In recent months, U.S. bankruptcy filings – such as Omega Navigation (filed July 8 in Houston) and Marco Polo Seatrade (filed July 29 in New York) – have caught the attention of the worldwide shipping community. It is no surprise that some shipping companies have sought bankruptcy protection resulting from financial distress. Rather, the cause for surprise is that non-U.S. shipping companies have sought protection in U.S. bankruptcy courts. High-profile secured creditors in these cases have contested the exercise of the jurisdiction of U.S. bankruptcy courts on grounds that the debtor shipping companies lack sufficient assets in, and connections to, the United States.
Marco Polo Shipping
This past Friday, October 21, in the Marco Polo proceedings, the bankruptcy court judge refused to grant the secured creditors’ motions to dismiss the case. As a result, at least for now, Marco Polo Seatrade’s (“MPS”) U.S. filing strategy has succeeded. The Marco Polo court ruling came at the end of a lengthy motion hearing, in which the primary arguments revolved around (1) whether MPS had sufficient contact with the U.S. to support bankruptcy court jurisdiction; (2) whether MPS had filed its bankruptcy petition in bad faith, thus warranting dismissal even if the court had baseline jurisdiction; and (3) whether the best interests of the debtors and creditors warranted dismissal, even if jurisdiction existed.
With respect to MPS’s contacts with the U.S., the court stated that property interest in an OSG Aframax pool and deposit accounts related to a vessel owned by one of the MPS debtors in that pool was sufficient to satisfy the minimal bar necessary to establish jurisdiction eligibility for the bankruptcy court for the debtor. Additionally, a further U.S. contact was the retainer deposit that MPS had paid to its U.S. lawyers on the date that the bankruptcy proceeding was commenced. In analyzing this latter issue, the court noted that §1109 of the U.S. Bankruptcy Code merely states that “property” in the United States is sufficient to establish jurisdiction and that this provision does not specify an amount (the court noted that, if the proceedings had been a Chapter 15 cross-border insolvency proceeding rather than a Chapter 11 reorganization, it would have found MPS’s center of main interest to be The Netherlands). These contacts were sufficient to preclude dismissal even though the OSG pool property was the property of only one of the debtors. With respect to the retainer deposit, the court observed that it was not relevant which company within the MPS group paid the attorney retainer so long as it covered the group of debtors.
In connection with the question of whether MPS had filed in bad faith, the court’s inquiry focused on whether the bankruptcy proceeding was brought to frustrate the lenders’ foreclosure rights. The court found no evidence of a bad faith filing from the facts on the record. It noted that the proceeding was filed shortly after Credit Agricole had arrested an MPS vessel in England and then swept that MPS debtor’s cash from its operating account. As businesses cannot operate without cash and the debtors’ options became limited when the cash accounts were swept, the court noted that the bankruptcy filing may have been the only option to save the companies.
With regard to the interests of the parties involved in the bankruptcy, the court found that the debtors’ interests and the unsecured creditors’ interests appeared to be better protected by the U.S. bankruptcy proceedings, while the only parties that dismissal potentially favored were the secured lenders. The court also found ambiguities in the secured lenders’ efforts (seeking to foreclose on assets overseas while providing bridge financing to MPS in the bankruptcy proceedings) and stated that the lenders’ motion to dismiss the bankruptcy proceeding could be viewed as a litigation ploy.
Based on these holdings, the court denied the lenders’ motion to dismiss, although the court’s dismissal was largely without prejudice to be possibly renewed as the proceedings developed.
United States Chapter 11 Proceedings
For a debtor, there are obvious benefits to filing for Chapter 11 protection in the United States. Once the bankruptcy petition is filed, the court imposes a worldwide automatic stay on actions against the debtor. Chapter 11 is a procedure for restructuring, not liquidation, and the debtor can reorganize by assuming, assigning or rejecting its executory contracts. In practice, this allows for a high level of negotiation. Those not familiar with the process should consider the entry and exit from Chapter 11 protection of major U.S. airlines by way of example.
Although the benefits of Chapter 11 to a debtor are well-known, the effects on creditors’ rights are less clear-cut and will depend on the nature and structure of the debt for each individual creditor.
In the shipping context, the issue of maritime liens is an important one because maritime liens, recognized by the U.S. bankruptcy court, will allow a secured claim and one that might be ranked above the secured lender-mortgagee. However, maritime liens are subject to jurisdictional analysis and not all maritime liens incurred in foreign jurisdictions, or subject to foreign jurisdiction under applicable contract clauses, are recognized in the United States.
Further, secured creditors can face unique issues such as the use of “cash collateral” in which funds in normally restricted accounts may be used by a debtor in Chapter 11 to fund current operations. Additionally, there is the possibility of a “cramdown” in the Chapter 11 proceedings where a loan balance may be adjusted to reflect the market value of the collateral. However, it must be emphasized that such actions are subject to numerous requirements and restrictions, a detailed discussion of which is beyond the scope this Alert.