MarAd first in line
The consolidated cases — Asamarbunker v. U.S. 5th Cir. Nos. 12-40246 & 12-40248. Feb.1 — center on the arrest of two ships and their subsequent sale to satisfy outstanding debts. The United States successfully intervened in the in rem proceedings on the basis of preferred mortgage liens on the two vessels.
Two bunker companies, Asmarbunkers and Bunkers International, challenged the federal government’s superior claim to the proceeds of the vessels’ sale. They based their challenge on the base fuel lien they possessed.
The district court granted summary judgment for the United States, and the 5th Circuit affirmed the lower court’s decision.
American Heavy Lift Corp. (AHL) owned two ships that were reconstructed in 1995. The reconstruction was financed by issuing bonds that were guaranteed by the U.S. Maritime Administration.
Under statute, MarAd’s mortgage on vessels it finances receives priority over most other creditor claims in the event of the vessel owner defaulting.
From 1995 to 2009, AHL had no problem paying the principal and interest due on the two ships, but it began to experience financial difficulties during the credit crisis of 2009.
AHL sought MarAd’s assistance with making a principal payment due in December 2009, while assuring the federal agency that it would make the relevant interest payment and it was only experiencing temporary difficulty.
Before MarAd had responded to AHL’s request, the company revised its request and asked MarAd to pay both the principal and interest due for December 2009.
As knowledge of AHL’s hardships spread throughout the shipping industry, companies that AHL dealt with began to withdraw or modify AHL’s credit, including demanding payment for fuel upfront instead of at the conclusion of a voyage, when AHL would receive payment for its services.
AHL sought alternative sources of fuel and eventually contacted the firms Asmarbunkers and Bunkers International.
The bunker companies made inquiries to other fuel suppliers to determine whether AHL was reliable, but did not seek a credit report or other financial documentation; nor did they check public records regarding outstanding mortgages on AHL’s vessels. Having satisfied themselves of AHL’s creditworthiness, the two bunker companies began supplying fuel.
Ultimately, MarAd declined to pay AHL’s principal and interest payments for December 2009, and AHL defaulted, giving MarAd the option to immediately foreclose on the mortgage. The agreements also gave AHL a grace period within which it could cure its default. MarAd elected against immediate foreclosure, but in January 2010, it was determined that AHL could not get itself out of financial difficulty, and MarAd paid the loan guaranty to the bondholders. MarAd then exercised its right to accelerate AHL’s debt and demanded immediate payment.
AHL could not remit the amount due, so MarAd negotiated surrender of the two vessels, taking control of them in April 2010.
After their arrest, the ships were sued by AHL’s creditors in rem.
The federal government moved to intervene, citing its preferred mortgage lien for some $91 million.
The bunker companies contested the United States’ position, alleging their lien for fuel took priority and the United States’ mortgage should be equitably subordinated.
The district court allowed the United States to intervene and granted summary judgment in the government’s favor.
The vessels were sold at auction for $5.7 million, satisfying only a fraction of the United States’ mortgage. AHL’s other creditors did not receive any of these funds.
The bunker companies appealed, claiming their lien for fuel supplied to AHL should take precedence over the United States’ preferred mortgage lien based on the principles of laches — the claim that another party’s inexcusable delay resulted in prejudice, or equitable subordination.
Appellants said MarAd knew about AHL’s financial difficulties before they began supplying the company with fuel. They contended they suffered prejudice as a result of MarAd’s conduct. They also sought reversal based on the district court’s failure to enforce a local rule when it considered the United States’ motion for summary judgment.
To justify equitable subordination of a valid claim, the bunker companies had to “show that (1) MarAd engaged in inequitable conduct; (2) the misconduct injured a creditor or conferred an unfair advantage on MarAd; and (3) equitable subordination is not inconsistent with statutory provisions.”
Showing MarAd is in a position of control over the debtor is generally the prerequisite to a finding of inequitable conduct, and the court said inequitable conduct exists in three categories of cases: (1) “those in which a fiduciary of the debtor misuses his position to the disadvantage of other creditors;” (2) “those in which a third party, in effect, controls the debtor to the disadvantage of others;” and (3) “those in which a third-party defrauds other creditors.”
The court said the appellants neither alleged nor demonstrated MarAd was in control of AHL, did not claim MarAd defrauded other creditors or MarAd was a fiduciary of AHL and as a result, it also could not be shown MarAd was engaged in inequitable conduct for purposes of equitable subordination.
The appellants claimed showing control over the debtor was irrelevant, but the court said they did not present persuasive precedent on point.
As to the claimants’ contention that laches applied because MarAd did not foreclose on AHL’s vessels at the first sign of financial distress, the appeals court said MarAd had no obligation to foreclose on AHL’s ships when the company first encountered financial difficulty.
The court said when MarAd opted to delay foreclosure, it did so for justifiable reasons.
Given the state of the credit market when AHL first exhibited signs of distress, the court said it was in the creditors’ interest to give AHL an opportunity to cure default.
The court said the ships’ value as collateral was minimal, and the interest rate on AHL’s bonds was far preferable to the alternatives available at the end of 2009. It was also in the interest of the industry overall given the number of jobs dependent on AHL’s continued operation.
“Any delay was thus excusable,” the court said. “To the extent appellants regret their decision to supply the ships with fuel after AHL’s default, it was not MarAd’s obligation to ensure AHL was creditworthy.”