United States: International Shipping Companies Successfully Navigate Chapter 11 With Prenegotiated Plans Of Reorganization

The recent depression in the maritime shipping industry served as the catalyst for many shipping companies to restructure. During the past few years, a number of foreign-based shipping companies have sought protection from creditors in U.S. Bankruptcy Courts—with varying degrees of success.

Debtor-friendly U.S. reorganization laws and the extraterritorial application of U.S. court orders have been cited as reasons these companies seek protection in the U.S. Both are necessary for an industry in which the primary assets are constantly moving from one jurisdiction to another and creditors span the globe.1 Had these companies filed their cases in jurisdictions outside the U.S., they could have been forced to liquidate, as dictated by law in many other countries.

Although several foreign-based shipping companies with virtually no U.S. assets have recently filed for Chapter 11, Bankruptcy Courts have been reluctant to dismiss these cases for lack of jurisdiction. This willingness to entertain such cases has created an inviting refuge for foreign shipping companies whose assets, operations and employees lie outside the U.S.

While Bankruptcy Courts have provided these companies with a safe harbor initially, restructuring efforts by these debtors have had mixed results. Those that were unable to negotiate prearranged restructuring agreements with their lenders have typically failed in their reorganization efforts.

The recent filing with a prepackaged Chapter 11 plan by Genco Shipping & Trading Ltd. ("Genco") and its affiliates highlights the importance and value of a consensual restructuring. With its lenders on board and trade creditors being paid in full, Genco is set to have a confirmation hearing on its plan within 45 days of filing, providing as little disruption to its operations as possible. Genco hopes to continue the trend of successful restructurings for shipping companies with consensual deals, avoiding the pitfalls of those filed without an agreement from their lenders.

Debtor Eligibility Requirements

Pursuant to Section 109 of the U.S. Bankruptcy Code, "only a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under this title." 11 U.S.C. §109(a). If a proposed debtor is not eligible under Section 109(a), then the Bankruptcy Court does not have jurisdiction to hear the case.

However, the Bankruptcy Code is silent as to what amount of "property in the United States" is needed to satisfy Section 109(a) so that a foreign company becomes an eligible debtor. Essentially, parties may establish eligibility as a debtor, so long as any property is present in the United States.2 Two recent Bankruptcy Court decisions relating to foreign shipping companies have only strengthened this interpretation of Section 109(a).

In 2011, Marco Polo Seatrade (MPS) and three affiliates filed for bankruptcy protection in the Southern District of New York. MPS, a Netherlands-based shipping company, owed its foreign-based secured lenders about $210 million, collateralized by the company's ships, at the time of filing. Shortly after the filing, Credit Agricole and Royal Bank of Scotland, both secured lenders, moved to dismiss the cases on the grounds that MPS failed to meet the debtor eligibility requirements of Section 109(a).

In its motion, Royal Bank of Scotland pointed to a number of factors favoring dismissal, including: (i) the debtors were foreign entities; (ii) the debtors' ships operated under foreign flags; (iii) the debtors' principal offices were in the Netherlands; (iv) the debtors had no offices or employees in the U.S.; (v) the debtors' business operated primarily in foreign waters; (vi) the debtors' loan documents were governed by foreign law and provided for foreign courts to have exclusive jurisdiction over disputes involving the loans; (vii) the debtors' secured creditors were foreign entities; and (viii) the members of the unsecured creditors' committee were foreign entities.3

MPS countered that its property in the U.S. was sufficient to establish eligibility under Section 109(a), citing an interest it held in funds in a pooling account located in the U.S. and a prepetition retainer held by its U.S.-based bankruptcy counsel.4 MPS further argued that it had business records and ongoing business in the U.S. because its ships would sometimes visit U.S. ports.

In ruling for the debtor, the Bankruptcy Court found that the funds held by MPS's counsel in New York and those in the pooling account were sufficient to satisfy Section 109's eligibility requirements.5 However, despite prevailing against the motion to dismiss early in the bankruptcy case, MPS was unable to reorganize successfully because it could not reach a consensual restructuring agreement with its lenders. A joint plan of liquidation was confirmed on August 14, 2012, with Credit Agricole and Royal Bank of Scotland ultimately receiving their collateral (the ships) in satisfaction of their claims.6

Another international shipping company faced questions about jurisdiction and eligibility in the Chapter 11 filing In re TMT Procurement Corporation, et al.7 TMT, a shipping company based in Taiwan, filed Chapter 11 petitions on June 20, 2013, in the Southern District of Texas. At the first-day hearing, the Bankruptcy Court took up the issue of jurisdiction and TMT's eligibility to be a debtor in the U.S. The court noted that while jurisdiction is technically governed by 28 U.S.C. § 1334, courts do not exercise jurisdiction over parties that are not eligible to be debtors under Section 109(a).8

Despite the arguments and evidence presented alleging that eligibility had been manufactured on the eve of the bankruptcy filing, the court found that TMT was eligible to be a debtor under Section 109 based on prepetition retainers held by the company's U.S.-based financial and legal advisors.9 However, the court reserved the issue of whether such minimal and manufactured contacts were grounds for dismissal as a bad faith filing.10

Shortly thereafter, several of TMT's secured lenders sought to have the case dismissed, arguing that the minimal contacts with the U.S. and the fact that such contacts were manufactured on the eve of filing were grounds for dismissal as a bad faith filing.11 As was the case in MPS, these lenders cited a number of factors that they said weighed in favor of dismissing the case, including: (i) all of the debtors other than TMT USA Shipmanagement LLC were foreign entities; (ii) the debtors were headquartered in Taipei; (iii) the debtors' vessels were located in foreign waters and operated under foreign flags; (iv) the debtors' secured creditors were all foreign entities and all loan documents were governed by foreign law; (v) other than TMT USA, the debtors had no offices, employees or property in the U.S.; (vii) TMT USA was incorporated in the U.S. less than two weeks before the bankruptcy filing; and (viii) TMT's only asset other than its interest in the retainers held by its bankruptcy professionals was an interest in a receivable from a U.S. company.12

In its ruling, the court decided not to revisit the issue of whether the retainer held by TMT's U.S.-based professionals was sufficient to meet jurisdiction and eligibility requirements. The court denied dismissal of the bankruptcy cases, holding that the cases were filed in good faith.13 The court based its decision on whether the debtors filed bankruptcy to accomplish, and in fact could accomplish, a financial restructuring of their debts.

Interestingly, as a condition to allowing the company to proceed with its Chapter 11, the Bankruptcy Court required that TMT or an affiliate transfer non-debtor property with a value of about $40 million to the court's control to: (i) ensure TMT's compliance with court orders; (ii) fund payment of any sanctions ordered by the court against TMT or its principals; and (iii) satisfy amounts that may be owed to the lenders for failure of adequate protection. Accordingly, TMT's ability to pursue its bankruptcy cases was conditioned on the company depositing substantial funds within the jurisdiction of the Bankruptcy Court. The lenders appealed these decisions, and the District Court affirmed the Bankruptcy Court's rulings.

Sink or Swim

While the MPS and TMT cases make clear that foreign shipping companies with de minimus assets in the U.S. are likely to find an initial safe harbor in U.S. Bankruptcy Courts, smooth sailing from there is by no means guaranteed. As noted, MPS concluded with confirmation of a liquidating plan and the company's ships being turned over to its secured lenders.

Another shipping case, In re Baytown Navigation, Inc., et al., also ended in confirmation of a liquidating plan with the foreign-based secured lenders ultimately having their collateral (the ships) turned over to them.14 The Greek-based debtor was unable to negotiate a consensual restructuring with its secured lenders and was forced to liquidate.

TMT appears to be following a path similar to Baytown and MPS. Since the court denied the motions to dismiss, TMT has been embroiled in litigation with its secured lenders. Several appeals were filed and the District Court went so far as to withdraw the reference of the entire bankruptcy case for several months. Motions to dismiss have been re-urged, and several lift stay motions have been filed by the secured lenders.

While the Bankruptcy Court ordered mediation, that has not yet occurred, and the prospect for a successful mediated resolution in unclear. Absent a consensual restructuring agreement with its secured lenders, TMT may be headed for the same fate as Baytown and MPS—a failure to reorganize followed by a controlled liquidation of its ships.

This is not to say that all foreign shipping restructurings in the U.S. are doomed. Several global shipping companies have successfully reorganized recently in Chapter 11. Shortly after MPS was filed, General Maritime Corporation Inc. and its affiliated companies (collectively, GenMar), a Marshall Island incorporated debtor, filed bankruptcy in the Southern District of New York. The results of this case stand in stark contrast to those in MPS.

The day before filing bankruptcy, GenMar entered into a restructuring support agreement with its first lien lenders and other secured creditors to effectuate a restructuring. With significant creditor constituencies on board, the restructuring encountered smooth sailing. In less than six months, GenMar was able to confirm a plan of reorganization that was accepted by all voting classes of claims.15

Similarly, Ireland-based TBS International Limited and its affiliates navigated bankruptcy without any problems. TBS filed a prepackaged plan of reorganization and disclosure statement in February 2012 in the Southern District of New York after reaching restructuring agreements with four separate lending groups. The prepackaged plan consolidated the four lending groups and provided for payment of all general unsecured claims in full. The plan of reorganization in TBS's case was confirmed in less than two months.

Additionally, Excel Maritime Carriers Ltd., a Greek shipping company, and its affiliates filed for bankruptcy protection in the Southern District of New York last July. Like GenMar and TBS, Excel had a plan support agreement in place with its senior secured lenders and filed a plan of reorganization consistent with the agreement as part of its first-day pleadings.

With the secured lenders on board, Excel entered into mediation post-petition with the unsecured creditors' committee and other parties to resolve issues related to their proposed plan. As a result of its efforts, Excel was able to confirm a plan that was accepted overwhelmingly by all voting classes less than seven months after filing.16

Finally, most recently, Genco Shipping and Trading Limited and its affiliated entities ("Genco"), a Marshall Islands incorporated shipping company with substantially all of its assets and operations located outside of U.S. jurisdiction, filed for bankruptcy protection in the Southern District of New York on April 21, 2014. Genco is seeking approval of a prepackaged Chapter 11 plan that would convert the outstanding senior secured debt into equity in the reorganized entities, pay general unsecured trade creditors in full, and provide a small recovery for existing equity. A hearing on confirmation of Genco's prepackaged Chapter 11 plan is set for June 23-24, 2014.

Lessons Learned

Two lessons can be learned from recent bankruptcy filings in the U.S. by foreign shipping companies. First, if the foreign companies have de minimus property in the U.S., such as retainers held by their U.S.-based professionals, courts will likely consider them eligible to proceed in bankruptcy. Second, while bankruptcy may provide an initial breathing spell from creditors, it cannot change the financial realities faced by distressed shipping companies or the current state of the market.

The shipping companies that have experienced success in Chapter 11 each had a consensual restructuring in place with their secured lenders prior to filing. Those that have pursued free fall bankruptcies, such as MPS, Baytown and TMT, have thus far found themselves embroiled in costly litigation which, in the cases of Baytown and MPS, resulted in a failed reorganization followed by a liquidation of the debtor's assets.

Footnotes

1. See, e.g., Tr. H'rg July 11, 2011, 14:17 to 15:6, in In re Baytown Navigation, Inc. et al., Case No. 11-35926 (Bankr. S.D. Tex. July 11, 2011).

2. U.S. Bankruptcy Courts have frequently found that any amount of property in the U.S. is sufficient to satisfy Section 109(a) and establish jurisdiction in the U.S. for a foreign company. See In re Global Ocean Carriers, Ltd., 251 B.R. 31, 37-40 (Bankr. D. Del. 2000) (finding debtors eligible where only property in U.S. was cash of less than $100,000 in two bank accounts and $400,000 held as retainer by counsel to the debtors); In re McTague, 198 B.R. 428, 431-32 (Bankr. W.D.N.Y. 1996) (finding $194 in a bank account sufficient to satisfy Section 109(a)); In re Spanish Cay Co., Ltd., 161 B.R. 715, 721-22 (Bankr. S.D. Fla. 1993) (advertising and marketing material, office equipment and a bank account containing $100, was sufficient property in the United States to create eligibility to file bankruptcy); In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235, 249 (Bankr. S.D.N.Y. 2004) (explaining that Section 109(a) would be satisfied if claims that the debtor-owned subsidiary that was a U.S. company and had a bank account in the U.S. were substantiated); In re Iglesias, 226 B.R. 721, 722–23 (Bankr. S.D. Fla. 1998) (finding $500 in a bank account sufficient predicate under Section 109 in an individual Chapter 7 case).

3. See Motion of the Royal Bank of Scotland PLC Pursuant to 11 U.S.C. §§ 105(a), 362(d), 305(a), and 1112(b) for Entry of Order (I)(A) Suspending Chapter 11 Cases or Granting Relief from the Automatic Stay and (B) Dismissing Chapter 11 Cases, or Alternatively, (II) Dismissing Chapter 11 Cases or Granting Relief from the Automatic Stay [Docket No. 120] in In re Marco Polo Seatrade B.V., et al., Case No. 11-13634 (Bankr. S.D.N.Y. Sept. 12, 2011).

4. See Post-Trial Brief of Debtors and Debtors in Possession [Docket No. 209] in In re Marco Polo Seatrade B.V., et al., Case No. 11-13634 (Bankr. S.D.N.Y. Oct. 19, 2011).

5. Tr. H'rg. October 21, 2011, 488: 11-19 [Docket No. 222] in In re Marco Polo Seatrade B.V., et al., Case No. 11-13634 (Bankr. S.D.N.Y. Oct. 26, 2011)

6. See Order Confirming First Amended Joint Plan of Liquidation [Docket No. 583] In re Marco Polo Seatrade B.V., et al., Case No. 11-13634 (Bankr. S.D.N.Y. Aug. 14, 2012)

7. TMT included the filing of 23 debtors and was originally docketed with lead debtor TMT USA Shipmanagement LLC as Case No. 13-33740. However, as discussed herein, TMT USA Shipmanagement LLC was dismissed as a debtor, and the case is currently proceeding under lead case In re TMT Procurement Corporation, et al., Case No. 13-33763 in United States Bankruptcy Court of the Southern District of Texas.

8. See Tr. Hr'g June 24, 2013, at 235: 6-16 in In re TMT Procurement Corp., et al., Case No. 13-33763 (Bankr. S.D. Tex.).

9. Id. at 236:22 to 240:10.

10. Id. at 234:14-18.

11. See, e.g., Brief in Support of Emergency Motion for Entry of an Order Dismissing with Prejudice the Debtors' Chapter 11 Cases Pursuant to Sections 105(a), 305(a), and/or 1112(b) of the Bankruptcy Code [Docket No. 92] in In re TMT Procurement Corp., et al., Case No. 13-33763 (Bankr. S.D.Tex. July 15, 2013).

12. Id.

13. See Order [Docket 134] in In re TMT Procurement Corp., et al., Case No. 13-33763 (Bankr. S.D. Tex. July 23, 2013) granting in part and denying in part the joint motion to dismiss (the Dismissal Order); Tr. Hr'g July 18, 2013 at 295:11 to 296:12 in In re TMT Procurement Corp., et al., Case No. 13-33763 (Bankr. S.D.Tex.).

14. In Baytown, motions to dismiss or alternatively lift the stay were filed early in the case, but the issue of jurisdiction and eligibility were not specifically litigated as in MPS and TMT.

15. See Order Confirming Second Amended Joint Plan of Reorganization of the Debtors Under Chapter 11 of the Bankruptcy Code [Docket No. 794] in In re General Maritime Corp., et al, Case No. 11-15285 (Bankr. S.D.N.Y. May 5, 2012).

16. See Findings of Fact, Conclusions of Law and Order Confirming the Amended Joint Chapter 11 Plan of Reorganization of Excel Maritime Carriers Ltd. and Certain of its Affiliates [Docket No. 551] in In re Excel Maritime Carriers Ltd., et al., Case No. 13-23060 (Bankr. S.D.N.Y. Jan. 23, 2014).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.