It’s looking like the Supreme Court will be required to clean up the mess created when O.W. Bunker A/S put subsidiaries into chapter 11 in Connecticut alongside its own bankruptcy in Denmark. The bankruptcies spawned lawsuits around the country, with district judges reaching diametrically different conclusions because the circuits are split on fundamental issues regarding maritime liens.
On Jan. 9, District Judge Valerie Caproni in Manhattan made a decision with an outcome favoring O.W. Bunker’s bank, while District Judge Robert L. Hinkle of Tallahassee, Fla., wrote a decision on Jan. 26 saying that Judge Caproni’s result gave the bank a “windfall” and was wrong as “a matter of common sense and simple fairness.”
The facts in both cases are essentially the same, although the results are polar opposites. The diverging outcomes are bred from fundamental, unresolved conflicts of circuits.
The O.W. Bunker Bankruptcy
Operating globally, O.W. Bunker was one of world’s largest suppliers of marine fuel, known as bunkers. The bankruptcy in late 2014 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. After 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.
The bankruptcy court could not resolve all resulting disputes 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. Not knowing whether to pay O.W. Bunker, O.W. Bunker’s bank or the suppliers of the physical fuel, vessel owners commenced 30 interpleader actions across the U.S. by depositing the price of the bunkers into the registry of the courts and asking the courts to decide who should get the money.
The Courts Collide Head-On
Because the Second Circuit has a policy of narrowly and strictly construing maritime liens, Judge Caproni decided earlier in January that the suppliers of the physical fuel did not have maritime liens. Instead, she concluded that O.W. Bunker held the lien. Because O.W. Bunker’s bank lender likely has a lien on receivables, Judge Caproni’s decision probably means that the purchase price for the fuel should to go the bank. To read ABI’s discussion of Judge Caproni’s decision, click here.
Fully aware of Judge Caproni’s decision to the contrary, Judge Hinkle gave the money to the supplier of the physical fuel, saying it was “the only distribution that accords with common sense.” Judge Caproni is probably not surprised that a judge elsewhere disagreed, because she said in her opinion that the Eleventh and Ninth Circuits have more lenient rules that might justify a lien based on the relationship between suppliers and ship owners.
Indeed, it was the relationship between the supplier and the ship owner that led to Judge Hinkle’s decision. He latched onto the certificate signed by the vessel’s chief engineer saying that nothing could waive the supplier’s maritime lien.
Judge Hinkle rested his decision on the Eleventh Circuit’s Galehead decision. Judge Caproni had refused to follow Galehead, saying that the Eleventh Circuit is “navigating outside the mainstream” of U.S. maritime law.
Instead, Judge Caproni employed the Second Circuit’s stricti juris approach to maritime liens. To that, Judge Hinkle said that if stricti juris means “anything other than to render an honest construction of the statute, it is a lousy canon of construction.”
Judge Hinkle reached his conclusion based on his view of the plain meaning of the federal Commercial Instruments & Maritime Lien Act, which creates and codifies common law maritime liens for “necessaries.” Even if the Eleventh Circuit’s interpretation of the CIMLA is outside of the mainstream, Judge Hinkle said his appeals court is not without company because the Ninth and Fifth Circuits come down the same way.
Florida Court Mimics Result Outside of Bankruptcy
The result reached by Judge Hinkle recreates what would have been the outcome had there been no bankruptcy.
The total purchase price for the fuel was about $290,000. Outside of bankruptcy, the supplier of the physical fuel would have received about $286,000 and O.W. Bunker would have taken a fee of some $4,000, with the bank’s lien attaching to the $4,000 fee.
“As a matter of common sense and simple fairness,” Judge Hinkle said, “anyone seeking to do justice in this situation would distribute the fund in precisely this way, achieving the parties’ intended result.” According to Judge Hinkle, awarding the maritime lien to O.W. Bunker, as Judge Caproni did, would give the bank “a windfall — a payment far beyond anything it could have achieved from the underlying transaction.” Judge Hinkle said that Judge Caproni’s decision “seemingly recognized that its result smacked of inequality.”
We resist the urge to describe the rationales employed by Judges Caproni and Hinkle in more detail, because the issues are clearly going to the circuit courts. In Judge Caproni’s case, the supplier who lost has already announced its intention to appeal to the Second Circuit, although the time for appeal is yet to arrive.
The ratio decidendi of the circuits will carry more weight, but even then, the issue seems destined for the Supreme Court, where arcane legal questions are the justices’ bread and butter.