January 18, 2013

Supreme Court Issues New "Reasonable Observer" Test on What Constitutes a Vessel

Lenders, Dockside Casino Boats, Oil Rig Owners and Marinas Beware Post-Lozman
Holland & Knight Alert
Christopher R. Nolan

In Lozman v. City of Riviera Beach, Florida, No. 11-626 (January 15, 2013), the U.S. Supreme Court "reformulated" the definition of "vessel." It explained that an objective test, which looks to the physical characteristics of a watercraft rather than the subjective intent of the watercraft’s owner, determines whether a watercraft is a "vessel." In doing so, the Court looked through the eyes of a "reasonable observer" to the physical characteristics. In essence, the majority looked through their own eyes as reasonable observers rather than remanding the case for further fact-finding as urged by the dissent. If the matter had been remanded, the district court could have had the benefit of experts to determine whether the watercraft met the objective test that both the majority and dissent agreed should be used.

What Is a Vessel?

In Lozman, the Supreme Court was faced with the question of whether a certain floating home met the definition of "vessel" under 1 U.S.C. §3. That provision — the Rules of Construction Act — defines a vessel to include "every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water."

The City of Rivera Beach operated a marina in which the floating home was moored. After a dispute arose between the City and the owner of the floating home, the City commenced an action in rem in federal court against the floating home on the assumption that it was a vessel. The City arrested the craft, auctioned it at a judicial sale and bought the craft at that sale. The City then had it destroyed.

Both the district court and the U.S. Court of Appeals for the Eleventh Circuit held that the craft was a vessel and therefore admiralty jurisdiction existed over it. The Supreme Court reversed the Court of Appeals, holding:

We believe that a reasonable observer, looking to the home’s singular physical characteristics and activities, would not consider it to be designed to any practical degree for carrying people or things on the water. And we consequently conclude that the floating home is not a "vessel." Id., slip op. at 1 (emphasis added).

Writing for the majority, Justice Breyer explained that the Eleventh Circuit test, which would find practically any floatable object capable of transporting people or things over water a vessel, was overly broad. He also explained that the Court sought to avoid using subjective elements, such as the intent of the craft’s owner. The use of subjective elements could change the status of a watercraft with changes of owners or with changes of a particular owner’s state of mind and would thus not be predictable. The owner of a vessel used as a gambling casino should not, for example, be able to make the vessel not a vessel by deciding never to use the vessel for transportation.

The dissent by Justice Sotomayor, which was joined by Justice Kennedy, agreed with the reasoning of the majority to use an objective test, but indicated that the matter should have been remanded for findings of facts on which an objective determination could be made. The dissent pointed out that the holding of the majority was basically a subjective holding by the majority justices, because they relied on their own determination, after looking at photographs of the floating home and its aesthetic fixtures and features, to determine that a reasonable observer would not think it was designed to any practical degree for carrying people or things on water.

Effect on the Maritime Industry

A boon for naval architects and surveyors: We presume that the testimony of an expert, such as a naval architect, would be invaluable to determine whether a craft was physically capable of transporting people or cargo from place to place and thus whether a craft met the definition of "vessel." In future cases, a better record should be made before the trial court. An expert witness should examine the object in question and render an opinion after "looking to the [craft’s] physical characteristics and activities [and determining whether the craft was] designed to a practical degree for carrying people or things over water." Id., slip op. at 5. That testimony, with supporting evidence, should satisfy both the majority and the dissenting opinions.

Bankers and lenders for vessels may face less certainty as to lien remedies: The dissent appropriately noted that the uncertainty created by a new "reasonable observer" test will have an immediate effect on lending. As Justice Sotomayor observed, "it is impossible for lenders to know how properly to characterize [a structure] as collateral for a financing agreement because they do not know what remedies they will have recourse to in the event of a default." Dissent at 11 n. 6. The decision should have no effect on financing commercial vessels that transport cargo or passengers. Those craft are obviously vessels and a court would have no trouble deciding that they are.

Problems may arise, however, in the financing of recreational craft, casino boats, certain types of oil rigs and other waterborne craft that are not often moved. Before the decision was issued, marine lenders and creditors observed that the ability to file in rem actions against vessels in order to foreclose a preferred ship mortgage was of principal importance. Today, some lenders may want to open their files and take a closer look at whether certain structures will meet the "reasonable observer" test. Those same lenders may need to rely on state law remedies to repossess what were deemed vessels as opposed to seeking federal relief. Lozman may raise new questions as to what is exactly a "vessel." With today's market, debt restructuring is a common occurrence, and when contracts are renegotiated, the uncertainty will likely result in the lender specifying their rights and remedies at law as opposed to merely referring to the Commercial Instruments and Maritime Liens Act.

Dockside casino boat operators are not in the clear: The gaming industry is a substantial one in the United States; according to the American Gaming Association, 61 state-licensed dockside casinos are in operation today in six states. In an amicus brief, the association sought reversal of the 11th Circuit's ruling because the definition was too broad and would affect near-settled jurisprudence involving floating structures and converted vessels. The old adage of being careful what you wish for comes to mind. Although the majority opinion cited with approval previous precedent involving mostly immobile wharf boat structures, language in the opinion may introduce uncertainty. "A craft whose physical characteristics and activities objectively evidence a waterborne transportation purpose or function may still be rendered a non-vessel by later physical alterations." Slip op. at 12. Operators will have to review the steps taken at dockside not only to immobilize a once-functional riverboat, but will also have to consider aesthetic matters. Lozman teaches us that physical characteristics really do matter. So remove the water-tight portholes and add French doors and ordinary windows — an actual point the majority noted when discussing the petitioner's structure.

Cities and marinas lose certainty: The City of Riviera Beach thought outside the box when dealing with what it deemed a local nuisance. The result? The City probably owes the petitioner the value of the destroyed structure. For municipalities and marinas around the country, margins are already tight and protracted litigations over what or what is not a vessel is cumbersome. Even hiring a surveyor can be costly, and passing the cost to individuals is an added, unwelcome burden. Appropriate remedies must be reexamined. 


What have we learned for certain?

  • More litigation may ensue. The Court recognizes its "reasonable observer" standard, wholly new, "is neither perfectly precise nor always determinative." Slip op. at 12. Relying on lower court examples for similar structures when determining a "vessel" will not be prudent; Lozman is the new world order. And it will lead to colorable challenges to the definition of a structure as a "vessel" in areas that were once considered settled. For example, structures that often invite challenges as to “vessel” or not status are oil rigs. Indeed, the "physical characteristics and activities" of rigs may even change over time. For an interesting examination of this circumstance, see Louisiana International Marine L.L.C. v. Drilling Rig Atlas Century, No. C-11-186, 2012 WL 1029934 (S.D. Tex. Mar. 9, 2012).
  • A U.S. maritime practitioner can no longer argue the definition of a vessel is "anything that floats." In so finding, the Supreme Court wryly provided examples of non-vessels: "a wooden washtub, a plastic dishpan, a swimming platform on pontoons, a large fishing net, a door taken off its hinges, and Pinocchio (when inside the whale)." Also, aesthetics matter: more French doors and fewer portholes actually help attain non-vessel status. Frequency of movement — "too little actual use" — as a watercraft carrying passengers and cargo also matters. Slip op. at 14.
  • The uniformity of federal maritime law is less settled. As the dissent noted, the majority's reference to state environmental laws and tax laws when defining a vessel confuses the precept that vessel regulation is supposed to be within the federal province.
  • For Southern District of New York practitioners, the slight movements gained over the last half decade on ship constructions and its contracts being deemed maritime contracts for jurisdiction purposes ran into the brick wall that is Justice Sotomayor in the dissent. The Justice addressed ships "not yet born" and citing Supreme Court precedent noted that a structure becomes a vessel only when launched. Dissent op. at 3 n.1.
  • The Lozman structure was "an unusual structure": a surveyor could not find a comparable craft in all of Florida. Perhaps this observation will result in admiralty practitioners seeking to lessen the precedential value of the decision.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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