Buyer Beware in Buying Vessels? Maybe Not if Buying Stock!
In an opinion issued by the U.S. Court of Appeals for the Eleventh Circuit on July 8, 2011, in the case of Quail Cruises Ship Management Ltd. V. Agencia de Viagens CVC Tur Limtada, et.al., the court determined that a purchaser of stock of a foreign company that owned a commercial vessel could maintain claims in U.S. courts for securities fraud, maritime torts of fraud in the inducement, recklessness and negligence/negligent representation and common law claims for civil conspiracy to commit fraud in the inducement and breach of fiduciary duty.
The case involved the sale of the M/V PACIFIC, better known as the Love Boat from television show of the 70s and 80s. According to the plaintiff, the vessel’s owners and managers deferred much needed maintenance on the vessel, influenced Lloyd’s Register North America, Inc. to provide favorable inspections, and misrepresented the condition of the vessel, in reliance upon which the plaintiff was induced to purchase the shares of the foreign company that owned the vessel. When the plaintiff later learned of the actual condition of the vessel, the law suit, based in large part on alleged securities fraud, followed.
The opinion of the appellate court focused primarily on the jurisdictional basis for the maintenance of the lawsuit, i.e. whether there was a sale of securities that took place in the U.S. Nevertheless, the case also illustrates the increased liability exposure of those that choose to sell the ownership of the company that owns a vessel, rather than selling the vessel as a separate asset. Normally, in an asset sale of a vessel, the principle of caveat emptor, or “buyer beware” applies. When a seller sells stock or other securities, state and federal securities laws apply to create far greater disclosure requirements on sellers. While tax effects generally drive the decision of whether to sell stock or assets, the increased liability exposure in selling stock is a factor to be considered.
