The U.S. side of the O.W. Bunker A/S bankruptcy is teaching marine suppliers a lesson: You might not have a maritime lien simply because you supplied goods to a vessel, especially when attempting to enforce a lien in New York.
A Jan. 9 decision by District Judge Valerie Caproni in Manhattan told vessel suppliers how they could change their business practices to avoid the losses they are facing from O.W. Bunker. Her decision highlights maritime law splits among circuits and even with another district judge in Manhattan. Absent settlement, the O.W. Bunker bankruptcy could end up with the Supreme Court deciding arcane questions of maritime law.
Based in Denmark, O.W. Bunker was a global supplier of marine fuel, known as bunkers. Before bankruptcy in late 2014, the company and its affiliates had 7% of the world market supplying bunkers to ocean-going vessels. Bankruptcy came on quickly after the Danish parent disclosed fraud at a Singapore subsidiary that cost $125 million and a separate $150 million risk-management loss from the declining price of petroleum. Bankruptcy was all the more surprising because it came on the heels of a public offering valuing the company at $980 million.
When the parent’s reorganization failed in Denmark, U.S. subsidiaries filed chapter 11 petitions in Connecticut, where a liquidating chapter 11 plan was confirmed in December 2015. Bankruptcy was not the platform for sorting out the entire financial entanglement, because petroleum suppliers who provided fuel to vessels on behalf of O.W. Bunker were asserting maritime liens against the vessels that received the goods.
In turn, the vessel owners didn’t know whom to pay. If they paid O.W. Bunker, which had arranged to supply the fuel, suppliers might arrest their vessels by asserting maritime liens for the value of the goods. Judge Caproni said the vessel owners could have faced triple liability.
Consequently, vessel owners instituted 30 interpleader actions in the U.S., where they put the price of the bunkers in the registry of the courts and asked the courts to sort out the mess by deciding who was entitled to payment. Two dozen of the interpleader actions ended up in Judge Caproni’s court, with three test cases underlying her Jan. 9 opinion.
The facts in the test cases were similar. Vessel owners contracted for O.W. Bunker to supply fuel. In turn, O.W. Bunker selected the suppliers who ultimately delivered fuel to the vessels. When O.W. Bunker’s financial problems became public knowledge, vessel owners refused to pay anyone.
In the test cases, the suppliers contended they had maritime liens entitling them to payment. Pointing out circuit conflicts in the course of her opinion, Judge Caproni decided that the suppliers had no maritime liens, even though it was undisputed that they had supplied “necessaries” to the vessels.
The outcome was governed by the federal Commercial Instruments & Maritime Lien Act, or CIMLA, which codifies common law maritime liens for “necessaries,” or supplies and services provided to vessels. As Judge Caproni explained, a valid lien for “necessaries” has three requisites: (1) the goods must be “necessaries;” (2) the goods must be “provided” to the vessels; and (3) the goods must have been delivered “upon the order of” the owner or someone authorized by the owner.
With the first two issues uncontested, the only question was whether fuel was supplied “on the order of” O.W. Bunker or the vessel owners.
Judge Caproni said the result was based on “the Second Circuit’s commitment to a strict approach to maritime liens” and the “long-standing Federal policy disfavoring maritime liens.” To avoid the assertion of a plethora of unrecorded maritime liens, she said there should be no “uncertainty in an area of the law that demands definite answers.” For example, there should be no liens on vessels resulting from disputes between contractors and subcontractors.
In large part, the result turned on facts showing that the vessel owners contracted with O.W. Bunker, not with the suppliers. In addition, the suppliers were giving credit to O.W. Bunker and were basing their decisions on O.W. Bunker’s finances, not the credit of the ship owners. The receipts signed by the vessels’ masters did not give rise to a contract between the suppliers and the ship owners, Judge Caproni said.
Subcontractors, such as the suppliers, “lack a direct connection to the vessel” and thus are not entitled to maritime liens, Judge Caproni held. In that regard, she declined to follow more lenient rules from the Ninth and Eleventh Circuits that might have justified a lien based on the attenuated relationship between the suppliers and the ship owners.
Invoking the more stringent Second Circuit standard, Judge Caproni said that the bunkers were not supplied “on the order of” the vessel owners because the suppliers were not “directly engaged” by the owners. Moreover, she said the suppliers were not entitled to liens because the owners “were indifferent to the identity of the suppliers.”
Having decided that the suppliers had no liens, Judge Caproni next analyzed whether O.W. Bunker had liens. “Until recently,” she said, courts uniformly held that “a contractor like O.W. could ‘provide’ necessaries to a vessel indirectly through performance by a subcontractor.”
Deciding that O.W. Bunker had a lien, Judge Caproni declined to follow District Judge Katherine B. Forrest in New York, who held in October 2016 that O.W. Bunker “was not a statutory ‘provider.’” Judge Forrest’s decision is on appeal, giving the Second Circuit a chance to decide whether Judge Forrest or Judge Caproni has the correct approach to maritime liens.
Nonetheless, Judge Caproni said she adopted the analysis utilized by Judge Forrest, but said that Judge Forrest reached a different result because the facts laid out on summary judgment were different.
The Second Circuit may eventually tell us whether the factual distinctions are pivotal. Judge Forrest rested her conclusion on the more equitably based fact that O.W. Bunker was in pursuit of a windfall because it had not paid the suppliers.
Looking at the equities, Judge Caproni said she sympathized with the suppliers, “which apparently believed that they held maritime liens and may be financially harmed by this court’s holding that they do not.”
The suppliers argued it would be inequitable to award O.W. Bunker with a lien without paying the suppliers who actually delivered the fuel. Although she admitted there was “some force” to the suppliers’ reliance on equity, she said the suppliers “have not seriously argued that any equitable doctrine bars O.W.’s recovery.”
To prevent a similar loss in the future, Judge Caproni explained to suppliers how they could demand an assignment of O.W. Bunker’s claims against the vessels or could have made the vessel owners parties to the supply contracts. Either alternative, though, might not have been feasible under O.W. Bunker’s own secured lending arrangements.
O.W. Bunker’s secured lender was also a party in the test cases and asserted a right to the interpleaded funds. At a later time, Judge Caproni will decide whether O.W. Bunker validly assigned its maritime liens to the bank.