Theodore D. Sauers, Through His Guardian, Irene G. Ellis,plaintiff-appellee, v. Alaska Barge and Transport, Inc., an Alaska Corp., and Theunited States of America, Defendants-appellants, 600 F.2d 238 (9th Cir. 1979)

This is an appeal from a judgment in an admiralty action brought by plaintiff Sauers against defendants Alaska Barge & Transport, Inc. (AB & T) and the United States to recover for injuries plaintiff suffered while serving as a civilian seaman on an AB & T tugboat, the Shawnee, which was transporting munitions up the Mekong River to Phnom Penh, Cambodia, under contract with the United States. The district court found defendants jointly liable for plaintiff's injuries and awarded $685,113.79 in damages.

Pursuant to the contractual agreement between the defendants, the government has at all times defended this action on behalf of AB & T, and now prosecutes this appeal. It contends that: (1) the district court erred by holding AB & T liable to plaintiff on negligence, breach of contract, and unseaworthiness grounds; (2) the United States has not waived its sovereign immunity under the Suits in Admiralty Act, 46 U.S.C. §§ 741-52; (3) the district court erred by holding the United States liable to plaintiff on a negligence theory; and (4) the court erroneously refused to consider evidence of a criminal charge against plaintiff when determining his future loss of earning capacity. Plaintiff Sauers cross-appeals, contending that: (1) the district court erred by refusing to consider the effects of inflation when it computed plaintiff's damage award; and (2) the district court erred in its calculation of the impact of income taxes on the amount of plaintiff's damage award.

Our jurisdiction rests on 28 U.S.C. § 1291. We affirm the judgment of the district court on the issue of AB & T's liability, modify the judgment on the issue of damages, and remand with directions to enter a modified judgment in accordance with the views expressed herein.

I. The Facts.

The events from which this lawsuit arose occurred during the United States' military involvement in Vietnam. In January 1971 the United States, South Vietnamese and Cambodian military authorities decided to ship military supplies to Cambodia by sending convoys of civilian merchant vessels, tugs, and barges up the Mekong River from Vietnam to Phnom Penh, Cambodia. AB & T was under contract with the United States to provide a portion of such shipping services.¹  Plaintiff was injured in Cambodia while serving as a civilian seaman on AB & T's tugboat, the Shawnee, which was transporting military supplies for the United States.² 

Under the contract between AB & T and the United States, the U. S. Navy's Military Sealift Command (MSC), See note 1 Supra, designated both the type and number of vessels which AB & T was to provide for each convoy. The legal and political restrictions imposed upon the use of U. S. military forces in southeast Asia prevented such forces from actively providing adequate security for the civilian cargo vessels carrying supplies into Cambodia.³  Instead, the U. S. Navy arranged for Vietnamese and Cambodian military escorts to provide security for the transports.⁴  The district court concluded, however, that the U. S. armed forces were able to, and did, provide AB & T vessels and personnel in Vietnam greater protection from attack than the Cambodian and Vietnamese armed forces provided such vessels and personnel while in Cambodia.⁵ 

The Shawnee made three trips from Tan Chau, Vietnam to Phnom Penh, Cambodia prior to the trip on which the plaintiff was injured. On each of these three trips the convoy was attacked in a narrow part of the Mekong River located several miles downstream from Phnom Penh. On January 16, 1971, the Shawnee departed Tan Chau on its first trip in a convoy carrying military supplies up the Mekong River to Phnom Penh. The convoy arrived without incident in Phnom Penh on January 17. On the return leg of the trip, however, the lead ship in the convoy was attacked six to eight miles downstream from Phnom Penh, at a point referred to as kilometer (km) 198. On the January 23-24 trip, the second trip, the convoy was attacked at km 188 and km 197 enroute to Phnom Penh. On the January 29-30 trip, the convoy was attacked at km 198 both enroute to, and while returning from, Phnom Penh. The Shawnee sustained two rocket hits during the latter attack. Plaintiff Sauers served as Pilot/Advisor on the Shawnee during the first trip, but was not on board for either the January 23-24 or January 29-30 trip.⁶ 

Sauers served as Chief Mate on the fourth trip, February 21-22, on which he was injured. At a pre-departure briefing conducted by an admiral in the U. S. Navy⁷  and by the Vietnamese naval officer who was to command the mission, plaintiff was advised that the convoy would prove safer than any of the earlier convoys to Phnom Penh.⁸  This prophecy proved to be false.

The Shawnee, pulling several bomb-laden barges, departed Tan Chau in convoy on the evening of February 21, 1971. The record indicates that the escort vessels accompanying the convoy either pulled ahead or lagged behind the Shawnee. This left it exposed and vulnerable to attack.⁹  At 10:30 a. m. on February 22, 1971, the Shawnee was attacked with small arms fire near km 188, which caused no injury or damage. The next attack was different. At approximately 1:00 p. m. the Shawnee was raked with hostile gun fire from the right ascending bank of the river at km 198, the site of the previous attacks. The first round struck the galley area of the tug. A second round exploded in the passageway located aft of the wheelhouse and knocked out the tug's electrical system, including the vessel's power steering. A third round pierced the aft part of the pilothouse and seriously wounded Sauers. He received a penetrating shrapnel wound to the head which caused irreversible brain damage and left him permanently and totally disabled.

Almost two years later, on January 24, 1973, plaintiff commenced this admiralty action through his legal guardian. The court conducted a bifurcated trial concerning liability and damages.¹⁰  On November 21, 1975, the court rendered its Findings of Fact and Conclusions of Law concerning liability, holding that: (1) AB & T was liable to plaintiff on negligence, breach of contract, and unseaworthiness grounds; and (2) the United States was liable to plaintiff based upon a negligence theory.¹¹  Almost two years later, September 14, 1977, the court rendered its Findings of Fact and Conclusions of Law on the issue of damages and entered judgment in plaintiff's favor.¹²  The court subsequently amended its Findings of Fact and Conclusions of Law on December 9, 1977, and entered an amended judgment on December 22, 1977.

To facilitate our disposition of the issues raised by these appeals we will discuss the liability issues raised by the defendants initially and then turn to the damages issues raised by both the plaintiff and defendants.

II. Defendants' Liability to Plaintiff.

A. Liability of AB & T.

The United States contends that the district court erred by finding AB & T liable to plaintiff on the basis of negligence, breach of contract, and unseaworthiness grounds. It argues that the district court based several of its findings on theories that were not stated either in the pleadings or in the pretrial order, and that, in any event, the evidence is not sufficient to support the court's findings and conclusions. We find no merit in the first contention. Facts supporting the court's findings and conclusions were before the court and were argued. Under these circumstances the court properly may consider the pleadings and pretrial order to have been amended to conform to the evidence presented. See Puget Sound Gillnetters Assoc. v. United States District Court, 573 F.2d 1123, 1131 (9th Cir.), Cert. granted, 439 U.S. 909, 99 S. Ct. 277, 58 L. Ed. 2d 255 (1978) (Rule 15(b) Fed. R. Civ. P. standards applicable to modification of pleadings or pretrial order to conform to evidence presented); Dering v. Williams, 378 F.2d 417, 419 (9th Cir. 1967); American Pipe & Steel Corp. v. Firestone Tire & Rubber Co., 292 F.2d 640, 643 (9th Cir. 1961). The trial court did not err by treating the pleadings and pretrial order as if they had been amended. See Puget Sound Gillnetters, supra, 573 F.2d at 1131 n.12.

Turning to the issue of the sufficiency of the evidence to support the trial court's findings, Rule 52(a) provides our standard. In admiralty, as in other types of cases, this court will not overturn the trial court's findings unless we are left with the definite and firm conviction that a mistake has been committed. Rederi A/B Soya v. SS Grand Grace, 369 F.2d 159, 163 (9th Cir. 1966); See Stranahan v. A/S Atlantica & Tinfos Papirfabrik,471 F.2d 369, 372 n.2 (9th Cir. 1972), Cert. denied, 412 U.S. 906, 93 S. Ct. 2293, 36 L. Ed. 2d 971 (1973); Sines v. United States, 430 F.2d 644, 645 (9th Cir. 1970) (per curiam); Waterman S.S. Corp. v. Gay Cottons, 414 F.2d 724, 735 n.27 (9th Cir. 1969). We have no such convictions; hence, we affirm the district court's findings of fact. Such findings support its conclusions of law.

B. Liability of the United States.

The United States asserts that it cannot be held directly liable for plaintiff's injuries. It asserts that not only has it not waived its immunity from suit under the Suits in Admiralty Act for injuries arising from what it terms the "uniquely governmental activity involved in this case," but also that the evidence does not support the district court's findings and conclusions with respect to its liability based on negligence. During oral argument before this court all parties recognized that the contractual agreement between the United States and AB & T, which obligates the government to pay for any recovery that plaintiff obtains from AB & T, makes resolution of the issues pertaining to the liability of the United States unnecessary should we uphold the imposition of liability against AB & T. Having done precisely that, we need express no opinion concerning the liability of the United States.

III. Damages Issues.

A. Those of the Plaintiff.

1. Consideration of the Impact of Inflation.

Plaintiff contends that the district court erred by refusing to take into account the impact of inflation when calculating the size of the lump sum awarded for lost future earnings and for the cost of future care. The district court's refusal was based on its inability to "determine with any degree of certainty the effect of inflationary or deflationary factors during the remainder of plaintiff's work life expectancy."

In United States v. English, 521 F.2d 63 (9th Cir. 1975), we noted that it would be "inconsistent with economic reality and grossly unfair to the plaintiff" to ignore the effects of inflation upon a damage award, Id. at 74, and specifically rejected the argument that the speculative nature of predicting future inflation justifies ignoring its impact entirely.

While predicting future inflationary trends, or extrapolating from present ones, may be speculative, so are most predictions courts make about future incomes, expenses . . . . Since it is still more probable that there will in the future be changes in the purchasing power of the dollar, it is better to try as best we can to predict them rather than to ignore them altogether. . . . Even in the short time since the cases against considering inflation in making damages awards have been decided, inflation has become a considerably more important factor in our economic lives. Ignoring inflation is, in essence the same as predicting it will not occur, or that its effects will be de minimus. While the administrative convenience of ignoring inflation has some appeal when inflation rates are low, to ignore inflation when rates are high is to ignore economic reality.

Id. at 75. We have also observed that when "sound and substantial economic evidence" of future inflation exists, Id. at 76, "a District Court should take inflation into account" when computing the damage award. Burlington Northern, Inc. v. Boxberger, 529 F.2d 284, 293 (9th Cir. 1975). Thus, the issue before us is whether the district court was presented with sound and substantial evidence concerning inflation and therefore erred by refusing to adjust the damage award to reflect the impact of future inflation. We believe that the district court did so err.

Plaintiff's evidence consisted mainly of the uncontroverted testimony of Dr. Bassett, a professional economist. Dr. Bassett prepared a study of the historical pattern of wage increases in the towing industry which indicated that wages for masters, mates, and second mates had increased an average of 5.7% Annually during the twenty year period between 1957 and 1977; during the period between 1968 and 1977, industry wages increased an average of 8.0% Per year. He testified that the same pattern of wage increases also occurred in the nursing industry, so that the cost of future in-home care would increase at a comparable rate. Bassett presented the court with a calculation in which he projected a 5.5% Annual wage increase in the future based upon the historical pattern of wage increases, and then discounted that stream of income to its present value using a 7.5% Interest rate as a discount factor. In both English, supra, and Boxberger, supra, we approved this method of accounting for the impact of future inflation on the size of a damage award for lost earnings.¹³  Nevertheless, in this case the district court computed the amount of plaintiff's lost future earnings and the cost of future in-home care based upon the wage rates prevailing at the time of trial; the court did not adjust the amounts to account for any future inflation, but did discount the awards to present value using a 5.0% Interest rate.

Dr. Bassett testified that knowledge of the precise rate of future inflation was not necessary to arrive at an award that reflects future inflation. Such an award could be computed, he urged, by applying to future earnings and costs of in-home care, based on rates prevailing at the time of trial, a discount rate of 2.0% To arrive at a present value that, in fact, reflects the impact of inflation on wages, costs, and interest rates. Bassett maintained that inflation could be expected to continue well into the future, and that although it is difficult to predict with certainty what the precise rate of future inflation might be, the interest rate on a secure investment, the expected future growth rate of future wages, and the cost of future care each would be similarly influenced by the prevailing level of inflation. Moreover, he stated that, as an historical matter, the difference between the rate of interest earned on a secure investment and the rate of wage increases remains relatively constant over time and is approximately equal to 2.0%.¹⁴  Hence, he suggested that the court could properly account for the impact of inflation on the lump sum award of damages by employing a 2.0% Discount rate to compute the present value of the award based on presently prevailing wage rates.¹⁵ 

We are not prepared to endorse the figures or economic theories proffered by Dr. Bassett. We do find, however, that the plaintiff did adduce sufficient sound and substantial evidence pertaining to the impact of inflation to require that the district court take inflation into account in some appropriate manner when it calculated the size of plaintiff's damage award. In failing to do so, the district court erred. For reasons that we state below, this error, however, does not require a remand to the trial court for a complete recalculation of damages.

2. Consideration of the Impact of Income Taxes on Plaintiff's Damage Award.

Turning to the plaintiff's income tax contentions, he acknowledges that the district court acted properly when it adjusted the amount awarded plaintiff for lost future earnings to reflect the net income he would have received after a deduction of income taxes had been made. See Felder v. United States, 543 F.2d 657, 665 (9th Cir. 1976); Boxberger, supra, 529 F.2d at 294-95 ("in cases wherein the gross earnings in question are beyond 'the lower or middle reach of the income scale,' and consequently 'the impact of income tax has a significant and substantial effect in the computation of probable future contributions' . . ., both parties should be permitted to introduce evidence of the extent to which future earnings would have been taxed.") Plaintiff contends that the district court erred, however, by failing to increase the lump sum awarded to account for the fact that the interest earned when that sum is invested would be taxable. Without such an adjustment, the plaintiff argues, the lump sum award will never yield annual sums equal to what plaintiff would have earned after taxes had there been no injury.

Mathematically, the plaintiff is right. Had the judgment called for the defendant to make deferred payments rather than a lump sum award, the funding of such an award would have required either an investment large enough to allow for any income tax on the interest yield of the fund or management of the investment in a manner that would either eliminate, or compensate for, the income tax on its yield. The award of a lump sum to the plaintiff inescapably shifts to him this investment management responsibility. His judgment and acumen will control the extent to which the income tax burden will be overcome. What the plaintiff seeks is the elimination of a portion of his investment risk. A larger award would permit a more conservative investment policy with less risk of the income tax diminishing the annual yield below that projected in arriving at the lump sum award.

We do not believe the plaintiff is entitled to this additional relief. With the lump sum award come both the benefits and the detriments of investment management. The opportunities for gain carry a price, Viz. the risks of loss. The existence of tax free investment opportunities reinforces the reasonableness of maintaining the link between these opportunities and risks.

Thus, we hold that the court properly considered the impact of income taxes when computing the award for lost future earnings, See Felder, supra, and Boxberger, supra ; it acted properly by discounting the stream of future earnings to its present value, English, supra; and it properly refused to adjust the award to reflect the Potential income taxes which Might arise should the lump sum be invested in a taxable security.

B. Those of the Defendants.

The United States sought to introduce evidence of a criminal charge pending against plaintiff, which, it contended, might have materially impaired plaintiff's advancement as a seaman and reduced the amount of his future earnings. The district court refused to consider evidence of the criminal charge, noting that plaintiff had not been convicted of the charge and that the charge had been dismissed because of the mental incompetence which plaintiff's injury had caused. The district court did not err. It did not abuse its discretion by refusing to consider this evidence. Its speculative character justifies it being excluded from consideration by the trial court.

IV. Modification of the Judgment.

Notwithstanding our holding that the district court erred by failing to adjustplaintiff's damage award to account for the impact of inflation, we believe that a speedy termination of this litigation will best serve the interests of the plaintiff.¹⁶  This suit is still in the courts more than eight years after the occurrence of the underlying accident. As observed in Felder, supra, 543 F.2d at 671, "A remand could easily lead to a further appeal. In order for damages to fulfill their purpose of compensat(ion) . . . they must be received as soon as possible after the loss." We therefore have concluded that rather than remanding this case for recalculation of the damages or recomputing the damages ourselves, See id., the interests of justice and the best interest of the parties require us instead to order the award of prejudgment interest on the damage award, to be computed at an annual rate of 8% Compounded annually from the date on which plaintiff filed its complaint, January 24, 1973. Cf. Williamson v. Western Pacific Dredging Corp., 441 F.2d 65, 67 (9th Cir.), Cert. denied, 404 U.S. 851, 92 S. Ct. 90, 30 L. Ed. 2d 91 (1971) (allowance of prejudgment interest ordinarily matter within trial court's discretion); Howell v. Marmpegaso Compania Naviera, S.A.,578 F.2d 86, 87 (5th Cir. 1978) (upholding grant of prejudgment interest from date of judicial demand); Harrison v. Flota Mercante Grancolombiana, S.A.,577 F.2d 968, 988 (5th Cir. 1978) (award of prejudgment interest at 6% Rate from date of injury proper); Oil, Chemical & Atomic Workers International Union, Local 4-447, 546 F.2d 1144 (5th Cir. 1977) (general federal rule is that in absence of statutory provision, award of prejudgment interest is within the discretion of the court); Doucet v. Wheless Drilling Co., 467 F.2d 336, 339 (5th Cir. 1972) (prejudgment interest allowed from date of judicial demand); Samincorp v. S.S. Rivadeluna, 277 F. Supp. 943, 945 (D. Del. 1967) (court sitting in admiralty not required to set prejudgment interest rate at rate allowed by law). Postjudgment interest shall be computed as required by28 U.S.C. § 1961. While this course of action lacks the appeal that precise and proper measurement of damages would afford, it does accord the plaintiff reasonably generous and, more importantly, immediate relief.

Accordingly, the judgment of the district court is affirmed on the issue of AB & T's liability, modified on the issue of damages, and remanded with directions to enter a modified judgment in accordance with the views expressed herein. The costs of this appeal shall be taxed against the United States.

Affirmed in part, modified in part, and remanded.