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

by Holland & Knight LLP
Contact

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 areasonable 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 wharfboat 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. 

Conclusion

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 allided against 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Holland & Knight LLP | Attorney Advertising

Written by:

Holland & Knight LLP
Contact
more
less

Holland & Knight LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.