By: Joseph Briggett
The Ninth Circuit recently issued a decision on the friction between admiralty jurisdiction and bankruptcy jurisdiction in cases involving seized vessels. The decision reached two conclusions that limit commonly accepted principles of the jurisdiction of bankruptcy courts: 1) that the federal district court retained in rem jurisdiction over a constructively seized vessel, even after the owner of the vessel filed a bankruptcy petition, and 2) that the bankruptcy court, in ordering a sale under Section 363 of the Bankruptcy Code, could not adjudicate and extinguish a seaman’s maritime lien.
The first of these two issues represents a return to old orthodoxy on vessel seizures. The question concerns the dueling jurisdiction of two courts. A holder of a maritime lien commences an admiralty foreclosure proceeding against a vessel in federal district court. Then, the owner of the vessel files a petition for relief in federal bankruptcy court. Which court has in rem jurisdiction over the vessel? Up until around the time of Congress’ reforms of the Bankruptcy Code in 1978, most courts had concluded that the federal district court retained jurisdiction over the vessel under the ancient doctrine of custodia legis. But it is now “relatively well settled” that when the vessel owner files bankruptcy, the automatic stay transfers power over the vessel to the bankruptcy court. Atl. Richfield Co. v. Good Hope Refineries, Inc., 804 F.2d 865, 869-70, 1980 AMC 470, 472 (5th Cir. 1979); See Stewart F. Peck, Navigating the Murky Waters of Admiralty and Bankruptcy Law, 87 Tul. L. Rev. 955, 967 (2013).
Barnes bucks this trend toward the primacy of bankruptcy jurisdiction. The Ninth Circuit did not expressly mention or analyze the many circuit court decisions that have held that a bankruptcy court’s exclusive in rem jurisdiction over property of the estate ousts the jurisdiction of a previously filed in rem action in federal district court. It relied on the general doctrine that in a conflict between two courts obtaining jurisdiction over a res, the one that first obtained that jurisdiction will control.
Given the lack of persuasive analysis on the issue, subsequent courts faced with this jurisdictional quandary, particularly those outside of the Ninth Circuit, may regard this decision as an outlier. The case concerned the maritime lien of a seaman and his right to maintenance and cure, and the court discussed the paramount importance of vindicating seaman’s liens. It cited prior Ninth Circuit decisions holding that “the automatic stay provision does not expressly refer to maritime liens, which, when owed to seamen as a consequence of their service, are sacred liens entitled to protection as long as a plank of the ship remains.” United States v. ZP Chandon, 889 F.2d 233, 238 (9th Cir. 1989) (quoting The John G. Stevens, 170 U.S. 113, 119 (1898)). The decision may therefore also be limited to cases involving seamans’ liens.
The second issue regarding power to extinguish maritime liens is a narrower, but equally complicated question. Bankruptcy courts routinely order the sale of a debtor’s property free and clear of liens under Section 363 of the Bankruptcy Code. That provision allows the bankruptcy court to sell property of the estate, after notice and a hearing. To do this in any meaningful way, the court must have the jurisdictional power to extinguish any liens against the property. There is no question that a bankruptcy court has this power in the context of, for example, real estate sales. After notice and a hearing, the court has full power to sell a parcel of real estate owned by the debtor and discharge any mortgages, liens or encumbrances held by third parties, as long as those parties are given notice and an opportunity to be heard. Whether a bankruptcy court, which is not an Article III court, has the power to extinguish maritime liens, however, has long perplexed courts and scholars.
The court in Barnes held that the bankruptcy court lacked the power to order the sale of the M/V Tenahi free and clear of Mr. Barnes’ maritime lien. It based this decision on the principle that maritime liens may only be adjudicated and extinguished according to admiralty law. The bankruptcy court, it reasoned, applied bankruptcy law and, in so doing, lacked the authority to extinguish the maritime lien.
The distinction between applying bankruptcy law or admiralty law is an important one for sales of maritime assets in bankruptcy court. In such a sale, it is incumbent upon the attorney for the debtor or trustee to bring issues of admiralty law before the court so that the sale order complies with admiralty law. Moreover, the process for the sale should comply with notice and procedural requirements that would apply in an admiralty foreclosure. Provided the trustee or debtor follow these procedures in obtaining approval of the sale, it stands to reason that it would meet the standard set forth in Barnes that the bankruptcy court “be required to [order a vessel sale] pursuant to admiralty law.”
Commentators have raised a related issue in this context: whether bankruptcy judges’ status as non-Article III judges might preclude them from discharging maritime liens. This issue did not enter into the reasoning of the court in Barnes. The court did, however, address another related issue of consent and waiver of objection to jurisdiction. It acknowledged the exception that a bankruptcy court may extinguish a maritime lien when the maritime lien holder has voluntarily submitted its claim before the bankruptcy court, citing a decision of the U.S. Second Circuit Court of Appeals, authored by its erstwhile Judge Sonia Sotomayor. In re Millenium Seacarriers, Inc. 419 F.3d 83, 95–96 (2d. Cir. 2005). It is an important practical consideration that maritime lienholders should be cautious about submitting their claims to a bankruptcy court (for example,. by filing a proof of claim), or else risk losing their rights to challenge the bankruptcy court’s jurisdiction.
Lugenbuhl's admiralty & maritime law group provides its clients in the onshore and offshore oilfield-service and alternative energy sectors with a wide range of services. More information about the firm's admiralty & maritime practice is available here. Lugenbuhl also provides special expertise in maritime reorganization proceedings. More information about the firm's bankruptcy, restructuring & creditors' rights practice is available here.
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