OTIs and Ocean Carriers in the U.S.: Impact of Importers Filing for Bankruptcy

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1 OTIs and Ocean Carriers in the U.S.: Impact of Importers Filing for Bankruptcy Presentation by Benjamin F. Mann & Carlos Rodriguez Husch Blackwell LLP

2 With You Today Carlos Rodriguez Benjamin F. Mann

3 Lenders Lien in Goods Only one source Consensual lien granted in security agreement Governed by UCC Article 9 3

4 Marine Carriers (including NVOCCs) Multiple sources Common law maritime lien Statutory Carrier s lien Consensual lien 4

5 Common Law Maritime Lien Arises from English common law Now part of federal admiralty common law Maritime describes variety liens Lien on ship for repairs, food, provisions, injuries Lien on funds generated by use of ship freights Lien on goods by Carrier Can be asserted by NVOCC as well as physical transporter. See Logistics Management, Inc. v. One Pyramid Test Arena, 86 F.3d 908, 914 (9 th Cir. 1996) Scope of maritime Carrier s lien On goods in possession of Carrier for costs to ship those goods only Arises automatically by operation of law Terminates upon surrender of possession See The Bird of Paradise, 72 U.S. 545, 555 (1866) But, parties can agree to extend lien to survive surrender of possession into warehouse, dock or other third-party. See Arochem Corp. v. Wilomi, Inc., 962 F2d 496, 500 (5 th Cir. 1992). 5

6 Statutory Carrier s Lien Source: UCC Applicability: Any Carrier who issues bills of lading so applies to land, air and sea Carriers Scope: on goods in possession of Carrier for costs to ship those goods only arises automatically by operation of law terminates upon surrender of possession 6

7 Consensual Lien Must be in writing agreed to by the customer Sufficient credit application signed by the customer See In re Colortran, Inc., 218 B.R. 507, 509 (9 th Cir. BAP, 1997) Not sufficient invoice issued by Carrier but not signed by the customer See In re CFLC, Inc., 209 B.R. 508, (9 th Cir. BAP, 1997) Maybe sufficient bills of lading issued pursuant to tariff agreed to by the customer See Capital Transportation, Inc. v. United States, 612 F.2d 1312, 1325 (1 st Cir. 1979) Governing law consensual lien is not governed by maritime law but by state UCC law See In re Colortran, Inc., 218 B.R. 507 (5 th Cir. BAP, 1997); Maersk-Sealand v. Eurocargo Express LLC, 2004 WL (C. D. Calif. 2004); Paul Harris Stores, Inc. v. Expeditors Int l of Washington, Inc., 342 B.R. 290 (Bankr. S.D. Ind. 2006) 7

8 Perfection of Consensual Lien Filing UCC-1 lien can extend to all goods of customer Possession lien can only extend to goods in possession of Carrier 8

9 Priority of Competing Liens Maritime lien primes Lender s security interest as to: Goods in Carrier s possession for costs to ship those goods only UCC provides that Article 9 security interests are subordinate to statutory liens which arise by operation of law based on possession of the goods and secure payment on performance of an obligation for services or materials furnished with respect to the goods by a person in the ordinary course of business. (emphasis added). Similarly, statutory Carrier s lien primes Lender s security interest pursuant to UCC

10 Priority of Competing Liens (cont d.) Carrier s consensual lien can be written to grant Carrier s lien in all goods of customer for any and all shipping charges not paid but method of perfection may affect priority Perfection by possession by Carrier occurs when Carrier takes possession whereas perfection by Lender occurs when the UCC-1 is filed and Debtor obtains rights in collateral UCC govern priority of conflicting liens in the same collateral Priority goes to party who was first to file or perfect Competing liens may arise at same time but Lender s lien is filed before Carrier s lien is perfected by possession If Lender and Carrier both file UCC-1 s, then party who files first has priority Whether Lender is Lender to consignor or consignee may impact priority of carrier s lien. 10

11 Priority of Competing Liens (cont d.) Effort to create consensual Carrier s lien that is entitled to priority of Carrier s maritime lien has been rejected by the only two courts to address issue In re World Imports Ltd., Inc., 2013 WL (Bkcy. E. D. Pa. 2013) In re Guildmaster, Inc., (unreported) Case No (Bkcy. W. D. Mo. 2013) Possibility exists if language in credit application expressly states that general lien on goods in possession of Carrier for all charges for current and past shipments is governed by federal maritime common law Maritime lien can be expanded by agreement to cover prior shipments See Eagle Maritime Transport Co. v. A Cargo of Hardwood Chips, 1998 WL (E. D. La. 1998) Cases involving non-carrier maritime liens hold that maritime lien trumps UCC Article 9 lien See Walsh v. Placedo Shipping Corp., 789 F.2d 1406 (9 th Cir. 1986); Cornish Shipping Ltd. v. Int l Nederlanden Bank, 53 F.3d 499 (2 nd Cir. 1995); In re Muma Services, 322 B.R. 541 (Bankr. D. Del. 2005) 11

12 Bankruptcy of Importer/Exporter Carrier holding goods when customer files for bankruptcy should NOT surrender goods If does so, possessory lien is lost Instead file motion with court to require Debtor to satisfy possessory lien (i.e., pay the bill) or provide substitute lien on assets in possession of Debtor (i.e., lien continues per court order in surrendered assets and other assets of Debtor) Carrier who has been paid in past 90 days on prior shipments may be subject to recovery of payments as preference under 547 of Bankruptcy Code Ordinary course of business defense and subsequent new value defense may apply Carrier acting as customs broker or freight forwarder may also have preference exposure If payments made to broker/forwarder are then paid to Government (for customs) or Carrier (freight bill), mere conduit defense may be asserted, but not if importer is reimbursing for payments already made 12

13 Claims Priority for Custom Duties Good News custom duties share same claims priority as federal taxes under 507 of the Bankruptcy Code Bad News broker who pays customer duties for customer and seeks reimbursement from customer is expressly not subrogated to the claims priority See 507(d); In re Chalk Line Mfg., Inc., 181 B.R. 605 (Bkcy. N. D. Ala. 1995) 13

14 Next Steps: Check your credit application provisions to insure you have language that creates a valid consensual lien. Review your customers and determine whether, when and where to perfect your consensual lien with a UCC-1 filing. 14

15 THANK YOU Benjamin F. Mann Carlos Rodriguez

16 Questions? Husch Blackwell LLP