Hanjin Sends Emergency S.O.S: Provisional Relief in § 1519(a) of the U.S. Bankruptcy Code

December 21, 2017

Nick Owens

 

[1]International companies are increasingly using chapter 15 of the U.S. Bankruptcy Code to implement cross-border restructurings. In many of these cases, debtors have sought provisional relief pursuant to § 1519(a) of the Bankruptcy Code to stabilize their business operations during the first days and weeks of a chapter 15 bankruptcy case. Section 1519(a) provides that “the court may, at the request of the foreign representative, where relief is urgently needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional nature.”[2] For young practitioners, the recent chapter 15 case of Hanjin Shipping Co. Ltd. demonstrates the effectiveness of obtaining provisional relief under § 1519(a) when creditors are aggressively pursuing assets of the debtor in multiple jurisdictions.

 

Overview of Chapter 15 and § 1519(a)

A chapter 15 case is commenced by a “foreign representative” of the debtor filing a petition for recognition of a “foreign proceeding” in a U.S. bankruptcy court.[3] After notice and a hearing, the bankruptcy court is authorized to issue an order recognizing the foreign proceeding as either a “foreign main proceeding” (a proceeding pending in a country where the debtor’s center of main interests are located) or a “foreign non-main proceeding” (a proceeding pending in a country where the debtor has an establishment, but not its center of main interests).[4] During the “gap period” between the petition date and the date the court recognizes the petition, there is no automatic stay in place (as is generally the case under chapter 7 and 11 of the Bankruptcy Code) and the debtor is exposed to actions by creditors to collect its assets. This is where § 1519(a) of the Bankruptcy Code serves as an important tool to protect the debtor’s assets from seizure.

            Section 1519(a) provides that a court may grant several types of “provisional” relief. Available provisional relief includes, among other things, staying execution against the debtor’s assets, entrusting the administration or realization of all or part of the debtor’s assets located in the U.S. to the foreign representative, and suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor.[5] Provisional relief under § 1519(a) may be granted on the first day of the case, and it terminates when the petition for recognition is granted.[6] Additionally, provisional relief is not intended to last indefinitely and may be dismissed if there if there is a delay in recognizing the foreign proceeding.[7] Thus, § 1519(a) provides the debtor with the opportunity to seek protection in court and maintain a ratable distribution of assets without providing ample notice.

 

Hanjin Shipping Co. Ltd.

Headquartered in Seoul, South Korea, Hanjin filed for bankruptcy under South Korea’s Debtor Rehabilitation and Bankruptcy Act in August 2016 after the global recession and financial crisis of 2008 dramatically reduced the demand for transportation of goods.[8] Less than a month later, in September 2016, Hanjin filed a petition with the U.S. Bankruptcy Court for the District of New Jersey seeking recognition of the South Korean insolvency as a foreign main proceeding under chapter 15 of the Bankruptcy Code. When Hanjin filed its chapter 15 petition, it was the largest shipping company in Korea and transported over 100 million tons of cargo per year.[9]

In addition to the chapter 15 petition, Hanjin also filed a motion (the “provisional relief motion”) requesting, among other things, that the bankruptcy court provisionally impose the automatic stay and recognize the stay order previously entered by the South Korean court (the “Korean stay order”). Hanjin’s provisional relief motion was necessitated by the fact that certain maritime lienholders had begun arresting Hanjin’s vessels, with some terminal owners refusing to unload cargo until they received payment (the “maritime lienholders”).[10] Hanjin argued that granting the provisional relief motion was necessary to ensure that creditors did not seize its assets during the 21-day “gap period” before the chapter 15 petition for recognition would be entered and further impact the company’s liquidity.[11] When Hanjin filed its chapter 15 petition, 13 of the Hanjin’s cargo ships were outside of U.S. territorial waters and were unable and/or unwilling to enter U.S. ports due to fear of arrest by the maritime lienholders.[12]

 

Objections to Provisional Relief

The maritime lienholders opposed the provisional relief motion in part, arguing that they should not be subject to a provisional stay unless their lien rights were “sufficiently protected” under § 1522(a) of the Bankruptcy Code.[13] This section provides that “the court may grant relief under section 1519 ... only if the interests of the creditors are sufficiently protected.”[14] Sufficient protection, the maritime lienholders contended, could be provided in the form of requiring Hanjin to pay cash and post bond or security, otherwise a provisional stay should not apply.[15] Moreover, the maritime lienholders feared that if they lost their lien rights, their claims would be downgraded to regular unsecured claims in the main insolvency proceeding in South Korea.[16] The asserted liens consisted of the right to arrest Hanjin’s vessels in the event of nonpayment under federal maritime law.

 

Bankruptcy Court Rulings

The bankruptcy court granted the provisional relief motion and based its ruling on the following five main reasons. First, it held that Hanjin’s ships were not entering U.S. ports in part because of the threat arrest to satisfy maritime liens. [17] Second, the court believed that allowing arrest at U.S. ports would violate the Korean stay order.[18] Third, the court viewed the claimed maritime liens as “unripe and unenforceable” under U.S. law because Hanjin’s vessels had not yet entered a port within U.S. territorial waters.[19] In effect, the maritime lienholders were seeking permission to enforce liens that were only enforceable after commencement of the South Korean insolvency proceedings and would violate the Korean stay Order.[20] Fourth, the court recognized the “potentially severe negative impact that the immobilization of cargo would have on other United States constituents,” including beneficial cargo owners whose products were stranded in cargo containers.[21] Finally, the court stressed the lack of liquidity available to Hanjin: It only had enough financing to pay certain future expenses, and the posting of a bond or other liquid security for pre-bankruptcy liabilities “seemed impossible.”[22]

Unsatisfied with this result, the maritime lienholders filed a motion for reconsideration of the court’s order. They argued that the bankruptcy court had erred because they would not be asserting liens against Hanjin’s vessels as they were chartered by Hanjin, not owned by Hanjin. Under South Korean law, they contended that a ship cannot be arrested unless the claimant has a claim against the owner of a ship. As such, they were entitled to enforce the liens against ships that entered U.S. ports and were entitled to sufficient protection.

The court disagreed. In denying the reconsideration motion, the court was guided by what it characterized as the “universalist approach” to chapter 15 bankruptcy cases “where a bankruptcy progresses as a unified global proceeding that is administered by one court, with the assistance of courts in other nations.”[23] The court then held that Hanjin made a prima facie showing that the South Korean proceeding would qualify as a foreign main proceeding and that Hanjin would qualify for protection of the automatic stay after the gap period.[24] The court found that the Korean stay order was intended to apply to all of Hanjin’s creditors and that to allow enforcement of the maritime lienholders’ asserted lien rights would undermine the Korean stay order, which was to preserve the status quo.[25] The court recognized that while the chartered vessels were not owned by Hanjin, the maritime lienholders’ claims against the vessels were based in part upon the liabilities of Hanjin.[26] The court also held that § 1522(a) of the Bankruptcy Code does not mandate sufficient protection to creditors and requires a court to “weigh the interests of all parties, including other creditors and the debtor, in providing discretionary relief.”[27] Considering these parties as a whole, the court believed that the Korean insolvency proceeding would be “better off” if Hanjin could deliver its cargo and the South Korean court was left to administer the maritime lienholders’ claims. [28]

 

Conclusion

The Hanjin bankruptcy shows that the success of a chapter 15 bankruptcy case may depend on whether a court grants provisional relief pursuant to § 1519(a) early in the case. This case illustrates that a court will be inclined to grant provisional relief when doing so will benefit all parties in interest and the court is likely to grant a petition for recognition. Familiarity with provisional relief in § 1519(a), and the likely challenges to such relief, is vital to ensuring that a debtor’s business is preserved prior to a ruling on a petition for recognition.

 

[1] Nick Owens is an ABI member but is not a lawyer. Nick writes in his individual capacity; this article should not be attributed to any lawyer or law firm. It is not intended to provide legal advice.

[2] 11 U.S.C. § 1519(a).

[3] Id. § 1504(1).

[4] See id. §§ 1502(4), 1502(5), 1517.

[5] Id. §§ 1519(a), 1521(a).

[6] See id. § 1519(b).

[7] 8 Norton Bankruptcy Law and Practice § 154:16 (William L. Norton, Jr. ed., 3d ed. 2017).

[8] In re Hanjin Shipping Co. Ltd., No. 16-27041 (JKS), 2016 WL 6679487, at *1 (Bankr. D.N.J. Sept. 20, 2016).

[9] Id.

[10] Id. at *1–2.

[11] In re Hanjin Shipping Co. Ltd., Case No. 16-27041 (JKS), Order Granting Provisional Relief Pursuant to Section 362, 365(e), 1519, 1520, and 105(a) of the Bankruptcy Code Pending Hearing on Petition for Recognition as a Foreign Main Proceeding (Bankr. D.N.J. Sept. 9, 2016) [Dkt. No. 102].

[12] Id.

[13] 2016 WL 6679487, at *2.

[14] 11 U.S.C. §§ 1522(a).

[15] 2016 WL 6679487, at *2.

[16] See id. at *2-3 & *6.

[17] Id. at *2.

[18] Id.

[19] Id. at *3.

[20] Id.

[21] Id.

[22] Id.

[23] Id. at *4.

[24] Id. at *6.

[25] Id.

[26] Id.

[27] Id. at *7.

[28] Id.

 

This article was originally published in the December 2017 edition of the Young and New Members Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member.  Committees provide networking and leadership opportunities.  For additional information on how you could become involved in ABI and our Committees please visit membership.abi.org.

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