Indemnity Claims and Timebar


Published: 22 February 2005

William Seele, one of Skuld’s regular attorneys in Houston, discusses an important memorandum and opinion recently rendered by the U.S. District Court for the Southern District of Texas, Houston Division, regarding indemnity claims and timebar

Re: Hyundai Merchant Marine Company Limited vs. The Burlington Northern Sante Fe Railway Company. (United States District Court for the Southern District of Texas, Houston Division), C. A. No. H-04-0588 (December 2, 2004)

Recently Judge Sim Lake of the United States District Court for the Southern District of Texas, Houston Division, issued a written memorandum and order regarding a motion filed by the Burlington Northern Sante Fe Railway Company to obtain summary judgment. The issue addressed to the court by the motion was whether claims filed by the ocean carrier, Hyundai Merchant Marine Company Limited, were barred because the claims were first not presented timely or placed in suit within time limits set out in the railroad’s rules and regulations.

The background of the pending action was that our principal had been presented eleven different claims for loss or damage to containerized shipments. Nine of the claims involved what can be described as pilferage claims; that is, cargoes shipped in containers were missing when delivered to the ultimate receivers after transshipment on the railroad from ports of entry on the U.S. Pacific coast. Two of the claims involved damage caused during a derailment while being carried to the port where the containers were to be loaded on the carrier’s vessels.  In all cases, through bills of lading or the equivalent had been or were to be issued for the containers. 

After investigation of the claims made by the various cargo interests, the ocean carrier paid the claims either in full or for an agreed amount.  The ocean carrier then presented claims seeking indemnity for the losses to the railroad, who denied them on the basis of the railroad’s own rules which required claims to be presented within nine months of the loss.  Having no alternative, the ocean carrier filed one suit seeking indemnity from the railroad for the losses paid.

The railroad asserted various defenses, but by its motion for summary judgment argued that the claims were not timely because they were either not timely presented within nine months, or that suit was not brought within one year from the time the claims were denied. The response made was that limitations for indemnity claims does not begin to run until the primary liability is established by either a judgment (or award) or by settlement of the underlying liability.  In addition, the ocean carrier urged to the court that prior decisions of two other courts should be given preclusive effect.

In his memorandum, Judge Lake did not agree that preclusive effect could be given to the prior decisions, but agreed that the claims for indemnity were not barred.  A brief discussion of the memorandum and the court’s reasoning we believe would be of interest to all.

Preclusive Effect:

The argument was that there exist two prior court decisions, which both involve the same railroad addressing the same issue and thus based on those opinions, the railroad’s motion should be denied and the indemnity claims be allowed to proceed. 

The first case cited was Atlantic Mutual v. Orient Overseas Container Line, 1992 WL 226953, 1992 AMC 2022 (W.D. Wash. 1992) in which the railroad or, at least, a predecessor of the railroad, lost on the same issue; that is, the ocean carrier’s claims for indemnity were not barred. Because the order was not a final order, Judge Lake decided that under current applicable Fifth Circuit precedent, preclusive effect or collateral estoppel could not be given to that decision.

The second case is more interesting as it involves the parties before the court in Houston but in another one of the U.S. federal courts circuits. That case was Burlington Northern R.R. Co. v. Hyundai Merchant Marine Co., 63 F. 3d 1227 (3rd  Cir. 1995) and again presented the same issues.  The trial court actually held for the railroad but the Court of Appeals for the Third Circuit reversed that ruling.  The judges of the Third Circuit found no impediment in their circuit to give
preclusive effect to the ruling of the District Court in Washington which is in the Ninth Circuit. Therefore they did not directly address the limitations issue but saw no reason to allow the railroad to litigate again an issue that had been decided adversely to them.

As noted above Judge Lake upon review of Fifth Circuit precedent decided he could not give preclusive effect to the prior rulings but that did not mean the railroad won.

The Limitations issue:

Judge Lake then turned to a case cited not only by the court in Washington but also the ocean carrier in its response for the proposition that the indemnity claims were not barred; that being
Hercules, Inc. v. Stevens Shipping Co., 698 F. 2d 726 (5th Cir. 1983). In that case the Court of Appeals for the Fifth Circuit held that the limitations period for maritime claims is determined by laches.  In reaching this conclusion Judge Lake had to first determine whether maritime law governed the indemnity actions. Citing U. S. Supreme Court and Fifth Circuit precedent Judge Lake held that it did.  This is because the body of law, which establishes the primary liability; that is the ocean carrier, governs the claim for indemnity. In other words, since the shippers causes of action were clearly maritime causes of action, the ocean carrier’s indemnity action against the inland rail carrier was governed by maritime law and thus the time limitations established by the railroad did not govern the action.

Again citing the Hercules case Judge Lake agreed that a cause of action for indemnity arises separately and after primary liability is established and thus a contractual limitations provision would not be enforced.  Judge Lake also noted that the Court of Appeals in reaching such conclusion had expressed its concern that to rule contrary would enable parties with potential liability to a defendant to connive with the plaintiff to proceed only against the defendant and even to delay filing suit until after the contractual suit time provision had expired. This is a potentiality the Court of Appeals and Judge Lake found to be repugnant.

As Judge Lake in his opinion stated at page 9 thereof:

"Were a loss or damage limitations provision like the one here at issue held to apply to indemnity claims, one in Hyundai's position would essentially be at the mercy of the whim or timing of cargo claimants. Cargo claimants might, for whatever reason, choose to bring suit only after the limitations period had expired, and, since the Fifth Circuit has clearly instructed that indemnity claims arise only after primary liability has been established, the party in Hyundai's position could not be faulted for failing to bring its indemnity claim any earlier. Were BNSF's argument accepted one in BNSF's position would be empowered to plot with cargo claimants to concentrate liability on a potentially innocent party. That potentially innocent party, of course, would be an unwitting (at least to the extent that the limitations provision makes no explicit mention of indemnity suits) insurer to the cargo claimants. This was precisely the result the Hercules, Inc. court sought to avoid."

Consequently in this new memorandum and opinion it was held that the timebar only commenced running once the cause of action arose, i.e. that is, once the primary liability was established.