Chapter 11’s charms

   With the shipping industry in a downturn, there has been intense interest in a ruling handed down from the bench by Judge James M. Peck of the U.S. Bankruptcy Court for the Southern District of New York. (Marco Polo Seatrade, No. 11-13634, SDNY, Oct. 21)
   Marco Polo is one of four related companies that filed for protection under Chapter 11 of the federal bankruptcy laws and whose cases were consolidated. They operate a ship management business, specializing in tankers and bulk carriers. Founded in 2005, the companies mainly operate under the name Seaarland Shipping Management from its headquarters in Amsterdam. Their primary assets at the time of filing consisted of six tankers.
   The companies said they believed Chapter 11 would help them “complete a restructuring process designed to restore the company to long-term financial health.
   “As a result of the Chapter 11 filings, all creditor actions throughout the world, including any attempts to enforce claims against the companies’ vessels, are automatically enjoined from proceeding while the companies reorganize their businesses.”
   The companies said they were “hit by a sudden and dramatic drop in the shipping markets” and complained senior lenders had “reversed their support for these restructuring efforts and started enforcement actions,” forcing them to seek bankruptcy protection.
   The Royal Bank of Scotland and Credit Agricole made motions to suspend or dismiss the Chapter 11 cases or grant relief from the automatic stay, but the court denied those motions. (Though it also said the banks could renew other motions having to do with non-jurisdictional matters.)
   Judge Peck rejected arguments that the debtors were not eligible to file bankruptcy in the United States, because they are foreign entities that do not have a place of business in the country.
   Though he did not go along with arguments that ownership records at the Liberian Ship Registry office in Manhattan were significant in establishing jurisdiction, Peck said the fact that one of the four companies had an interest in an account maintained at J.P. Morgan in the name of another company, Overseas Shipholding Group, for an Aframax pool constituted debtor property. The judge also found a retainer paid to a debtor’s attorney the day before the filing was significant.
   “I don’t believe it should be effective to give them jurisdiction, but from the case law, it appears that is effective to sustain the fairly low threshold of jurisdictional property in the United States that is required,” said Alfred Yudes Jr., an attorney at Watson, Farley and Williams, which represented Credit Agricole. The judge found the company had made a reasonable business decision to set up representation by counsel in the United States, plus they had the connection with New York-based OSG.
   How significant that ruling will ultimately be is still unclear. 
   Peck’s ruling “certainly indicates that at least the judge in New York was willing to find U.S. bankruptcy jurisdiction on rather slender facts as far as assets and contacts in the United States,” said Jim Hohenstein, the head of Holland & Knight’s maritime practice. “It is very early, but one might think that would make it simpler for others, basically foreign-based shipping companies to seek protection under the U.S. Bankruptcy Code, but… usually it takes more than one decision to establish a trend.”
   He added: “It is perceived worldwide with some basis in fact that Chapter 11 is more ‘debtor-friendly’ than the insolvency proceedings in other jurisdictions.”  
   Jurisdiction in the United States might be less of an issue for container companies than bulk operators. Many container companies have more contacts in the United States — offices, bank accounts, agents, and assets such as containers and chassis, whereas a bulk company may never or only very rarely come to the United States.
   Yudes believes there will be more shipping company bankruptcies, and said they will involve international companies whose “center of operations and ownership are going to be outside of the United States. Some companies will have assets in the United States and some are going to put assets into the U.S. in order to do it.
   “The worldwide automatic stay that issues out of the U.S. bankruptcy code the minute they file for bankruptcy is a great protective device for them to continue their operations,” he noted.
   But there is a big caveat, said Hohenstein. “It sort of depends on who the claimant is. If the claimant is a trade creditor who has no contacts with the United States, they may proceed to arrest a ship in some foreign jurisdiction, because a U.S. bankruptcy court would not interfere with the exercise of jurisdiction of a foreign court,” he explained. “On the other hand, if the claimant is located in the United States, the bankruptcy court can certainly exercise jurisdiction on the claimant and hold them in contempt, and that will affect a lot of parties, especially financial institutions that might hold a mortgage on a ship.” 
   Foreign shipping companies in the past have sought protection under Chapter 11.
   The Greek company Global Ocean Carriers filed for Chapter 11 in 2000 and won a jurisdictional challenge based on a retainer paid to a U.S. attorney.
   (Omega Navigational Enterprises, also from Greece, has filed for Chapter 11 protection in July, citing a U.S. bank account, a subsidiary registered in the United States and a chief financial officer’s office in the country as support for jurisdiction, according to an article in Seatrade.)
   Yudes said he did not believe the law has changed since 2003, “but I think maybe the perception of the shipping companies in the industry as to what a U.S. bankruptcy can or cannot do for them may have become more attractive.”
   He said it will cause banks to tighten their lending practices to shipping companies, “which is not good for the industry. It will lead to banks considering the possibility of U.S. bankruptcies even in companies that have no real connection to the U.S. and what you will see is a lot more of what the banks are already doing, which is that they lend to legacy borrowers only — the people they know, trust and have worked with for years.”
   Hohenstein said there have been changes in the financing of vessels over the past 20 years, making for increased complexity and involvement by different players that may push companies into litigation more quickly. He also said New York courts are an attractive venue because they are sophisticated in handling complex bankruptcies for companies across all industries.