The prospect of a circuit split evaporated when the Second Circuit agreed with the Eleventh and held that a contractor who agrees to provide fuel to a vessel is entitled to a maritime lien, not the subcontractor who actually supplies the fuel.
In other words, physically supplying “necessaries” for a vessel will not automatically give rise to a maritime lien. The opinions by the two circuit courts feather the nest of the initial contractor’s secured lenders at the expense of those who supply physical fuel.
The decisions from the two circuits mean that suppliers of physical fuel need to revise their documents if they hope to have maritime liens, or they must insist on receiving collateral from general contractors to avoid having unsecured claims if the general contractor goes bankrupt.
The O.W. Bunker Mess
The cases in both circuits arose from the insolvency of the Danish parent of the O.W. Bunker Group. When the parent’s reorganization failed in Denmark, U.S. subsidiaries filed chapter 11 petitions in Connecticut and confirmed a liquidating chapter 11 plan in December 2015.
The underlying disputes followed the same trajectory: A ship owner or charterer contracted with O.W. Bunker to supply bunkers, the name given to fuel for oceangoing vessels. O.W. Bunker, as the general contractor, then subcontracted with local suppliers who physically supplied 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 asserted maritime liens and demanded payment from the vessel owners or charterers. Unsure of whom to pay, the ship operators commenced dozens of interpleader actions in district courts around the U.S. because the bankruptcy court’s jurisdiction was not sufficiently robust to resolve the disputes.
In late November 2017, the Eleventh Circuit upheld an Alabama magistrate judge by concluding that the supplier-subcontractor did not have a maritime lien because O.W. Bunker had “provided” the fuel. Relying on general principles of contract law, the Atlanta-based appeals court ruled that O.W. Bunker satisfied its performance obligations by using a subcontractor and was therefore entitled to the lien.
Ultimately, the secured lender came out on top because the Eleventh Circuit agreed that O.W. Bunker had assigned its lien to the bank. See Barcliff LLC v. M/V Deep Blue, 876 F.3d 1063 (11th Cir. Nov. 30, 2017). To read ABI’s discussion of Barcliff, click here.
The Second Circuit Case
The facts were fundamentally the same in the Second Circuit, but the district court’s decision was different from the case that came up in Alabama. In New York, the district court concluded that neither O.W. Bunker nor the subcontractor had maritime liens. Employing much the same analysis as the Eleventh Circuit, the Manhattan-based appeals court reversed in part in a June 13 opinion by Circuit Judge Barrington D. Parker, Jr.
The outcome is governed by a provision in the federal Maritime Lien Act, 46 U.S.C. § 31342(a), which provides that “a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner . . . has a maritime lien on the vessel . . . .”
Undercutting the court’s ability to invoke principles of equity weighing in favor of the physical supplier, Judge Parker explained that maritime liens “are disfavored by the law” and must be “construed strictly.” The outcome, he said, turns on who “provided” the fuel, since fuel undisputably is a necessary.
Judge Parker resolved the case “guided by straightforward principles of contract law,” citing the Restatement (Second) of Contracts for the proposition that a supplier may perform indirectly through a subcontractor because the “subcontractor’s performance is attributable to the contractor.” He therefore held that “necessaries are supplied . . . even if by another party.”
Identifying O.W. Bunker as the supplier meant that it held the maritime lien, not the subcontractor who actually supplied the physical fuel.
Judge Parker went on to explain away the physical supplier’s additional arguments. Among other things, he said that notions of unjust enrichment and agency did not apply. Likewise, generalized principles of contract law do not “comply with the express provisions of the [Maritime Lien Act]” and thus cannot give rise to a maritime lien.
Judge Parker therefore upheld the district court’s conclusion that the physical supplier did not have a lien, but he reversed the lower court by finding that O.W. Bunker as the general contractor did have a lien. The opinion ended with a procedural twist giving rise to another reversal.
Sua sponte, the district court had granted summary judgment in favor of the vessel, although the charterer had not filed a motion for summary judgment. Judge Parker reversed and remanded because the district court had not complied with Rule 56(f) by failing to give notice and time for the lender to respond.