Re Lyondell Chemical Co, et al; Edward Weisfelner, as Trustee of the LB Litigation Trust v LR2 Management K/S [18.09.15]

US Bankruptcy Court confirms that a trustee in bankruptcy could not avoid freight payments made by charterers shortly before they applied for bankruptcy protection.

Implications

This decision provides welcome reassurance for owners that even if freight payments received from charterers are plainly preferential or tactically prioritised they should not, under New York law, ordinarily have to hand them back if the payor subsequently seeks Chapter 11 protection.

The ‘contemporaneous exchange’ defence does not require simultaneous payment. However, payments which are not made in accordance with common shipping industry practice may remain vulnerable to clawback.

Background

By a charterparty dated 20 November 2008 Equistar Chemicals LP (Equistar), a Lyondell Chemical Company subsidiary, contracted with LR2 Management K/S (LR2) for the transportation of petroleum condensate from Algerian ports to the US aboard the vessel, Torm Valborg. The charterparty incorporated the Standard Form of Contract of the Association of Ship Brokers and Agents (USA) which provided that payment of freight was to be made by charterers upon delivery of cargo at destination.

On 2 December 2008 Sonatrach as shippers provided a “clean on board” bill of lading to Equistar. On 3 December 2008 LR2 made payment to Bejaia port on behalf of Equistar in the sum of US$12,298.08 for ‘quay dues’. LR2 invoiced Equistar for the payment made to the port on 4 December 2008.

On 10 December 2008 LR2 invoiced Equistar for US$2,057,851.25 for freight charges payable upon completion of discharge. The invoice included a reservation of the owner’s right to claim interest on sums not received within three business days. By 22 December 2008 Lyondell was suffering cash shortages and suspended its automatic payment system in order to prioritise payments to critical vendors.

Discharge of the cargo was completed on 26 December 2008 in Houston and on 30 December 2008 (two business days after discharge) Equistar paid LR2 the freight and quay dues invoices in full by bank transfers.

On 6 January 2009 Equistar filed for Chapter 11 bankruptcy protection in New York. The Trustee of Lyondell and its associated companies sought to recover (by way of avoidance) the sums paid by Equistar to LR2 by alleging they were preferential transfers.

Decision

United States Bankruptcy Judge, Robert Gerber held as follows:

  • Equistar’s transfer of the freight charges formed part of a “contemporaneous exchange” (US Bankruptcy Code s.547(c)(1)) on “ordinary business terms” (s.547(c)(2)(B)) and could not be avoided by the Trustee. The charterers were not permitted to rely on a defence that transfers were made in the “ordinary course of business” under s.547(c)(2)A).
  • The transfer for the quay dues was made according to “ordinary business terms” (s.574(c)(2)(B)) and could not be avoided by the Trustee either. It was common industry practice for charterers to reimburse owners for payments made on their behalf during the voyage.