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Is There Caveat Emptor When It Comes to Purchasing the "Love Boat"?

In the case of QUAIL CRUISES SHIP MANAGEMENT LTD. v. AGENCIA DE VIAGENS CVC TUR LIMITADA, 23 Fla. L. Weekly Fed. C92a (11th Cir. July 8, 2011), Quail Cruises Ship Management Ltd. (“Quail”) appeals from the district court's order dismissing its amended complaint for lack of subject matter jurisdiction. The Eleventh Circuit Court of Appeals vacated the district court's order and remand for further proceedings.

Quail, a cruise ship operator, alleged in its amended complaint that the defendants conspired to induce it to purchase the M/V Pacific (“vessel”) -- better known as the eponymous Love Boat from its television days of the 1970s and 1980s -- by fraudulently misrepresenting the vessel's deteriorating and defective condition. Quail alleged that the fraud was orchestrated by Agencia de Viagens CVC Tur Limitada (“CVC”), a tour operating company, and its President Valter Patriani. According to Quail, CVC directed Seahawk North America, LLC (“Seahawk”), a ship management company supervising the vessel's operation, and its President Rodolfo Spinelli, to defer repairs and conceal the vessel's condition. As a part of the concealment effort, Seahawk allegedly influenced Lloyd's Register North America, Inc. (“LRNA”), a maritime classification society, to provide favorable inspections and certify the vessel's seaworthiness. Quail further alleged that, while overseas, CVC and Seahawk representatives made several fraudulent misrepresentations regarding the vessel's condition. In reliance on those representations, as well as those made by LRNA, Quail alleged that it purchased the stock shares of Templeton International Inc. (“Templeton”), the principal asset of which was the vessel.

Quail brought claims for: securities fraud under § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5; maritime torts of fraud in the inducement, recklessness, and negligence/negligent misrepresentation; and common law claims of civil conspiracy to commit fraud in the inducement, fraud in the inducement, and breach of fiduciary duty. Quail sought damages for extensive repair work to the vessel, loss of use of the vessel as a passenger cruise ship, and injury to its reputation as a cruise ship operator.

The district court dismissed Quail's amended complaint for lack of subject matter jurisdiction. Applying the Supreme Court's recent decision in Morrison v. Nat'l Australia Bank Ltd., 561 U.S. __, 130 S. Ct. 2869 (2010), which held that § 10(b) and SEC Rule 10b-5 do not apply extraterritorially, the district court concluded that it lacked federal question jurisdiction over the securities fraud claim, because Quail failed to allege that the purchase or sale of the Templeton stock took place within the United States. The court also concluded that it lacked admiralty jurisdiction over Quail's putative maritime tort claims. As a result, the court declined to exercise supplemental jurisdiction over Quail's common law claims. It then dismissed as moot both Patriani's pending motion to dismiss for lack of personal jurisdiction and LRNA's pending motion to dismiss for improper venue based on a forum-selection clause. Quail appeals the dismissal of its amended complaint, and LRNA cross-appeals the concomitant denial (as moot) of its motion to dismiss for improper venue.

The court reviewed Morrison and noted that Quail alleged that “[t]he transaction for the acquisition of the Templeton stock closed in Miami, Florida on June 10, 2008, by means of the parties submitting the stock transfer documents by express courier into this District . . . .”. Given that the Supreme Court in Morrison deliberately established a bright-line test based exclusively on the location of the purchase or sale of the security, the court concluded that the district erred by dismissing Quail's claim, because it was too early in the proceedings to know whether the alleged transfer of title to the shares in the United States lies beyond § 10(b)'s territorial reach.

Although Quail also challenged on appeal the district court's conclusion that it lacked admiralty jurisdiction over Quail's putative maritime tort claims, the court found it unnecessary to address that issue, because those claims form “part of the same case or controversy” as Quail's securities fraud claim, thus providing the district court supplemental jurisdiction over those claims. Thus, the court vacated and remanded for further district court proceedings consistent with the Eleventh Circuit's opinion.

It is therefore too early to tell at this juncture whether "caveat emptor" will ultimately prevail in this case. If you are interested in receiving a complete copy of this decision or wish to contact me, you may do so at miamipandi@comcast.net or motero@houckanderson.com.

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