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Maritime Bankruptcies in the US during the Coronavirus Pandemic: An Introduction for Creditors

May 11, 2020


The combined effects of the coronavirus pandemic and falling oil prices have resulted in a surge of US bankruptcy petitions.  Although the nation’s ports remain open for business, many retail and energy businesses have been unable to overcome the volatile economic climate and are seeking relief in US Bankruptcy Courts. The following is a brief introduction to creditor’s rights and obligations under US bankruptcy laws with emphasis on chapter 11 reorganization in the context of international maritime transportation and supply chains.

First, a US chapter 11 debtor operates as a “debtor in possession” and may continue to purchase goods and services in the ordinary course of business, even after the bankruptcy petition is filed. The goal is for the debtor to reorganize, restructure, and emerge from bankruptcy. Contractual clauses providing for a default or termination upon insolvency (so-called “ipso facto” clauses) are unenforceable. Generally, only the debtor can assume or reject contracts, subject to creditor objections, and ultimately, US Bankruptcy Court approval. So, for example, an ipso facto clause in a “service contract” between a shipper and an ocean common carrier is generally unenforceable upon the shipper’s bankruptcy, and the creditor-carrier must continue to carry the shipper-debtor’s cargo until the service contract naturally expires, the contract is rejected by the debtor, or relief is obtained from the US Bankruptcy Court.

Second, a chapter 11 debtor is protected by the US Bankruptcy Code’s “automatic stay.” Section 362 of the US Bankruptcy Code generally enjoins creditors from commencing and continuing collections actions against the debtor outside of the debtor’s main bankruptcy proceeding, including staying any act to create, perfect, or enforce any lien against debtor property. This aspect of the US Bankruptcy Code can greatly impact the rights of maritime creditors, who might have unrecorded-but-enforceable possessory liens for freight carried or statutory liens for “necessaries” provided. Although it might be tempting to try to avoid the bankruptcy and enforce these liens by, for example, arresting a vessel, it is prudent to first ask the US Bankruptcy Court for, what is called, “stay relief.” A creditor who violates the automatic stay will be liable to the debtor for damages. Furthermore, if the US Bankruptcy Court determines that the creditor “willfully” violated the automatic stay, the creditor might also be liable for punitive damages. So, for example, a creditor-bunker supplier who has a statutory maritime lien on a debtor’s vessel should think twice before arresting the debtor’s vessel to enforce its maritime lien.

Third, at or near the beginning of a bankruptcy proceeding, the debtor will give notice to its creditors of the opportunity to file a “proof of claim.” This short form might appear straight-forward on its face, but it does much more than simply state the dollar amount of a creditor’s claim. By filing a proof of claim, the creditor submits to the jurisdiction of the US Bankruptcy Court. The proof of claim also informs the debtor what kind of claim the creditor is asserting.  Is the creditor’s claim secured or entitled to priority that would require it be paid ahead of other claims? For example, Section 503(b)(9) of the US Bankruptcy Code allows a creditor to assert an “administrative priority claim” for goods delivered to the debtor within the 20-day period prior to the debtor’s bankruptcy petition. So, for example, a seller-creditor should carefully analyze its pre-petition claim to ensure that, if the requirements are met, the buyer-debtor treats its claim with administrative priority.

Fourth, compounding a creditor’s frustration with potentially not being fully paid for goods and/or services provided to a debtor, a creditor must also be concerned about “preference” actions. Sections 547 and 550 of the US Bankruptcy Code allow a debtor to claw-back some payments made to creditors within the 90-day period prior to the debtor’s bankruptcy filing. Notwithstanding the foregoing, it is important to remember that US Bankruptcy Courts are courts of equity and debtors are frequently motivated to make deals to avoid costly and lengthy litigation for the purpose of maximizing distributions to their creditors. It is not unusual in the context of international maritime transportation and supply chain bankruptcies for a debtor to negotiate settlements with maritime lienors and administrative priority creditors. These negotiated settlements may settle pre-petition claims (including liens and administrative or priority claims) and potential preference claims, while also setting the terms under which a creditor might continue providing post-petition goods and/or services to the debtor.

Montgomery McCracken’s Maritime & Transportation and Bankruptcy & Financial Restructuring Practice Groups are experienced and engaged in all aspects of maritime and bankruptcy litigation and arbitration throughout the US. We are working remotely during the coronavirus pandemic and remain available to assist you. Please contact Robert “Bobby” O’Connor at roconnor@mmwr.com or +1 (516) 993-4471, Edward “Ed” Schnitzer at eschnitzer@mmwr.com or +1 (212) 551-7781, and Alfred “Fred” Kuffler at akuffler@mmwr.com or +1 (267) 342-0325 if you have any questions or comments. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.