The recent depression in the maritime shipping industry served as the catalyst for many shipping companies to restructure. During the past few years, a number of foreign-based shipping companies have sought protection from creditors in U.S. Bankruptcy Courts—with varying degrees of success.
Debtor-friendly U.S. reorganization laws and the extraterritorial application of U.S. court orders have been cited as reasons these companies seek protection in the U.S. Both are necessary for an industry in which the primary assets are constantly moving from one jurisdiction to another and creditors span the globe.1 Had these companies filed their cases in jurisdictions outside the U.S., they could have been forced to liquidate, as dictated by law in many other countries.
Although several foreign-based shipping companies with virtually no U.S. assets have recently filed for Chapter 11, Bankruptcy Courts have been reluctant to dismiss these cases for lack of jurisdiction. This willingness to entertain such cases has created an inviting refuge for foreign shipping companies whose assets, operations and employees lie outside the U.S.
While Bankruptcy Courts have provided these companies with a safe harbor initially, restructuring efforts by these debtors have had mixed results. Those that were unable to negotiate prearranged restructuring agreements with their lenders have typically failed in their reorganization efforts.
The recent filing with a prepackaged Chapter 11 plan by Genco Shipping & Trading Ltd. (“Genco”) and its affiliates highlights the importance and value of a consensual restructuring. With its lenders on board and trade creditors being paid in full, Genco is set to have a confirmation hearing on its plan within 45 days of filing, providing as little disruption to its operations as possible. Genco hopes to continue the trend of successful restructurings for shipping companies with consensual deals, avoiding the pitfalls of those filed without an agreement from their lenders.
Debtor Eligibility Requirements
Pursuant to Section 109 of the U.S. Bankruptcy Code, “only a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under this title.” 11 U.S.C. §109(a). If a proposed debtor is not eligible under Section 109(a), then the Bankruptcy Court does not have jurisdiction to hear the case.
However, the Bankruptcy Code is silent as to what amount of “property in the United States” is needed to satisfy Section 109(a) so that a foreign company becomes an eligible debtor. Essentially, parties may establish eligibility as a debtor, so long as any property is present in the United States.2 Two recent Bankruptcy Court decisions relating to foreign shipping companies have only strengthened this interpretation of Section 109(a).
In 2011, Marco Polo Seatrade (MPS) and three affiliates filed for bankruptcy protection in the Southern District of New York. MPS, a Netherlands-based shipping company, owed its foreign-based secured lenders about $210 million, collateralized by the company’s ships, at the time of filing. Shortly after the filing, Credit Agricole and Royal Bank of Scotland, both secured lenders, moved to dismiss the cases on the grounds that MPS failed to meet the debtor eligibility requirements of Section 109(a).
In its motion, Royal Bank of Scotland pointed to a number of factors favoring dismissal, including: (i) the debtors were foreign entities; (ii) the debtors’ ships operated under foreign flags; (iii) the debtors’ principal offices were in the Netherlands; (iv) the debtors had no offices or employees in the U.S.; (v) the debtors’ business operated primarily in foreign waters; (vi) the debtors’ loan documents were governed by foreign law and provided for foreign courts to have exclusive jurisdiction over disputes involving the loans; (vii) the debtors’ secured creditors were foreign entities; and (viii) the members of the unsecured creditors’ committee were foreign entities.3
MPS countered that its property in the U.S. was sufficient to establish eligibility under Section 109(a), citing an interest it held in funds in a pooling account located in the U.S. and a prepetition retainer held by its U.S.-based bankruptcy counsel.4 MPS further argued that it had business records and ongoing business in the U.S. because its ships would sometimes visit U.S. ports.
In ruling for the debtor, the Bankruptcy Court found that the funds held by MPS’s counsel in New York and those in the pooling account were sufficient to satisfy Section 109’s eligibility requirements.5 However, despite prevailing against the motion to dismiss early in the bankruptcy case, MPS was unable to reorganize successfully because it could not reach a consensual restructuring agreement with its lenders. A joint plan of liquidation was confirmed on August 14, 2012, with Credit Agricole and Royal Bank of Scotland ultimately receiving their collateral (the ships) in satisfaction of their claims.6
Another international shipping company faced questions about jurisdiction and eligibility in the Chapter 11 filing In re TMT Procurement Corporation, et al.7 TMT, a shipping company based in Taiwan, filed Chapter 11 petitions on June 20, 2013, in the Southern District of Texas. At the first-day hearing, the Bankruptcy Court took up the issue of jurisdiction and TMT’s eligibility to be a debtor in the U.S. The court noted that while jurisdiction is technically governed by 28 U.S.C. § 1334, courts do not exercise jurisdiction over parties that are not eligible to be debtors under Section 109(a).8
Despite the arguments and evidence presented alleging that eligibility had been manufactured on the eve of the bankruptcy filing, the court found that TMT was eligible to be a debtor under Section 109 based on prepetition retainers held by the company’s U.S.-based financial and legal advisors.9 However, the court reserved the issue of whether such minimal and manufactured contacts were grounds for dismissal as a bad faith filing.10
Shortly thereafter, several of TMT’s secured lenders sought to have the case dismissed, arguing that the minimal contacts with the U.S. and the fact that such contacts were manufactured on the eve of filing were grounds for dismissal as a bad faith filing.11 As was the case in MPS, these lenders cited a number of factors that they said weighed in favor of dismissing the case, including: (i) all of the debtors other than TMT USA Shipmanagement LLC were foreign entities; (ii) the debtors were headquartered in Taipei; (iii) the debtors’ vessels were located in foreign waters and operated under foreign flags; (iv) the debtors’ secured creditors were all foreign entities and all loan documents were governed by foreign law; (v) other than TMT USA, the debtors had no offices, employees or property in the U.S.; (vii) TMT USA was incorporated in the U.S. less than two weeks before the bankruptcy filing; and (viii) TMT’s only asset other than its interest in the retainers held by its bankruptcy professionals was an interest in a receivable from a U.S. company.12
In its ruling, the court decided not to revisit the issue of whether the retainer held by TMT’s U.S.-based professionals was sufficient to meet jurisdiction and eligibility requirements. The court denied dismissal of the bankruptcy cases, holding that the cases were filed in good faith.13The court based its decision on whether the debtors filed bankruptcy to accomplish, and in fact could accomplish, a financial restructuring of their debts.
Interestingly, as a condition to allowing the company to proceed with its Chapter 11, the Bankruptcy Court required that TMT or an affiliate transfer non-debtor property with a value of about $40 million to the court’s control to: (i) ensure TMT’s compliance with court orders; (ii) fund payment of any sanctions ordered by the court against TMT or its principals; and (iii) satisfy amounts that may be owed to the lenders for failure of adequate protection. Accordingly, TMT’s ability to pursue its bankruptcy cases was conditioned on the company depositing substantial funds within the jurisdiction of the Bankruptcy Court. The lenders appealed these decisions, and the District Court affirmed the Bankruptcy Court’s rulings.
Sink or Swim
While the MPS and TMT cases make clear that foreign shipping companies with de minimus assets in the U.S. are likely to find an initial safe harbor in U.S. Bankruptcy Courts, smooth sailing from there is by no means guaranteed. As noted, MPS concluded with confirmation of a liquidating plan and the company’s ships being turned over to its secured lenders.
Another shipping case, In re Baytown Navigation, Inc., et al., also ended in confirmation of a liquidating plan with the foreign-based secured lenders ultimately having their collateral (the ships) turned over to them.14 The Greek-based debtor was unable to negotiate a consensual restructuring with its secured lenders and was forced to liquidate.
TMT appears to be following a path similar to Baytown and MPS. Since the court denied the motions to dismiss, TMT has been embroiled in litigation with its secured lenders. Several appeals were filed and the District Court went so far as to withdraw the reference of the entire bankruptcy case for several months. Motions to dismiss have been re-urged, and several lift stay motions have been filed by the secured lenders.
While the Bankruptcy Court ordered mediation, that has not yet occurred, and the prospect for a successful mediated resolution in unclear. Absent a consensual restructuring agreement with its secured lenders, TMT may be headed for the same fate as Baytown and MPS—a failure to reorganize followed by a controlled liquidation of its ships.
This is not to say that all foreign shipping restructurings in the U.S. are doomed. Several global shipping companies have successfully reorganized recently in Chapter 11. Shortly after MPS was filed, General Maritime Corporation Inc. and its affiliated companies (collectively, GenMar), a Marshall Island incorporated debtor, filed bankruptcy in the Southern District of New York. The results of this case stand in stark contrast to those in MPS.
The day before filing bankruptcy, GenMar entered into a restructuring support agreement with its first lien lenders and other secured creditors to effectuate a restructuring. With significant creditor constituencies on board, the restructuring encountered smooth sailing. In less than six months, GenMar was able to confirm a plan of reorganization that was accepted by all voting classes of claims.15
Similarly, Ireland-based TBS International Limited and its affiliates navigated bankruptcy without any problems. TBS filed a prepackaged plan of reorganization and disclosure statement in February 2012 in the Southern District of New York after reaching restructuring agreements with four separate lending groups. The prepackaged plan consolidated the four lending groups and provided for payment of all general unsecured claims in full. The plan of reorganization in TBS’s case was confirmed in less than two months.
Additionally, Excel Maritime Carriers Ltd., a Greek shipping company, and its affiliates filed for bankruptcy protection in the Southern District of New York last July. Like GenMar and TBS, Excel had a plan support agreement in place with its senior secured lenders and filed a plan of reorganization consistent with the agreement as part of its first-day pleadings.
With the secured lenders on board, Excel entered into mediation post-petition with the unsecured creditors’ committee and other parties to resolve issues related to their proposed plan. As a result of its efforts, Excel was able to confirm a plan that was accepted overwhelmingly by all voting classes less than seven months after filing.16
Finally, most recently, Genco Shipping and Trading Limited and its affiliated entities (“Genco”), a Marshall Islands incorporated shipping company with substantially all of its assets and operations located outside of U.S. jurisdiction, filed for bankruptcy protection in the Southern District of New York on April 21, 2014. Genco is seeking approval of a prepackaged Chapter 11 plan that would convert the outstanding senior secured debt into equity in the reorganized entities, pay general unsecured trade creditors in full, and provide a small recovery for existing equity. A hearing on confirmation of Genco’s prepackaged Chapter 11 plan is set for June 23-24, 2014.
Two lessons can be learned from recent bankruptcy filings in the U.S. by foreign shipping companies. First, if the foreign companies have de minimus property in the U.S., such as retainers held by their U.S.-based professionals, courts will likely consider them eligible to proceed in bankruptcy. Second, while bankruptcy may provide an initial breathing spell from creditors, it cannot change the financial realities faced by distressed shipping companies or the current state of the market.
The shipping companies that have experienced success in Chapter 11 each had a consensual restructuring in place with their secured lenders prior to filing. Those that have pursued free fall bankruptcies, such as MPS, Baytown and TMT, have thus far found themselves embroiled in costly litigation which, in the cases of Baytown and MPS, resulted in a failed reorganization followed by a liquidation of the debtor’s assets.