[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 97-2591, 97-3153, 97-3566
________________________
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 vesselHero.
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 inrem
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, 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 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 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
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. SeeThomas
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.
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 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 inrem
actions. SeeAmerican
Dredging Company v. Miller, 510 U.S. 443, 446-47 (1994). The saving
to suitors clause allows an inpersonam
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. SeeRed
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)SeeEverett
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. SeeHatteras
of Lauderdale, Inc., v. Gemini Lady, 853 F.2d 848, 849-850 (11th
Cir.1988).
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. SeeNew
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 if converted
to a saving to suitors clause case. We
review denovo
conclusions of law. SeeGodfrey
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. SeeAmerican
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. SeeSteelmet,
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,
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)SeeId.
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. SeeSteelmet,
779 F.2d at 1488.
The federal
interest in uniformity under admiralty law is great. SeeMink
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. SeeEdward,
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. SeeEdward,
785 F.2d at 888. To be enforceable, the limited liability clause must clearly
and unequivocally indicate the parties' intention. SeeEdward,
785 at 889. However, the limitation must not absolve the repairer of all
liability and must still provide a deterrent to negligence. SeeBisso
v. Inland Waterways Corp., 349 U.S. 85, 90-91. Also, the parties
must be of equal bargaining power to prevent overreaching. SeeEdward,
785 F.2d at 888 (citingBisso,
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
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 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
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. SeeSteelmet,
779 F.2d at 1488. Admiralty law incorporates
common law fraud. SeeM/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 enforceable. SeeEast
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. SeeTally-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 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.
FOOTNOTES
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. SeeExecutive
Jet Aviation, Inc., City of Cleveland, 409 U.S. 249 (1972).
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).
4. Islander did not cite
and the court did not find any cases to the contrary.
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.
