Luckenbach v. McCahan/Opinion of the Court

The W. J. McCahan Sugar Refining Company shipped a cargo of sugar from Porto Rico to Philadelphia by the Julia Luckenbach which was under charter to the Insular Line, and the cargo suffered severe damage. In the District Court of the United States for the Southern District of New York, a libel seeking damages was filed in the name of the shipper in personam against the Insular Line and in rem against the steamer. It alleged that the damages resulted from unseaworthiness of the hull, existing at the commencement of the voyage. The petitioners, owners of the ship, were impleaded. The bills of lading sued on contained a clause relieving the carrier from liability for damages arising from—

'any latent defect in hull. * *  * or by unseaworthiness of      the ship, even existing at the time of shipment or sailing on      the voyage, but not discoverable by the exercise of due      diligence by the ship owner or manager. * *  * '

The libel alleged that the unseaworthiness would have been discovered, had due diligence been exercised. The District Court so found and held that the libelant was entitled to recover. The damages were agreed to be $87,526.65, with interest, and the value of the ship and pending freight was found or agreed to be $66,600. The owners duly moved for limitation of liability. The District Court found that the damages sustained were occasioned without the privity or knowledge of the owners; held that they were entitled to limit their liability, both as against the shipper and as against the charterer, who claimed indemnity; and ordered that the owners should pay the shipper's claim to the extent of the value of the ship and pending freight, and that the balance should be paid by the Insular Line. 235 Fed. 388, 148 C. C. A. 650. Both the owners and the Insular Line appealed to the Circuit Court of Appeals. That court modified the decree, so as to award that payment of the full amount be made to the shipper primarily by the steamer and the owners, and that the charterer should be called upon to make payment only of the deficiency, if any. 235 Fed. 388, 148 C. C. A. 650. The case comes here on writ of certiorari granted on the petition of the owners. 242 U.S. 638, 37 Sup. Ct. 111, 61 L. Ed. 540.

It is urged, on three grounds, that the decision of the Circuit Court of Appeals should be reversed and that the District Court should be directed, either to dismiss the libel or to limit the owners' liability to the value of the ship and pending freight.

First. The owners contend that both lower courts erred in holding that the steamer was unseaworthy at the commencement of her voyage and that due diligence to make her seaworthy had not been exercised. The issue involved is one of fact; and no reason appears why the general rule should not apply, that concurrent decisions of the two lower courts on an issue of fact will be accepted by this court unless shown to be clearly erroneous. The Wildcroft, 201 U.S. 378, 387, 26 Sup. Ct. 467, 50 L. Ed. 794; The Carib Prince, 170 U.S. 655, 658, 18 Sup. Ct. 753, 42 L. Ed. 1181.

Second. The owners (and also the charterer) contend that the libel should be dismissed, because the shipper had already been compensated for the loss by insurance which it effected; and that the carrier is entitled to the full benefit of this insurance.

The shipper had effected full insurance. The bills of lading sued on contain the following clause:

'In case of any loss, detriment or damage done to or     sustained by said goods or any part thereof for which the      carrier shall be liable to the shipper, owner or consignee,      the carrier shall to the extent of such liability have the full benefit of any insurance that may have been effected      upon or on account of said goods.'

Such a clause is valid, because the carrier might himself have insured against the loss, even though occasioned by his own negligence; and if a shipper under a bill of lading containing this provision effects insurance and is paid the full amount of his loss, neither he nor the insurer can recover against the carrier. Phoenix Insurance Co. v. Erie & Western Transportation Co., 117 U.S. 312, 6 Sup. Ct. 750, 29 L. Ed. 873; Wager v. Providence Insurance Co., 150 U.S. 99, 14 Sup. Ct. 55, 37 L. Ed. 1013. In the case at bar, the shipper has received from the insurance companies an amount equal to the loss; but it is contended that the money was received as a loan or conditional payment merely, and that, therefore, the carrier is not relieved from liability. The essential facts are these:

The policies under which the shipper was insured contained the following, or a similar, provision:

'Warranted by the assured free from any liability for     merchandise in the possession of any carrier or other bailee,      who may be liable for any loss or damage thereto; and for      merchandise shipped under a bill of lading containing a      stipulation that the carrier may have the benefit of any      insurance thereon.'

The situation was, therefore, this: The carrier (including in this term the charterer, the ship, and the owners) would, in no event be liable to the shipper for the damages occasioned by unseaworthiness, unless guilty of negligence. The insurer would, in no event, be liable to the shipper, if the carrier was liable. In case the insurer should refuse to pay until the shipper had established that recovery against the carrier was not possible prompt settlement for loss (which is essential to actual indemnity and demanded in the interest of commerce) would be defeated. If, on the other hand, the insurers should settle the loss, before the question of the carrier's liability for loss had been determined, the insurer would lose the benefit of all claims against the carrier, to which it would be subrogated in the absence of a provision to the contrary in the bill of lading (The Potomac, 105 U.S. 630, 634, 26 L. Ed. 1194), and the carrier would be freed from liability to any one. In order that the shipper should not be deprived of the use of money which it was entitled to receive promptly after the loss, either from the carrier or from the insurers, and that the insurer should not lose the right of subrogation, agreements in the following (or similar) form were entered into between the insurers and the shipper:

'New York, Aug. 15, 1912.

'Received from the Federal Insurance Company. twenty-three     hundred four and 16/100 dollars, as a loan and repayable only      to the extent of any net recovery we may make from any      carrier, bailee or others on account of loss to our property      (described below) due to damage on S/S Julia Luckenbach from      Porto Rico/Philadelphia, Philadelphia, on or about _____      _____, 19__, or from any insurance effected by any carrier,      bailee or others on said property, and as security for such      repayment we hereby pledge to the said Federal Insurance      Company, the said recovery and deliver to them duly endorsed      the bills of lading for said property and we agree to enter      and prosecute suit against said railroad, carrier, bailee, or      others on said claim with all due diligence at the expense      and under the exclusive direction and control of the said      Federal Insurance Company.

'The W. J. McCahan Sugar Refining Co.,

'$2.304.

R. S. Pomeroy, Treasurer.

'Description of property: Sugar.'

Upon delivery of this and similar agreements, the shipper received from the insurance companies, promptly after the adjustment of the loss, amounts aggregating the loss; and this libel was filed in the name of the shipper, but for the sole benefit of the insurers, through their proctors and counsel, and wholly at their expense. If, and to the extent (less expenses) that, recovery is had, the insurers will receive payment or be reimbursed for their so-called loans to the shipper. If nothing is recovered from the carrier, the shipper will retain the money received by it without being under obligation to make any repayment of the amounts advanced. In other words, if there is no recovery here, the amounts advanced will operate as absolute payment under the policies.

Agreements of this nature have been a common practice in business for many years. Pennsylvania Railroad Co. v. Burr, 130 Fed. 847, 65 C. C. A. 331; Bradley v. Lehigh Valley Railroad Co., 153 Fed. 350, 82 C. C. A. 426. It is clear that if valid and enforced according to their terms, they accomplish the desired purpose. They supply the shipper promptly with money to the full extent of the indemnity or compensation to which he is entitled on account of the loss; and they preserve to the insurers the claim against the carrier to which by the general law of insurance, independently of special agreement, they would become subrogated upon payment by them of the loss. The carrier insists that the transaction, while in terms a loan, is in substance a payment of insurance; that to treat it as if it were a loan, is to follow the letter of the agreement and to disregard the actual facts; and that to give it effect as a loan is to sanction fiction and subterfuge. But no good reason appears either for questioning its legality or for denying its effect. The shipper is under no obligation to the carrier to take out insurance on the cargo; and the freight rate is the same whether he does or does not insure. The general law does not give the carrier, upon payment of the shipper's claim, a right by subrogation against the insurers. The insurer has, on the other hand, by the general law, a right of subrogation against the carrier. Such claims, like tangible salvage, are elements which enter into the calculations of actuaries in fixing insurance rates; and, at least in the mutual companies, the insured gets some benefit from amounts realized therefrom. It is essential to the performance of the insurer's service, that the insured be promptly put in funds, so that his business may be continued without embarrassment. Unless this is provided for, credits which are commonly issued against drafts or notes with bills of lading attached, would not be granted. Whether the transfer of money or other thing shall operate as a payment, is ordinarily a matter which is determined by the intention of the parties to the transaction. Compare The Kimball, 3 Wall. 37, 44, 18 L. Ed. 50. The insurer could not have been obliged to pay until the condition of their liability-i. e., nonliability of the carrier-had been established. The shipper could not have been obliged to surrender to the insurers the conduct of the litigation against the carrier, until the insurers had paid. In consideration of securing then the right to conduct the litigation, the insurers made the advances. It is creditable to the ingenuity of business men that an arrangement should have been devised which is consonant both with the needs of commerce and the demands of justice.

Third. The owners contend that, under section 4283 of the Revised Statutes (Comp. St. 1916, § 8021) and section 18 of the Act of June 26, 1884, c. 121 (23 Stat. 57 [Comp. St. 1916, § 8028]), their liability should have been limited to the value of the ship and her pending freight; because the District Court found that her unseaworthiness was without their privity or knowledge; and this finding was not disturbed by the Circuit Court of Appeals. But the liability of the owners sought to be enforced here is one resting upon their personal contract; and to such liabilities the limitations acts do not apply. Pendleton v. Benner Line, 246 U.S. 353, 38 Sup. Ct. 330, 62 L. Ed. 770.

It is also urged that, as between the owners and the Insular Line, the original warranty of seaworthiness was exhausted upon delivery of the ship to the charterers and that the maintenance clause relied upon does not import a warranty of seaworthiness at the commencement of each voyage under a time charter, but merely an obligation to pay the expense of keeping her hull and machinery in repair throughout the service. Neither the language of the clause nor the character of time charters afford support for this contention. The charter of the vessel states clearly that, the vessel 'being, on her delivery, tight, staunch [and] strong,' the owners will 'maintain her in a thoroughly efficient state in hull and machinery for and during the service'-not pay the expense of maintaining her. This duty to maintain the vessel in an efficient state is imposed by the contract, because a time charter, like a charter for a single voyage, is not a demise of the ship. In both, the charterer is without control over her repair and maintenance. In operations under each the charterer becomes liable to shippers without limitation for losses due to unseaworthiness discoverable by the exercise of due dilligence on the part of the owners; and in each case he requires for his protection a warranty, without limitation, of seaworthiness at the commencement of every voyage. Compare The Burma, 187 Fed. 94, 110 C. C. A. 330; Whipple v. Mississippi & Yazoo Packet Co. (D. C.) 34 Fed. 54; McIver & Co., Ltd., v. Tate Steamers, Ltd., [1903] 1 K. B. 362; Park v. Duncan & Sons, 35 Scottish Law Reporter, 378. If Giertsen v. Turnbull & Co., 45 Scottish Law Reporter, 916, strongly relied upon by the owners, is inconsistent with this view, it should be disregarded.

Fourth. The vessel was owned 54/80ths by Edgar F. Luckenbach, as sole trustee of the estate of Lewis Luckenbach; 10/80 ths by Edgar F. Luckenbach individually; and 16/80 ths by John W. Weber and Hattie W. Luckenbach, executors of the estate of Edward Luckenbach. All of these parties were impleaded as owners. The charter party was signed only by 'Estate of Lewis Luckenbach, per Edgar F. Luckenbach, Trustee'; but it was admitted by all the petitioners that Edgar F. Luckenbach, Trustee, in so signing the charter party, acted for all the owners and intended to bind all. The decree in the District Court declares that libelant was entitled to recovery 'from the respondents Edgar F. Luckenbach et al., her owners.' The decree in the Circuit Court of Appeals adjudged (presumably through inadvertence) that the payment should be made by 'the estate of Luckenbach.' The right to recover against all the owners, for the full amount, in case any of them was so liable was not controverted.

The decree of the Circuit Court of Appeals should be modified so as to render all the owners liable. Compare Pendleton v. Benner Line, 246 U.S. 353, 38 Sup. Ct. 330, 62 L. Ed. 770. As so modified, the decree is affirmed.