Recent trade publications have prophesized a wave of shipping bankruptcies. We have already seen several in the United States in 2011, such as Omega and Marco Polo. Trailer Bridge and General Maritime fi led in November. There will undoubtedly be more, despite the potential debtors having little or no connection to the United States. In this respect, non-U.S. listed shipowning companies considering restructuring and reorganization may not factor in the potential for a U.S. main proceeding under Chapter 11 reorganization on the assumption that they do not qualify to be U.S. debtors. They would be mistaken; not least because of the right of resort to the U.S. bankruptcy court's expansive view of its jurisdiction to prevent interference with a Chapter 11 debtor's property wherever it is located (such as by way of vessel arrests in Hong Kong and Singapore in the U.S. Lines case that subjected the bunker supplier to a $5,000 per day penalty). This is a fairly unique U.S. concept of the restructuring protection given to a debtor. It should be noted that such protection is afforded to Chapter 15 debtors (i.e., those that have fi led their main bankruptcy case outside the U.S.) only in respect of property within the territory of the U.S. At present, the U.S. Bankruptcy Code, as interpreted by case law, provides liberal provisions for foreign companies seeking to reorganize under the protections of Chapter 11.
Who May Be a Debtor?
The Bankruptcy Code, 11 U.S.C. § 109, says that a person or entity with a U.S. residence or domicile, or a U.S. place of business or "property", qualifi es to be a U.S. debtor.
The case law interpreting "property in the United States" has expanded the potential for the fi ling by an otherwise non-resident entity. For example, in the 2009 case of Petrorig 1 Pte Ltd., et al., which was fi led in the Bankruptcy Court of the Southern District of New York, the Singapore debtor's only assets were oil rigs under construction in Singapore and a "riser"—the title to which was disputed—in Louisiana. Nevertheless, two weeks prior to the bankruptcy fi ling, they had deposited a substantial retainer with their bankruptcy counsel. That, apparently, suffi ced. The case has remained rooted in the United States.
More recently, the same judge in the 2011 Marco Polo fi ling denied the secured lenders' attempts to dismiss the case on the basis that the foreign shipowning companies failed, among other things, to qualify as U.S. debtors. He held that certain property in the U.S. was suffi cient. This included unallocated pool revenue (subject to setoffs) "in conjunction with" a legal retainer to bankruptcy counsel which, he concluded, had not been remitted solely for the purpose of manufacturing jurisdiction, because "there were contacts with the [U.S.] beyond the payment of the retainer."
In another maritime bankruptcy case, Global Ocean Carriers, which was fi led in the Bankruptcy Court of District of Delaware in 2000, business documents, various bank accounts (regardless of how much was actually in them), and an unearned portion of legal retainers held in escrow was again held to be suffi cient "property" to permit that company to qualify as a U.S. debtor.
Of significant interest is the case of Cenargo International PLC, which was filed in New York in 2003, where the debtor opened bank accounts in late 2002 and then filed for bankruptcy protection in February 2003. Those accounts were held to be "further support for a fi ling." In this case, the judge specifi cally sustained the fi ling and applied the automatic stay to one of the mortgagee banks over whom it had personal jurisdiction and thereby injunctive powers to prevent interference with the debtor's property "even if foreign courts ... chose not to enforce it."
Challenges to Jurisdiction
Notwithstanding the case law that permits even a de minimis deposit of "property" into a bank account, even where that account is held by way of a retainer by the lawyers fi ling the case, consideration should also be given to potential challenges to such "manufactured" jurisdiction based on absention or "bad faith" grounds. As always, pre-planning and consultation with counsel is advised at the earliest stage possible.
Conclusion
Napoleon's dictum that the "worst decision to make is not to make a decision" is especially true in distressed shipping cases. Secured creditors and other creditors in multiple jurisdictions may preempt the shipowner's decision whether to seek the worldwide bankruptcy protection for their trading assets (i.e. ships) afforded to U.S. debtors. By then, it may be too late and the shipowner may find itself in a liquidation proceeding—over which it may have little control—and the potential "going concern" value, as well as the potential for restructuring, will be lost to "fi re sales."
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