1

United States Court of Appeals,

Fifth Circuit.

No. 95-20153.

UNDERWRITERS AT INTEREST ON COVER NOTE JHB92M10582079, PlaintiffAppellee,

v.

NAUTRONIX, LTD., and Nautronix Inc., Defendants-Appellants.

April 10, 1996.

Appeal from the United States District Court for the Southern

District of Texas.

Before JONES, STEWART and PARKER, Circuit Judges.

ROBERT M. PARKER, Circuit Judge:

FACTS

Schahin Cury, a Brazilian company, owned the drill ship S.C.

Lancer, which was chartered by another Brazilian company to conduct

off-shore oil and gas well drilling. As part of the charter

agreement, Schahin Cury was required to update the S.C. Lancer with

a new dual computer dynamic positioning system ("DPS"). DPS is a

complex device that holds the vessel in one place while the vessel

does its drilling. Schahin Cury selected Nautronix, Ltd., an

Australian corporation, to supply and install the DPS. Nautronix,

Ltd. was to install the DPS, calibrate it, and train the officers

and crew of the S.C. Lancer in the operation of the new system

before starting drilling operations. Nautronix, Ltd. subcontracted

portions of the DPS upgrade work to its wholly owned California
 

1Nautronix, Ltd. and Nautronix, Inc. will be referred to

collectively as "Nautronix". 

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subsidiary, Nautronix Inc.1, which in turn operated a sales office

in Houston.

The chartering contract required Schahin Cury to have the S.C.

Lancer fully operational at a specific date, but because of several

delays, Schahin Cury ran up against the time-limit required by its

chartering contract. Nautronix contends that Schahin Cury cut

short necessary tests and sea trials of the new DPS, did not allow

complete calibration of the system, and did not make its officers

or crew available for training prior to commencing the

contracted-for drilling operations. As a result, Nautronix

contends that it was required to maintain its technicians on board

to complete installation and adjustments to the DPS during the

initial weeks of those drilling operations. Exactly what happened

next on a dark and stormy night in June, 1993, is in contention.

During a drilling operation, Nautronix contends that the

ship's captain panicked when the DPS indicators falsely showed that

the vessel was drifting. It is Nautronix's contention that the

ship's captain disregarded warnings by the Nautronix technician and

warnings from his own DPS operator and chose to disengage the DPS

and place the vessel in manual control. Schahin Cury argues that

the DPS was not working properly, and that the captain pulled the

ship about because a gale was causing it to roll dangerously, and

that had he not done so, lives would have been in peril. In any

case, as a result of the ship's movement, some 1,100 meters of well
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casing that had been suspended beneath the ship sheared off, fell

to the ocean floor, and had to be salvaged.

Schahin Cury and Rudgil, a wholly owned Panamanian subsidiary

of Schahin Cury, made a claim of loss against its insurance policy,

underwritten by Underwriters. According to Nautronix, Schahin Cury

showed its loss to total $10,815,161.17. After the $100,000

deductible, Schahin Cury allegedly settled its claim for a total

payment of $9,300,000, leaving it about $1,500,000 unreimbursed.

Schahin Cury and Rudgil then brought suit against Nautronix for

"the amount of its actual damages", alleging negligence, breach of

various warranties, and negligent misrepresentation in connection

with the manufacture, sale, and installation of the S.C. Lancer's

DPS. The complaint was submitted by "attorneys for plaintiffs

Schahin Cury Engenharia E Comércio, Ltda. and Rudgil, Inc."

Nautronix answered, denying Schahin Cury's claims and

asserting defenses and counterclaims against Schahin Cury and

Rudgil. In its counterclaims, Nautronix claimed that Schahin Cury

had made various statements to the chartering company and to others

in the offshore drilling industry, including both competitors of

Nautronix and customers or potential customers of Nautronix.

Nautronix contends that Schahin Cury's alleged statements defamed

and disparaged Nautronix and the quality and reliability of its DPS

system. Nautronix alleged that Schahin Cury made statements

attributing the loss of the drillstring and attendant delay in

drilling operations solely to defects in the Nautronix DPS and not

the result of either Schahin Cury's or its captain's errors.
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Specifically, Nautronix claimed commercial disparagement, damage to

prospective economic advantage, slander, malicious prosecution, and

abuse of process.

PROCEEDINGS BELOW

Schahin Cury filed a Rule 12(b) motion to dismiss Nautronix's

counterclaims, stating that this lawsuit was "filed in the name of

Schahin Cury without its authorization or consent and at the

instance of attorneys acting solely on behalf of certain insurance

underwriters." Schahin Cury claimed that it was not the real party

in interest, that the District Court had no jurisdiction over it,

and that service of Nautronix's counterclaims was insufficient.

After a first amended complaint adding an additional defendant, a

second motion to amend was filed by Underwriters on Friday,

September 12, 1994. In their motion to amend, Underwriters stated

that this is a subrogation suit, and that while Underwriters had

the right to bring the suit in the name of Schahin Cury and Rudgil,

the "continued exercise of that right would only serve to confuse

the Court ... [s]ince Underwriters are the true parties in

interest, Underwriters now seek to substitute their name for that

of Schahin Cury and Rudgil." On the following Monday, September

19, 1994, the District Court approved and signed the order

requested by Underwriters allowing the substitution of the name of

Underwriters for Schahin Cury and Rudgil.

Nautronix filed a motion for reconsideration pointing out that

by allowing the opposed second amendment to the complaint, the

District Court had disregarded local rules allowing 20 days for a
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party to respond to a motion, and that the amendment had de facto

dismissed Nautronix's counterclaims without allowing Nautronix to

be heard on the issue. That motion was denied and Nautronix then

filed a motion to allow those claims as a third-party complaint.

The court denied, in part, Nautronix's motion, noting that the

still pending 12(b) motion by Schahin Cury to dismiss Nautronix's

counterclaims was "moot" by reason of the earlier substitution of

parties. The court sua sponte transferred this case to the Houston

Division, where Nautronix's emergency motion for reconsideration of

the ruling against its third-party motion was denied. Nautronix

then filed this interlocutory appeal.

JURISDICTION

This court has jurisdiction over appeals from

"[i]nterlocutory decrees of such District Courts or the judges

thereof determining the rights and liabilities of the parties to

admiralty cases in which appeals from final decrees are allowed."

28 U.S.C. § 1292(a)(3). In an admiralty case, it is not necessary

for the order appealed from to have determined all the rights and

liabilities of all the parties before such an order is appealable

under § 1292(a)(3). O'Donnell v. Latham, 525 F.2d 650, 652 (5th

Cir.1976). However, Underwriters argues that we are without

jurisdiction because the interlocutory order appealed from does not

effectively determine any "rights or liabilities" of Nautronix. We

disagree.

 After having claims asserted against it by Schahin Cury and

Rudgil, Nautronix was required to assert its claims, in the form of
 

2A counterclaim is compulsory "if it arises out of the

transaction or occurrence that is the subject matter of the

opposing party's claim and does not require for its adjudication

the presence of third parties of whom the court cannot acquire

jurisdiction." Fed.R.Civ.P. 13(a). The test for whether a claim

is compulsory is:

(1) whether the issues of fact and law raised by the

claim and counterclaim largely are the same; (2)

whether res judicata would bar a subsequent suit on

defendant's claim absent the compulsory counterclaim

rule; (3) whether substantially the same evidence will

support or refute plaintiff's claim as well as the

defendant's counterclaim; and (4) whether there is any

logical relationship between the claim and the

counterclaim. An affirmative answer to any of the four

questions indicates the claim is compulsory.

Park Club, Inc. v. Resolution Trust Corp., 967 F.2d 1053,

1058 (5th Cir.1992) (citing Plant v. Blazer Fin. Servs., 598

F.2d 1357, 1360 (5th Cir.1979)). We have no difficulty

concluding that Nautronix's counterclaims, including slander

and commercial disparagement, satisfy the third and fourth

tests cited above. Therefore, these claims were compulsory

and Nautronix was required to bring them once they had been

sued by Schahin Cury and Rudgil. See McDaniel v. AnheuserBusch, Inc., 987 F.2d 298, 304 (5th Cir.1993) ("A

counterclaim which is compulsory but is not brought is

thereafter barred.") (quoting Baker v. Gold Seal Liquors,

Inc., 417 U.S. 467, 469 n. 1, 94 S.Ct. 2504, 2506 n. 1, 41

L.Ed.2d 243 (1974)). 

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counterclaims, against the opposing parties.2 Nautronix complied

with this requirement when they filed their counterclaims.

Fed.R.Civ.P. 41(a)(2) provides, in part:

If a counterclaim has been pleaded by a defendant prior to the

service upon the defendant of the plaintiff's motion to

dismiss, the action shall not be dismissed against the

defendant's objection unless the counterclaim can remain

pending for independent adjudication by the court.

When the district court issued its order granting Underwriters

motion to amend the original complaint by substituting its name in

place of Schahin Cury and Rudgil as the party plaintiff, it made no

provision for Nautronix's counterclaims to remain pending for
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independent adjudication by the court.

"[F]inality and appealability are not perfectly congruent.

Some interlocutory orders are appealable under 28 U.S.C. § 1292."

O'Donnell, 525 F.2d at 652. Although the court in O'Donnell was

addressing the appealability of the district court's order

dismissing the plaintiff's action against one co-defendant, that

case and the instant case are analogous. In the instant case, the

district court's decision to permit Underwriters' to replace

Schahin Cury and Rudgil as the party plaintiff, without making a

provision for Nautronix's counterclaims to remain pending for

independent adjudication by the court, as discussed infra,

effectively dismissed Nautronix's counterclaims against Schahin

Cury and Rudgil. Therefore, we hold that an order that effectively

dismisses a party from suit, without making provision for pending

compulsory counterclaims, is appealable under § 1292(a)(3).

ANALYSIS

Having determined that we have jurisdiction over this appeal

we next must determine whether the trial court erred when it

granted Underwriters' motion to substitute its name in place of

Schahin Cury and Rudgil as the party plaintiff. A party may amend

its pleadings only "by leave of court or by written consent of the

adverse party; and leave shall be freely given when justice so

requires." Fed.R.Civ.P. 15(a). This court's review is limited to

determining whether the trial court abused its discretion when it

permitted Underwriters' amendment. Chitimacha Tribe of La. v.

Harry L. Laws Co., Inc., 690 F.2d 1157, 1163 (5th Cir.1982)
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(internal citations omitted), cert. denied, 464 U.S. 814, 104 S.Ct.

69, 78 L.Ed.2d 83 (1983). Justice requires that "[e]very action

shall be prosecuted in the name of the real party in interest."

Fed.R.Civ.P. 17. Therefore, central to a determination of whether

the trial court abused its discretion when it permitted

Underwriters' amendment is the question of whether Schahin Cury and

Rudgill, at the time the original suit was filed in their name,

were in fact real parties in interest. If they were not, then the

trial court's decision to permit the amendment would not only be

correct but it would have been required by Rule 17.

If the insurer has paid the entire loss suffered by the

insured, it is the only real party in interest and must sue in its

own name. United States v. Aetna Casualty & Sur. Co., 338 U.S.

366, 379-81, 70 S.Ct. 207, 215, 94 L.Ed. 171 (1949) (citing 3

Moore, Federal Practice (2d Ed.) p. 1339). However, if the insurer

"has paid only part of the loss, both the insured[s] and the

insurer ... have substantive rights against the tortfeasor which

qualify them as real parties in interest." Id. In its brief,

Schahin Cury acknowledged that "Underwriters and Schahin Cury are

separate entities, with independent interests because the full loss

was not paid by Underwriters " (emphasis added). Thus, this is a

case of partial subrogation, which means that Schahin Cury, Rudgil,

and Underwriters are all real parties in interest. Consequently,

we must determine whether the trial court's decision to allow

Underwriters to replace Schahin Cury and Rudgil, which effectively

dismissed Nautronix' counterclaims, constituted an abuse of
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discretion.

The decision to grant or deny a motion for leave to amend

lies within the sound discretion of the trial court. Addington v.

Farmer's Elevator Mut. Ins. Co., 650 F.2d 663, 666 (5th Cir. Unit

A) (citing Layfield v. Bill Heard Chevrolet Co., 607 F.2d 1097,

1099 (5th Cir.1979), cert. denied, 446 U.S. 939, 100 S.Ct. 2161, 64

L.Ed.2d 793 (1980)), cert. denied, 454 U.S. 1098, 102 S.Ct. 672, 70

L.Ed.2d 640 (1981). However, approval of a motion to amend is not

automatic. Addington, 650 F.2d at 666. Denial of leave to amend

may be required when allowing an amendment would cause undue

prejudice to the opposing party. See Foman v. Davis, 371 U.S. 178,

83 S.Ct. 227, 9 L.Ed.2d 222 (1962). We have previously recognized

that it is an abuse of discretion for a trial court to deny a

plaintiff's motion to amend when the denial of that motion could

unduly prejudice the plaintiff's action as a result of res judicata

implications. See Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594,

600 n. 3 (5th Cir.1981) (noting that where res judicata might bar

a subsequent action by the plaintiff, then the denial of a motion

to amend in order to add that cause results in undue prejudice).

The converse situation is also true. Where the trial court's

decision to grant a motion to amend could potentially bar the

claims being asserted, then the granting of the amendment would

result in undue prejudice to the party whose claims are potentially

barred. See Foman, supra. When the trial court permitted the

amendment in the instant case, it effectively dismissed Nautronix's

compulsory counterclaims. Those counterclaims are potentially
 

3We express no opinion as to whether Nautronix's claims

would actually be barred if brought in a separate action. We

simply recognize that there is a potential bar, which is

sufficient to support our finding of undue prejudice. See

Dussouy, supra. 

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barred by the statute of limitations.3 Therefore, the trial

court's decision to permit the amendment in the instant case not

only violated the express provisions of Fed.R.Civ.P. 41(a)(2), but

it also unduly prejudiced Nautronix by potentially barring it from

bringing its claims in a subsequent suit. Consequently, we find

that the trial court's decision to permit the amendment constituted

an abuse of discretion. Having determined that the trial court

erred when it permitted the amendment, we need not reach

Nautronix's other points of error.

CONCLUSION

For the foregoing reasons the district court's order of

September 20, 1994, is VACATED. The district court is ordered to

reinstate Schahin Cury and Rudgil as parties-plaintiff, Nautronix's

counterclaims are reinstated, and Schahin Cury's and Rudgil's First

Amended Complaint is reinstated. This ruling does not prohibit the

district court from realigning the parties or from permitting

Underwriters to prosecute its subrogation claims in its own name,

so long as the substantive rights of the other parties are not

affected by such orders.