On December 15, 2015, in In re Daebo International Shipping Co., Ltd., Bankr. Case No. 15-10616 (MEW), the United States Bankruptcy Court for the Southern District of New York (the “New York Bankruptcy Court”) issued a memorandum opinion vacating a set of Rule B attachments on a bond (proxy collateral for M/V DAEBO TRADER, a Panamax dry bulk container ship leased to Daebo International Shipping Co. Ltd. from Shinhan Capital Co.).
Daebo’s Korean Rehabilitation Case Recognized
Earlier in 2015, the New York Bankruptcy Court had recognized Daebo’s rehabilitation proceed- ing under Korea’s Debtor Rehabilitation and Bankruptcy Act (“DRBA”), a collective remedy similar to chapter 11 of the U.S. Bankruptcy Code, as a “foreign main proceeding,” and that Daebo’s representative in the chapter 15, Mr. Chang-Jung Kim, the company’s custodian and chief executive officer, was a duly authorized “foreign representative.”
Recognition in this context enables a foreign representative to exercise bankruptcy power under chapter 15 to support the foreign bankruptcy and to appear in U.S. courts to do so. Chapter 15 is not itself a substantive bankruptcy law, but it integrates both foreign law and parts of the U.S. Bankruptcy Code to enable international bankruptcy and reorganizations. The idea is that there is a universal interest in seeing fair collective remedies implemented across borders.
So if a foreign debtor or insolvent has assets or key interests in the United States, upon recognition, among other things, the automatic stay under U.S. Bankruptcy Code section 362 protects the foreign debtor’s assets and the foreign representative can sell assets free and clear of interests and claims under U.S. Bankruptcy Code section 363. Moreover, under U.S. Bankruptcy Code sections 1507 and 1521, a foreign representative can seek relief to assist it and the foreign court in implementing a collective remedy or to provide additional relief for the same purposes—all in aid of “comity” between the U.S. bankruptcy system and the foreign bankruptcy system.
Attachment of DAEBO TRADER
In the Daebo case, the DAEBO TRADER was attached in the United States District Court of the Eastern District of Louisiana after Daebo had filed its rehabilitation and after its assets were protected by a stay under Korean law. The Rule B actions were commenced by general trade creditors of Daebo; none of the plaintiffs had provided necessaries to the vessel itself. Since the registered owner of DAEBO TRADER was Shinhan and not Daebo, in order to have a colorable Rule B action each plaintiff pled not just against Daebo, but against Shinhan as well, asserting that the 2007 financing arrangement between Daebo and Shinhan was fraudulent as to Daebo creditors and that Shinhan was an alter ego of Daebo.
The practical effect of the attachment was to trap the DAEBO TRADER and a very valuable cargo in New Orleans for several months. Daebo had limited liquidity and was unable to post a bond on its own credit. Daebo (and Shinhan), therefore, faced substantial cargo, insurance and regulatory risks—risks that would negatively impact Daebo’s rehabilitation—if the attachment was not addressed. And if the attachments were honored, each plaintiff would wind up doing substantially better than other general Daebo creditors.
Shinhan and other vessel interests sought to vacate the Rule B attachment in the New Orleans District Court. The district court refused so to do because it found that the plaintiffs in New Orleans had asserted a colorable cause of action under a U.S. legal doctrine known as “recharacterization.” Recharacterization is applied in certain contexts where statutory or statutorily based law requires legal outcomes to reflect the economic substance of a transaction between parties. Here, the district court reviewed allegations relating to the Shinhan lease of DAEBO TRADER to Daebo and determined that the plaintiffs had pled enough to suggest that the vessel was in point of economic fact owned by Daebo—notwithstanding the formal registration of DAEBO TRADER in Shinhan’s name—requiring the preservation of the attachments under possibly applicable law.
Attachment Vacated under Chapter 15
At the same time that Shinhan and others were seeking to vacate the attachments in New Orleans under non- bankruptcy law, the foreign representative invoked U.S. Bankruptcy Code sections 1507, 1519-21, and long-standing case law under chapter 15 and its predecessor provision under the U.S. Bankruptcy Code, section 304, which permits a bankruptcy court to entrust U.S. assets to a foreign representative for administration in the United States, free and clear of Rule B attachments that captured the foreign debtor’s property after a stay had been commenced in the foreign proceeding (so long as the attaching party is afforded an opportunity to participate ratably in the foreign proceeding with other general creditors). In New York, the plaintiffs invoked the registered ownership of the TRADER as a basis for defeating the foreign representative’s 1507/1521 claims, arguing that their fraudulent transfer/alter ego claims against Shinhan were independent maritime claims against Shinhan. These defenses, of course, conflicted with the arguments they had just made to the New Orleans District Court; to wit, that the TRADER belonged to Daebo as a matter of economic substance.
In order to resolve the business crisis facing Daebo and Shinhan by virtue of the attachment, pursuant to provi- sional relief ordered by the New York Bankruptcy Court, Shinhan posted a bond to secure the DAEBO TRADER’s release on condition that the vacatur action in New York would go forward and, if granted, that the attachments would be released in Louisiana.
The matter was briefed in detail, and upon careful consideration of the record yielded from a day-long evidentiary hearing, the New York Bankruptcy Court vacated the attachments, finding that the plaintiffs’ claims amounted to nothing more than a case that the DAEBO TRADER actually was owned by Daebo as opposed to Shinhan. The court also found that if the plaintiffs were to succeed on the merits in New Orleans, the Rule B attachments would have to be vacated in the chapter 15 in New York because they each were taken after the Korean stay was imposed to protect all Daebo assets, including the DAEBO TRADER.
The New York Bankruptcy Court additionally dismissed the plaintiffs’ alter ego claims as unsupportable under applicable non-bankruptcy law (there was no evidence that Daebo and Shinhan had anything but a lessor/lessee, debtor/ creditor relationship) and suggested that the fraudulent transfer claims would be time barred under any applicable law (the lease was entered into more than seven years ago in 2007 at a time when the TRADER was valued at approximately $60M and Daebo had 85 ships in its fleet). The court rejected attempts by the plaintiffs to suggest that there was some independent tort that could cause Shinhan, as lessor, to be deemed an involuntary guarantor of Daebo’s trade creditors, since no law exists to support such a claim.
Important Win for Daebo and for the Chapter 15 Process and Law
This is an important decision. Because of the court’s orders, Daebo avoided cargo damage and loss, risk on its insurances, and has been able to monetize the DAEBO TRADER in order to reduce its exposure to Shinhan and certain other lenders in its recently approved Korean rehabilitation plan. The decision upholds the independence of vessel lenders and lessors from their borrowers’ and lessees’ general obligations to their trade creditors and non-collateral/lease specific obligations, while reaffirming the power of chapter 15 to protect foreign collective remedies from opportunistic individual creditor action in the United States.