[00:00:01] Speaker 01:
Good afternoon.

[00:00:02] Speaker 01:
We'll hear argument this afternoon in case 22-36049, Tug Construction LLC versus Harley Marine Financing.

[00:00:11] Speaker 01:
Mr. Marino?

[00:00:22] Speaker 04:
Good afternoon, Your Honors, and may it please the Court.

[00:00:25] Speaker 04:
The trial court's decision should be reversed because plaintiff failed to adduce any evidence

[00:00:31] Speaker 04:
that the vessels at issue in this case were surveyed by a method that included written and photographic documentation prior to or at delivery as the bare boat charters expressly required.

[00:00:48] Speaker 04:
Beyond that fatal defect, plaintiff's damages expert admitted at trial that he issued and failed to correct an expert report that he knew falsely inflated plaintiff's damages claim by nearly $300,000.

[00:01:02] Speaker 02:
Counsel, on that one with the damages expert, didn't he put an asterisk by the figure?

[00:01:08] Speaker 04:
So that's your honor.

[00:01:10] Speaker 02:
You can answer my question yes or no.

[00:01:11] Speaker 02:
First, just make sure I've got that.

[00:01:13] Speaker 04:
No asterisk, a footnote.

[00:01:15] Speaker 02:
Yes, you put an asterisk by it, and that was to a footnote.

[00:01:17] Speaker 02:
That's correct.

[00:01:17] Speaker 02:
You mentioned that he's going to have to, you might correct it later.

[00:01:19] Speaker 04:
That's correct.

[00:01:20] Speaker 02:
Did he correct it later?

[00:01:22] Speaker 04:
No, actually he did not.

[00:01:23] Speaker 04:
So if I can explain what actually happened, and it's quite different from what the trial court said happened.

[00:01:30] Speaker 04:
This expert, Mr. Kelly,

[00:01:38] Speaker 04:
And I would like to just walk you very briefly through how this occurred.

[00:01:43] Speaker 04:
Initially, he issued an expert report in September of 2019.

[00:01:48] Speaker 04:
In that expert report, he indicated that $300,000 to repair the engine of the Leila Franco was an estimate.

[00:01:58] Speaker 04:
And specifically, what he said was that it would be subject to revision after he had the opportunity to review invoices.

[00:02:07] Speaker 04:
Well, he had the opportunity to review those invoices.

[00:02:10] Speaker 04:
That opportunity came, actually, after he had issued that September 2019 report.

[00:02:16] Speaker 04:
And so he, at this point in time, and this is the finding in the trial court made at ER 7, is that he placed an asterisk next to the $281,260.09 in engine repairs.

[00:02:31] Speaker 04:
That is completely false.

[00:02:33] Speaker 04:
That did not happen.

[00:02:36] Speaker 00:
the trial court though kind of begs a question because he did make a credibility finding and he said that in the respect of the two experts dueling experts he said that Kelly more accurately sets forth and then he goes on to say so how do we overturn that credibility finding because you're suggesting as I hear it that because in your view

[00:03:05] Speaker 00:
the failure to come back and either remove it or add another asterisk to the report somehow invalidates his entire testimony.

[00:03:14] Speaker 04:
No, Your Honor, let me try to clarify.

[00:03:16] Speaker 04:
There's not a credibility issue here at all.

[00:03:19] Speaker 04:
It's not as though the judge listened to Mr. Kelly's testimony, listened to Mr. Walther's testimony, and decided one was more credible than the other based on an accurate reading of what they said.

[00:03:32] Speaker 04:
The judge, in his findings of fact, stated, the discrepancy regarding the cost to repair the Lila Franco's engines arose because Kelly's pre-trial report indicated repairs of $281,260.09 may be needed, subject to further tests and trials.

[00:03:52] Speaker 04:
There is not a shard of evidence in the record that Mr. Kelly ever said anything of the sort or that he placed an asterisk after the 280- Which paragraph are you looking at?

[00:04:02] Speaker 04:
I'm on page, on ER 9, Your Honor.

[00:04:06] Speaker 00:
But what paragraph?

[00:04:07] Speaker 00:
Are you in the judge's findings?

[00:04:10] Speaker 04:
In the judge's findings.

[00:04:11] Speaker 00:
Okay, and what paragraph in those findings?

[00:04:14] Speaker 04:
So the paragraph, it's the first full paragraph on page ER 9.

[00:04:18] Speaker 00:
Rather... Just so you know, we get different ER references depending on which version we're looking at.

[00:04:24] Speaker 00:
Oh, I'm sorry.

[00:04:25] Speaker 00:
If you could tell us what paragraph of the findings and it

[00:04:29] Speaker 04:
So, before he began to number the paragraphs in the first few pages, Judge Toshida has, well, he has, let's see, one, two, three, four, he has six.

[00:04:41] Speaker 02:
Are we reading from the same thing?

[00:04:43] Speaker 02:
I'm reading from the findings affecting conclusions of law.

[00:04:45] Speaker 04:
No, we're not.

[00:04:45] Speaker 04:
Okay.

[00:04:46] Speaker 04:
I'm sorry, Your Honor.

[00:04:46] Speaker 02:
What are you looking at?

[00:04:47] Speaker 04:
I'm looking at his order, which is... Order.

[00:04:51] Speaker 04:
This is the order that Judge Toshida entered on

[00:04:53] Speaker 02:
Attorney's fees?

[00:04:54] Speaker 04:
Current order on attorney's fees, interest costs, and award of damages to plaintiff.

[00:04:58] Speaker 02:
OK.

[00:04:58] Speaker 02:
OK.

[00:04:59] Speaker 04:
Sorry.

[00:05:01] Speaker 02:
That's not the findings.

[00:05:02] Speaker 02:
I apologize.

[00:05:02] Speaker 04:
All right.

[00:05:02] Speaker 04:
So in ER 9, he says, in first paragraph, the discrepancy regarding the cost to repair the Lila Franco's engines arose because Mr. Kelly's pretrial report indicated engine repairs

[00:05:15] Speaker 04:
of $281,260.09 may be needed, subject to further tests and trials.

[00:05:22] Speaker 04:
Mr. Kelly testified that based upon further tests, only $8,551 in engine repairs were needed.

[00:05:28] Speaker 04:
That did not happen.

[00:05:30] Speaker 04:
That's not what happened.

[00:05:31] Speaker 04:
What Mr. Kelly said was initially in September of 2019, he put an estimate, $300,000 estimate, right?

[00:05:39] Speaker 04:
That $300,000 estimate, he dropped his footnote,

[00:05:43] Speaker 04:
And it's September 11, 2019.

[00:05:45] Speaker 04:
It says, quote, further.

[00:05:50] Speaker 01:
I see where you're going with it.

[00:05:51] Speaker 01:
So let's assume you're right about your characterization of this.

[00:05:53] Speaker 01:
What is the remedy that you're asking and that you think is justified?

[00:05:58] Speaker 04:
I think that his entire damages report is flawed by the fact that he testified and admitted on cross-examination that he intentionally has left an inaccurate statement.

[00:06:10] Speaker 02:
This is a faults in one, faults in all argument?

[00:06:13] Speaker 00:
It is, right.

[00:06:14] Speaker 00:
That's where I started, because now you're jumping from his findings of fact to this final order.

[00:06:21] Speaker 00:
And if my question at the outset

[00:06:26] Speaker 00:
and I want to understand your perspective, is that this fault in one, fault in the other, had to do with the dueling experts and your view that he falsely put in there these numbers, albeit with an asterisk.

[00:06:45] Speaker 00:
So are you in effect saying that the order with respect to the final damages and attorney's fees somehow overrides the findings

[00:06:55] Speaker 04:
No, it's perfectly consistent with the findings of fact.

[00:06:58] Speaker 04:
They're equally inaccurate.

[00:07:00] Speaker 04:
All right?

[00:07:00] Speaker 04:
So finding of fact number 12.

[00:07:12] Speaker 02:
I want to make sure I have... It doesn't seem to have anything to do with...

[00:07:24] Speaker 02:
Either the Lee LaFranco or Mr. Kelly.

[00:07:27] Speaker 04:
All about the Lee LaFranco and... Are you talking about Finding a Fact 36?

[00:07:32] Speaker 04:
Yeah.

[00:07:32] Speaker 04:
So in Finding a Fact 36, he says on January... Am I in the right place?

[00:07:38] Speaker 04:
On January 3rd?

[00:07:40] Speaker 04:
All right.

[00:07:41] Speaker 04:
So he issues that, but if you turn to 12.

[00:07:50] Speaker 00:
To what?

[00:07:51] Speaker 04:
number 12 the finding of fact number 12 yeah indeed in his initial expert report dated September 11 2019 Kelly your number 12 of what findings of fact that one begins at the time HMS accepted each tugboat each tugboat was newly constructed I apologize

[00:08:20] Speaker 04:
In his findings of fact, the judge states, and I want to get to the exact right page here.

[00:08:31] Speaker 00:
He does talk about Mr. Kelly at paragraph 40.

[00:08:35] Speaker 04:
Yes, paragraph 36.

[00:08:37] Speaker 04:
In his written report, Mr. Kelly placed an asterisk next to the $300,000 costs for engine repair for Lila Franco.

[00:08:45] Speaker 04:
Mr. Kelly explained that cost was provisional, which is why an asterisk was placed next to it and subject to testing, which later revealed $8,551 in repairs were needed.

[00:08:55] Speaker 04:
That is not what happened.

[00:08:58] Speaker 04:
He issued his first report September 11, 2019, and in that report, which I have as ER, it's page 1672, he included an estimate of repairs for the Lilo Franco, and in the footnote he said, quote, further verification being obtained on final cat repairs, opinions stated herein subject to revision upon review of final cat repair invoice.

[00:09:21] Speaker 04:
That's at page 1676.

[00:09:22] Speaker 04:
The final cat invoices are at pages 1821,

[00:09:27] Speaker 04:
1823, 1827 and 1829.

[00:09:32] Speaker 04:
And those four invoices totaled $281,260.35.

[00:09:35] Speaker 04:
He was off by about $0.26.

[00:09:41] Speaker 04:
But actually, that figure is what he puts in his January 31, 2020 rebuttal report, ER 1793, at page 1814.

[00:09:50] Speaker 04:
There's no asterisk.

[00:09:52] Speaker 04:
There's no footnote.

[00:09:53] Speaker 04:
There's no suggestion that there's going to be further testing.

[00:09:56] Speaker 04:
That did not happen.

[00:09:57] Speaker 01:
But your client was not charged for the $300,000 that we're talking about, right?

[00:10:01] Speaker 04:
That's correct.

[00:10:02] Speaker 01:
So I guess the question becomes, what do you think should happen here?

[00:10:04] Speaker 01:
Because you're claiming there's something wrong in this order, but the magistrate judge did hear your experts, otherwise found him credible, Kelly that is, and awarded damages based on his testimony.

[00:10:15] Speaker 01:
You seem to be saying this one inaccuracy should just unravel everything.

[00:10:18] Speaker 04:
Well, the reason I say that, Your Honor, is, and this isn't a situation in which we're saying, well, this individual

[00:10:28] Speaker 04:
I see that I have the yellow light out and I did reserve five minutes.

[00:10:32] Speaker 01:
Is that why the yellow light's out?

[00:10:33] Speaker 04:
That's why it's come on.

[00:10:34] Speaker 04:
Go ahead.

[00:10:34] Speaker 04:
Okay.

[00:10:35] Speaker 04:
So here's the point.

[00:10:37] Speaker 04:
The idea is not that because

[00:10:41] Speaker 04:
like Judge Tushida found as he did, he should have and was enjoined to find false and one false and all.

[00:10:50] Speaker 04:
He wasn't.

[00:10:51] Speaker 04:
He didn't have to do that.

[00:10:52] Speaker 04:
But what he did have to do was base his findings on what actually happened.

[00:10:57] Speaker 00:
And he did.

[00:10:58] Speaker 00:
My question, and I'm sure the presiding judge will give you some leeway, what does it matter when that's not an issue in the end?

[00:11:06] Speaker 04:
What matters is, when I cross-examined Mr. Kelly, he admitted that he knew in April of 2019 that there was no basis to ask HMS to repair this engine, to replace the engine for $300,000.

[00:11:21] Speaker 04:
He knew, they said he knew it.

[00:11:22] Speaker 00:
End of the day, was there any claim made for that?

[00:11:26] Speaker 04:
Yeah, they made a claim until he got on the witness stand.

[00:11:28] Speaker 00:
Well, no, I mean at the end of the day.

[00:11:31] Speaker 00:
Your client didn't suffer any damage, correct, on that point?

[00:11:35] Speaker 04:
That's certainly correct, Your Honor, other than the damage that was devoted to litigating the entire case, Prime Minister.

[00:11:43] Speaker 01:
Can we go back to the first issue, the first issue you raised in your brief?

[00:11:48] Speaker 01:
So is it your position that to have any kind of damages following the return of the tugs, there had to have been some formal inspection?

[00:11:58] Speaker 01:
Or are you conceding that it doesn't necessarily need to be formal, there can be something else that's akin to that?

[00:12:03] Speaker 04:
100%, they were required to do an on-hire survey.

[00:12:09] Speaker 04:
What the testimony was was, no, they didn't do an on-hire survey.

[00:12:13] Speaker 04:
What they did was they did a, during construction, Mr. Appleton took some photos that were never put into evidence.

[00:12:20] Speaker 04:
During construction, that's not when you do the on-hire survey.

[00:12:24] Speaker 04:
See, the reason this happened the way it did was because Mr. Franco controlled both companies.

[00:12:28] Speaker 04:
He didn't have any need.

[00:12:29] Speaker 04:
to do an on-hire survey because the tug construction existed, was formed solely for the purpose of selling boats to his other company, Harley Marine Services.

[00:12:40] Speaker 04:
What happened was the world changed.

[00:12:41] Speaker 04:
He got fired.

[00:12:42] Speaker 04:
And after he got fired, then it was time to say, wait a minute, now we are going to enforce it.

[00:12:46] Speaker 04:
The problem was he couldn't enforce it because he didn't do the on-hire survey.

[00:12:50] Speaker 04:
So there was no way to compare.

[00:12:52] Speaker 04:
And there is not a drop of evidence in this record

[00:12:55] Speaker 04:
as to what happened at the time of delivery.

[00:12:59] Speaker 04:
That didn't occur.

[00:13:00] Speaker 04:
And he said so.

[00:13:01] Speaker 04:
Mr. Franco said it.

[00:13:03] Speaker 04:
Mr. Appleton said it.

[00:13:04] Speaker 04:
We surveyed it during the course of the day.

[00:13:08] Speaker 04:
We surveyed it.

[00:13:10] Speaker 04:
We took pictures and so forth.

[00:13:11] Speaker 01:
But weren't the votes accepted?

[00:13:12] Speaker 04:
I mean they were new newly constructed right then they were accepted the Hank Kaplan conked out eight times on its maiden voyage there was testimony in the record that there were plenty of problems with these boats Mr. Franco wanted to accept the boats and he was in a position to accept them and he was in a position to say that's what the

[00:13:27] Speaker 04:
the bare boat charters say, but it's unnecessary to follow them.

[00:13:30] Speaker 04:
The bare boat charters were in place for one reason, and that's because cat financing required it.

[00:13:36] Speaker 04:
That's in the record.

[00:13:37] Speaker 04:
It couldn't be clearer.

[00:13:38] Speaker 04:
That's why we had bare boat charters, and they're formal, and they say something quite specific.

[00:13:42] Speaker 04:
And you know what that is.

[00:13:43] Speaker 04:
They say prior to or at delivery, there must be a formal on hire survey that has photographs and documentation that does not exist.

[00:13:55] Speaker 00:
It says method.

[00:13:55] Speaker 00:
I mean, it doesn't say on hire survey.

[00:13:58] Speaker 00:
that absent non-hire survey, you have no baseline for determining good conditions.

[00:14:05] Speaker 04:
Correct.

[00:14:05] Speaker 04:
Correct.

[00:14:06] Speaker 04:
No benchmark at all.

[00:14:06] Speaker 04:
And I asked that question of Mr. Kelly.

[00:14:10] Speaker 04:
This is the reality.

[00:14:12] Speaker 04:
And it couldn't be clearer in the barebone servism.

[00:14:16] Speaker 04:
Prior to or at delivery, the vessel shall be surveyed to comprehensively document its condition.

[00:14:22] Speaker 04:
And whatever method they agree on, any method agreed must include written and photographic documentation.

[00:14:28] Speaker 04:
Why?

[00:14:29] Speaker 04:
so that you actually have a benchmark.

[00:14:31] Speaker 04:
It did not exist.

[00:14:33] Speaker 04:
And it's not enough to say they were new.

[00:14:35] Speaker 04:
New is a temporal thing.

[00:14:36] Speaker 04:
Yeah, they were new.

[00:14:37] Speaker 04:
But there were lots of problems with new boats.

[00:14:39] Speaker 04:
And these pictures and things that were taken before that Mr. Appleton testified about, that was, in some instances, weeks before the boats were actually done.

[00:14:47] Speaker 01:
But couldn't the parties agree to do something short of the survey?

[00:14:50] Speaker 01:
They could have, but they didn't.

[00:14:52] Speaker 04:
And there wasn't a modification here.

[00:14:53] Speaker 04:
I hear there's now a last minute argument about modification.

[00:14:56] Speaker 04:
They didn't argue modification.

[00:14:57] Speaker 04:
They argued that they complied with the contract.

[00:14:59] Speaker 04:
To comply with the contract, they had to have the benchmark there.

[00:15:02] Speaker 01:
It seems like by the logic of your argument, your clients could return the boats completely, totally damaged, and there would be no remedy unless this on-hire survey had been conducted.

[00:15:13] Speaker 04:
And that sounds crazy, right, Judge?

[00:15:14] Speaker 04:
But it's not.

[00:15:15] Speaker 04:
And the reason it's not is, if you do not have a benchmark, you cannot determine what the cost of damages was.

[00:15:24] Speaker 04:
It's impossible.

[00:15:26] Speaker 04:
And why?

[00:15:26] Speaker 04:
Because they didn't need to do it.

[00:15:28] Speaker 04:
Why didn't they need to do it?

[00:15:30] Speaker 04:
They didn't need to do it because Mr. Franco owned both companies.

[00:15:32] Speaker 01:
Is there any evidence between the time in which the boats were first inspected during the construction and the time that your clients received them?

[00:15:40] Speaker 01:
that there was any damage to the boats?

[00:15:41] Speaker 01:
I know your position is that's their problem, not my problem.

[00:15:44] Speaker 01:
But is there actually any evidence that in that several month period, the boats sustained some kind of damage?

[00:15:49] Speaker 04:
Sure, there was evidence.

[00:15:51] Speaker 04:
But the problem was the boats were returned when they were returned.

[00:15:56] Speaker 04:
And the answer was, well, you are responsible for this.

[00:16:00] Speaker 04:
And the question coming back from HMS was, why?

[00:16:03] Speaker 04:
Why are we responsible?

[00:16:05] Speaker 04:
What condition was the boat in when it was delivered?

[00:16:07] Speaker 04:
I mean, either these contracts mean something or they mean nothing.

[00:16:10] Speaker 04:
That's the reality.

[00:16:11] Speaker 04:
And this one apparently meant nothing.

[00:16:13] Speaker 04:
And the reason it meant nothing is they didn't care.

[00:16:16] Speaker 04:
Mr. Franco says it.

[00:16:17] Speaker 04:
Mr. Appleton says, I don't have any documentation.

[00:16:19] Speaker 04:
I don't have any photos.

[00:16:20] Speaker 04:
They're never produced.

[00:16:21] Speaker 04:
Why do the bare boat charters require photographs?

[00:16:26] Speaker 04:
They require them for exactly this reason, so that when you bring the boat back, they can't say, wait a second, that all happened while you had the boat.

[00:16:32] Speaker 04:
That didn't happen at the time of delivery.

[00:16:34] Speaker 04:
We don't know what happened at the time of delivery.

[00:16:36] Speaker 04:
And I don't think there's anything improper or extreme in saying,

[00:16:41] Speaker 04:
Wait a second, the contract required you to do it and you didn't do it.

[00:16:46] Speaker 04:
And back for one second to the four invoices that you add up to the 281, those kind of mistakes that Judge Toshida made, they weren't small mistakes.

[00:16:56] Speaker 04:
That's a huge mistake.

[00:16:57] Speaker 04:
His thing, when I was questioning the witness about it, he said, well, what do you care?

[00:17:00] Speaker 04:
Do you want to pay 8,000 or do you want to pay 300,000?

[00:17:03] Speaker 04:
Well, that wasn't the point.

[00:17:04] Speaker 04:
The point was Mr. Kelly told me he knew in April of 2019 that the 300 was completely bogus.

[00:17:10] Speaker 04:
But he put it in his report anyway.

[00:17:12] Speaker 04:
And he put it in again.

[00:17:13] Speaker 04:
No asterisk.

[00:17:14] Speaker 04:
He added up the invoices and he put it in $281,000.

[00:17:17] Speaker 04:
That's what he did.

[00:17:20] Speaker 04:
And he did it knowing it.

[00:17:21] Speaker 04:
And I said to him, why?

[00:17:22] Speaker 04:
Don't you know that you have to sign a report and have to be honest and so on?

[00:17:26] Speaker 04:
Yes, I know.

[00:17:27] Speaker 04:
Why didn't it happen here?

[00:17:28] Speaker 04:
He said, I don't have a good answer for that.

[00:17:29] Speaker 01:
Okay, we've let you go over your time, so we're going to let you have a seat and we'll have two minutes up for rebuttal when you come back.

[00:17:34] Speaker 01:
Thank you very much, Ron.

[00:17:35] Speaker 01:
Thank you.

[00:17:46] Speaker 03:
Thank you, Your Honors.

[00:17:47] Speaker 03:
May it please Court, Jess Webster, for the respondent tug construction.

[00:17:53] Speaker 03:
I believe you know that these were all custom-made boats.

[00:17:56] Speaker 03:
They were custom-built for Harley Marine services use.

[00:18:00] Speaker 03:
They were built Harley Marine specifications and design and by agreement.

[00:18:06] Speaker 03:
The parties had Harley Marine's engineering department serve as the owner's representative throughout the entire course of the construction of these vessels, which I will describe later as way more exhaustive and more comprehensive than what you would ever have on a on-hire survey consisting of a walkthrough on a vessel.

[00:18:29] Speaker 03:
And it was through that exhaustive process which included photographs and reports and testing and sea trials and the creation of punch lists of any known deficiency and the correction of those punch lists, all those deficiency items before the vessels were finally accepted on charter that ensured that these boats, at the time they went on charter,

[00:18:57] Speaker 03:
were brand new and were in perfect condition to the extent knowable.

[00:19:02] Speaker 00:
But let me say, though, I thought there's evidence that there were some significant issues prior to the tender.

[00:19:11] Speaker 00:
And so when you say they were in new condition, but that was with some caveats, was it not?

[00:19:17] Speaker 03:
Well, in the record, if you read Mr. Appleton's testimony, he will confirm that with respect to the one vessel, the Hank Kaplan, they accepted that vessel provisionally because they needed it for a christening ceremony, but subject to a laundry list of things that had to be corrected before it was finally accepted.

[00:19:39] Speaker 03:
And he did confirm that the vessel returned to the shipyard.

[00:19:43] Speaker 03:
All those deficiency items were corrected.

[00:19:47] Speaker 03:
And the vessel was, in his opinion, in perfect condition, brand new when they made the final acceptance of the vessel from the builder, which was simultaneous to the acceptance of the tugs under the charter agreements.

[00:20:02] Speaker 03:
Now, if you'd like to hear about the methodology by which these vessels were inspected to confirm their condition, as Mr. Marino noted, in the charter agreements, which were all identical and were prepared by counsel for Harley Marine at the direction of Harley Marine's CFO, Todd Proffitt, who represented Harley Marine's interests throughout the negotiation of all these charters,

[00:20:33] Speaker 03:
contrary to the characterization that Mr. Franco controlled everything.

[00:20:38] Speaker 03:
They provided that prior to or at delivery, the vessel shall be surveyed to comprehensively document its condition.

[00:20:47] Speaker 03:
The parties may agree on an appropriate method by which to survey the vessel and establish its condition, which would include dry docking and or

[00:20:59] Speaker 03:
under water inspection.

[00:21:01] Speaker 03:
And it was proven at trial that the agreed method, agreed between Mr. Franco and Mr. Proffitt, was that they would have Harley Marine's engineering department serve as the owner's representative throughout the entire vessel construction, testing, sea trials, and acceptance process.

[00:21:23] Speaker 03:
It only makes sense that they do this.

[00:21:25] Speaker 03:
These are vessels who are custom built for Harley Marine 2, Harley Marine Spec.

[00:21:32] Speaker 03:
Harley Marine's engineering department had the technical ability to conduct those investigations.

[00:21:38] Speaker 03:
And there was multiple witnesses who testified at trial that that exhaustive, continuous process is a far more comprehensive and robust method of establishing

[00:21:52] Speaker 03:
the condition of the vessels at the commencement of the charters or when accepted from the builder.

[00:21:58] Speaker 00:
There does seem to be some difference of opinion between the two parties as to whether you need, you're talking about something that's either equivalent to or actually in excess of an on-hire survey and your colleague here says no, if you stick to the contract it has to be an on-hire survey.

[00:22:21] Speaker 00:
What's your position

[00:22:22] Speaker 03:
Well, that's not what the contract says.

[00:22:25] Speaker 03:
What it says is that the parties may agree upon the pro-fit method by which to survey the vessel and establish its condition.

[00:22:34] Speaker 03:
The testimony at trial was also that after undergoing this

[00:22:39] Speaker 03:
intensive and robust inspection, testing, and correction methodology at the point that the vessels were accepted.

[00:22:48] Speaker 03:
It was to the best of anyone's knowledge, these vessels were perfect in every respect.

[00:22:56] Speaker 03:
And it's for that very reason that it is customary, and there's testimony of this effect, that after going through that exhaustive process, they don't bother hauling the vessel out again at great expense to take one last looksie at the bottom of the vessel to make sure there's not a problem.

[00:23:15] Speaker 03:
And it's also noteworthy the type of problems that were found after the vessels were returned.

[00:23:24] Speaker 03:
a lot of physical damage from striking things.

[00:23:28] Speaker 03:
It was primarily electrolysis damage caused by Harley Marine not maintaining the zinc anodes on the vessels with a regular maintenance and repair schedule.

[00:23:41] Speaker 01:
Is there anything in the record that

[00:23:44] Speaker 01:
And I recognize that you're saying there's testimony that basically this process that the parties went through during the construction and testing of the vessels qualified as the survey that's referenced in the contract.

[00:23:57] Speaker 01:
Is there anything more formal in the record that would indicate that?

[00:24:00] Speaker 03:
Well, Your Honor, what is in the record is Mr. Appleton's testimony that he and the head of the engineering department, Mr. Nelson, actually performed all those repairs.

[00:24:11] Speaker 03:
inspections, which included dry dock inspections before the vessel went in the water, testing the equipment, and that all those inspections were documented with photographs and written reports.

[00:24:26] Speaker 01:
How close to delivery did all this take place?

[00:24:29] Speaker 01:
Excuse me?

[00:24:30] Speaker 01:
How close in time to delivery did all this take place?

[00:24:35] Speaker 01:
Delivery to what other point in time?

[00:24:37] Speaker 01:
Delivery to HMF.

[00:24:39] Speaker 03:
Well, the delivery from the builder to tug construction was simultaneous with the delivery of the vessels from tug construction to Harley Marine under the charter agreements.

[00:24:52] Speaker 03:
It was one and the same event.

[00:24:54] Speaker 01:
Okay.

[00:24:54] Speaker 01:
I had maybe understood the other side's position to be there was some time lag between some of these inspections during the construction process and then the eventual delivery of a completed vessel, but is that not the case?

[00:25:06] Speaker 03:
Yes, there is some time lag.

[00:25:08] Speaker 03:
For instance, when you inspect welds during the weld-up process, there'll be some time lag between that and final delivery.

[00:25:16] Speaker 03:
But the real test was the final inspections and sea trials that took place just shortly before the delivery of the vessels by the builder and to the charterer under the charter.

[00:25:29] Speaker 03:
You know, under the judge Toshida noted that there is absolutely no evidence that these vessels sustained any damage during that interim between launch and delivery.

[00:25:42] Speaker 03:
And that at best, Harley Marine only had speculations that something could have happened.

[00:25:48] Speaker 03:
And as I said, customarily in the industry, after going through that exhaustive inspection process, which as I said, included photographs and written reports, you know, they don't bother or incur the expense to haul the vessel again just to look at the underside.

[00:26:05] Speaker 03:
And getting back to the reports and the photographs, I wanted to emphasize that Mr. Appleton confirmed that throughout the entire process, the conditions of the vessel was documented with photographs and with written reports, and that there was a final report written upon final acceptance of the vessels.

[00:26:27] Speaker 03:
and that he turned all those reports over to the engineering department at Harley Marine.

[00:26:33] Speaker 03:
And they actually discussed those reports at the weekly engineering department meetings.

[00:26:39] Speaker 03:
He also testified that when his employment was terminated, he turned over his laptop to Harley-Marine, which contained all his copies of those photographs and reports.

[00:26:52] Speaker 03:
Now, we don't know.

[00:26:53] Speaker 03:
There was no evidence at trial as to what Harley-Marine did with that collection of reports and photographs.

[00:27:02] Speaker 03:
But Mr. Appleton clearly testified it was all done, it was all delivered.

[00:27:08] Speaker 03:
But it's noteworthy that none of Harley Marine's witnesses at the trial controverted any of that testimony and said that, no, he had not, in fact, done those reports, turned over those photographs.

[00:27:22] Speaker 03:
Rather, we're left to speculate as to what happened to those.

[00:27:26] Speaker 03:
And I would also note, as I put in my supplemental citation of authorities,

[00:27:33] Speaker 03:
You know, the parties, if they wish, they could have selected a selection inspection method that didn't include photographs and written reports.

[00:27:42] Speaker 03:
Because under maritime law, alteration, modification, or waiver of a marine contract provisions may be implied by the acts of the parties and the circumstances surrounding performance of the contract.

[00:27:55] Speaker 03:
There is ample evidence in the record as to what the parties agreed to do.

[00:28:01] Speaker 03:
In fact, it did include written reports and photographs.

[00:28:05] Speaker 03:
We're just left to speculate as to what happened to those.

[00:28:08] Speaker 01:
Do you want to address this issue with the $300,000 figure on Mr. Kelly's expert report?

[00:28:15] Speaker 03:
Yes.

[00:28:16] Speaker 03:
You would like me to address that, or you have a specific question?

[00:28:19] Speaker 01:
I'd like to hear your response to what we heard from your opposing counsel.

[00:28:22] Speaker 03:
Well, first of all, Mr. Kelly testified for days.

[00:28:28] Speaker 03:
He was on the stand longer than any witness in this case, and Judge Tashida had ample opportunity to

[00:28:35] Speaker 03:
observe his demeanor, to observe the way he conducted himself in performing these repairs, and made findings that affirm that he acted with alacrity and integrity and fairness in going about the process.

[00:28:51] Speaker 03:
So there is a lot in the record that Mr. Judge Toshida was relying upon in making his credibility determination.

[00:29:00] Speaker 03:
What we're talking about here is one line item.

[00:29:04] Speaker 03:
in a laundry list of damage claim items.

[00:29:08] Speaker 03:
And as to this one line item, contrary to what Mr. Marino said,

[00:29:14] Speaker 03:
Mr. Kelly didn't confirm that there was no basis for including that line item in the claim initially, or that it was completely bogus.

[00:29:24] Speaker 03:
Instead, the record reflects that he considered that item of damages to be a close call, because the initial testing showed that there was not excessive wear, even though

[00:29:39] Speaker 03:
The engines had been run up to the very brink of the point where the engine manufacturer, Cat, would require a total rebuild of the engines.

[00:29:49] Speaker 03:
And eventually, his reservations on that one alityme of damages caused him to recommend to Tug Construction that it not pursue that item of damages in the claim.

[00:30:06] Speaker 03:
And tug construction, which is run by Mr. Red, who is himself an expert with respect to tractor tugs and their operation, he disagreed because he believed that the reports from Caterpillar Tractor were conclusive and due to the number of engine hours that have been run.

[00:30:24] Speaker 02:
All right.

[00:30:25] Speaker 02:
Can you help me understand this?

[00:30:26] Speaker 02:
So in the initial report, he put down a figure of $300,000.

[00:30:29] Speaker 03:
That's correct.

[00:30:30] Speaker 02:
Elsewhere in the record, there is a figure of $281,000 in change.

[00:30:33] Speaker 02:
Correct.

[00:30:35] Speaker 02:
What's the 281?

[00:30:36] Speaker 02:
Is that a revised figure?

[00:30:40] Speaker 03:
Excuse me?

[00:30:41] Speaker 02:
What does the 281 represent?

[00:30:43] Speaker 03:
That was after the actual cost of rebuilding the engines for the Leila Franco had been determined.

[00:30:48] Speaker 02:
But ultimately, we allow, what, 8,000?

[00:30:51] Speaker 03:
Well, after the decision was made to withdraw that claim item entirely, making this entire line of impeachment

[00:30:59] Speaker 03:
impeachment on a collateral issue.

[00:31:02] Speaker 03:
Yes, there was only $8,000 in repairs and getting the engines back on warranty.

[00:31:08] Speaker 03:
Okay.

[00:31:09] Speaker 00:
The argument, as I heard it, was, well, he had around $300, he had an asterisk, but he actually goes into trial not modifying his report.

[00:31:18] Speaker 03:
That's correct.

[00:31:19] Speaker 00:
And that is what I think they see as the nub of his

[00:31:24] Speaker 00:
apparent dishonesty or at least a basis for completely disregarding his expert analysis.

[00:31:32] Speaker 00:
So why in your view did Judge Toshida not make an error?

[00:31:38] Speaker 03:
Well, in my view, the decision to not pursue that item of damages because it was such a close call was made right on the brink of trial.

[00:31:48] Speaker 03:
And in retrospect, a supplemental report was in order, but it was not performed.

[00:31:54] Speaker 03:
But even if that were to constitute a big lie, there was a plethora of other testimony and evidence that Judge Toshida relied upon in making his

[00:32:07] Speaker 03:
credibility determination.

[00:32:09] Speaker 02:
Okay, so they make the decision, who makes the decision not to seek the larger amount, the $281,000?

[00:32:15] Speaker 03:
Ultimately, it was made between Mr. Kelly's recommendation and Mr. Red accepting that recommendation.

[00:32:23] Speaker 03:
That was done before trial?

[00:32:24] Speaker 03:
I think the day before trial.

[00:32:26] Speaker 03:
OK.

[00:32:26] Speaker 02:
And so when Mr. Kelly gets on the stand, is he still pushing for the 281?

[00:32:30] Speaker 02:
And does the $8,000 figure, is that admitted by your side, or is that elicited by the other side on cross-examination?

[00:32:38] Speaker 03:
No, it was announced to the court and made clear that that line item of damages for the rebuilding was withdrawn.

[00:32:48] Speaker 02:
Was withdrawn and being corrected and being lowered to $8,000.

[00:32:52] Speaker 03:
That's correct.

[00:32:54] Speaker 03:
You know, ultimately, Mr. Kelly's decision to withdraw that item as it be due to it being a close call, if anything, reflects on his integrity to not pursue an item of damages in this case that wasn't absolutely clear.

[00:33:11] Speaker 02:
And when you say it was a close call, it was a close call as to whether this was attributable to misuse of the engines, or it was a close call as to whether the engines needed repair.

[00:33:21] Speaker 03:
Correct.

[00:33:21] Speaker 03:
It was a close call whether the amount of wear on the engines was beyond what is normal wear and tear.

[00:33:29] Speaker 02:
Because the engines were going to need $281,000 worth of refurbishing.

[00:33:35] Speaker 02:
But you were only going to seek $8,000.

[00:33:37] Speaker 02:
Am I correct on that?

[00:33:38] Speaker 02:
That's correct.

[00:33:39] Speaker 02:
OK.

[00:33:39] Speaker 02:
All right.

[00:33:39] Speaker 02:
So the engines were going to need to be overhauled, but the question was whether that was

[00:33:46] Speaker 02:
the ordinary use of the engines or whether it was extraordinary?

[00:33:49] Speaker 03:
That's correct.

[00:33:50] Speaker 03:
The engines actually were overhauled.

[00:33:53] Speaker 03:
But the question was whether or not it's something that Harley Marines should have been held accountable for.

[00:33:59] Speaker 03:
And initially, Mr. Kelly believed it was something that was Harley Marines' responsibility, but it was a close call.

[00:34:11] Speaker 03:
And at the time of trial, it was decided that

[00:34:15] Speaker 03:
Because he felt it was a close call, it was withdrawn.

[00:34:20] Speaker 03:
And we only pursued clear items of damage that were sustainable.

[00:34:26] Speaker 01:
We'll let you go over your time, Mr. Webster.

[00:34:27] Speaker 01:
But let me see if my colleagues have any further questions for you.

[00:34:31] Speaker 01:
Thank you very much for your argument this afternoon.

[00:34:33] Speaker 03:
Thank you, Your Honor.

[00:34:35] Speaker 01:
And we'll hear a rebuttal from Mr. Marino.

[00:34:37] Speaker 04:
Thank you very much, Your Honor.

[00:34:39] Speaker 04:
Just to be clear.

[00:34:41] Speaker 04:
Mr. Kelly knew in April of 2019 that that $300,000, which represented fully 20% of the claim damages, was not proper.

[00:34:54] Speaker 04:
That's what he testified to.

[00:34:55] Speaker 04:
He knew it in April.

[00:34:57] Speaker 04:
He knew it in September.

[00:34:58] Speaker 04:
But in September, he put his $300,000 with the footnote in, subject to the arrest.

[00:35:01] Speaker 02:
When you say it was not proper, you mean it was not an accurate figure, or it was not legally attributable to your client?

[00:35:09] Speaker 04:
It was not legally attributable to our client.

[00:35:11] Speaker 04:
And what happened here is they got all these boats fixed, and then they gave us the bill.

[00:35:16] Speaker 04:
And so with the $300,000, and this is, let's be clear about this.

[00:35:21] Speaker 04:
It's not a question of credibility.

[00:35:23] Speaker 04:
The guy told me that he knew.

[00:35:27] Speaker 04:
that this 300,000 was not right.

[00:35:30] Speaker 04:
And he capitulated and allowed his client to let him inflate the damage figure.

[00:35:36] Speaker 04:
And then Judge Deshita didn't get it respectfully at all.

[00:35:39] Speaker 04:
He thought this is an asterisk that this guy put there.

[00:35:42] Speaker 04:
And then, hey, you know, he took a look at the invoices.

[00:35:45] Speaker 04:
He took a look at further testing.

[00:35:47] Speaker 04:
There's nothing there about further testing.

[00:35:48] Speaker 04:
He put the 300 in because he didn't have the exact number.

[00:35:52] Speaker 00:
But at the end of the day,

[00:35:53] Speaker 00:
When the judge is looking at, well, should I reduce the attorney's fees because of potential time spent on this?

[00:36:00] Speaker 00:
He says, no, it didn't matter.

[00:36:02] Speaker 04:
It didn't matter to him at all.

[00:36:07] Speaker 04:
Just understand this.

[00:36:08] Speaker 00:
No, wait.

[00:36:10] Speaker 00:
I'm saying what the judge said, but was time spent at the trial proving that it was 281 or 8,000?

[00:36:21] Speaker 04:
No, time was spent defending it all the way up to the trial.

[00:36:24] Speaker 00:
Up to the trial.

[00:36:26] Speaker 00:
So I just want to be clear that by the time of trial, it was acknowledged that Tug was no longer pursuing that damage, correct?

[00:36:37] Speaker 04:
That's absolutely right.

[00:36:39] Speaker 04:
At the time of trial, it was acknowledged.

[00:36:41] Speaker 04:
The problem was this.

[00:36:43] Speaker 00:
I understand what the problem was in your view, but I just wanted to be clear about the timing.

[00:36:48] Speaker 02:
Mr. Minow, I guess I still don't understand

[00:36:51] Speaker 02:
what the implications of that are.

[00:36:53] Speaker 02:
Does that mean that the district judge's findings are clearly erroneous?

[00:36:57] Speaker 02:
Your client doesn't get charged for this amount.

[00:36:59] Speaker 02:
So what's the problem?

[00:37:01] Speaker 04:
The problem is that, yes, the district judge's findings, the magistrate judge's findings were clearly erroneous.

[00:37:08] Speaker 04:
He said that this guy put in asterisks there and all of that.

[00:37:11] Speaker 02:
But at the end of the day, Mr. Maynard, your client doesn't get charged for that.

[00:37:14] Speaker 04:
That's right, but that's not how it works.

[00:37:17] Speaker 04:
You don't get to put in false reports, not once, but twice.

[00:37:20] Speaker 04:
He ridiculed Mr. Walther's report in his rebuttal in 2020.

[00:37:25] Speaker 04:
He ridiculed it and said, of course.

[00:37:27] Speaker 02:
Mr. Marino, we see all kinds of cases where people compromise on damages that they claim.

[00:37:32] Speaker 02:
And sometimes they decide that they can't make something stick that they thought they could when they started the case.

[00:37:37] Speaker 02:
And if this is a case about whether or not this was ordinary wear and tear or extraordinary wear and tear,

[00:37:43] Speaker 02:
Those are judgments.

[00:37:44] Speaker 02:
And the difference between $281,000 in extraordinary wear and tear and $8,000 in extraordinary wear and tear is a big amount.

[00:37:54] Speaker 02:
But at the end, your client doesn't get charged for that.

[00:37:57] Speaker 04:
I think I've not made myself clear, and I apologize for that.

[00:38:00] Speaker 04:
But the problem is related to the overall credibility of this witness.

[00:38:06] Speaker 00:
But that's not you got done telling me that credibility is not an issue.

[00:38:09] Speaker 04:
No, but the overall credibility.

[00:38:11] Speaker 04:
Well, I'm sorry, Your Honor.

[00:38:12] Speaker 04:
Well, I think I can I think I can illuminate when I say credibility is not an issue This is not about us coming to say well judge Tushida found that he was credible, but you should reverse it That's not what I'm saying.

[00:38:25] Speaker 04:
Judge Tushida said he put an asterisk there He got further testing and then he changed his mind.

[00:38:31] Speaker 04:
That's dead wrong.

[00:38:32] Speaker 04:
That's not what happened

[00:38:33] Speaker 04:
What happened was he was bullied into putting it in and carrying it all the way through discovery.

[00:38:38] Speaker 04:
He put in a rebuttal report that ridiculed, absolutely ridiculed the idea that that $300,000 wasn't our responsibility.

[00:38:44] Speaker 04:
And then as we get up to trial, I say, you know what?

[00:38:46] Speaker 04:
It's not $300,000, it's $8,000.

[00:38:49] Speaker 04:
That's all I'm saying with respect to that.

[00:38:50] Speaker 04:
With respect to the on-hire, I must just say one thing.

[00:38:53] Speaker 04:
Yes, the bare boat charter says that you can agree on the method.

[00:38:57] Speaker 04:
What's the method they agreed on?

[00:38:59] Speaker 04:
There was a method agreed upon.

[00:39:01] Speaker 04:
There were no photographs.

[00:39:02] Speaker 04:
There was no documentation.

[00:39:04] Speaker 04:
They didn't do it.

[00:39:05] Speaker 04:
And we know why they didn't do it.

[00:39:07] Speaker 04:
But now to come here and say, well, there was a lot of stuff done during construction.

[00:39:12] Speaker 04:
I mean, at the end of the day,

[00:39:15] Speaker 04:
It's not going to work that way.

[00:39:17] Speaker 04:
It doesn't work that you get to say, even though the barebone charters are quite specific about the need for photographic and written documentation, and they're quite specific as to why, so that you can compare the on-hire to the off-hire.

[00:39:32] Speaker 01:
I think we've let you go over your time, Mr. Moreno.

[00:39:34] Speaker 01:
Let me see if my colleagues have any further questions for you this afternoon.

[00:39:37] Speaker 01:
I want to thank you for your presentation, Mr. Moreno, and I want to thank opposing counsel, Mr. Webster, for his.

[00:39:43] Speaker 01:
And this matter is submitted.

[00:39:45] Speaker 01:
Thank you very much.

[00:39:45] Speaker 00:
We'll stand in recess.

[00:39:46] Speaker 00:
Thank you.

[00:39:46] Speaker 01:
Thank you, Ron.