Early this year, it looked as though the Supreme Court might be called on to resolve a split of circuits to identify the winners and losers in maritime lien litigation resulting from the bankruptcy of what had been the world’s largest supplier of bunkers, the name given to fuel for oceangoing vessels.
As the result of an opinion by the Eleventh Circuit on Nov. 30, the likelihood of a circuit split is diminishing, and the scales are tipping in favor of secured lenders at the expense of subcontractors who actually supply fuel.
Perhaps surprisingly, it’s looking as though merely supplying “necessaries” for a vessel will not necessarily give rise to a maritime lien.
The Alabama Litigation
Like two cases early this year in other states, a lawsuit in district court in Alabama arose from the insolvency of the Danish parent company of the O.W. Bunker Group, which initially attempted to reorganize in Denmark. 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 disputes arose from the same fact pattern: A ship owner would contract with O.W. Bunker to supply bunkers. O.W. Bunker, as the general contractor, would then subcontract with local suppliers to provide fuel to the vessels.
O.W. Bunker’s bankruptcy occurred before some ship owners had paid for fuel. O.W. Bunker, its secured lender, and the local subcontractors all demanded payment from the vessel owners. Not sure whom to pay, the ship owners commenced dozens of interpleader actions around the U.S. to avoid having their vessels arrested. The bankruptcy court’s jurisdiction was not broad enough to resolve the disputes.
The appeal in the Eleventh Circuit resulted from a lawsuit in Alabama, where the magistrate judge held a trial on consent and ruled that the local subcontractor did not have a maritime lien, although it had supplied the fuel. Instead, the Alabama court concluded that O.W. Bunker held the lien, which had been assigned to O.W. Bunker’s secured lender, thus allowing the lender to collect from the ship owner.
The Lawsuits in Early 2017
Much like the Alabama magistrate judge, District Judge Valerie Caproni in Manhattan ruled in early January 2017 that O.W. Bunker had the maritime lien, not the actual supplier of the fuel. She reserved the question of whether the lien was assigned to the lender. To read ABI’s discussion of Clearlake Shipping Pte. Ltd. v. O.W. Bunker (Switzerland) SA, 14-9287, 2017 BL 5738 (S.D.N.Y. Jan. 9, 2017), click here.
Later in January, District Judge Robert L. Hinkle of Tallahassee, Fla., reached the polar opposite conclusion, saying that Judge Caproni’s ruling gave the bank a “windfall” and was wrong as “a matter of common sense and simple fairness.” Resting his opinion on the Eleventh Circuit’s decision in Galehead Inc. v. M/V Anglia, 183 F.3d 1241 (11th Cir. 1999), Judge Hinkle granted the lien to the subcontractor who actually supplied the fuel, saying it was “the only distribution that accords with common sense.” To read ABI’s discussion of Judge Hinkle’s decision, click here.
The appeals to the Second and Eleventh Circuits from the decisions by District Judges Caproni and Hinkle are nearing oral argument, as are other appeals from similar cases decided by District Judge Katherine B. Forrest of New York.
The Eleventh Circuit’s Opinion
In her Nov. 30 opinion for the Atlanta-based appeals court, Circuit Judge Susan H. Black construed the Federal Maritime Lien Act. In particular, she based her decision on 46 U.S.C. § 31342(a), which provides that a person who provides “necessaries to a vessel on the order of the owner or a person authorized by the owner . . . has a maritime lien on the vessel . . . .”
For Judge Black, the controlling question was whether the subcontractor supplied fuel “on the order of the owner.”
Like District Judge Hinkle, Judge Black found the answer in Galehead, but she reached the opposite conclusion and ruled in favor of the lender.
Galehead, she said, stands for the principle that a subcontractor retained by a general contractor like O.W. Bunker “to perform work or provide the supplies is generally not entitled to a maritime lien.” Unless there are facts showing that the owner designated the general contractor as its agent, “a general contractor does not have authority to bind the ship,” Judge Black said.
The general contractor, according to Judge Black, is the entity that supplies necessaries for the ship on order of the owner. Whether the general contractor supplies the fuel itself or through subcontractors “is immaterial,” she said.
Judge Black recognized that Galehead has an exception that would be applicable to a subcontractor who provided “extensive maintenance, such as painting, coating, and cleaning” and developed a relationship with the owner “over an extended period of time.” Because the subcontractor relied on the exception for the first time on appeal, Judge Black declined to rule on it.
Having decided that the actual supplier did not have a lien, Judge Black went on to rule that O.W. Bunker had “provided” the fuel. Relying again on Galehead and general principles of contract law, she said that a general contractor can satisfy its performance obligations by using a subcontractor.
Ultimately, the secured lender came out on top because Judge Black agreed that O.W. Bunker had assigned its lien to the bank.
Judge Black’s opinion implies that the Eleventh Circuit is likely to reverse District Judge Hinkle, unless the appeals courts finds that the Galehead exception is applicable.
In future cases, subcontractors who actually supply fuel or other necessaries may be able to alter this outcome by modifying their contracts. Although not addressing the issue directly, a Nov. 29 decision by District Judge Charles S. Haight Jr. opened the door to that possibility when he ruled that an arbitration clause in an O.W. Bunker contract was overcome by the subcontractor’s paperwork. See NCL (Bahamas) Ltd. v. O.W. Bunker USA Inc., 17-1327 (D. Conn. Nov. 29, 2017).