Protecting the Supply Chain: U.S. Government Studies the Role of Federal Agencies in Ocean Carrier Bankruptcies

Rick Antonoff and Evan Jason Zucker

In December 2018, the Frank LoBiondo Coast Guard Authorization Act (the “LoBiondo Act”) was enacted to, among other things, improve and support the operation and administration of the Coast Guard and update maritime and environmental policy. Section 713 of the LoBiondo Act directs the Comptroller General of the United States to “conduct a study that examines the immediate aftermath of a major ocean carrier bankruptcy and its impact through the supply chain.” In accordance with that mandate, in January 2020, the U.S. Government Accountability Office (“GAO”) published a report on the role of the Federal Maritime Commission (the “FMC”) and Department of Commerce (“Commerce”) in an ocean carrier’s bankruptcy case.

The study was prompted by supply chain disruption at sea and at numerous ports caused by the bankruptcy of Hanjin Shipping Co., Ltd. in August 2016. At the time, Hanjin was one of the world’s largest integrated logistics and container shipping companies transporting cargo to and from ports throughout the world. The GAO concluded that the FMC and Commerce played an important monitoring function in the industry, but did not recommend any changes to either agency’s role in an ocean carrier bankruptcy. This is because the GAO found that industry participants have already taken steps to mitigate the effects of another ocean carrier bankruptcy and current law does not authorize these agencies to have a more active role.

The Ocean Carrier Industry

The maritime transport industry is the backbone of globalized trade and the manufacturing supply chain. According to the United Nations Conference on Trade and Development’s Review of Maritime Transport 2019, more than four-fifths of world merchandise trade by volume is carried by sea. Annually, more than one trillion dollars in U.S. exports and imports are moved by ocean vessels. Prior to the current pandemic, the industry was already coping with low-freight rates, reduced earnings, and oversupply as a result of increased global tariffs, volatility in demand, and new environmental regulations. These market conditions have led to the continued consolidation of ocean carriers. “In February 2019, the [top] 10 deep-sea container-shipping lines represented 90 per cent of deployed capacity and dominated the major East-West trade routes through three alliances.” This consolidation in the industry increases the risk of disruption that the financial instability of any one shipping company can have on the global supply chain.

Scope of the GAO Study

To address the objectives mandated in the LoBiondo Act, the GAO reviewed documents filed in Hanjin’s bankruptcy case and documents provided by the FMC and Commerce. Additionally, the GAO interviewed 15 industry stakeholders representing various roles in the supply chain including representatives from four ports, two ocean carriers, one association representing carriers, one association representing freight forwarders and customs brokers, five associations or companies representing transportation and equipment providers, one association representing retailers, one association representing agricultural cargo owners, and officials with the FMC and Commerce. Continue Reading

Enforcement of an Insolvency-Related Judgment Does Not Require Recognition under Chapter 15

Michael B. Schaedle and Evan Jason Zucker

In EMA GARP Fund v. Banro Corporation1 (the “U.S. Action”), the U.S. District Court for the Southern District of New York dismissed a lawsuit filed by shareholders of an insolvent Canadian company, Banro Corporation (“Banro”), and its former CEO, finding that, under the principles of comity, an approved Canadian plan of reorganization released all claims against the defendants. In so ruling, the court summarily rejected a longstanding principle that recognition of a foreign bankruptcy proceeding under chapter 15 of the U.S. Bankruptcy Code is a prerequisite to the enforcement by a U.S. court of a judgment entered in a foreign bankruptcy proceeding.

The Banro Insolvency Proceeding

Banro was a public corporation headquartered in Canada and incorporated under Canadian law. Banro was involved in the exploration, development, and mining of gold in the Democratic Republic of the Congo. Banro faced liquidity challenges in 2017, eventually becoming insolvent and in need of additional liquidity to fund operations. On December 22, 2017, under the Canadian Companies’ Creditors Arrangement Act (“CCAA”), Canada’s equivalent to chapter 11 of the U.S. Bankruptcy Code, Banro initiated a restructuring proceeding (the “CCAA Proceeding”) in the Ontario Superior Court of Justice (Commercial List) (the “Canadian Court”). On that same date, trading in Banro’s securities on the New York Stock Exchange was suspended. Continue reading “Enforcement of an Insolvency-Related Judgment Does Not Require Recognition under Chapter 15”

Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization

Michael B. Schaedle and Jose F. Bibiloni

In complex long-term charters for vessels or finance leases in respect of vessels under the U.S. Uniform Commercial Code (“UCC”) and its Article 2A (governing commercial matters relating to finance leases) and under other similar law, a charterer’s or lessor’s damages under a charter or lease—both generally upon a payment default or in the event of a casualty—are often liquidated in stipulated loss value (“SLV”) provisions. These provisions ensure that the lessor/charterer gets the benefit of its bargain. It insulates the lessor/charterer, in part, from unusual market downturns impacting vessel value or casualties.

A typical SLV calculation enables the present value recovery of the charterer’s/lessor’s unrecovered investment, residual value in the vessel, and the recapture of tax benefits and certain fees and costs, less a credit for the value of the vessel, if the stipulated loss value is repaid by the charter party/lessee, a net proceeds measure.1 Schedules to identify the stipulated loss are a common feature of such charters and leases.2 Now, any SLV provision under Article 2A of the U.S. U.C.C., for example, must be reasonable as of lease/charter commencement.3 Oftentimes, these kinds of charters and leases are backed by absolute, unconditional guaranties of such loss value from affiliates of the charter parties.4 Continue reading “Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization”

Update on UNCITRAL Insolvency Working Group

Rick Antonoff and Evan J. Zucker

The Insolvency Working Group of the United Nations Commission on International Trade Law (“UNCITRAL”)1 has been busy this past year, working on three new model laws and developing work on at least two possible future projects.2 The Insolvency Working Group is responsible for drafting the Model Law on Cross-Border Insolvency (the “CBI Model Law”) in 1997, which has since been adopted in 46 countries and is under consideration in several others. In 2005, the United States adopted the CBI Model Law as Chapter 15 of the United States Bankruptcy Code.

Insolvency-Related Judgments

In May 2018, the Insolvency Working Group completed its work on a Model Law on Recognition and Enforcement of Insolvency-Related Judgments (the “IRJ Model Law”). The Insolvency Working Group determined that there was a need for the IRJ Model Law after judicial decisions in certain countries declined to recognize judgments related to foreign insolvency proceedings. In addition, the Insolvency Working Group noted that many international treaties addressing foreign judgments exclude insolvency-related judgments, and countries that do recognize foreign insolvency-related judgments have inconsistent rules about when a judgment is related to an insolvency proceeding. (For more information, please read our article published in INSOL International’s Special Report (March 2019), UNCITRAL’s Model law on Recognition and Enforcement of Insolvency-Related Judgments—A Universalist Approach to Cross-Border Insolvency.) Continue reading “Update on UNCITRAL Insolvency Working Group”

Court-to-Court Communication and Letters of Request in Cross-Border Litigation and Asset Tracing

Rick Antonoff and Evan Jason Zucker

An increasingly global economy and the ease with which money and other property is transferred across national borders has led to more cross-border litigation and a call for greater cooperation and communication between foreign courts. But the ability for courts to communicate across borders has its limits. Recently, in In re Zetta Jet USA, Inc.,1 a chapter 7 trustee asked a U.S. bankruptcy court to authorize sending a letter from the U.S. court to an Australian court, under 28 U.S.C. § 1781, asking the Australian court to continue an injunction against moving a vessel located in Australia pending the resolution of an avoidance action in the United States against the vessel’s purported owner. The U.S. court refused to issue such a letter after concluding that a letter from a U.S. court requesting the Australian court to continue an injunction would be an unwarranted interference by the U.S. court in the Australian proceeding, and would offend principles of international comity by suggesting how the Australian court should rule on the injunction as well as preempting the Australian court’s consideration of whether to vacate the injunction.2

Background

Zetta Jet USA, Inc. (“Zetta US”) and Zetta Jet PTE (“Zetta Singapore,” and together with Zetta US, collectively, the “Zetta Entities”) operated an international luxury travel business that fell into financial distress largely due to allegedly fraudulent activity of its principal, Geoffrey Owen Cassidy. On September 15, 2017, Zetta US and Zetta Singapore each filed a voluntary petition for relief under chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Central District of California (the “U.S. Bankruptcy Court”). The cases were subsequently converted to chapter 7 cases and Jonathan King (the “Trustee”) was appointed the chapter 7 trustee. Continue reading “Court-to-Court Communication and Letters of Request in Cross-Border Litigation and Asset Tracing”

Enforcing Ipso Facto Clauses in International Transactions and the Importance of Being Proactive in Dealings with Troubled and Insolvent Entities

Michael B. Schaedle and Gregory F. Vizza

A proactive creditor often ends up in a better legal position, and has more negotiating power, than a reactive one. While that may seem obvious, it is a lesson driven home by a 2017 decision in the SunEdison bankruptcy case, which involves issues of international comity, choice of law provisions, and ultimately, the tactics employed by a Korean debtor in connection with its contractual relationship with SunEdison. In SMP Ltd. v. SunEdison, Inc. and GCL-Poly Energy Holdings Limited, 577 B.R. 120 (Bankr. S.D.N.Y. 2017), the SunEdison bankruptcy court refused to apply Korean insolvency law in a contract termination dispute, and enforced a contractual New York choice-of-law provision. Notwithstanding the chapter 15 recognition of the Korean debtor’s rehabilitation, applying New York law, the court upheld the enforcement of an ipso facto (“by the fact itself”) clause against the Korean debtor, thereby allowing termination of a license with SunEdison that was essential to the debtor’s business. Continue reading “Enforcing Ipso Facto Clauses in International Transactions and the Importance of Being Proactive in Dealings with Troubled and Insolvent Entities”

Oi Brasil and Competing Foreign Main Proceedings: Creditors Can’t “Weaponize” Chapter 15

Michael B. Schaedle and Rick Antonoff

A Fight over the Effect of Consolidation

According to the Manhattan Bankruptcy Court’s thoughtful and well-written December 4, 2017, decision in In re Oi Brasil Cooperatief U.A.,[1] a bondholder, Aurelius Capital Management (“Aurelius”) forced the straight Dutch liquidation of Oi Brasil Cooperatief (“Coop”) in order to revoke the prior recognition as a foreign main proceeding in the Manhattan Bankruptcy Court of a broader Brazilian reorganization of Coop and its operating affiliates, the Oi Group, a Brazilian telecommunica­tions consortium. In that Brazilian reorganization, Coop was to be consolidated substantively with other Oi Group members. This consolidating effect, according to the court, would limit Aurelius recoveries to a single pathway in a unitary capital structure and prevent additive recoveries for the holder on bond guaranties.[2]

Aurelius Criticized for Insisting on Dutch Recognition in Order to Preserve Guaranties

Specifically, the court found that Aurelius was an active participant in the hearing on the Oi Group’s Brazilian proceeding’s recognition in June and July of 2016, negotiating rights reservations to act in the Netherlands in its own interest, but never challenging the propriety of Brazil as the Oi Group’s (and Coop’s) “center of main interest” or “COMI.”[3] At the same time, the court ruled that even as Aurelius participated in the first-filed New York Oi Group chapter 15, it intended to challenge the Brazilian recognition of Coop by seeking to liquidate Coop in the Netherlands through a Dutch trustee.[4] According to the court, these Dutch-centered tactics were in aid of an Aurelius strategy to achieve higher recoveries at the Coop level of the Oi Group restructuring in the Netherlands outside of the Brazilian reorganization (where ratable recoveries for Aurelius would be lower after consolidation), while intercompany claims for the benefit of Coop and in aid of this Netherlands-centered strategy were pursued by a Dutch trustee in a Dutch home court.[5] Continue readingOi Brasil and Competing Foreign Main Proceedings: Creditors Can’t “Weaponize” Chapter 15″

NY Bankruptcy Courts Grapple with Territorial Limits

Mainbrace | March 2018 (No.1)

Rick Antonoff, Michael B. Schaedle, Bryan J. Hall, and Matthew E. Kaslow

In a pair of recent opinions from the U.S. Bankruptcy Court for the Southern District of New York, two judges took varying approaches to the issues of 1) their ability to assert personal jurisdiction over foreign defendants, and 2) applica­tion of U.S. laws to transactions that occur, at least in part, outside of the United States.

The first opinion, from Judge Sean H. Lane, denied the defendants’ motion to dismiss a lawsuit seeking to avoid and recover money initially transferred to correspondent bank accounts in New York designated by the defendants, before being further transferred outside of the United States to complete transactions under investment agreement executed outside of the United States and governed by foreign law. On remand after a district judge ruled that the defendants’ use of correspondent banks in the United States was sufficient for the bankruptcy court to have personal jurisdiction over them, Judge Lane held that the doctrine of international comity and the presumption against extra­territoriality did not prevent application of U.S. law to avoid transfers under the Bankruptcy Code. The second opinion, from Judge James L. Garrity, Jr., dismissed a bankruptcy trustee’s claims to avoid and recover transfers under U.S. bankruptcy law that occurred entirely outside the territory of the United States. Continue reading “NY Bankruptcy Courts Grapple with Territorial Limits”

Concurrent Plenary Insolvency Proceedings: Additional Options for Cross-Border Reorganization and Liquidation

Mainbrace | March 2017 (No. 2)

Michael B. Schaedle and Bryan J. Hall

For the most part, the U.S. Bankruptcy Code formally and specifically deals with cross-border cases through chapter 15, a statute based on the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997.1 The purpose of chapter 15 is to enhance cooperation between U.S. and foreign courts in connection with cross-border insolvencies to promote greater legal certainty for trade and investment, fairness, value optimization of a debtor’s assets, and the protection of investment and employment.2 Chapter 15 serves these goals by providing a foreign debtor’s representative with access to U.S. courts to assist a foreign main or non-main proceeding, which has been raised cross-border in a jurisdiction that is either the center of the debtor’s main interests or in which the debtor has an important facility.

Continue reading “Concurrent Plenary Insolvency Proceedings: Additional Options for Cross-Border Reorganization and Liquidation”

Innovative Uses of Chapter 15: Energy Coal and Vneshprombank

Mainbrace | March 2017 (No. 2)

Michael B. Schaedle and Rick Antonoff

Blank Rome has the distinction of representing the foreign representatives in two recent chapter 15 bankruptcy cases that broke new ground in U.S. law by being the first to recognize foreign insolvency proceedings under the newly revised insolvency law of Italy and a bank insolvency proceeding in Russia.

Revised Italian Insolvency Law (Concordato Preventivo)

Energy Coal is a petroleum coke and specialty fuel merchant and supplier based in Genova, Italy, with substantial business in the United States as well as a complex capital structure. When the Delaware Bankruptcy Court recognized Energy Coal’s concordato preventivo proceeding in Genoa, it was the first U.S. bankruptcy court to recognize a concordato preventivo since the recent amendments to the Italian Insolvency Law that were enacted to facilitate debt restructurings and distressed investing, while binding dissenting creditors to homologated arrangements.

Continue reading “Innovative Uses of Chapter 15: Energy Coal and Vneshprombank”