Slip Op. 01-105
UNITED STATES COURT OF INTERNATIONAL TRADE
BEFORE: HONORABLE NICHOLAS TSOUCALAS
___________________________________
:
AMERICAN SHIP MANAGEMENT, LLC, :
:
Plaintiff, :
:
v. :
:
UNITED STATES, :
:
Defendant, :
: Consolidated
and : Court No. 99-03-00151
:
SL SERVICE, INC., :
:
Plaintiff, :
:
v. :
:
UNITED STATES, :
:
Defendant. :
___________________________________:
Plaintiffs, American Ship Management, LLC and SL Service,
Inc., move for summary judgment pursuant to R. 12(c) of the Rules
of the United States Court of International Trade alleging that the
undisputed material facts in the case show that United States
Customs Service misapplied 19 U.S.C. § 1466, as interpreted by
Texaco Marine Servs., Inc. v. United States, 44 F.3d 1539 (Fed.
Cir. 1994), by assessing duties on the plaintiffs’ dry-docking
expenses on a pro-rata basis. Customs has filed a cross-motion for
summary judgment contending that Customs acted legally by
apportioning the dry-docking expenses on a pro-rata basis in a
fashion mimicking the methodology used by Customs for apportionment
of expenses between dutiable and non-dutiable foreign work.
Held: For the reasons stated below, the plaintiffs’ motion and
Customs’ cross-motion are denied on the ground that there remain
triable issues of fact.
Consol. Court No. 99-03-00151 Page 2
[The plaintiffs’ motion and Customs’ cross-motion are denied. The
parties are to proceed with the litigation on merits.]
Dated: August 17, 2001
Garvey, Schubert & Barer (Charles Routh) for plaintiff
American Ship Management, LLC.
Sonnenschein Nath & Rosenthal (Evelyn M. Suarez and Alexander
H. Schaefer) and Robert S. Zuckerman, General Counsel, for
plaintiff SL Service, Inc.
Stuart E. Schiffer, Acting Assistant Attorney General; Joseph
I. Liebman, Attorney in Charge, International Trade Field Office,
Commercial Litigation Branch, Civil Division, United States
Department of Justice (Barbara M. Epstein); of counsel: Karen P.
Binder, Assistant Chief Counsel, International Trade Litigation,
United States Customs Service, for defendant.
Collier Shannon Scott, PLLC (Lauren R. Howard) for
Shipbuilders Council of America, Inc., amicus curiae in support of
defendant’s cross-motion for summary judgment.
MEMORANDUM OPINION AND ORDER
TSOUCALAS, Senior Judge: Plaintiffs, American Ship Management,
LLC and SL Service, Inc. (“plaintiffs”), pursuant to R. 12(c) of
the Rules of the United States Court of International Trade, move
for summary judgment alleging that the undisputed material facts in
the case show that, as a matter of law, United States Customs
Service (“Customs”) misapplied and misinterpreted the vessel repair
statute, 19 U.S.C. § 1466 (1994), by assessing duties on the
plaintiffs’ dry-docking expenses on a pro-rata basis irrespective
of the inspection required by the United States Coast Guard and
Consol. Court No. 99-03-00151 Page 3
American Bureau of Shipping and performed during the dry-docking.
Customs has filed a cross-motion for summary judgment contending
that Customs acted legally by apportioning the dry-docking expenses
incurred by the plaintiffs in a fashion mimicking the methodology
used by Customs for apportionment of expenses between dutiable and
non-dutiable foreign work. For the reasons stated below, the
plaintiffs’ motion and Customs’ cross-motion are denied on the
ground that there remain triable issues of fact.
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28
U.S.C. § 1581(a) (1994).
DISCUSSION
I. Undisputed Facts
The case concerns dry-docking duties imposed by Customs on two
vessels, specifically, M/V President Truman, a vessel belonging to
American Ship Management, LLC, and Sea-Land Pacific, a vessel
belonging to SL Service, Inc. M/V President Truman underwent dry-
docking at the Hongkong United Dockyard Ltd., and Sea-Land Pacific
was dry-docked in the Hyundai Mipo Dockyard. Both vessels were put
into their scheduled dry-docks to comply with mandatory United
States Coast Guard and American Bureau of Shipping regulations
Consol. Court No. 99-03-00151 Page 4
requiring certain inspections and modifications. During the dry-
docking, the vessels, in addition to the mandatory inspections,
underwent non-dutiable modifications as well as dutiable repairs.
The dry-docking and general service expenses incurred by the
vessels were apportioned by Customs in the following manner: (1)
the expenses for dutiable repairs were added to the expenses for
non-dutiable modifications and inspection; (2) the percentage of
this total was calculated representing the expenses ensuing from
the dutiable repairs; and (3) the same percentage of the total dry-
docking expenses incurred by each vessel was deemed to be a
dutiable expense. See Def.’s Mem. Law Opp’n Pl.s’ Mot. Summ. J.
Supp Def.’s Cross-Mot. Summ. J. (“Def.’s Mem.”) at 22.
II. Contentions of the Parties
The plaintiffs assert that the liquidation of dry-docking
expenses as dutiable is illegal, even on a pro-rata basis, in view
of the following: (1) the fact that the vessels were undergoing a
mandatory inspection; and (2) the test posed by Texaco Marine
Servs., Inc. v. United States (“Texaco”), 44 F.3d 1539 (Fed. Cir.
1994) prohibits the imposition of duties on the dry-docking
undetaken for “mixed purpose.” See Pl.s’ Joint Mem. Law Supp. Mot.
Summ. J. (“Pl.s’ Mem.”) at 2. The plaintiffs also contend that any
imposition of duties on a pro-rata basis is per se illegal under
Consol. Court No. 99-03-00151 Page 5
the Texaco test. See id.
Customs maintains that where dry-docking expenses were
incurred for more than one purpose, e.g., both dutiable repairs and
a mandatory inspection, such “mixed-purpose” expenses are subject
to the imposition of apportioned duties. See Def.’s Mem. at 7.
IV. Analysis
A. Statutory Background and the Texaco Test
Section 1466(a) of United States Code, Title 19, provides that
[t]he equipments, or any part thereof, including boats,
purchased for, or the repair parts or materials to be
used, or the expenses of repairs made in a foreign
country upon a vessel documented under the laws of the
United States . . . shall . . . be liable to entry and
the payment of an ad valorem duty . . . on the cost
thereof in such foreign country.
19 U.S.C. § 1466(a) (emphasis supplied).
The case at bar involves the interpretation of the term
“expenses of repairs” used in 19 U.S.C. § 1466(a). Prior to the
Federal Circuit decision in Texaco, 44 F.3d 1539, Customs used a
restrictive interpretation of the term. For example, Customs did
not treat the dry-docking as an “expense of repairs” making dry-
docking expenses non-dutiable. See Texaco, 44 F.3d 1539. Customs’
pre-Texaco treatment was based upon the premise that dry-docking
expenses were not “part of” and/or “directly involved” in a
Consol. Court No. 99-03-00151 Page 6
dutiable repair. See id.
The court in Texaco examined the statutory language,
determined the language to be clear and unambiguous, and concluded
that it is proper to
interpret [the term] “expenses of repairs” as covering
all expenses (not specifically excepted in the statute)
which, but for dutiable repair work, would not have been
incurred. Conversely, [the term] “expenses of repairs”
does not cover expenses that would have been incurred
even without the occurrence of dutiable repair work. [In
sum,] the “but for” interpretation accords with what is
commonly understood to be an expense of a repair.
Texaco, 44 F.3d at 1544 (citations omitted).
The court in Texaco also specified that
[t]he mere drawing up of a vessel on a dry dock is not a
part of her repairs, but is rather a method of making an
inspection of her to determine whether any repairs are
necessary. The examination might show the hull to be in
perfect condition, requiring no attention of any kind.
Id. at 1546 (citing United States v. George Hall Coal Co., 142 F.
1039 (2d Cir. 1906).
In light of Texaco, 44 F.3d 1539, Customs started assessing
duty on the dry-docking expenses which would not have been incurred
“but for” dutiable repairs even if the expenses were not “part of”
and/or “directly involved” in the repair itself. See Def.’s Mem.
at 7.
Consol. Court No. 99-03-00151 Page 7
B. Apportionment Under the Texaco Test
The plaintiffs assert that any imposition of duties on dry-
docking expenses on a pro-rata basis is per se illegal under the
Texaco test. See Pl.s’ Mem. at 2. The plaintiffs point out that
“the Federal Circuit has specifically ruled” that “‘mixed purpose’
dry-docking . . . do[es] not qualify as ‘expenses of repairs.’”
Id. While the Court agrees with the plaintiffs’ reading of Texaco
with regard to “mixed purpose” dry-docking expenses, the Court
disagrees with the plaintiffs’ unreasonable expansion of the Texaco
holding.
In essence, the court in Texaco delineated two categories of
expenses under 19 U.S.C. § 1466(a), specifically: (1) dutiable
expenses that would not be undertaken “but for” the need to repair;
and (2) non-dutiable expenses undertaken for a purpose either
unrelated to repair or for a “mixed purpose” related to a dutiable
repair as well as to a non-dutiable activity, e.g., an inspection
or modification. The Texaco classification, however, does not make
an apportionment of dry-docking expenses per se illegal if there is
a clear identification of the dutiable dry-docking expenses
undertaken solely for the purpose of repair and the non-dutiable
dry-docking expenses undertaken for a purpose either unrelated to
repair or for a “mixed purpose.” See generally, Texaco, 44 F.3d
1539. Therefore, the Court holds that Customs correctly concluded
Consol. Court No. 99-03-00151 Page 8
that it could apportion dry-docking expenses under the mandate of
19 U.S.C. § 1466(a), as clarified by Texaco, 44 F.3d 1539.
C. Pro-Rata Apportionment Used by Customs
In the case at bar, the dutiable and non-dutiable dry-docking
expenses were apportioned by Customs according to the percentage
corresponding to the value of dutiable repairs and non-dutiable
expenses incurred by each vessel. See Def.’s Mem. at 22. While
the general concept of apportionment of dry-docking expenses does
not contradict the holding of Texaco, 44 F.3d 1539, see supra, the
particular apportionment used by Customs was arbitrary, capricious
and in violation of the classification designated by Texaco, 44
F.3d 1539.
Dry-docking expenses include, among other things, maintenance
expenses and the cost of tugs to put the vessel into and out of dry
dock.1 See, e.g., Dahlia Maritime Co. v. M/S Nordic Challenger,
1993 U.S. Dist. LEXIS 10170 (E.D. La. 1993). Consequently, the
cost of tugs is an inevitable expense of a mandatory inspection
and, thus, is non-dutiable. See Texaco, 44 F.3d 1539. Similarly,
all maintenance charges (along with all other charges related to
1
The latter usually comprises the main expense of the dry-
docking process.
Consol. Court No. 99-03-00151 Page 9
the maintenance)2 associated with the dry-docking during the period
of mandatory inspection and/or modifications are non-dutiable
expenses under the test posed by Texaco notwithstanding whether or
not the vessel undergoes any repair during this period. See id.
Therefore, only the maintenance expense of dry-docking for the
period of time in excess of that necessary for a mandatory
inspection and/or modifications are dutiable under the Texaco test.
See id.
While, under an unlikely scenario, such calculation may create
a result accidently corresponding to that reached by Customs in the
given case, this possibility is irrelevant to the validity of
Customs’ method of calculation because the method violates, as a
matter of law, the test offered by Texaco, 44 F.3d 1539. Customs
shall obtain from the plaintiffs the information necessary to make
a calculation supported by logic rather than random guessing.3
2
The term “maintenance” in the context of dry-docking
usually associates with utilities and analogous services, the
related charges could include, for example, the procedures and
tools necessary to bring and keep the vessel in a stable position.
3
Customs asserts that the plaintiffs failed to satisfy the
plaintiffs’ “burden” because, according to Customs, there is no
pertinent information in the plaintiffs’ brief. This Court
presumes that Customs was referring to the term “burden of
production.” The term “burden of production” defines the burden on
one party to introduce sufficient evidence to avoid judgment
against that party as a matter of law. Specifically, the plaintiff
shall go forward with the evidence on the issue, thus, shifting the
burden to the defendant to produce evidence showing otherwise.
Court No. 98-03-00620 Page 10
V. CONCLUSION
This Court finds that there are genuine issues of material
fact as to what dry-docking maintenance charges (along with all
other charges related to the maintenance) were undertaken by the
plaintiffs during the dry-docking in excess of that necessary for
the mandatory inspections and/or modifications. Because triable
issues of fact remain, the plaintiffs’ motion and Customs’ cross-
motion for summary judgment are denied, and it is hereby
ORDERED that parties proceed with the litigation on merits.
______________________________
NICHOLAS TSOUCALAS
SENIOR JUDGE
DATED: August 17, 2001
New York, New York
See, e.g., Environmental Defense Fund, Inc. v. EPA, 548 F.2d 998,
1013 (D.C. Cir. 1976) (noting that the burden of production does
not necessarily lay with the same party carrying the burden of
persuasion). In the case at bar, the plaintiffs provided a series
of affidavits stating that “the dry-docking expenses would have
been incurred regardless of whether or not any repair work took
place.” See Pl.s’ Mem., Ex. 1. Consequently, the plaintiffs came
forward with the evidence sufficient to shift the burden to Customs
to show otherwise and justify the apportionment method used by
Customs.