In the legal battle of competing maritime lien claims against vessels whose charterers contracted with O.W. Bunker & Trading A/S or its affiliates in October-November 2014, an important decision was issued on June 13, 2018, by the U.S. Court of Appeals for the Second Circuit. The Second Circuit ruled that the physical suppliers do not have liens against the vessels. The issue of whether O.W Bunker's lending bank (the Bank) may assert a lien claim against any vessel remains a serious question. Several factors indicate that the Bank may not have secured an assignment of a U.S. maritime lien, and that O.W. Bunker's insolvency status and alleged reckless behavior at O.W. Bunker that induced charterers to purchase fuel during the critical time period preceding O.W. Bunker's ultimate bankruptcy filing may preclude it from being a "good faith" provider of necessaries.
Under the Commercial Instruments and Maritime Lien Act (CIMLA), a provider of necessaries may obtain a maritime lien against the supplied vessel under certain circumstances, if such provision was made on the order of the vessel or a person authorized by the owner (i.e., a charterer). 46 U.S.C. §31341, et seq.
Following the global collapse and bankruptcy of O.W. Bunker & Trading A/S and its global subsidiaries (collectively, O.W. Bunker) in November 2014, O.W. Bunker failed to make payment to its subcontracting physical suppliers. Despite O.W. Bunker expecting to make only a small commission on each fuel delivery, as O.W. Bunker's security agent, the Bank sought to recover on outstanding invoices due against vessel owners by means of arrest around the world, pursuant to Fed. R. Civ. P., Supplemental Admiralty Rule C, on grounds that the Bank received an assignment of a U.S. maritime line claim from O.W. Bunker. Many of these vessel owners were not the contractual counterparties and, therefore, had no notice that funds were even owed by the respective charterers.
Despite the Bank's demand for payment pursuant to a Security Agreement and purported assignment of claim executed by O.W. Bunker (the validity of which has not yet been established in the U.S. Court for the Southern District of New York or the Second Circuit), the physical suppliers who remained unpaid by O.W. Bunker and the Bank also filed arrest claims against the vessels, demanding payment pursuant to CIMLA based on their delivery of fuel to the vessels under their contracts with O.W. Bunker.
In ING Bank N.V. v. M/V Temara, 2016 WL 6156320 (S.D.N.Y. Oct. 21, 2016) (Temara II), Judge Katherine B. Forrest held that the physical supplier CEPSA International B.V. was not entitled to a maritime lien, because it failed to meet the requirements of CIMLA. In addition, the District Court noted that it is possible that neither entity possesses a lien where neither meets the statutory requirements. The District Court held that O.W. Bunker (and therefore the Bank) was also not entitled to a maritime lien against the vessel because, at the time of the vessel arrest, it did not plan to make payment to the underlying physical supplier, it failed to take on any monetary risk in connection with the fuel delivery and its payments obligations were illusory. The District Court held that without such a risk, O.W. Bunker did not have an interest that the lien statute was meant to protect. Judge Forrest also suggested, based on clear legislative history behind the adoption of CIMLA, that there may be some good faith requirement on the part of the lien claimant, based on the legislative history of the statute. The Bank and the physical supplier filed cross-appeals.
The Second Circuit issued an opinion reversing in part, affirming in part and remanding the case back to the District Court to determine further issues. ING Bank N.V. v. M/V Temara, No. 16-3923, (2d Cir. June 13, 2018). In a victory for vessel owners and charterers, the Court of Appeals agreed with the District Court that CEPSA as physical supplier did not meet the requirements of CIMLA because it provided bunkers at the direction of O.W. Bunker, rather than on the authority of the vessel or charterer.1 The Court also rejected that clause L.4 of the O.W. Bunker General Terms and Conditions, which purports to substitute the physical supplier's terms in the contract between O.W. Bunker and the customer, served to create a contract or agency relationship between CEPSA and the customer that gives rise to a maritime lien.
The Court of Appeals did find that O.W. Bunker met the requirements of CIMLA and disagreed with Judge Forrest that some "financial risk" at the time of arrest or contracting was required in order to obtain a maritime lien. However, the Second Circuit left wide open the issue of whether a factual finding that O.W. Bunker provided the fuel in bad faith (i.e., contracting while insolvent on the eve of bankruptcy, knowing that it could not and would not pay the physical supplier) would negate any such lien. The issues of alleged bad faith and fraud of O.W. Bunker was not before the Second Circuit and will be fully ligated on remand provided that the Bank can overcome the threshold issue of whether it was assigned a U.S. maritime lien claim from O.W. Bunker. The Second Circuit also found that the District Court erred in its initial grant of summary judgment in favor of the vessels without providing O.W. Bunker an opportunity to submit additional evidence that O.W. Bunker had paid its downstream affiliate in the contract chain with the ultimate physical supplier.
The Second Circuit has remanded the case back to the District Court for further proceedings after full discovery into the alleged bad faith and fraud of O.W. Bunker. As such, the renewed District Court proceedings will likely address any additional defenses or exceptions to the lien, such as "bad faith" or fraud, as significant developments and disclosures concerning O.W. Bunker's activities have come to light since Judge Forrest's original decision. Additionally, the Court of Appeals' finding that O.W. Bunker meets the requirements of CIMLA still leaves open the question of whether a maritime lien was validly assigned by O.W. Bunker to the Bank (the assignment being governed by English law, which does not give rise to a U.S. maritime lien).
1 The Second Circuit has since been joined by the U.S. Court of Appeals for the Fifth Circuit in finding against the physical suppliers. Valero Marketing & Supply Co. v. M/V Almi Sun, No. 16-30194 (5th Cir. June 19, 2018). The Eleventh Circuit has also so ruled in Barcliff, LLC v. M/V Deep Blue, 867 F.3d 1063 (11th Cir. 2017).
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