, Home paid Pan American $3,333,000 in exchange for which Pan American agreed that Home would receive one third of any future recoveryfrom third parties by Pan America n unti l Home had recovered$1,333,000, and one third of all additional Pan American recoveries over a total of $10,000,000 until Home recouped its full $3,333,000. H/P Settlement Agreement at para. 6. At that time, Pan American was i mmersed in several attempts to recover damages for this casualty, including an arbitration proceeding in New York, five additional lawsuits in the U.S. District Court for Puerto Rico-4-

against various priv ate parties, and an action against the U.S. Coast Guard in Miami.

The H/P Settlement Agreement further provided that until such time as Home recouped an initial sum of $1,333,000, Pan American was required to notify Home of any proposed third party settlement of ITB ZORRA claims, and to receive Home's written approval before effectuating any such settlement. Id. at para. 7. However, once the first $1,333,000 were recoveredby Home, although Home was entitled to share in additional settlements over $10,000,000, up to the $3,333,000 total paid to Pan American, prior notice to Home and its approval were not required.

One further provision of the H/P Settlement Agreement is of re levance; i ndeed, it is at the crux of the present dispute: Although Home was to share in all recove ries of third party ITB ZORRAclaims up to the total paid by Home to Pan American, Home was not entitled to share in any " verdict or awardin favor of Pan American that specifically and separately award(s) Pan American a recovery for punitive damages and/or loss of use ." Id. at para. 6 (emphasis supplied).

Approximately one year after the parties entered into the H/P Settlement Agreement, Home learned t hat Pan American had settledone of its outstanding I TB ZOR RA suits, with Ochoa Fertilizer, Inc., for $800,000 ("the Ochoa settlement"). Pan American gave no prior notice of this settlement to Home, nor did-5-

Home give approval for Pan American to enter into the Ochoa settlement. Pan American claimed that the Ochoa settlement was for damages for "loss of use" of the ITB ZORRA, and thus specifically excludedfrom the H/P Settlement Agreement. Home, however, was not

so easily put off. It c onten ded that, irrespective of the label given to the amount s r ecovered under the Ochoa agreement, these sums could not constitute a recovery for "loss of use" of the ITB Z ORRA, since under maritime law a shipowner is barre d fro m recovering for loss of use wher e the insu red vessel was a total loss, as was t he case of the ITB ZORRA. See 2 Thomas J. Schoenbaum, Admiralty and Maritime Law , § 14-6, at 118-119 (4th ed. 2004) ("Only in a partial loss situation is there liability for [loss of use] damages."). Home further alleged that the Ochoa settlement was not the result of a "verdict or award," and thus was also not excluded from coverage of the H/P Settlemen t Agre ement. Home therefore insisted on entitlement to one third of the $800,000 Ochoa settlement pursuant to the H/P S ettlement Agreement, to be creditedtowards the amounts Home had paid to Pan Amer ican. Pan American rejected this demandan d Home responded by filing this action, se eking to recover one third of the $800,000 Ochoa settlement, plus interest and attorneys' fees.

In the course of the proceedings, Home filed for summary judgment alleging (1) breach of the H/P Settlement Agreement, and (2) fraudulent inducement of th e H/P Settlement Agreement. Pan-6-

American cross-motio ned on Home's claim of breach of the H/P Settlement A gree ment, and opposed the claim of fraudulent inducement, moving for summary judgment on both issues.

The motions we r e initially argued before a magistrate judge who ruled that there existed no genuine issues of material fact because the H/P Settlement Agreement was clear on its face as excluding Home from recovering for damages for loss of use of the ITB ZORRA. Home I n s. Co. v. Pan Am. Grain & Mfg. Co., Inc. , No. 00-1184 (D. P.R. Apr. 19, 2002) ("Report and Recommendation"). Thus, the magistrate judge concluded that, as a matter of law, Pan American did not breach the terms of the H/P Settlement Agreement when it failed to notify Home, or seek Hom e's approval, of the Ochoa settlement. The magistrate judge further found that the Oc hoa settlement constituted an "award" because it was "an agreement granted by a formal process -- a mutually agreed upon resolution to negotiation boun d by voluntary signatures of the involvedparties." Report and Recommendation at 7. In so ruling, the magistrate judge relied on Black's Law Dictionary, Pocket Edition 54 (Bryan Garner et al., ed. 1996), which defines "award"

as "to grant by formal process or by judicial decree." See Report andRecommendation at 7. The magistrate judge, in effec t, consideredthat if the term"award" referred only to the result of

a formal judicial process, it would be redundant to the alternative term, "verdict," contained in the H/P Settlement Agreement, which-7-

also encompasses a judicial decision. Id. at 7-8. He thus found that the Ochoa settlement was an "award," and that therefore Home

was not entitled to share in that settlement under the terms of the H/P Settlement Agreement. Addi ti onally, the magistrate judge decidedthat because the Ochoa settlement "plainly states that the payment of $800,000 is to settle 'claims or future claims for loss of use of property,'" id. at 10, the recovery of such damages was excluded by the specific terms of the H/P Settlement Agreement.

The magistrate judge's reasoning and recommendation that summaryjudgment be granted in favor of Pan American was adopted in essence by the district court, see Home Ins. Co. v. Pan Am. Grain & Mfg. Co., Inc. , 286 F. Supp. 2d 190 (D. P.R. 20 03), and this appeal was taken from that decision.

The standard of review of a distri ct court's grant of summary judgment is de novo . Tumv. Barber Foods, Inc. , 360 F.3d 274, 279 (1st Cir. 2004). The same standardof rev iew is applicable to a district court's interpretation of a settlement agreement, because i t es sentially involves the revisiting of a question of law. See Alternative Energy, Inc. v. St. Paul Fire & Marine Ins. Co. , 311 F.3d 450, 451-52 (1st Cir. 2002). I. We disagree with the district court's interpretation of the term "award." Under Puerto Rican law, "[i]f the terms of a contract are clear and leave no doubt as to the intentions of the-8-

contracting parties, the literal sense of its stipulations shall be observed." 31 P.R. Laws Ann. § 3471 (1991). This court has endorsedthe Puerto Rico Supreme Court's con clus ion that "clear" terms are those that "in themselves are lucid enough to be understoodin one sense alone, without leaving any room for doubt, controversies or difference of interpretation . . . ." Heirs of Ramírez v. Superior Court , 81 P.R.R. 347, 351 (1959) (internal citati on omitted), quoted in Catullo v. Metzner , 834 F.2d 1075, 1079 (1st Cir. 1987); see also Borschow Hosp. & Med. Supplies, Inc.

v. César Castillo, Inc. , 96 F.3d 10, 15-16 (1st Cir. 1996) (espousing sam e standard). Our disagreement with the district court about the meaning of "award" does not suggest that the term itself admits of ambiguity. It is our view that the interpretation below went beyond the clear meaning of the term as used in legal writing in general, and in the H/P Settlem ent Ag reement in particular, by misconstruing the voluntary settlement negotiation between parties as the kind of "formal process" referred to in the Black's pocket edition definition.

Black's Law Dictionary137 (6th ed. 1990) defines "award" in keeping with our understanding of what that term means in everyday legal parlance:

award , vb . To gra nt, concede or adjudge to. To give or a ssign by sentence or judicial determination or after careful weighing of evidence. Thus, a jury awards damage s ; the court awards an injunction; one awards a-9- contract to a bidder. To confer as being deserved or merited. award, n . The decision or determination renderedby arbitrators or commissioners, or other private or extrajudicial deciders, upon a controversy submitted to them; also the writing or document embodying such decision. Clearly, the Ochoa settlement does n ot c ome within the definition of "award" when used as a noun, as it is not a extrajudicial determination by third party decision makers such as would be the case of an award by an arbitrator. Furthermore, the Ochoa settlement ce rta inly is not a "document embodying" such a decision. Rather, the Ochoa settlement is the product of a private negotiation between parties to a lawsuit. Neither does the Ochoa settlement come within the principal definition of "award" when usedas verb, which connotes judicial or quasi-judicial acti on "after careful weighing of evidence." Even the secondary meaning of its use as a verb, as "[t]o confer as being deserved or merited," which refers to events such as the granting of an honor, title, or medal, implies unilateral action by the grantor, rather than a multi-party negotiation of the sort which takes place in the settlement of a dispute. Such a definition does not encompass the Ochoa settlement.

Most important to our view, and a factor apparently not consideredby the district court, is that it is difficult to countenance that sophi stic ated parties such as those involved in the H/P Settlement Agreement, represented by counsel, would not-10-

have used the term " set tlement" rather than "award" had they intendedto also exclude negotiated settlemen ts, as the term is normally used, from the H/P Settlement Agreement. The term "settlement" is well known to attorneys, and its meaning is distinctly different from what is normally understood to be meant by the term "award." See id. at 1372 (defining "settlement").

Indeed, the text of Paragraph (6) of the H/P Settlement Agreement, when read as a whole, further supports the common-sense interpretation that an "award" is distinct from a "settlement." Itindicates that Home will obtain "the lesser of $1,333,000 or onethirdof . . . [any] recovery made, whether obtained by way of suit, arbitration, claim, verdict , award , settlement , or otherwis e," but excludes from such recoverable amounts only "any verdict or awardin favor of Pan American that specifically and separatelyaward(s) Pan American a recovery for puni tive damages and/or loss of use." H/P Settlement Agreement at para. 6 (emphasis supplied). It then goes on to allow Home to also share in additional recoveries " wheth er obtained by way of suit, arbitration, cla im, verdict , award , settlement , or otherwise, in

excess of $10,000,000 (excluding any recovery for punitive damages and/or loss of use as described above )." Id. (emphasis supplied). The omission of "settlement" fro m th e description of those recoveries of punitive damages andloss of use that are not subject to sharing, in the same paragraph where the term was twice-11-

explicitlyincluded elsewhere, strongly suggests a recognition that the types of recoveries that were described -- "aw ard" and "verdict" - do not themselves incorporate a settlement.

We have no doubt that the Ochoa settlement was not an "award" from which Home was excluded in participating under the H/P Settlement Agreement. II.

The district court also erred in con clud ing that the Ochoa settlement was excluded from the terms of the H/P Settlement Agreement as a recovery for loss of use of the ITB ZORRA. We are inevitablyled to this conclusion by the text of the Ochoa settlement itself.

As a result of a complaint filed against Ochoa and others in which Pan American claimed "extensive fire damage to the tug" and sought compensation for "damages, losses, and expenses to the tug" in the amount of $31,000,000, Pan Am. Grain Mfg. Co. v. Continental Grain Co., Inc. , No. 97-7748 (D. P.R. filed Aug. 19, 1997), Ochoa entered into a settlement agreement with Pan American. That agreement states, in relevant part:

1. SETTLEMENT . The undersigned, Pan American

. . ., for and in consideration of the payment of $800,000, as more particularly described in par a graph 2 below, . . .does hereby remise, release and discharge . . . [Ochoa] . . . of andfrom all actions, causes of action, suits, claims, damages, covenants, contracts, agreements, judgments, costs and demands, whatsoever in law or i n equity, foreseen or unforeseen, matured or unmatured, known or-12- unknown, accrued or not accrued, in connection with the i ncident that occurred on the 24th day of April, 1995, . . . which allegedly c ause dloss of use of property and damage to property of [Pan American] . . . . 2. PAYMENT TO RELEASING PARTY . By express agreement of the parties hereto, the $800,000 payment made by the [Pan Am eri can] . . . is allocated. . . in settlement of [ Ochoa's] claims or futu re claims for loss of use of property

. . . 4. FULL AND COMPLETE SETTLEMENT . [Pa n American] acknowledges that this SETTLEMENT

. . . is expressly intended to be a full and complete settlement of all disputed claim(s) made or which could be made betwe en [Pa n American] and [Ochoa] arising out of the April 24, 1995 incident described above

. . . . Ochoa settlement at 3-4 (emphasis supplied).

The district court determined that a reading of Pan American's claims ag a inst Ochoa, combined with the Ochoa settlement, did not provide "sufficient evidence to determine that saidagreement was not for loss of use. On the contrary the settlement agreement specifically states that it is in settlement of 'claims or future claims for loss of use of property.'" Home Ins. Co. v. Pan Am. Grain & Mfg. Co., Inc. , 286 F. Supp. 2d at 196- 97. This analysis leaves aside the contents of paragraphs 1 and 4 of the Ochoa settlement, which make explicit that the $800,000 was paidin consideration not only for Ochoa's release from any claims of loss of use, but for its release from all possible claims, on4 In this respect it is noteworthy that the claims Pan American

filedagainst Ochoa did not include a demand for damages for "loss of use," but rather for "damages, losses, andexpenses to the tug."

5 Indeed, there is little reason to believe that the proceeds have anyconnection to loss of u se; w e earlier described the event as one in which the ITB ZORRA "caught fire and thereafter was lost as a result of the conflagration." See Pan Am. Grain Mfg. Co., Inc. v. P.R. Ports Auth. , 295 F.3d at 113. If the tub was a total loss, then under maritime law there could be no recovery for loss of use, see A & S Transp. Co., Inc. v. Tug Fajardo , 688 F.2d 1,2 (1st Cir. 1982), and labeling any part of the payment as for loss of use wouldbe nothing more than an attempt on Pan Am's part to keep all of the Ochoa settlement by purporting to bring the payment within the H/P Settlement Agreement. -13- the basis of any cause of action, which arose from the fire on the ITB ZORRA. 4 Thus, even were negotiatedsettlements for loss of use

-- as opposed to verdicts or awards for loss of use -- excluded fr om the notice, approval, and sharing provisions of the H/P Settlement Agreement, the Oc hoa settlement, insofar as it also settled other claims, was not so excluded. III. Fromthe record before us it is clear that the Ochoa settlement is neither an "award" nor a "verdi ct. " Furthermore, irrespective of how the proceeds of that settlement may have been labeledby Pan Ame rican, they cannot properly be construed as exclusively for loss of use of the ITB ZORRA. 5

We thus must conclude that t he dis trict court erred in not finding that Pan American breached the H/P Settlement Agreement when it fail ed t o notify Home of the Ochoa settlement prior to entering into the sa me, and when it refused to share in the-14-

recove redproceeds in the manner specified by the H/P Settlement Agreement. We have considered all other argum ents of the parties, and determined that they are without substance.

The judgment of the district c ourt i s reversed and the

case is remanded with instructio n that judgment be entered on behalf of Home, in the manner consistent with this opinion.

Considering that this is an action brought pursuant to

our diversity jurisdiction, Home shall be entitled to recover reasonable attorney fees and costs.

Reversed and remanded .-15- Appendix I (6) Pan American and/or the ZORRAand/or Zorra Transport Inc.("Zorra Transport") will pay The Home the lesser of $1,333,000 or one third of the gross aggregate recovery made, whether obtained by wayof suit, arbitration, claim, verdict, award, settlement, or otherwise, from or against any and all person(s) for damage to Pan American and/or the ZORRA, and/or Zorra Transport arising out of or relating to the Fire, excluding only that portion, if any, of any verdict or award in favor of Pan American that specifically and separatelyaward(s) Pan American a recovery for punit ive damages and/or loss of use. If Pan American and/or the ZORRA and/or Zorra Transport make a gross aggregate recovery, whether obtained by way of suit, arbitration, c lai m, verdict, award, settlement, or otherwise, in excess of $10,000,000,(excluding any recovery for punitive damages and/or loss of use as described above) then Pan American and/or the ZORRA and/or Zorra Transport will pay The Home one-thirdof any gross amount in excess of $10,000,000 up to $2,000,000, in addition to the above $1,333,000.

(7) The Home's written approval of any settlement by Pan Ame rican and/or the ZORRA and/or Zorra transport of any c lai m against any person for damage arising out of or relating to the the Fire, out of which The Home is to receive all or part of the above amount of $1,333,000 is a condition precedent to any agreement to anysuch settlement. The Home agrees that it will not unreasonably withholdits written approval. The Home's approval is not a condition precedent to any settlement out of which The Home is not to receive any part of the above amount of $1,333,000.

(8) Prior to re ques ting any required approval from The Home of any settlement, and prior to agreeing to any settlement or satisfaction of any judgment or award out of which The Home is to make a recovery under this agreement, Pan American will advise the prospective settling or paying party that The Home has an economic interest in the settlement or satisfaction if Pan American and The Home jointly agree that such information will maximize the recovery or will obtain some other mutually advantageous result. The payment of any such settlement or satisfaction shall be made by check(s) or bank draft(s) made payable to both Pan American and The Home. In the event the information is not disclosed, Pan American agrees and undertakes that payment of any settlement or satisfaction shall be made by check(s), bank draft(s), or wire transfe r(s ) to Chaffe, McCall, Phillips, Toler & Sarpy, L.L.P ., as attorneys for Pan American Grain Manufacturing Co., Inc., and that such funds will be heldin trust or escrow by Chaffe McCall, to be disbursed pursuant to the terms and conditions of this agreement only after-16-

disbursement has bee n ag reed to, approved, and authorized in writing to Chaffe McCall by Pan American and The Home.