At 04.41 hours on 13 March 1942 the unarmed and unescorted Colabee (Master Lee Merchant Morgan) was hit by a torpedo from U-126, while she steered a nonevasive course about 10 miles off Cape Guajaba, Cuba. The torpedo was fired on the surface not more than 800 yards away and struck the starboard side at the after end of #2 hold. The explosion created a large hole, blew off the #2 hatch covers and extensively damaged the bridge, killing the master and two men. The crew of eight officers and 29 men abandoned the ship in panic, because they only had two lifeboats and no rafts aboard. Only ten men get away with one boat, the others jumped overboard or fell into the water when the second boat swamped, many drowned. U-126 picked up able seaman John L. Cobb, helped him into the lifeboat and questioned the survivors. The chief engineer had been unable to stop the engines and the ship went aground shortly afterwards. The boat landed on a small Island off Key Verde, Cuba, where the Cuban steam merchant Oriente picked up these 11 survivors and took them to Nuevitas on 15 March. Two other survivors were rescued by a flying boat and taken to Guantanamo Bay in the afternoon on 13 March. The first engineer and his dog stayed with the ship and were taken off the next day at 21.30 hours by the American steam tanker Cities Service Kansas and landed at Matanzas. The master, three officers and 19 men were lost.

Later the Colabee was pulled off the shoal by Oriente and anchored. On 16 March, the Cuban Navy towed her into Nuevitas, where she recieved temporary repairs. From 20 to 27 April, the ship was towed to Tampa, repaired and returned to service in September 1942.