Third Circuit Addresses Cleanup Cost Apportionment and Related Affirmative Defenses

On March 29, the U.S. Court of Appeals for the Third Circuit decided an important oil spill cost recovery case: In re Petition of Frescati Shipping Co., Ltd. v. Citgo Asphalt Refining Co., et al. It is a case concerning the apportionment of oil spill-related cleanup costs and related affirmative defenses, including subrogation, equitable recoupment, and liability limitations under the Oil Pollution Act of 1990 (OPA).

In November 2004, the M/T Athos I, an oil tanker owned by Frescati Shipping Company (Frescati), was chartered by CITGO East Coast Oil Corporation (CARCO) to deliver a shipment of Venezuelan crude oil to CARCO’s berth in Paulsboro, NJ. As this single-hulled oil tanker approached the berth, it struck an abandoned anchor located on the bottom of the Delaware River, spilling approximately 264,000 gallons of crude oil into the river. Frescati cleaned up the spill, which took many days, at a cost of $143M. Under OPA, Frescati’s liability was capped at $45M, and the U.S. reimbursed Frescati for the remainder of $88M.

In the above cost recovery litigation, Frescati sued CARCO for breach of contract, seeking $55M, which included $10M for associated cleanup costs for damages that fell outside the scope of OPA’s liability cap. The U.S., as a partial subrogee for some of Frescati’s claims, also sued CARCO, and CARCO also filed its own claims.

The U.S. District Court for the Eastern District of Pennsylvania held that Frescati was entitled to nearly $56M in damages from CARCO based on its determination that CARCO breached its contractual duty to comply with a “safe berth warranty” as well as prejudgment interest of $16M; the U.S. was awarded half of its claim for $88M on its subrogated breach of contract claim, plus $4.6M in prejudgment interest.

The claim of the U.S. was reduced by the District Court because of CARCO’s “equitable recoupment” defense, based on the argument that three federal agencies— the National Oceanic and Atmospheric Administration (NOAA), U.S. Coast Guard and US Army Corps of Engineers—misled CARCO into believing they “were maintaining the anchorage free of obstructions.” Otherwise, CARCO’s motion for summary judgment was denied.

The Third Circuit affirmed the District Court’s ruling with respect to Frescati, and reversed the finding regarding CARCO’s equitable recoupment defense against the U.S., concluding that this defense was not available to CARCO, and the United States was entitled “to a full recovery.” In addition, CARCO’s late-filed affirmative defense that it was also entitled to OPA’s limited liability cap under 33 U.S.C. § 2702(d)(2)(B) was filed too late and without the “requisite clarity,” and was waived and failed on the merits. The Third Circuit also affirmed the District Court’s ruling denying CARCO’s motion for partial summary judgment on its limitation of liability defense. The case was returned to the District Court for additional consideration of certain prejudgment issues.