Since 2008, the shipping market (in particular, the bulker market) has been badly affected by a decreased demand for shipping, largely due to the global financial crisis. To date, the shipping market is struggling, and claims for unpaid charter hire continue to surface along with the traditional assortment of other claims that arise between contracting parties.
Claimants frequently look to admiralty counsel in the United States to secure their claims and/or to assist in enforcing foreign awards and judgments. Many shipping personnel around the world have at least a basic working knowledge of the attachment and arrest procedures in the U.S. and typically request their attorney to take immediate steps to affect those measures. Rule B attachment and Rule C arrest procedures typically provide the admiralty claimant with an effective tool to obtain security for their claim and to bring a recalcitrant defendant into court.
Clients must, however, be wary of three scenarios where attaching and/or arresting a vessel may expose them to additional losses. Those situations include when the attachment is “futile”; where bankruptcy looms over the vessel owner; or where the vessel itself, while in good condition, has no value because it has no market—the proverbial “white elephant.”
When a vessel is attached or arrested, the dispute often mushrooms to include competing claims by various creditors of the owner and the vessel that can be broken down, usually, into two categories of competing interest. The first group is the “Rule B” attaching plaintiffs, which consists of claimants who have maritime claims against the owner that do not specifically relate to the attached vessel. The second group is the “Rule C” arresting plaintiffs, which consists of claimants who seek to enforce maritime liens in the arrested vessel itself, e.g., cargo interests, charterers, and the bank that holds a mortgage on the vessel.
Whenever property is attached under Rule B, Supplemental Rule E(4)(f) allows any party claiming an interest in the property to obtain a prompt hearing at which the attaching plaintiff must bear the burden of showing that the attachment is proper. When numerous competing interests appear, a “prompt hearing” usually results in discovery orders being issued, motion practice, and hearings being scheduled, all while the vessel remains under attachment and/or arrest.
The paramount disagreement between competing Rule B and Rule C interests is whether the vessel should be released. Unless they wish to foreclose on the vessel, a Rule C arresting party often wants the ship to be released so it can conclude a voyage, deliver cargo, and earn revenue, while the Rule B claimants want the vessel to stay under attachment and, if necessary, be sold at interlocutory sale to generate funds to pay their claims.
The Second Circuit in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d 434 (2d Cir. 2006), confirmed that a district court possessed authority in certain circumstances to vacate attachments on equitable grounds even if the attachments were properly obtained under Rule B. As noted by the Second Circuit in Aqua Stoli, the precise scope of the district court’s authority was not well defined, but did allow a district court, at the very least, to vacate otherwise valid attachments when: (1) the defendant is subject to a suit in a convenient adjacent jurisdiction; (2) the plaintiff could obtain in personam jurisdiction over the defendant in the district where the plaintiff is located; or, (3) the plaintiff has already obtained sufficient security for the potential judgment. For a period of time, the only authority to vacate a Rule B attachment was said to be the three Aqua Stoli criteria.
There is a fourth potential criteria, however, not specifically addressed by Aqua Stoli. At least two cases have introduced “futility” as a basis to vacate an otherwise valid Rule B attachment. The decision in A. Coker & Company Limited vs. The National Shipping Agency Corporation, 1999 WL 311941 (ED. LA 1999), pre-Aqua Stoli, is instructive because it demonstrates that even a party with a legitimate claim can be prevented from obtaining relief under Rule B where its attachment is futile because it is primed by substantial superior interests in the seized property.
In Coker, where the court focused on the general rule of “first attachment—first in right,” the vessel charterer entered into a settlement with a sub-charterer for $900,000 after a London Arbitration Panel issued an interim final award in favor of the charterer. The charterer then obtained a Rule B writ of attachment against the sub-charterer’s property aboard a vessel in the Eastern District of Louisiana valued at nearly $100,000. Another claimant moved for leave to intervene in the action to serve its own Rule B claim against the same property. Because the value of the seized property was not enough to fully secure the first attaching creditor’s claim, however, the court denied the second attaching creditor’s request to intervene.
The Coker court explicitly recognized that a party with a right to proceed under Rule B can be prevented from forcing the judicial sale of the defendant’s property where a superior claim in the property renders the party’s attachment proceeding futile.
In the recent case of Evridiki Navigation, Inc. v. Sanko Steamship Company, JKB-12- 1382 (D.C. MD 2012), the total value of the Rule C claims of the charterer, the cargo interests, mortgagee bank, and related transshipment costs far exceeded the potential judicial sale value of the attached vessel, and thus, the issue of futility was raised by the Rule C claimants. It was clear from the submissions made by Rule C claimants that the Rule B claimants would never benefit from a judicial sale, and thus, any sale would have been futile. The dispute regarding whether the Rule B attachments were futile required extensive briefing and several hearings, all while the vessel was under attachment incurring substantial custodial costs. The vessel remained in port for nearly 50 days. Expert opinions were required regarding: (1) the potential sale value of the vessel; (2) transshipment costs to get cargo to its final destination; and (3) whether the foreign mortgage was valid, etc., all at substantial cost.
Although a Rule B claimant may be the first to attach a vessel, charterers, banks, and cargo interests, all of whom may want the voyage to be completed, may have Rule C claims that are priority liens over the Rule B claims. Futility arises where it would be inequitable to continue to detain a vessel when doing so would not provide the attaching Rule B plaintiffs with any security for their claims. For this reason, the cases discussed above indicate that a court may exercise its equitable powers and its discretion and release the vessel to avoid further losses to innocent parties such as cargo interests and the bank. Vacating a Rule B attachment on the grounds of futility is no longer a radical departure from the narrow allowances for equitable vacatur set forth in Aqua Stoli.
There have been numerous instances where the attachment and/or arrest of a vessel becomes the financial tipping point resulting in a vessel owner’s filing for bankruptcy. In that instance, the automatic stay by the bankruptcy court will, unless a specific carve-out is made under a stipulation of all interested parties, result in the Rule B attachment being stayed and/or vacated. In Evridiki, discussed above, the court held that the detention of the vessel could not possibly achieve the objectives of the Rule B attachment and that any power that the Rule B attachment once had almost certainly will be eviscerated by the bankruptcy. The Evridiki court stated that the owner’s “interest in regaining the use of its vessel to generate revenue to be distributed to creditors in a reorganization proceeding carries an equitable weight that is even greater than the average defendant’s interest in the free use of his property.”
Thus, in the situation that was presented to the Evridiki court, the attaching Rule B plaintiff’s interest in maintaining the attachment in the face of the bankruptcy filing was not only futile, but as the court noted, “Less than the defendant’s interest in vacating them, greater than in the situations where Aqua Stoli found equitable vacatur to be appropriate.”
The “White Elephant”
Lastly, admiralty litigants must be wary when attaching a vessel that has no market value. Regardless of the physical condition of the vessel, if a vessel has no market to trade in, it has little or no value, other than scrap, in a judicial sale. Be wary—attaching a single purpose or specially configured vessel may result in a large custodia legis cost that will far exceed any market sale of the vessel.