A maritime lien is a non-possessory right in a vessel that gives the lienholder a right to proceed in rem against the property. In the United States, maritime liens are based on the fiction of a “personified” vessel. Under this legal fiction, a vessel is considered to be a legal person separate and distinct from its owner or operator and can be held liable for torts and contractual obligations. A person claiming to hold a maritime lien against a vessel may file suit in rem against the vessel and have the court order the arrest of the vessel to secure their claim.
Maritime liens arise by operation of law. Although parties may waive or surrender the right to a maritime lien by contract or otherwise, they may not agree to confer a maritime lien where the law does not provide for one. Maritime liens are governed by the Commercial Instruments and Maritime Liens Act (“CIMLA”) and general maritime law.
A recent wave of vessel seizures premised on alter-ego theories has swept through various U.S. federal courts. These cases present significant risks for vessel owners and ship managers, even if the underlying claims are ultimately defensible. Plaintiffs employ Supplemental Admiralty Rule B as the procedural device to seize vessels as an asset of the target defendant. Rule B requires a prima facie showing that the defendant is not present within the district to satisfy the existence of general-personal jurisdiction. The Supreme Court’s general jurisdiction ruling in Daimler AG v. Bauman, 134 S.Ct. 746 (2014), has made it much easier to meet Rule B’s requirement because such jurisdiction is now predicated upon proof that the defendant’s systematic and continuous contacts render it essentially at home within the district, effectively requiring its principal place of business to lie within the district. Given the peripatetic existence of merchant ships and their ownership—often by single ship-owning companies incorporated within flag-of-convenience countries—satisfying Rule B’s “presence within the district” standard now is nearly automatic.
Plaintiffs couple Rule B’s easy compliance with alter-ego allegations that the ship manager or ship-owning group are dominated and controlled by a single individual or entity to the disadvantage of the plaintiffs and that the target defendant is but a corporate extension of the company with whom the plaintiffs’ real dispute exists (and that dispute may have absolutely no connection with the United States). Supplemental Admiralty Rule E(4)(f) permits a defendant whose property has been seized to an immediate post-seizure hearing. While the federal courts are not aligned as to the standard that applies at such a hearing, it is fair to say that plaintiffs are required, at minimum, to meet the probable-cause test, which equates to reasonable grounds for supposing the allegations are well founded.
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It has long been the law in the Second Circuit that when a foreign party registers with the New York Department of State to conduct business in New York and designates an agent within the district upon whom process may be served, it will be “found within the district” for purposes of Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure (the “Admiralty Rules”). This precedent was clearly established in STX Panocean (UK) Co. v. Glory Wealth Shipping Pte Ltd., 560 F.3d 127, 133 (2d Cir. 2009), where the Second Circuit unequivocally held that “a company registered with the Department of State is ‘found’ [within the district] for purposes of Rule B… .”
Restraining maritime property ex parte within the district of a United States federal court represents a challenging and “high stakes” area of admiralty practice for the American maritime litigator. Given the significance of this unique type of litigation and its inevitable impact on maritime commerce, two preliminary questions are almost always asked by our foreign colleagues at the outset of conflict. First, once an arrest or attachment occurs, can the defendant respond with a wrongful arrest or attachment claim against the initiating plaintiff? Second, what is “counter-security,” and is it available in the United States to the defendant whose property has just been attached or seized? Both of these important questions will be addressed below.
United States maritime law offers a maritime plaintiff two principal means of obtaining security for its claims: Rule B attachment in respect of maritime claims, and Rule C arrest in respect of maritime liens. These rules are superficially similar, but each has different criteria and serves a different purpose. Each also gives the defendant the opportunity to obtain countersecurity on related counterclaims. But what happens when the plaintiff is in bankruptcy, subject to a bankruptcy court’s automatic stay of proceedings against it? Can a debtor be compelled to give countersecurity in such a case? This article discusses a recent decision from a bankruptcy court in Colorado (of all places) that helps answer this question.
The Admiralty Rules of Arrest and Attachment
First, the rules: maritime attachment and arrest remedies in the United States are as old as the general maritime law, which predates the Constitution, but in present times the applicable rules are contained in special maritime rules that supplement the Federal Rules of Civil Procedure. Rule B of those rules pertains to maritime attachment, which is available where a plaintiff has an in personam maritime claim against a party. Rule B allows the plaintiff to attach property belonging to that party in any district where the party is not subject to jurisdiction, but where its property can be found. (This quirky jurisdictional rule arises from the notion that Rule B is intended to serve twin aims: allowing a party to obtain jurisdiction over a defendant at least to the extent of property attached, and also to obtain security for its claim. Thus, it is only available in jurisdictions where the defendant is not otherwise subject to the court’s inpersonam jurisdiction.) Establishing a right to a Rule B attachment is quite simple: the plaintiff must show (1) that it has a primafacie maritime claim, i.e., a claim within the court’s admiralty and maritime jurisdiction; (2) that the defendant can- not be “found” in the district; (3) that the defendant has property within the district; and (4) that no statute bars maritime attachment in the circumstances.
Rule C of the Supplemental Admiralty Rules governs maritime arrest, which arises where a party seeks to enforce a maritime lien against an in rem defendant. This is most commonly a vessel, but a maritime lien can arise against cargo and other maritime property as well. Maritime liens are themselves a creature of U.S. maritime law and arise, for instance, in cases of maritime tort such as collision or crew injury, salvage, breach of certain maritime contracts such as charter parties, and for nonpayment for “necessaries” provided to a vessel.
Rules B and C are augmented by Supplemental Rule E, and the three rules together set out the procedures governing maritime attachment and arrest actions. Rule E is essentially a “mechanics” rule that governs such issues as when and how a party may challenge an arrest or attachment, how and in what amount alternate security may be posted to obtain release of attached or arrested property, and when property may be sold by interlocutory sale before judgment, such as when the attached or arrested property is perishable.
Rule E also grants the defendant the right to seek counter- security. Specifically, Rule E(7)(a) provides as follows:
When a person who has given security for dam- ages in the original action asserts a counterclaim that arises from the transaction or occurrence that is the subject of the original action, a plaintiff for whose benefit the security has been given must give security for damages demanded in the counterclaim unless the court, for cause shown, directs otherwise. Proceedings on the original claim must be stayed until this security is given, unless the court directs otherwise.
The premise of Rule E(7) is to place the parties on equal footing with respect to disputes arising out of the same “transaction or occurrence,” and though the rule does allow the district court some discretion where the plaintiff can show “cause” why it should not be required to post countersecurity (or why countersecurity should be posted in some amount other than the full amount of the counter-claims), an order directing countersecurity is very much the rule rather than the exception.
The Scenario: A Plaintiff in Bankruptcy
Now, back to our issue: suppose a dispute arises between an owner and a time charterer of a vessel, where the char- ter is governed by U.S. maritime law. The charterer has various breach of charter claims, but the owner also has a counterclaim for non-payment of hire. Further suppose the charterer files a petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, thereby invoking the automatic stay provisions under Section 362 of the Bankruptcy Code. That section bars creditors from pursuing claims or process against the debtor and its estate outside the bankruptcy case, including seeking security from the debtor without authorization under the Bankruptcy Code.
Further assume that the charterer, after commencement of the Chapter 11 case, avails itself of the right under Section 365 of the Bankruptcy Code to reject the charter. That section allows a debtor to exercise its business judgment to determine that an executory contract is burdensome to the estate and of no value. Rejection is treated under the Bankruptcy Code as a repudiation of the con- tract, returning the vessel to the owner’s service and giving the owner an accelerated prepetition damages claim for the balance of the charter period.
Then, following rejection, the charterer arrests the vessel, asserting its maritime lien claim and pressing for a judicial sale. Faced with this whipsaw, the owner wants to pursue countersecurity for its counterclaim, but can it do so in the face of the bankruptcy court’s automatic stay?
Those are the basic relevant facts in In re Haimark Line Ltd., 15-22180-JGR (Bankr. Col. 2015), a Chapter 11 bankruptcy case pending in the Bankruptcy Court for the District of Colorado. After commencing its Chapter 11 case, the charterer arrested the vessel in Florida, and Blank Rome’s maritime and bankruptcy groups worked together to assist the owner in pursuing the right to seek countersecurity in the Florida arrest action.
The Arguments on Owner’s Motion for Relief from the Automatic Stay
To pursue countersecurity, the owner first had to obtain relief from the bankruptcy court’s automatic stay. In its motion for such relief, the owner argued that Rule C and Rule E are part and parcel of the same remedy of maritime arrest and that the charterer, having knowingly invoked that remedy, should not be allowed to hide behind the bankruptcy court’s automatic stay to avoid the litigation “cost” associated with the arrest right—namely, the obligation to give countersecurity. The charterer countered by arguing that allowing the owner to obtain countersecurity on its claim would unfairly elevate the claim in status from an unsecured claim to a secured claim, thereby prejudicing other creditors of the bankruptcy estate.
The bankruptcy court granted the owner’s motion in an oral ruling on March 16, 2016, (transcript at Dkt No. 220). In rejecting the charterer’s arguments, the judge observed as follows:
Even if it’s found somehow that by allowing the stay to be lifted to allow the request for counter-security to be made and counter-security to be ultimately ordered, even if somehow that does convert some sort of unsecured claim to a secured claim, the Court finds that it’s difficult for the debtor to make that argument when the pursuit of the Florida [arrest action] was due to its own business judgment.
The debtor initiated the action. And in this Court’s view, it’s unfair to cut off [Owner’s] rights to defend itself in any manner provided by law, especially when the asset seized is a four-million-dollar vessel. [Tr. at pp. 13-14.]
The charterer thereafter filed a motion for reconsideration, contending that the court misconstrued the nature of the counterclaims and the countersecurity sought. In an (as yet) unpublished written ruling dated April 15, 2016, (Dkt. 246), the bankruptcy court denied the charterer’s motion, holding as follows:
The Debtor’s present motion is premised upon the argument that this Court held a fundamental misapprehension of “esoteric maritime law concept of countersecurity.” The Debtor, in effect, argues that while it [is] proper for this Court to allow the Arrest Action initiated by the Debtor to proceed, the District Court should be prevented from considering whether countersecurity is required. The Court respectfully disagrees.
The automatic stay under 11 U.S.C. § 362(a) should not be used to unilaterally deny [Owner] the benefit of traditional maritime security devises to which it may be entitled.
This holding—which appears to be a ruling of first impression in the United States—represents an important clarification of the scope of protection that should (or should not) be afforded a debtor by the Bankruptcy Code’s automatic stay when, post-petition, it seeks to pursue claims against parties who also hold claims against the bankruptcy estate. Any debtor should take this ruling into account when deciding whether to pursue arrest or attachment actions where the target is also a creditor of the estate on a related counterclaim, and any such creditor may take heart that the bankruptcy stay is not an automatic bar to obtaining countersecurity in such circumstances.
As their owners, operators, and charterers are all too aware, foreign-flagged vessels calling in U.S. ports routinely face the threat of becoming entangled in U.S. civil litigation, such as through arrest and/or attachment actions. This can happen even when the underlying
litigation involves matters completely unrelated to the affected vessel. A recent decision from the U.S. Court of Appeals for the Fifth Circuit, Licea v. Curacao Drydock, No. 14-20619, 2015 WL 7445504 (5th Cir., November 23, 2015), highlights this particular aspect of the complex web of risks attendant to U.S. port calls. Continue reading “Gulf Coast Legal Update”
Blank Rome LLP successfully represented Flame S.A. in an ongoing maritime litigation case against Freight Bulk Ltd. and Vista Shipping.
Industrial Carriers, Inc., a shipping company based in Ukraine, became insolvent in October 2008 and defaulted on four forward freight agreements (“FFAs”) with Flame. Flame secured a judgment of approximately $19 million in England. In 2010, Flame had its English judgment recognized in the Southern District of New York. In 2013, the vessel M/V CAPE VIEWER arrived in Norfolk, Virginia.
Blank Rome’s maritime litigation team filed a writ of attachment against the vessel and a complaint alleging that its owner and operator, Freight Bulk and Vista, were alter egos of Industrial
Carriers. After lengthy pre-trial proceedings, a bench trial began in August 2014 wherein Blank Rome established that Industrial Carriers fraudulently transferred hundreds of millions of dollars of assets to Vista. The court awarded judgment in excess of $8M (the value of the CAPE VIEWER) to Flame. Freight Bulk appealed and the Fourth Circuit unanimously affirmed the judgment of the district court. Last week, a request for an en banc review was denied. In addition to this successful outcome, Flame was able to seize additional bank accounts overseas in an effort to collect the rest of its judgment.