United States: Viable Choices For The Restructuring Of U.S. And Non-U.S. Maritime Companies

A Primer on Chapter 11 and Chapter 15

Chapter 11 and Chapter 15 of the United States Bankruptcy Code (the "Code") should be viewed as debtor friendly and helpful in facilitating restructurings. Chapter 11 is a flexible way for a U.S. or foreign entity to reorganize its business, operations, and capital structure. Chapter 15, which was added to the Code in 2005 and incorporates the Model Law on Cross Border Insolvency drafted by the United Nations Commission on International Trade Law, is a valuable tool that can be used to assist with crossborder bankruptcy issues and thus, due to the nature of the maritime industry, is very attractive for maritime restructurings. Some of the benefits of Chapters 11 and 15 are outlined below.

Chapter 11 – Overview

In a Chapter 11 case, a debtor is reorganized pursuant to a plan filed with the bankruptcy court. The petition may be voluntarily filed by the debtor or involuntarily filed by creditors that meet certain requirements. An important aspect of Chapter 11 is that the debtor may retain control of its business operations as a debtor-in-possession.

Who can be a Debtor in the U.S.

It is necessary to have some minimal contact with the U.S. in order to file a Chapter 11 case as a debtor under the Code. Minimal contact has been interpreted by the courts to include as little as $100 in a bank account located in the U.S. or through domicile, place of business or some other ownership of property in the U.S.

Consequences of a Chapter 11 Filing

Once a Chapter 11 case has been filed, an automatic stay under the Code is invoked. This prohibits all creditors, generally worldwide, from attempting to enforce any obligations of the debtor or taking possession of any of the debtor's assets. The debtor is also shielded from making payments on any debt incurred prior to the initiation of the bankruptcy case without an order of the bankruptcy court; however, to continue its business operations during the bankruptcy proceedings, a debtor will typically request permission from the bankruptcy court to pay ordinary business expenses.

Pending the outcome of a Chapter 11 case, debtors have the right to reject or renegotiate executory contracts, such as charters, leases, labor union contracts or supply contracts. The parties to an executory contract that has been rejected become unsecured creditors of the debtor.

Chapter 15 – Overview

Due to the international nature of the maritime industry, Chapter 15 is especially useful in maritime matters. Chapter 15 outlines the procedures for U.S. bankruptcy courts to facilitate foreign insolvency cases. The U.S. court action will generally be ancillary, or secondary, to a proceeding brought in a foreign jurisdiction. Chapter 15 can be used by a debtor to protect its assets and interests within the U.S. and to ensure judicial notice by U.S. courts of any foreign proceeding. A Chapter 15 case is commenced by a representative of the debtor.

Following a valid petition for Chapter 15 relief, the court is required to recognize the foreign proceeding as either a foreign main proceeding (a proceeding in a country where the debtor's primary business activities exist) or a foreign non-main proceeding (a proceeding in a country where the debtor has an establishment but not its primary business activities). Chapter 15 gives the courts general power to provide assistance to the representative filing a Chapter 15 case so long as certain factors are met (generally such factors relate to just treatment and protection of creditors).

One difference between a Chapter 15 case and a Chapter 11 case is the application of an automatic stay. As previously mentioned, an automatic stay is invoked as soon as a Chapter 11 case is filed. This prohibits creditors from attempting to enforce any obligations of the debtor to take possession of the debtor's assets. However, in a Chapter 15 case, an automatic stay is only "automatic" where a foreign proceeding has been deemed a foreign main proceeding by the courts. If a foreign proceeding has been deemed a foreign non-main proceeding by the courts in a Chapter 15 case, any relief requested by the debtor is at the discretion of the court and must be "necessary to protect the assets of the debtor or the interests of the creditors."

Recent Maritime Activity

A few maritime debtors have recently taken advantage of the benefits of Chapter 15, bringing it to the forefront as a viable option for maritime companies with foreign businesses seeking protection for their U.S. assets.

After suffering losses on defaulting charters, one such maritime debtor filed a bankruptcy proceeding in Singapore and subsequently filed for Chapter 15 protection in New York to protect its U.S. assets. Similarly, another maritime debtor who was unable to service its debt, filed a bankruptcy petition in Denmark and subsequently filed for Chapter 15 protection in New York. Most recently Samsun Logix, a maritime debtor that was forced into an insolvency proceeding in South Korea due to plunging rates and subcharterer insolvencies, also subsequently filed for Chapter 15 protection in New York. The judge in the Samsun Logix Chapter 15 case granted the application of a stay from any action or proceeding against the debtor in order to protect the debtor and its U.S. assets for the pendency of the South Korean insolvency proceeding. All three cases are still pending but highlight the importance of Chapter 15 in assisting foreign debtors to prevent inequitable distribution and protection of U.S. assets. It is essential that a maritime debtor with assets in the U.S. that might need to seek the protection of courts in either the U.S. or a foreign jurisdiction contemplate Chapters 11 and 15.

About Blank Rome's Restructuring Group — How can we help?

Blank Rome has an unmatched capability to provide one-stop shopping for financial restructurings in the maritime industry to debtors, investment bankers, secured creditors, creditor committees, lenders, purchasers, and unsecured creditors. Blank Rome has extensive experience in both Chapter 11 and Chapter 15 representations. Some of Blank Rome's recent Chapter 15 representations include the Air Canada case, where we acted as counsel to the foreign representative of an international airline in an ancillary proceeding. Another notable representation was that of SK Global, where Blank Rome acted as counsel to the foreign representative in an ancillary proceeding.

Chambers USA gives high marks to our bankruptcy practice and recognizes eight of our bankruptcy and restructuring team members. The American Lawyer's Corporate Scoreboard 2008 ranked our bankruptcy practice at the top. We served as creditors' committee counsel for two of the largest bankruptcy filings in 2007, and TheDeal.com has ranked Blank Rome among the top five bankruptcy law firms and individually ranked several of the attorneys in our bankruptcy practice as nationally prominent. In addition, three of our bankruptcy attorneys are fellows of the prestigious American College of Bankruptcy, our former group chair is a regent of the American College of Bankruptcy, and one partner served as chairman of the American College of Bankruptcy Foundation and is a past chair of the American College of Bankruptcy. Many members of the group write and lecture extensively on issues involving corporate restructuring and bankruptcy.

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.