Common Carriers Can Utilize Maritime Lien Law to Enhance Their Creditor Position in Chapter 11 Matters

In re: World Imports LTD (No. 15-1498)

Recently, the U.S. Court of Appeals for the Third Circuit issued a favorable decision for a secured creditor in the context of maritime liens on the prepetition goods of a Chapter 11 debtor, World Imports, Ltd., et al. The court noted the existence of a strong presumption that the creditor, OEC Group (“OEC”), a provider of non-vessel-operating common carrier transportation services, did not waive its maritime liens in connection with the prepetition goods. The court indicated there was clear documentation that the parties intended such liens to survive delivery of the goods, and evidence of an intention to preserve the lien after delivery. The contract stated that the “lien shall survive delivery, for all sums due under this contract or any other undertaking to which the merchant was party.” In support of the decision, the Court noted the “familiar doctrine” of admiralty courts that enables maritime liens to attach to property substituted for the original object of the lien. Although the lien arose by operation of law, the Court held that the parties were free to modify or extend the existing liens via contract, extending the lien from the prepetition goods to the “current goods” which included landed goods in OEC’s possession and those goods in transit for which OEC was to provide delivery in the near future.

The Court reasoned that the express agreement that OEC would not waive its liens upon delivery, constituted an ex ante agreement that OEC would retain the position already afforded by operation of maritime law. Essentially, the extension of the outstanding liens from prepetition goods to current goods functioned, in the aggregate, as it would have as to individual shipments, under maritime law.

For creditors in the shipping industry this decision acts as the Third Circuit’s acknowledgement of parties’ rights to contractually retain and consolidate liens insofar as those liens apply to goods still in the shipper’s possession. Providers of common carrier transportation services would be well served to take note of the decision in an effort to enhance their position among other creditors of debtors seeking protection under Chapter 11.