Court Opinion

ID: 75675
Source: CourtListenerOpinion
Date Created: 2010-04-26 23:23:30+00
Date Added: 2024-06-11T17:21:07.897551
License: Public Domain

[PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS

                        FOR THE ELEVENTH CIRCUIT                    FILED
                                                           U.S. COURT OF APPEALS
                          ________________________           ELEVENTH CIRCUIT
                                                              NOVEMBER 9, 2001
                                                              THOMAS K. KAHN
                         No. 97-2591, 97-3153, 97-3566             CLERK
                         ________________________

                         D. C. Docket No. 95-30545-CV-LAC

DIESEL “REPOWER”, INC.,
f.k.a. DIESEL “REPOWER” SYSTEMS, INC.,

                                                         Plaintiff-Appellee,

      versus

ISLANDER INVESTMENTS LTD.,

                                                         Claimant-Appellant.

                          ________________________

                  Appeals from the United States District Court
                      for the Northern District of Florida
                        _________________________

                              (November 9, 2001)

Before TJOFLAT, GODBOLD and HILL, Circuit Judges.

GODBOLD, Circuit Judge:

       Plaintiff Diesel “Repower” Inc. entered into a contract with Defendant

Islander Investments. The contract required Diesel to “repower” Islander’s vessel
Hero. To “repower” Hero Diesel was required to recondition and install a diesel

engine, including a transmission and propulsion system. In return for

“repowering,” the contract required Islander to pay Diesel $45,000 for a

reconditioned diesel engine and propulsion system and an estimated $5,000 to

$10,000 for labor, of which $45,000 was pre-paid.

         The district court found that Diesel reconditioned an engine and attached a

false engine plate to the engine. However the engine smoked and produced

inadequate horsepower. Diesel continued working on the engine. While Diesel

worked on the engine Islander allegedly failed to pay the balance on outstanding

invoices. Therefore, Diesel ceased work.

                                   Procedural History

         Diesel filed its complaint on December 1, 1995 invoking admiralty

jurisdiction. The in rem complaint attempted to enforce a maritime lien and

recover the balance due under the contract. The complaint alleged that Islander

breached the contract by not paying for engine components, materials, supplies and

labor.

         Islander, also invoking admiralty jurisdiction, answered and filed

counterclaims of breach of contract, fraud, and negligence. The counterclaims

alleged that Diesel breached the contract by negligently designing, reconditioning,

                                            2
manufacturing, and assembling the engine and propulsion system, and by installing

the defective engine improperly in an untimely manner. Islander alleges that

Diesel’s actions caused Islander damage. The alleged damages include the failure

to receive the “repowered” engine, the cost of additional work on Hero, the cost of

removing the defective engine, the loss of use of Hero, shipyard and docking cost,

and the cost of purchasing and installing a new engine.

      On July 29, 1996 the district court entered an order stating that the case

would be set for trial. On June 30, 1996 discovery ended. The day discovery

ended Islander filed a motion for leave to amend the pleadings. The motion

requested that the court allow Islander to (1) change the style of the case; (2)

provide an alternative basis for recovery of punitive damages; and (3) assert that,

pursuant to the saving to suitors clause, the court should apply Alabama state law

and not federal admiralty law.

      Islander brought its proposed amended pleadings under diversity jurisdiction

and admiralty’s saving to suitors clause. However, it asserted the identical claims

as originally pleaded under admiralty jurisdiction. Count one of Islander’s answer

and counterclaims states that Diesel was required to replace a Tandem Drive

Detroit Diesel propulsion system. Islander says that Diesel designed,

manufactured, reconditioned, assembled, sold, delivered and installed a propulsion

                                           3
system that was not capable of turning Hero’s propeller at a speed necessary for

safe, economical, and seaworthy operation. Islander also says that it needed Hero

immediately and Diesel failed to give the contract “Priority Vessel Down” status.

Islander asserts that because of Diesel’s actions it incurred expenses in making

necessary alterations, repairs and other modifications.

      Diesel objected to Islander’s motion for leave to amend the pleadings.

      The district court granted the motion in part and denied it in part. It granted

the motion in part thus allowing the name of the plaintiff to be changed from

“Diesel Repower Systems, Inc.” to its new corporate name “Diesel Repower, Inc.”

The court denied the remainder of the motion because (1) the amendment

regarding punitive damages would expand the factual basis of Islander’s causes of

action and (2) the amendment regarding the substantive law would be futile

because federal maritime law governs the case.

      The court conducted a bench trial and found that Diesel was not tortious or

malicious but that it breached the contract. The court found that Diesel breached

the contract because Diesel did not change the pistons to comply with

manufacturer’s specifications; the cylinder head assembly was not set up to

manufacturer’s specifications; and the transmission was not the type specified in

the contract or its equivalent and could not handle the level of horsepower that the

                                          4
engine was supposed to produce. Next, the court found that the contract’s

limitation on liability clause was applicable. Therefore the court entered judgment

for Islander in the amount of $45,000 and ordered Islander to return the engine to

Diesel.

      After the court entered its judgment, Islander filed suit in Alabama state

court against Diesel’s president personally alleging: (1) fraud in the inducement;

(2) fraud in the performance; (3) fraudulent concealment; (4) a pattern or practice

of fraudulent activity; and (5) fraudulent transfer. In federal district court Diesel

filed a motion to enjoin Islander from prosecuting the state court action. The

district court granted Diesel’s motion to enjoin on September 12, 1997 and wrote

“order to follow.” Islander appealed. On December 12, 1997 the district court

entered an order that clarified its September 12, 1997 order and granted in part and

denied in part the motion to enjoin. The district court enjoined counts 1 through 4

but not count 5.

      On May 6, 1999 Diesel filed a suggestion of bankruptcy. Accordingly, on

June 4, 1999 this court stayed this appeal pursuant to 11 U.S.C. § 362(a). The

bankruptcy case was closed on May 9, 2001. Therefore by operation of law the

stay has been lifted and we proceed. See 11 U.S.C. § 362(c).

                     Motion for Leave to Amend the Pleadings

                                           5
      Islander raises nine issues on appeal. First, we consider whether the court

erred in denying the motion for leave to amend the pleadings.

      We use the abuse of discretion standard when reviewing a district court’s

decision on whether to grant a motion for leave to amend the pleadings. See

Thomas v. Farmville Mfg. Co., Inc., 705 F.2d 1307 (11th Cir.1983). The court

must grant litigant’s motion for leave to amend the pleadings “when justice so

requires.” Fed.R.Civ.P 15(a). The Supreme Court reasoned:

      In the absence of any apparent or declared reason– such as undue delay, bad
      faith or dilatory motive on the part of the movant, repeated failure to cure
      deficiencies by amendments previously allowed, undue prejudice to the
      opposing party by virtue of allowance of the amendment, futility of
      amendment, etc.– the leave sought should, as the rules require, be “freely
      given.”

Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).

      By its amendment Islander wanted to convert its counterclaims brought

under admiralty jurisdiction, and thus subject to admiralty law, to claims brought

under admiralty’s saving to suitors clause and thus governed by state law. In the

motion for leave to amend the pleadings Islander asserted the identical claims

originally pleaded under admiralty jurisdiction. The district court denied the

motion on the ground that the amendment would not change Islander’s cause of

action or the application of federal law as the substantive law of the case. Thus,

allowing the amendment would be futile.

                                          6
      In this appeal Islander asserts that the district court abused its discretion in

denying the motion for leave to amend the pleadings because (1) the motion was

filed more than three months before the trial, and did not assert new claims but

recast its current claims as state law claims, (2) Diesel did not object on prejudice

grounds, and (3) the court did not find the amendment would be prejudicial.

      Islander’s assertions miss the essence of the district court’s order. The

district court reasoned that to allow Islander’s amended answer and counterclaims

would be futile because substantively it did not matter whether the case was

brought under admiralty or diversity jurisdiction. The claims were the same and

whether brought under admiralty or diversity jurisdiction the substantive law that

the court must apply was admiralty law.

      Thus the issue is whether the district court erred when it held that admiralty

law would control the substantive portion of the case even if the district court

granted the motion for leave to amend the pleadings and thereby allowed Islander

to proceed under diversity jurisdiction. If substantive admiralty law controlled

then the court did not abuse its discretion when it denied the motion for leave to

amend the pleadings.

                                     Jurisdiction

      We turn to the analysis of whether the district court correctly held that

                                           7
admiralty law would apply under both admiralty and diversity jurisdiction. The

district court has original jurisdiction “exclusive of the courts of the States of: (1)

Any civil case of admiralty or maritime jurisdiction, saving to suitors in all cases

all other remedies to which they are otherwise entitled.” 28 U.S.C. § 1333(1). The

federal court has exclusive jurisdiction over in rem actions. See American

Dredging Company v. Miller, 510 U.S. 443, 446-47 (1994). The saving to suitors

clause allows an in personam action, whether the action is instituted in a state court

or in a federal court under diversity jurisdiction or in a federal court under

maritime jurisdiction. See Red Cross Line v. Atlantic Fruit Co., 264 U.S. 109, 123

(1923). However, the action will be governed by federal principles of admiralty

and maritime law that control the respective rights and liabilities of the parties.1

See Everett v. Carnival Cruise Lines, 912 F.2d 1355, 1358 (11th Cir. 1990) (stating

federal maritime law controls when the tort occurs on navigable waters, even when

diversity is alleged as the basis for jurisdiction).2

       Islander’s claim is for breach of a repair contract. A contract to repair a

vessel invokes admiralty jurisdiction. See Hatteras of Lauderdale, Inc., v. Gemini

Lady, 853 F.2d 848, 849-850 (11th Cir.1988).

       1
        This is the so-called “Reverse-Erie Doctrine.”
       2
        The district court correctly held that it had admiralty jurisdiction because the situs and
nexus tests were met. See Executive Jet Aviation, Inc., City of Cleveland, 409 U.S. 249 (1972).

                                                 8
      Islander’s proposed amended pleading asserted the identical breach of

contract counterclaim as originally pleaded under admiralty jurisdiction. The

contract required Diesel to “repower” Hero. In count one of Islander’s answer and

counterclaims Islander states that Diesel was required to replace a Tandem Drive

Detroit Diesel propulsion system. Islander claims that Diesel designed,

manufactured, reconditioned, assembled, sold and delivered to Islander a

propulsion system that was not capable of turning Hero’s propeller at a speed

necessary for safe, economical, and seaworthy operation. Islander also says that it

needed Hero immediately and Diesel failed to give the contract “Priority Vessel

Down” status.

      From Islander’s pleadings it is abundantly clear that the contract required

Diesel to replace the engine, transmission and propulsion systems. Logic and

precedent dictate that replacement of these parts and systems falls under repair.

See New Bedford Dry Dock Co. v. Purdy, 258 U.S. 96, 99 (1922) (finding that

conversion of a car float which lacked steering and motor power into a steamer

used for amusement purposes constituted repairs). Since this case involves a

vessel repair contract admiralty jurisdiction is proper.

                             Substantive Admiralty Law

      Next we must determine if substantive admiralty law would govern this case

                                           9
if converted to a saving to suitors clause case. We review de novo conclusions of

law. See Godfrey v. BellSouth Telecommunications, Inc., 89 F.3d 755, 757 (11th

Cir.1996). Islander asserts that admiralty law would not apply and that the district

court should have held that Alabama state law would apply pursuant to admiralty’s

saving to suitors clause and, therefore, the motion to amend was erroneously

denied.

      The saving to suitors clause does not authorize the application of substantive

rights created by state statutes that change substantive admiralty and maritime law.

See American Dredging, 510 U.S. at 447 (citing Madruga v. Superior Court of

Cal., County of San Diego, 346 U.S. 556, 561, 74 S.Ct. 298, 301, 98 L.Ed. 290

(1954)). To determine what law to apply we use a balancing approach. See

Steelmet, Inc. v. Carbibe Towing Corp., 779 F.2d 1485, 1488 (11th Cir.1986).

      One must identify the state law involved and determine whether there is an
      admiralty principle with which the state law conflicts, and, if there is no such
      admiralty principle, consideration must be given to whether such an
      admiralty rule should be fashioned. If none is to be fashioned, the state rule
      should be followed. If there is an admiralty-state law conflict, the
      comparative interest must be considered- they may be such that admiralty
      shall prevail or if the policy underlying the admiralty rule is not strong and
      the effect on admiralty is minimal, the state law may be given effect.

      Id. (internal citations omitted).

      In other words, we apply the following analytic framework. First, we look

at the state law that Islander says the district court should have applied. Second,

                                          10
we determine whether admiralty law conflicts with state law. Here there are two

courses. We follow course one if there is not a conflict. Next, we determine

whether an admiralty rule is needed, if not, then we apply state law. We follow

course two if there is a conflict. Here, if the underlying admiralty policy is weak

and its effects are minimal, we apply state law.

                              Limitation of Liability Clause

       Next we apply the above framework to the contract’s limitation of liability

clause. In determining the applicability of the limitation of liability clause Islander

asserts that the district court should have applied Ala. Code § 7-2-203(1)(b)

(1975). The code imposes and defines a “good faith” requirement on merchants.3

See Id. Islander says that the court should have used the “merchant” analysis

because the contract was for a sale of goods, instead of the conflicting

“businessman” analysis imposed under admiralty law. Because of the conflict

between the “merchant” and “businessmen” analysis we must determine if the

underlying admiralty policy interest regarding the “businessmen” analysis is weak

and its affects are minimal. If so, then the district court should have applied state

law. See Steelmet, 779 F.2d at 1488.

       3
       “‘Good faith’ in the case of a merchant means honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade.” Ala. Code § 7-2-103 (1)(b).

                                              11
      The federal interest in uniformity under admiralty law is great. See Mink v.

Genmar Industries, Inc., 29 F.3d 1543, 1548 (11th Cir.1994). The great interest in

uniformity extends to the “businessmen” analysis because the analysis is a strong

admiralty policy that greatly affects the applicability of limitation on liability

clauses for vessel repair contracts. The rationale underlying limitation on liability

clauses is that businessmen can bargain the limitation during negotiations and set

their ultimate price accordingly. See Edward, 785 F.2d at 888 (citing Jig The

Third Corp. v. Puritan Marine Ins. Underwriters Corp., 519 F.2d 171 (5th Cir.

1975)).

      Parties to a contract for the repair of a vessel may validly agree to limit the

repairer’s liability. See Edward, 785 F.2d at 888. To be enforceable, the limited

liability clause must clearly and unequivocally indicate the parties’ intention. See

Edward, 785 at 889. However, the limitation must not absolve the repairer of all

liability and must still provide a deterrent to negligence. See Bisso v. Inland

Waterways Corp., 349 U.S. 85, 90-91. Also, the parties must be of equal

bargaining power to prevent overreaching. See Edward, 785 F.2d at 888 (citing

Bisso, 349 U.S. at 91, 75 S.Ct. at 632-33).

      In other words, the court must apply a three-step test to determine whether

the limitation on liability clause is enforceable. First, the clause must clearly and

                                           12
unequivocally indicate the parties’ intentions. Second, the clause may not absolve

the repairer of all liability and the liability risk must still provide a deterrent to

negligence. Third, the “businessmen” must have equal bargaining power so there

is no overreaching. We will discuss each step in turn.

       The clause is a clear and unequivocal indication of the parties’ intentions.

The limited liability clause states:

       DIESEL REPOWER SYSTEMS, INC. PROVIDES A NINETY DAY
       MAJOR PARTS REPLACEMENT WARRANTY ON REBUILT
       TRANSMISSION AND THIRTY DAY MAJOR PARTS REPLACEMENT
       WARRANTY ON “USED/RECONDITIONED” KTA-1150 ENGINE
       SHOULD THEY PROVE DEFECTIVE DURING NORMAL OPERATING
       CONDITIONS. DIESEL REPOWER SYSTEMS, INC. WARRANTY
       DOES NOT EXTEND TO OR COVER LABOR DOWNTIME, LOSS OF
       INCOME, SHIPPING COST, FREIGHT DAMAGE(S), ABUSE,
       ALTERATION, MISAPPLICATION, IMPROPER INSTALLATION
       (UNLESS CONTRACTED WITH DIESEL REPOWER SYSTEMS, INC.),
       PUNITIVE, PROGRESSIVE, OR CONSEQUENTIAL DAMAGES OF
       ANY TYPE. NO OTHER WARRANTY IS IMPLIED, EXPRESSED,
       RENDERED OR AVAILABLE.

Also, the contract stated at the bottom of each page that “DIESEL REPOWER

SYSTEMS, INC.’S TOTAL DOLLAR AMOUNT OF LIABILITY IS THE

PURCHASE PRICE OF THE EQUIPMENT SOLD ON THIS INVOICE.”

       The clause is clear and unequivocal. The clause limits Diesel’s liability to a

“TOTAL DOLLAR AMOUNT.” The amount is the “PURCHASE PRICE OF

THE EQUIPMENT SOLD ON THIS INVOICE.” The invoice states that the

                                            13
purchase price for the equipment was $45,000. Therefore it is clear and

unequivocal that Diesel’s liability may not exceed $45,000.

      The clause does not absolve Diesel of all liability, and the liability risk still

provides a deterrent. Here, Diesel’s liability risks included replacing parts free of

charge within the warranty period, refunding the $45,000 purchase price of the

equipment, and going uncompensated for numerous hours of labor expended on

replacement of parts under the warranty or on original installation. In this fact-

specific inquiry, we find that Diesel’s liability risks compared to the overall

obligations under the contract provide a sufficient deterrent.

      The clause is enforceable because there was no overreaching. There was no

overreaching because the “businessmen” possessed equal bargaining power upon

entering the contract. John Miller, a director of Islander, sought out Diesel,

negotiated, and executed the contract. Miller’s approach to the process of

purchasing the vessel and “repowering” it is an indication of his sophistication as a

businessman and his familiarity with the marine industry. Diesel was engaged in

the business of “repowering” engines for marine use. The “businessmen” were of

equally bargaining power.

      The three-step test, which incorporates the “businessmen” analysis, greatly

affects the limitation of liability clause applicability. The limitation of liability

                                           14
clause allows businessmen to bargain for and ultimately set the price of vessel

repair contracts. The admiralty interests in allowing businessmen to uniformly

bargain for and ultimately set the liability risks and price of vessel repair contracts

are great. Therefore, we conclude that substantive admiralty law controls the

limitation of liability clause analysis that is applicability to this case.

                                    Islander’s Fraud Claim

       Islander asserts a fraud claim against Diesel. In assessing the fraud claim we

use the balancing approach outlined above. See Steelmet, 779 F.2d at 1488.

Admiralty law incorporates common law fraud. See M/S Bremen v. Zapata Off-

Shore Co., 407 U.S. 1, 15 (1971); Wong Shing v. M/V Mardina Trader, 564 F.2d

1183 (5th Cir. 1978).4 The district court correctly applied principles of common

law fraud to this case and found that Diesel was neither tortious nor malicious.

Therefore the district court did not commit reversible error regarding Islander’s

fraud claim.

                                Islander’s Negligence Claim

       Islander argues that the district court erred when it held that Diesel’s conduct

was not negligent in its breach of contract. This argument is misplaced. Whether

Diesel was negligent relates to whether the limitation of liability clause is

       4
        Islander did not cite and the court did not find any cases to the contrary.

                                                15
enforceable. See East River Steamship Corp. v. Transamerica Delaval, Inc., 476

U.S. 858, 871 (1986) (holding that a manufacturer in a commercial relationship has

no duty under negligence when the only injury is to the product itself). “Such a

case, the Supreme Court said, would most naturally be understood as a warranty

claim, and should be governed by the contract for which the parties bargained and

the contract law.” Mink, 29 F.3d at 1549 n.9 (citing East River, 476 U.S. at 872).

      Since admiralty law controls the limitation of liability clause analysis, the

fraud claim and the negligence claim, Islander’s motion for leave to amend the

pleadings was futile. Therefore, the district court did not abuse its discretion when

it denied Islander’s motion for leave to amend the pleadings.

                            Motion to Enjoin Prosecution

      We use the abuse of discretion standard when reviewing the district court’s

order on a motion of injunctive relief. See Tally-Ho, Inc. v. Coast Community

College Dist., 889 F.2d 1018, 1022 (11th Cir. 1989).

      Islander contends the district court’s original order improperly granted the

motion to enjoin because (1) the court did not specify the grounds for entering the

injunction nor the limits of the injunction, (2) the injunction was overly broad

because it applied to an alleged fraudulent transaction that occurred post-judgment,

and (3) the district court lacked jurisdiction to amend the order because it lost

                                          16
jurisdiction when the notice of appeal was filed.5 Alternatively, Islander asserts

that the motion should have been denied because counts 1 through 3 were not

litigated in the federal action when the district court refused Islander’s motion for

leave to amend the pleadings.

       Islander acknowledges that when it filed its motion for leave to amend the

pleadings in the federal action it sought to litigate counts 1 through 3 of its state

court action.6 Islander argues that these claims are based upon state law and not

admiralty law. This is incorrect. We hold that federal admiralty law, not state law,

applies to Islander’s claims. Islander litigated these claims in the federal action.

Therefore the district court did not err in granting Diesel’s motion to enjoin

Islander from prosecuting the state court action.

       The district court did not commit reversible error.

AFFIRMED.

       5
        These assertions are without merit because the district court had jurisdiction to amend
the order. Therefore, we look to the second order. See Fed.R.App.P. 4(a)(2); see also, Virgo v.
Riviera Beach Assocs., 30 F.3d 1350, 1356 (11th Cir. 1994).
       6
        Islander’s argument regarding count 4 is without merit and does not require discussion.
The district court did not enjoin count 5 and neither party appealed that decision. Count 5 is not
before this court. Therefore this opinion has no bearing on count 5.

                                                17