Court Opinion

ID: 9468853
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:25:28.179368+00
Date Added: 2024-06-11T17:41:05.375027
License: Public Domain

WALLACE, Circuit Judge:
Edinburgh Assurance Co. (Edinburgh) appeals from a judgment entered by the district court in favor of R. L. Burns Corp. (Burns) and American Pacific International, Inc. (API). Burns and API cross-appeal on the issues of damages, fraud, and bad faith. The case involves an insurance claim for damages to an offshore oil drilling platform (the Gatto). The facts are outlined in the opinion of the district court reported at 479 F.Supp. 138 (C.D.Cal.1979). We affirm the district court’s judgment except for the failure to award prejudgment interest; we reverse that part of the judgment and remand for the district court to do so.
I. Actual Total Loss
Edinburgh claims that the district court erred in its construction of section 57(1) of the British Maritime Insurance Act of 1906 (the Act).1 Apparently, Edinburgh chal*1261lenges both the district court’s interpretation of the Act and its application of the Act to the facts of this case.
First, Edinburgh challenges the district court’s finding that after the Gatto was struck by the typhoon, “[i]t was no longer an off-shore drilling platform. It was a dispersed mass of scrap, a wreck. The Gatto had broken up.”2 On appeal, we will set aside a district court’s findings of fact only if they are clearly erroneous. Fed.R.Civ.P. 52(a); Supplemental Rules for Certain Admiralty and Maritime Claims, Rule A. We have reviewed the entire record in this case and are not “left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981).
Second, Edinburgh asserts that the district court confused the definition of “actual total loss” with that of “constructive total loss.” It argues that actual total loss “does not comprehend anything short of a total, physical loss,” and that the district court improperly considered the cost of reconstruction or repair of the Gatto in its determination. Contrary to Edinburgh’s contention, however, we believe the district court was correct in concluding that the second definition of actual total loss under the Act, namely whether the insured item is “so damaged as to cease to be a thing of the kind insured,” may properly be applied to vessels, and not just to cargo. See George Cohen, Sons & Co. v. Standard Marine Insurance Co., 21 Lloyd’s List L.R. 30, 33 (K.B. 1925); Knight v. Faith, 117 Eng.Rep. 605, 608 (Q.B. 1850). We also agree that there need not be a total, physical loss for a casualty to be considered an “actual total loss” under the Act. In its thoughtful and well-reasoned opinion, the district court adopted an intermediate position between the broad definition of actual total loss for which Burns and API argued, i.e., that a thing is an actual total loss when as a practical business matter it is not worthwhile recovering and rebuilding, and the definition for which Edinburgh argued, i.e., that a thing is a total loss only when it is not within the scope of present technological capacity to recover and repair. The district court concluded that a thing may cease to be a thing of the kind insured, and thus an actual total loss, even if there still exist significant, accessible physical remains.
This was a correct construction of English law. While the district court did suggest that the cost of recovering and refurbishing the thing insured may be relevant to an application of this test, any error involved there was harmless. Since we do not disturb the district court’s findings of fact that it was “extremely unlikely that more than a few component parts of the [Gatto] could be used in any rebuilding of the platform,” and that “the Gatto had to be considered as wreckage or as a dispersed wreck with little value other than as scrap metal,” we affirm the judgment. United States v. County of Humboldt, 628 F.2d 549, 551 (9th Cir. 1980) (judgment affirmed on any basis supported by the record).
II. Damages
Edinburgh challenges the legal sufficiency of the evidence supporting the district court’s award of damages to Burns and API. The insurance policy issued to API and Burns provided indemnification “against costs and expenses incurred in connection with the purchase, salvage, recovery, towage etc. including insurance premiums but less the value of equipment salvaged.” Edinburgh claims that certain dis*1262bursements by Burns and API to various individuals were not recoverable because there was no evidence that the funds were actually spent “in connection with” the attempt to salvage the Gatto. However, the Pollard deposition, admitted into evidence without objection by Edinburgh, documents the manner in which the expenditures were made. The district court expressly found that the evidence indicated the sums in question were disbursed in connection with the salvage venture and observed that a description of each separate disbursement was provided by representatives of API and Burns.
Edinburgh also argues that the district court erred in awarding costs and expenses which Burns and API incurred after March 29, 1976, the date they allegedly concluded that the Gatto was an actual total loss. We disagree. There is substantial evidence in the record supporting the district court’s conclusion that the expenditures challenged here were made to assist “in ascertaining the extent of damage,” and therefore were within the scope of the contractual indemnification provision.
Finally, Edinburgh insists that the district court improperly awarded damages under the “sue and labor” clause of the contract. While the district court did mention the sue and labor clause in its opinion, see 479 F.Supp. at 160, it did not, in its memorandum on damages, award sums to API and Burns solely under the sue and labor clause. All of the expenditures awarded were proper under the basic contractual indemnity. “We will affirm a district court’s decision if it is correct, regardless whether the district court relied upon a wrong ground or gave a wrong reason.” Huntington Beach Union High School Dist. v. Continental Information Systems Corp., 621 F.2d 353, 358 (9th Cir. 1980).
Burns and API, on cross-appeal, also raise several issues with respect to the damages awarded. Burns claims that it should have been awarded the interest on loans it secured to finance the Gatto salvage operation. The district court, however, found that the cost of securing venture capital was outside the contemplation of the parties in providing indemnity against expenses incurred “in connection with” the salvage. As this finding was not clearly erroneous we will not disturb it here. Both Burns and API also claim that the court erred in not awarding them the full amount of damages claimed as overhead expenses. We fail to see how it was error for the district court to refuse to award a flat 15% of the direct expenses as overhead expenses where, as here, there was sufficient information available for it to examine each item claimed as an overhead expense and decide whether or not the expense had been incurred “in connection with” the salvage operation.
In addition, Burns and API vigorously assert that Edinburgh’s conduct amounted to “bad faith” as a matter of law, and therefore that the district court erred in refusing to award damages for bad faith and attorneys’ fees. The district court found that Edinburgh had not acted in bad faith, but rather had refused to pay out on the policy due to a good faith, but erroneous interpretation of “actual total loss” under the Act. This finding was not clearly erroneous. See United States v. United States Gypsum Co., supra. Although the district court acknowledged Edinburgh’s “singlemindedness” in disclaiming liability, see 479 F.Supp. at 160, that observation does not, as Burns insists, conflict with a finding of good faith. Rather, it is equally consistent with the conclusion that Edinburgh honestly believed only a total, physical destruction of the Gatto was an insurable event. For this same reason, it was not error for the district court to refuse to award the amount claimed as attorneys’ fees. See Vaughan v. Atkinson, 369 U.S. 527, 530-31, 82 S.Ct. 997, 999, 8 L.Ed.2d 88 (1962).
The district court did err, however, in failing to award prejudgment interest. The district court awarded interest at the rate of 7%, the legal interest rate in California, from the date of judgment. Yet the general rule in admiralty cases is that prejudgment interest will be awarded. *1263Dillingham Shipyard v. Associated Insulation Co., 649 F.2d 1322, 1328-29 (9th Cir. 1981); The President Madison, 91 F.2d 835, 845 (9th Cir. 1937). The determination of whether peculiar circumstances exist warranting the denial of prejudgment interest is left to the sound discretion of the district court. Dillingham Shipyard v. Associated Insulation Co., supra; Federal Barge Lines, Inc. v. Republic Marine, Inc., 616 F.2d 372, 373 (8th Cir. 1980). Here, the district court presented no reasoned grounds for its refusal to award prejudgment interest' and its application of the 7% legal rate instead of the 10% rate sought by Burns and API. It is settled, however, that a federal court is not bound by state-prescribed interest rates in setting the rate of prejudgment interest in admiralty cases, id.; Sea-Land Service, Inc. v. Eagle Terminal Tankers, Inc., 443 F.Supp. 532, 534 (W.D.Wash.1977) (citing The President Madison, supra, 91 F.2d at 847), and that the rationale for an award of prejudgment interest is to compensate fully the injured party for its losses, Federal Barge Lines, Inc. v. Republic Marine, Inc., supra, 616 F.2d at 373. Having failed to articulate any reason why these general principles should not apply in this ease, the district court abused its discretion in refusing to award prejudgment interest. On remand, the district court should determine at what rate and from what time prejudgment interest should be awarded.
III. The Counterclaims
Burns and API also challenge the district court’s orders (1) granting summary judgment on their counterclaim for punitive damages for bad faith, and (2) striking their counterclaim for fraud in the inducement as a “sham” pleading pursuant to Fed.R.Civ.P. 11. The district court properly deferred consideration of the bad faith claim until after it had determined whether Edinburgh was liable under the indemnity contract. Subsequently, the district court concluded that there was no material question of fact as to whether Edinburgh disputed its obligation to indemnify Burns and API in bad faith. Summary judgment should, of course, rarely be granted on claims that hinge on questions of motive. Nonetheless, we find no support in the record for the contention that Edinburgh unreasonably refused to investigate the Gatto’s condition or to deal with Burns and API. Rather, the record supports the district court’s conclusion that the extent of the investigation conducted by Edinburgh was reasonable, and that Edinburgh refused to deal further with API and Burns only because of its erroneous, but good-faith belief that the Gatto had not suffered an “actual total loss” within the meaning of the indemnification provision. This necessarily compels the conclusion that Edinburgh did not, as Burns and API alleged, fraudulently induce Burns and API to enter the indemnity contract when, in fact, it never intended to meet its contractual obligation. Thus, if it was error to strike the counterclaim for fraud in the inducement as a sham pleading, see Lau Ah Yew v. Dulles, 236 F.2d 415, 416 (9th Cir. 1956); Murchison v. Kirby, 27 F.R.D. 14, 19 (S.D.N.Y.1961), it was harmless error. Kotteakos v. United States, 328 U.S. 750, 764-65, 66 S.Ct. 1239, 1247-48, 90 L.Ed. 1557 (1946); Fed.R.Civ.P. 61.
AFFIRMED IN PART, REVERSED AND REMANDED IN PART.

. For the purpose of this appeal, neither Burns nor API challenges the district court’s conclusion that English law governs the construction of the indemnity contract. Edinburgh Assurance Co. v. R. L. Burns Corp., 479 F.Supp. 138, 152-54 (C.D.Cal.1979). They argue that Cali*1261fornia law governs only in order to preserve the issue should we reverse the district court’s judgment. As we affirm, we do not decide the choice of law question.

. While Edinburgh did not formally challenge this finding of fact, it insisted that the record did not support the conclusion that the Gatto was a total wreck and could no longer be considered a mobile drilling platform. According to Edinburgh, “[wjhether described as a ‘wreck’ or by any other name, [the Gatto] is still a damaged, salvageable off-shore drilling platform.”