Invasion to Property and Actions to Mitigate Damages Satisfy the Physical Damage Requirement of the Economic Loss Rule

By: By Philip C. Brickman, Partner, Fowler Rodriguez Valdes-Fauli

The U.S. Fifth Circuit Court of Appeals recently overturned a decision by the Western District of Louisiana to dismiss a plaintiff’s demand for economic losses arising from a maritime tort for failure to satisfy the physical damage requirement of the economic loss rule as set forth in the decision Louisiana ex. rel. Guste v. M/V TESTBANK, 752 F. 2d 1019 (5th Cir. 1985)(en banc), cert. denied, 477 U.S. 903 (1986). Under general maritime law, there can be no recovery for economic loss without physical damage to or an invasion of a proprietary interest. Robbins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 48 S. Ct. 134, 72 L. Ed. 290 (1927); TESTBANK, 752 F.2d 1019. In Catalyst Old River Hydroelectric Limited Partnership v. Ingram Barge Co., 639 F.3d 207 (5th Cir. 2011), the Fifth Circuit addressed the issue of whether a physical invasion of a proprietary interest and preparations to mitigate further damages are sufficient to satisfy the economic loss rule under general maritime law.

In December 2007, two tug and barge units collided on the Mississippi River in Concordia Parish, Louisiana. As a result of the collision, several barges broke free and drifted down river.  One of the barges drifted into the intake channel of a hydroelectric station owned and operated by Catalyst Old River Hydroelectric Limited Partnership (“CAT”).  CAT owned the station and surrounding property necessary for its operation. There is an intake channel and a small island located in the mouth of the intake channel where the channel meets the Mississippi River. Both the channel and island were functioning elements of the hydroelectric facility and acted as a pipe to direct water into the station’s eight turbines to produce electricity.  The barge grounded on the east bank of the intake channel and lodged against the station and abutment. As a result of the barge being stuck in the channel, CAT had to reduce the flow of water into the turbines, which decreased the electricity output. This action was necessary both to prevent the barge from sinking and allow access to other equipment to remove the barge. After CAT reduced the flow of water and shut down six of its turbines, a barge crane entered the intake channel and freed it from the bank. There was no actual physical damage to the facility and normal operations resumed after the barge had been freed from the bank.

CAT filed suit in Louisiana state court against the barge companies involved in the collision (“barge defendants”) seeking damages for the value of the electrical power that it was unable to generate due to the barge intrusion.  The case was removed by the barge defendants to federal district court, where they subsequently filed a motion for summary judgment seeking dismissal of all economic loss claims on the grounds that CAT sustained no physical damage and, therefore, could not recover such damages.

On appeal, the Fifth Circuit noted that the purpose of the economic loss rule is to limit the consequences of negligence and exclude indirect economic repercussions, which can be widespread and open-ended. TESTBANK, 752 F.2d at 1022. The Fifth Circuit also noted that in the TESTBANK decision, physical harm to or invasion of a proprietary interest is generally an appropriate condition for recovery of negligently caused economic loss. Id. The barge defendants argued that CAT suffered no physical harm in that neither the channel, nor any of the facilities, were damaged by the barge.  However, the Court sided with CAT in holding that the mere presence of the barge in the intake channel, which was a functioning component of the hydroelectric facility, interfered with unobstructed continuous flow of water in the channel and thus impairing the ability of the facility to operate as designed.  The Fifth Circuit noted that the intrusion was sufficient to qualify as damage to CAT’s proprietary interest and satisfied the requirements of the economic loss rule.

Not only did the Fifth Circuit hold that the intrusion of the barge in the channel interfered with the flow of water and electrical generation, it also held that the physical recovery effort to secure and remove the barge from the intake channel also required a reduction of water flow that decreased operation of the turbines.  Acts taken in mitigation to prevent permanent physical damage can also serve as a physical damage requirement for the TESTBANK rule. Corpus Christi Oil & Gas Co. v. Zapata Gulf Marine Corp., 71 F.3d 198 (5th Cir. 1995). Here, CAT shut in and reduced the production of power of its hydroelectric facility to allow removal of the barge and prevent further permanent damage to its facility.  Without these acts, CAT would have run the risk of incurring physical damage to its hydroelectric station and, therefore, triggered the right to recover economic losses. 

The Fifth Circuit ultimately concluded that the presence of the barge in the intake channel caused physical damage to hydroelectric facility by obstructing the supply of water, which was critical station operations. The barge’s interference with the flow of water was considered an invasion to CAT’s proprietary interest. The Appellate Court also held that actions taken by CAT to shut in and reduce power production at its facility to prevent further damage satisfied the TESTBANK rule requirement. Based on this reasoning, the Fifth Circuit reversed the district court’s granting of motion for summary judgment on the issue of economic loss rule and remanded the case back to district court for further proceedings. In Catalyst, the Fifth Circuit illustrated that a party may be entitled to claim economic losses without demonstrating actual physical damage to property. A plaintiff may recover economic losses upon a showing of an invasion, intrusion or interference of a proprietary interest, rather than just physical damage to the property.  The physical damage requirement can also be met if the plaintiff has undertaken physical acts to mitigate the damages that would have been resulted from the intrusion or invasion. 

PLEASE CONTACT PHIL BRICKMAN AT (504) 523-2600 OR [email protected] FOR FURTHER INFORMATION ON THESE ISSUES.

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