A Kean Miller admiralty and maritime team recently represented AAA Holdings, LLC (AAA), the vessel buyer, against the vessel seller, Marine Worldwide Services, Inc. (MSW) in SPSL OPOBO Liberia, Inc. v. Marine Worldwide Services, Inc., 2011 WL 4509646 (5th Cir. 2011), the U.S. Fifth Circuit affirmed the district court’s ruling that a seller of a vessel who does not disclose pending litigation regarding ownership of the vessel to the buyer prior to the sale is liable for the buyer’s damages and attorneys’ fees pursuant to Louisiana Civil Code article 2545.
In June of 2008, MWS had possession and claimed ownership of a barge. MWS was involved in litigation with SPSL, a company that also claimed ownership of the barge. During the litigation, MWS sold the barge to AAA for $1,300,000. MWS did not disclose the existence of the litigation to AAA.
AAA paid $700,000 to MWS. MWS failed to produce title documentation for the barge. AAA refused to make further payments. Upon learning AAA’s purchase, SPSL filed an admiralty Rule D petitory action. AAA filed a third party claim against MWS for failing to disclose the existence of the litigation between it and SPSL.
SPSL’s claims against AAA and the barge were dismissed for SPSL’s failure to comply with the Court’s discovery orders, production of questionable documentation, and inconsistent representations.
Following SPSL’s dismissal, MWS sought summary judgment regarding ownership of the barge. MWS contended that it was the owner of the barge because AAA had allegedly breached the sale contract by refusing to pay the balance of the $1,300,000 purchase price.
AAA responded by contending that it was the owner of the barge because under Louisiana law, ownership of the barge transferred to AAA immediately upon the parties’ agreement on (1) thing and (2) price. AAA contended that MWS breached the sale contract by failing to provide merchantable title to the barge.
AAA further contended that the pending litigation between SPSL and MWS constituted a redhibitory defect that MWS knowingly did not disclose to AAA. AAA claimed that MWS was a “bad faith seller” pursuant to Louisiana article 2545 and liable for AAA’s damages and attorneys’ fees.
On December 17, 2010, the district court rejected MWS’s arguments and ruled in AAA’s favor, declaring that AAA owned the barge, that MWS was a “Bad Faith” seller, and that MWS was liable for AAA’s damages. SPSL OPOBO Liberia, Inc., et al v. Maritime Worldwide Services, Inc. et al, Civil Action No. 07-3355, Rec. Doc. No. 234, United States District Court for the Eastern District of Louisiana. MWS appealed.
The U.S. Fifth Circuit affirmed the district court’s ruling. SPSL OPOBO Liberia, Inc. v. Marine Worldwide Services, Inc., 2011 WL 4509646 (5th Cir. 2011). The U.S. Fifth Circuit rejected MWS’ ownership claim, finding that AAA was the owner of the barge because the parties had reach an agreement on thing and price.
The U.S. Fifth Circuit further found that since the pending litigation between SPSL and MWS constituted a redhibitory defect in the barge’s title, MWS was liable for AAA’s damages and attorneys’ fees for failing to disclose the litigation.
This decision highlights the reason sellers should fully disclose any pending litigation regarding the property being sold. The failure to do so – even if the seller views the pending litigation to be frivolous – can have dire consequences and expose the seller to significant liability.