Summary of Holding

In a recent opinion,1 in a case of first impression at the circuit level, the U.S. Court of Appeals for the Third Circuit held that maritime carriers and their customers may contractually extend the carrier’s common law possessory liens on cargo, securing payment of shipping charges, so as to cover not only the particular cargo for which shipping charges are outstanding, but all cargo belonging to the customer in the carrier’s possession, including cargo in different shipments than the one for which charges are outstanding.

Background

Under common law, a maritime carrier has a possessory lien on the customer’s cargo in the carrier’s possession, to secure payment of the carrier’s charges for transporting that cargo. Once the carrier hands over the cargo to the customer, however, the carrier’s lien is lost. The case law is sparse regarding whether the carrier and the customer may, by contract, extend that lien to cover all cargo of the customer in the carrier’s possession, including cargo other than the particular cargo for which freight charges are outstanding.

In In re World Imports Ltd., a maritime carrier and its customer had agreed that the carrier would have “a general lien and security interest in any and all property” of the customer in the carrier’s possession, which would secure all sums owed by the customer to the carrier for any shipment.2 The customer commenced a bankruptcy case, and the carrier promptly filed a motion for permission to retain the cargo then in its possession belonging to the customer/debtor until its prepetition claims were paid. The debtor owed the carrier approximately $1.45 million, of which approximately $458,000 consisted of charges for the shipment of the cargo then in the carrier’s possession (which the court called the “Current Cargo”), and $994,000 consisted of charges for the shipment of cargo previously delivered and released to the debtor (which the court called the “Prepetition Cargo”). The total value of the Current Cargo was approximately $1.9 million (i.e., enough to fully secure the carrier’s claim, if its liens were valid). In response, the debtor commenced an adversary proceeding seeking to compel the carrier to turn over all of the Current Cargo.

The bankruptcy court granted the relief sought by the debtor, ordered the carrier to turn over all of the Current Cargo, and ordered the debtor to pay the carrier only the freight charges related to the Current Cargo (i.e., the $458,000). The bankruptcy court held that the carrier’s asserted liens securing payment of the charges for the Prepetition Goods (i.e., the $994,000) were unenforceable, and therefore the carrier was unsecured with respect to that portion of its claim. On appeal, the district court affirmed.

The carrier then appealed to the court of appeals, which reversed the bankruptcy court’s ruling and held that the carrier’s liens on the Current Cargo to secure payment of charges related to the Prepetition Cargo were enforceable.

Discussion

The court of appeals began its analysis by describing common law maritime liens generally. This lien “arises from the right of the ship-owner to retain the possession of the goods until the freight is paid,” operates without notice, and enjoys priority over general creditors, purchasers and even secured lenders.3

A carrier’s common law lien is lost upon “unconditional delivery to the consignee.”4 The key word is “unconditional.” Where a carrier delivers goods, but demonstrates an intent to preserve its lien rights, the carrier “enjoys a strong presumption that, absent a clear indication to the contrary, he has not waived his cargo lien upon delivery of that cargo.”5

Beginning its analysis with the concept of this presumption against a carrier waiving its lien merely by handing over possession of the cargo, the court of appeals criticized the lower courts, stating that those courts “appear to have assumed, without analysis, that [the carrier] did not merely deliver the Prepetition Cargo to [the debtor], but did so unconditionally and thus in waiver of its liens on those goods.”6 The court continued, “Given the strong presumption against waiver, and in the absence of clear evidence of unconditional delivery, we cannot agree with that assumption.”7

On the contrary, the court of appeals held that the parties’ agreement evidenced their understanding that the carrier’s lien rights would survive delivery to the consignee. And following delivery, although the carrier’s liens would no longer adhere to the delivered goods, they would continue to adhere to all other goods belonging to the debtor in the hands of the carrier. In other words, when the debtor failed to pay the carrier’s freight charges for the Prepetition Cargo, following delivery of those goods the carrier’s lien rights securing payment of those outstanding charges remained fully intact with respect to the Current Cargo.

Accordingly, the carrier was entitled to assert liens on all of the goods in its possession (i.e., the Current Cargo) to secure payment of its unpaid freight charges for delivery of the Prepetition Cargo. The Current Cargo essentially took the place of the Prepetition Cargo to secure payment of the freight charges for the Prepetition Cargo.

In support of the lower court decisions, the debtor had argued that the carrier was attempting to essentially create a maritime lien by contract, where none would otherwise exist as a matter of common law. Since maritime liens are creatures purely of law, this cannot be done, the debtor’s argument continued. The court of appeals disagreed, and explained that the parties’ agreement had not created the maritime liens. Rather, the parties’ agreement evidenced the fact that the parties had “agreed … in advance that such liens would survive delivery and would be applied to any of [the debtor’s] goods currently in [the carrier’s] possession.”8 Moreover, the court explained, once created by law, a maritime lien certainly may be “extended or modified by agreement of the parties …”9 “In other words,” the court continued, “a traditional maritime lien cannot be created by contract alone, but that does not mean that such liens, once created, are beyond contractual modification.”10

Summing up its analysis, the court concluded, “Especially in light of the ‘familiar doctrine’ that a maritime lien may attach to property substituted for the original object of the lien, we see no sound reason why the parties’ contractual transfer of the unwaived liens to the Current Goods should not be enforceable.”11

The court concluded its opinion by discussing policy reasons favoring parties being allowed to extend maritime liens on already-delivered goods to goods currently held by the carrier. Among these reasons was that a carrier’s ability to deliver goods and release them into the flow of commerce, without worrying about waiving its lien rights by so doing, would encourage the free flow of goods in trade around the world. If a carrier were forced to retain goods as its sole means of preserving its lien rights, the result would be that many carriers would do exactly that, and commerce would be hampered. The court described this scenario as a “protracted, commerce-restrictive process of withholding each shipment until its attendant lien was satisfied,” and reiterated its holding, stating, “If parties to a maritime contract, through negotiation and private ordering, opt to streamline that process by retaining and consolidating liens arising by operation of longstanding maritime law, at least as such liens apply to goods still in the [carrier’s] possession, there is no compelling argument to undo such an agreement.”12

Takeaway

In re World Imports is the first circuit level decision on the question of whether these “contractually extended” maritime liens are enforceable. The court’s affirmative answer is an important precedent for all maritime carriers, and significantly bolsters their protection when a customer is in dire financial straits. The decision also stands to benefit financially imperiled customers, as their carriers may now be more inclined to release goods without first receiving payment, safe in the knowledge that courts, at least within the Third Circuit, will uphold their right to look to other cargo as collateral to satisfy their claims.

On May 4, 2016, the debtor filed a petition for rehearing en banc, which is presently pending. In the event that the petition is granted, we will provide further update.