The 2014 Landscape & Pitfalls For The Maritime Industry In Cases Ancillary to Foreign Bankruptcy Proceedings
Owners, charterers, bunker suppliers, or other creditors may hear the bad news from a P&I Club, an industry broker, the press - their contractual counterparty just filed for insolvency protection. A mad dash of information gathering and plotting ensues:
-
- confirm how in arrears the debtor is to you;
- when does the time charter expire?; and most significantly
- what are my rights?
Your rights and strategy moving forward depends largely on the type of bankruptcy relief sought by the debtor. For the purposes of this article, the focus is on a debtor filing for insolvency relief in a non-U.S. jurisdiction and then filing an ancillary bankruptcy proceeding in the U.S. Why is an ancillary proceeding in the U.S. necessary? Usually the debtor seeks to marshal assets under restraint in the U.S. or prevent arrests of its fleet. During the last year, the U.S. courts have issued important decisions concerning ancillary proceedings which impact the maritime industry significantly. Before addressing them, a short primer on Chapter 15 protection is necessary.
U.S. ancillary to foreign bankruptcy proceedings overview
In 2005, the U.S. adopted the United Nations Commission on International Trade Law (UNCITRAL), Model Law of Cross-Border Insolvency. Under the law, a Chapter 15 proceeding is brought by a "foreign representative" who is typically appointed by the foreign court. The key consideration for the foreign proceeding's recognition in the U.S. (and typically in the New York bankruptcy courts where the overwhelming majority of admiralty proceedings are filed), is whether the foreign insolvency proceeding is a "main" or "non-main" proceeding.
If it is deemed a "main" proceeding by the U.S. court, because it is found to be the "center of main interest" or "COMI" of the debtor, then it is deemed "recognized" and it gains powerful leverage over creditors. Of particular import, an automatic stay is available for assets and actions that affect the debtor within the U.S. The broad range of relief also includes seeking turnover of assets, commencing actions based on foreign law against creditors in the U.S., obtaining discovery in the U.S. concerning assets, and the ability for the U.S. judge to communicate with the foreign "main" insolvency proceeding judge to confirm their actions are consistent.
U.S bankruptcy judges will not rubber stamp foreign court decisions but it will show a proper level of deference using principles of comity (mutual recognition of the validity of the executive, legislative and judicial acts of another nation or jurisdiction out of courtesy). The average length of a Chapter 15 case varies greatly depending on the assets in the U.S., lawsuits already filed, or affirmative suits seeking assets brought by the foreign representative. The Chapter 15 proceeding will remain open until the foreign proceeding is concluded.
Important Rulings Impacting the Maritime Industry
During the last few years, courts have clarified what factors should be considered to determine if a foreign proceeding is a "main" proceeding, the scope of lawsuits that can be brought by a foreign representative, whether charterers interest are protected in vessels owed by another, and asset discovery that can be obtained from New York banks involving shipping interests.
a) COMI and shipping -- why is recognition of a foreign insolvency proceeding easier?
Shipping companies are often incorporated in "offshore" jurisdictions such as the BVI and the Marshall Islands but operated from mainland jurisdictions. Where are these companies' center of main interests (COMI)? Will foreign bankruptcy proceedings in such entities' jurisdiction of incorporation be recognized under Chapter 15? In re Fairfield Sentry Ltd., 714 F.3d 127 (2d. Cir. 2013), is a non-maritime case with important maritime implications which answered these questions. In Fairfield, the appellate court upheld the recognition of a BVI liquidation of a Connecticut-based Bernie Maoff feeder fund as a foreign main proceeding using a COMI analysis. The feeder fund was heavily dependent on Madoff securities and when his fraud was uncovered, the feeder fund was decimated. The feeder fund had registered offices and agents in the BVI but its decision makers were in New York. Ten shareholders sought the appointment of a liquidator in the BVI to marshal assets and the liquidator in turn sought Chapter 15 protection in New York while winding up matters in the BVI.
When a creditor opposed the Chapter 15 recognition arguing that the center of main interest was in New York because this is where the decision makers resided, the appellate court confirmed the proper analysis. It found that the correct question is whether, as of the date of the Chapter 15 filing in the U.S., the foreign debtor is being managed by a liquidator or court-appointed professional from the place of incorporation (the registered office), the assets of the company are under the control of the foreign proceeding and preferably located in the foreign-incorporation jurisdiction, and whether the creditors have looked to the foreign proceedings and place of incorporation to submit their claims. The court found the BVI met these considerations and recognition was granted. For shipping purposes, the location of the submission of a claim is particularly notable. Take the Marshall Islands for example. It has no established insolvency rubric. U.S.-based Delaware law is followed for corporate matters, but that does not address the full panoply of issues in an insolvency matter. For Marshall Islands shipping companies, the COMI analysis is more complicated and obtaining recognition in the U.S. for the Chapter 15 less assured.
b) Affirmative Use of Chapter 15 by Foreign Representative:
In In re The Containership Company (TCC), 466 B.R. 219 (2012), a New York bankruptcy judge explored the scope of a foreign representative's powers. TCC was a Danish liner service from a small port in China to Long Beach, California whose operations did not last a year. The foreign main proceedings were filed in Denmark and the Danish court-appointed trustee obtained Chapter 15 recognition in New York. It then filed 77 adversary proceedings against shippers alleging breaches of service contracts for failure to meet MQC in the Federal Maritime Commission ("FMC"), approved contracts. Claims varied from as little as $10,000 to over one million dollars -- $24 million in total claims was sought. The shippers filed a motion to have the suits transferred from the bankruptcy court to the FMC because they alleged in counterclaims that TCC committed violations of the U.S. Shipping Act of 1984 and said claims fell within the jurisdiction of the FMC. In the first decision of its kind, the bankruptcy court rejected the shippers request and the claims proceeded in bankruptcy court. It is an important ruling to consider because it shows the tools a foreign representative can use to obtain monies for the foreign insolvency proceeding with the expectation of paying creditors of the now defunct shipping company.
c) Are chartered vessels "property" capable of protection under the U.S. Bankruptcy Code?
At least one bankruptcy judge has recently said "yes." In In re STX Pan Ocean, the judge in July 2013, the foreign representative in the Chapter 15 proceeding successfully applied for a "stay" order that extended to STX's chartered interest in vessels. The unpublished recognition order enjoined all persons from arresting or attaching any vessel that was owned, or under charter to, STX Pan Ocean. The implications of a charterer obtaining the order are significant. If a third party has a claim against the owner of the vessel or the cargo interests, it cannot simply arrest the vessel. The lien holder or Rule B attachment seeker would have to seek relief from the court to lift the stay where the charterer's interests would be assessed. So much for the element of surprise in a vessel arrest….
Separately, an important lesson was learned in this case by the parties that rushed to arrest STX vessels in the U.S. after the foreign insolvency proceeding was commenced. The U.S. court upheld the well-established rule that arrests post foreign insolvency proceedings by pre U.S. ancillary Chapter 15 proceedings will be summarily vacated. The arresting or attaching party will then be left with paying custodia legis fees for a failed vessel arrest. It is important to weigh these considerations with the P&I Club and counsel before undertaking an arrest because if the target company faces too many actions in the U.S., it will surely seek Chapter 15 recognition to eviscerate the vessel arrests.
d) New filing requirements in the U.S.
In In re Barnet, 737 F.3d 238 (2d Cir. 2013), the appellate court limited the eligibility of foreign bankruptcy proceedings by requiring that the conditions of 11 U.S.C. section 109 were met for a foreign debtor. That is, the foreign debtor must have a place of business or property in the U.S. at the time of filing. Courts outside of New York have disagreed with the ruling and the U.S. Supreme Court may well have to decide the issue in the years to come.
The ruling has implications for the maritime industry because during the last few years, there have been a handful of Chapter 15 proceedings filed primarily for the purposes of obtaining discovery in the U.S.. A benefit is the foreign representative, through subpoenas of New York banks which acted as intermediaries of wire transfers, can trace the activities of the debtor to discern if fraudulent transfers were made to shell companies which could then be clawed back against said recipients of those transfers. The other important issue from this ruling is it calls into question the concept of preemptive Chapter 15 filings. Unless property is transferred or is already located in the U.S., the debtor may well need to wait until one of its ships is arrested or attached to be eligible for Chapter 15 relief, including the important automatic stay.
In sum, the insolvency practice in the U.S. is busier than it has ever been. This is a reflection of the global economy and the tightening of asset bases to prop up wobbly shipping companies. There are a number of considerations a soon-to-be-debtor or creditor of the debtor must undertake based largely on the contractual relationships in place and these recent decisions address some of these critical issues to address with counsel.
We are grateful to Christopher R. Nolan, Partner, Holland & Knight LLP New York for this article.
