International Shipping Companies Successfully Navigate Chapter 11 With Prenegotiated Plans Of Reorganization

The recent depression in the maritime shipping industry served as the catalyst for many shipping companies to restructure. During the past few years, a number of foreign-based shipping companies have sought protection from creditors in U.S. Bankruptcy Courts—with varying degrees of success.

Debtor-friendly U.S. reorganization laws and the extraterritorial application of U.S. court orders have been cited as reasons these companies seek protection in the U.S. Both are necessary for an industry in which the primary assets are constantly moving from one jurisdiction to another and creditors span the globe.1 Had these companies filed their cases in jurisdictions outside the U.S., they could have been forced to liquidate, as dictated by law in many other countries.

Although several foreign-based shipping companies with virtually no U.S. assets have recently filed for Chapter 11, Bankruptcy Courts have been reluctant to dismiss these cases for lack of jurisdiction. This willingness to entertain such cases has created an inviting refuge for foreign shipping companies whose assets, operations and employees lie outside the U.S.

While Bankruptcy Courts have provided these companies with a safe harbor initially, restructuring efforts by these debtors have had mixed results. Those that were unable to negotiate prearranged restructuring agreements with their lenders have typically failed in their reorganization efforts.

The recent filing with a prepackaged Chapter 11 plan by Genco Shipping & Trading Ltd. ("Genco") and its affiliates highlights the importance and value of a consensual restructuring. With its lenders on board and trade creditors being paid in full, Genco is set to have a confirmation hearing on its plan within 45 days of filing, providing as little disruption to its operations as possible. Genco hopes to continue the trend of successful restructurings for shipping companies with consensual deals, avoiding the pitfalls of those filed without an agreement from their lenders.

Debtor Eligibility Requirements

Pursuant to Section 109 of the U.S. Bankruptcy Code, "only a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under this title." 11 U.S.C. §109(a). If a proposed debtor is not eligible under Section 109(a), then the Bankruptcy Court does not have jurisdiction to hear the case.

However, the Bankruptcy Code is silent as to what amount of "property in the United States" is needed to satisfy Section 109(a) so that a foreign company becomes an eligible debtor. Essentially, parties may establish eligibility as a debtor, so long as any property is present in the United States.2 Two recent Bankruptcy Court decisions relating to foreign shipping companies have only strengthened this interpretation of Section 109(a).

In 2011, Marco Polo Seatrade (MPS) and three affiliates filed for bankruptcy protection in the Southern District of New York. MPS, a Netherlands-based shipping company, owed its foreign-based secured lenders about $210 million, collateralized by the company's ships, at the time of filing. Shortly after the filing, Credit Agricole and Royal Bank of Scotland, both secured lenders, moved to dismiss the cases on the grounds that MPS failed to meet the debtor eligibility requirements of Section 109(a).

In its motion, Royal Bank of Scotland pointed to a number of factors favoring dismissal, including: (i) the debtors were foreign entities; (ii) the debtors' ships operated under foreign flags; (iii) the debtors' principal offices were in the Netherlands; (iv) the debtors had no offices or employees in the U.S.; (v) the debtors' business operated primarily in foreign waters; (vi) the debtors' loan documents were governed by foreign law and provided for foreign courts to have exclusive jurisdiction over disputes involving the loans; (vii) the debtors' secured creditors were foreign...