Courts Split Over Interpretation of CIMLA Provisions Regarding Suppliers’ Maritime Liens Against Vessels

October 19, 2017

John T. Carroll, III

Cozen O’Connor; Wilmington, Del.

Simon E. Fraser

Cozen O’Connor; Wilmington, Del.

 

Suppliers of goods to ocean-going vessels can face considerable counterparty risk, as the vessels that they supply may never return to the same port. As protection, the common law gave suppliers a maritime lien against any vessel to which they provided “necessaries.” In the U.S., this common-law lien has been codified in the Commercial Instruments and Maritime Lien Act (CIMLA), which states in relevant part that “a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner has a maritime lien on the vessel” and “may bring a civil action in rem to enforce the lien.”[1]

The U.S. District Courts for the Southern District of New York[2] and the Northern District of Florida[3] recently decided disputes between a seller of fuel to certain ocean-going vessels and that seller’s subcontractors over which of them held maritime liens against the vessels to secure unpaid fuel charges. On nearly identical facts, the New York District Court decided in the seller’s favor and the Florida District Court in favor of the seller’s subcontractor, demonstrating a significant split between the two courts on the interpretation of the CIMLA.

Background

The two decisions each arose from the bankruptcy cases of O.W. Bunker & Trading A/S and its subsidiaries (collectively, “O.W. Bunker”), which were in the business of selling fuel to vessels. O.W. Bunker obtained its fuel from various third-party subcontractors (which the New York District Court labeled collectively the “physical suppliers”), and either delivered the fuel to the vessel itself, or had the physical sup- pliers make deliveries directly. In the latter instances, O.W. Bunker essentially acted as a broker. O.W. Bunker’s practice was to contract with the vessel owner to provide the fuel, and then separately contract with a physical supplier to purchase the fuel that would ultimately be delivered to the vessel. No privity of contract ever existed among the physical suppliers and the vessel owners. The New York District Court termed this dual contract arrangement as “back-to-back contracts.”

When O.W. Bunker began its bankruptcy cases, it was a party to many “back-to-back contract” arrangements in connection with which the fuel had been delivered to the vessel, but neither the vessel owner nor O.W. Bunker had made their contractually required payments. Realizing that they stood little chance of receiving payments from O.W. Bunker, the physical suppliers made demands directly upon the vessel owners for payment of the charges that O.W. Bunker had failed to pay. The vessel owners were faced with competing demands for payment for the same fuel: one demand from O.W. Bunker pursuant to the fuel-purchase contract between the owner and O.W. Bunker, and the other demand from O.W. Bunker’s applicable unpaid physical supplier. Not wanting to risk paying twice for the same fuel, numerous owners commenced interpleader actions in courts across the nation. The interpleader funds would take the place of the vessels as the subject of maritime liens held by any of the parties.

Clearlake Shipping Pte. Ltd. v. O.W. Bunker (Switzerland) SA decided three “test cases” regarding inter- pleader funds in the Southern District of New York,[4] and Martin Energy Servs. v. M/V Bravante IX decided a separate interpleader case in the Northern District of Florida. In each case, O.W. Bunker on one side, and the applicable physical supplier on the other, claimed competing rights to the funds, with each side arguing that it — and not the other — had provided “necessaries” to the applicable vessel and therefore possessed liens under the CIMLA.

The Clearlake Decision
The Clearlake court began its analysis by breaking the CIMLA into its elements: “[T]here are three elements that a party must prove to establish possession of a maritime lien ... (1) that the goods or services at issue were ‘necessaries,’ (2) that it ‘provided’ the necessaries ‘to a vessel,’ and (3) that it did so ‘upon the order of the owner of such vessel or a person authorized by the owner.’”[5] There was no question that fuel is a “necessary” for purposes of the CIMLA, but this dispute centered on the second and third elements: whether either O.W. Bunker or the physical suppliers had “provided” the fuel to the vessels, and whether they had done so “on the order of the owner.”

Did the Physical Suppliers Possess Liens?

The Clearlake court first analyzed whether the physical suppliers possessed liens under the CIMLA and held that they did not because they had not provided the fuel “on the order” of the vessel owners. The court’s decision turned on the fact that the physical suppliers did not have a privity of contract with the owners. Instead, they had contracted only with O.W. Bunker as subcontractors. The court held that in order to be considered to have supplied goods “on the order” of the vessel owner for purposes of the CIMLA, “a direct contractual or agency nexus between the supplier and the vessel or its agents is typically required.”[6] The court explained that “[r]equiring a direct contractual link between the vessels’ agents and the provider of necessaries reduces the risk of a multiplicity of liens,” and that a “contrary rule would ‘allow vessels to be arrested and encumbered based on the contractual disputes that arise between general contractors and subcontractors or even ... between subcontractors and sub-subcontractors.’”[7]
The Clearlake court examined the relationship between each physical supplier and the applicable vessel, and concluded that “[i]n each case, there was no contractual agreement between the Physical Supplier” and the applicable vessel owner.[8] Rather, each physical supplier contracted with O.W. Bunker to sell the fuel to O.W. Bunker, and O.W. Bunker then contracted separately with the applicable owner. Because the physical suppliers lacked contractual relationships with the owners to supply the fuel, the court held that they had not provided the fuel “on the order” of the vessel owners, and did not possess liens against the vessels.

Some of the physical suppliers argued that even though they had no contractual relationships with the vessel owners, they should nonetheless be deemed to possess liens because they had delivered the fuel directly to the vessels themselves (as opposed to delivering the fuel to O.W. Bunker). The Clearlake court rejected this argument, but noted that “[s]everal cases, nearly all from the Eleventh Circuit, suggest that close coordination” between a subcontractor and a vessel owner can give rise to a lien in the subcontractor’s favor — even if there is no contractual relationship between the two parties.[9]

The court declined to follow these cases and criticized that they “are ‘navigating outside the mainstream’ of American maritime law.”[10] The court noted that any approach short of the “bright-line” rule of requiring a direct contractual relationship between supplier and owner would make it possible for “multiple parties to the same transaction to be entitled to a lien,” and that vessels would “run ... the risk of being arrested twice on the same debt.”[11]

Did O.W. Bunker Possess Liens?

Having decided that the physical suppliers did not possess liens, the Clearlake court then turned to the question of whether O.W. Bunker satisfied the requirements under the CIMLA to hold liens against the vessels. There was no question that O.W. Bunker had received the requests for fuel “on the orders” of the vessel owners or their agents, as O.W. Bunker was the counterparty on the vessel owners’ fuel-purchase contracts. Accordingly, O.W. Bunker satisfied the third element of the statute. However, the physical suppliers argued that O.W. Bunker did not meet the second CIMLA element because it had not “provided” the fuel to the vessels. The physical suppliers — and not O.W. Bunker — had physically delivered the fuel to the vessels. Accordingly, the physical suppliers argued that it was they — not O.W. Bunker — who had “provided” the fuel for purposes of the CIMLA.

The Clearlake court disagreed: “A supplier may ‘provide’ necessaries to a vessel indirectly through a subcontractor.”[12] The court explained that the party who is deemed to “provide” necessaries to a vessel for purposes of the CIMLA is the party who would be contractually liable to the vessel owner for nonperformance in the event that the necessaries in question were not supplied. If the physical suppliers had failed to perform, they would have been contractually liable only to O.W. Bunker and not to the vessel owner. O.W. Bunker, on the other hand, would have been be contractually liable to the owner for any failure to supply fuel. The fact that O.W. Bunker bore the risk of nonperformance meant that it — not the physical suppliers — was deemed to have been the “provider” of the fuel under the CIMLA. Accordingly, the court held that O.W. Bunker satisfied the CIMLA’s requirements and held maritime liens on the vessels (which translated to liens on the interpleader funds). The court ruled that O.W. Bunker had the superior right to the funds.

The Martin Decision
The facts in Martin were materially similar to those in Clearlake. O.W. Bunker had entered into the same “back-to-back contract” arrangement with a vessel owner on one end and a physical supplier on the other, and no privity of contract existed between the owner and the physical supplier. Just as in Clearlake, the physical supplier alone had actually delivered the fuel to the vessel. However, the Martin court reached the opposite result and held that the physical supplier — not O.W. Bunker — was entitled to a maritime lien on the vessel.

The Martin court based its decision on the fact that the physical supplier alone had made the actual physical delivery of fuel to the vessel. The court also held that according to the “ordinary meaning” of the word “provided,” it had been the physical supplier, and not O.W. Bunker, who had “provided” the fuel to the vessel for the purposes of the second prong of the CIMLA’s requirements.[13]

Unlike the New York District Court in Clearlake, the Florida District Court in Martin held that a privity of contract between a would-be lienholder and the vessel owner is not determinative. Rather, the Martin court held that the party who makes the actual physical delivery of the necessaries to a vessel is the one who “provides” them for purposes of the CIMLA. Relying on Eleventh Circuit precedent,[14] the Martin court stated that a subcontractor to a vessel owner’s contract counterparty “sometimes does and sometimes [does] not acquire a lien, depending on whether ‘the level of involvement between the owner and the third-party provider [i.e., the subcontractor of the contract counterparty] was significant and ongoing during the pertinent transaction.’”[15]

Turning to the statute’s third prong, the Martin court held that the physical supplier had delivered the fuel “on the order of” the vessel owner. Pointing to a statutory presumption that a vessel’s captain and certain other individuals have an authority from the owner to procure necessaries,[16] the court noted that the vessel’s captain and engineer, as well as the owner’s agent at the port, had all “dealt directly with [the physical supplier] on the logistics for delivery of the fuel,” as well as the fact that the vessel’s engineer had signed a certificate acknowledging the physical supplier’s delivery of the fuel.[17] Having already decided that O.W. Bunker failed the CIMLA’s second prong, the court did not discuss whether O.W. Bunker satisfied the third prong. Accordingly, the Martin court held that the physical supplier — not O.W. Bunker – satisfied the elements of the CIMLA and held a lien on the interpleader funds.

The obvious drawback to the Florida District Court’s approach in Martin is that where the vessel owner’s contact counterparty and its subcontractor each help to make physical delivery of the same supplies to a vessel, they might each be deemed to have “provided” the supplies for purposes of the CIMLA, and multiple liens against the same vessel for the same debt might result. The court briefly noted this possibility, but dismissed it rather casually, stating that a rule that only one lien may exist for the same debt “is not self-evident” in the statute, and that “the statute includes no such explicit limitation.”[18] Perhaps realizing the confusion that would result from multiple liens existing against the same vessel for the same debt, the court added, “But the ship and its owner can properly be required to pay only once for any given product or service. A regime that allowed multiple maritime liens would have to recognize that any proper, full payment by the owner would discharge all liens.”[19] The Florida District Court provided no further details about how such a single-satisfaction system might work.

Take Away

The Southern District of New York’s approach is seemingly more practical. It is an easily applied bright-line rule: The only party entitled to a maritime lien against a vessel is the party who is contractually obligated to the vessel owner to supply the “necessaries” in question. This rule provides certainty to the parties and results in only one lien against a vessel for each delivery of supplies. On the other hand, the Northern District of Florida’s approach requires a factual inquiry into which party/parties made the physical delivery, and might result in multiple liens against the same vessel for the same debt where multiple parties combine to make the physical delivery.

An appeal of the Martin decision has been led with the Eleventh Circuit, which is still pending as of the publication of this article. At least for now, a split in the application of the CIMLA still exists and suppliers have to live with uncertainty as to which approach will ultimately prevail. While the New York District Court’s approach is the majority rule,[20] it is possible that the Eleventh Circuit will continue to follow the approach in Martin. Accordingly, suppliers to vessels should be aware that they might be subject to either approach.

 

[1] 46 U.S.C.A. § 31342(a).

[2] Clearlake Shipping Pte. Ltd. v. O.W. Bunker (Switzerland) SA, Nos. 14-9287, 14-10091, 14-9949, 15-6718, 2017 WL 78514 (S.D.N.Y. Jan. 9, 2017).

[3] Martin Energy Servs. v. M/V Bravante IX, No. 14-322, 2017 WL 373449 (N.D. Fla. Jan. 26, 2017).

[4] Twenty-four interpleader actions were pending in the Southern District. The court discussed the three “test cases” together and applied the same analysis to each.

[5] Id. at *5 (quoting Integral Control Sys. Corp. v. Consol. Edison Co. of N.Y., 990 F. Supp. 295, 298 (S.D.N.Y. 1998)).

[6] Id. at *6.

[7] Id. (quoting ING Bank N.V. v. M/V TEMARA, No. 16-CV-95, 2016 WL 4471901, at *9 (S.D.N.Y. Aug. 24, 2016)).

[8] Id. at *7.

[9] Id. at *9.

[10] Id. (quoting Consol. Edison, 990 F. Supp. at 301).

[11] Id.

[12] Id. at *12.

[13] Martin, 2017 WL 373449 at *5.

[14] The court principally relied on Galehead Inc. v. M/V Anglia, 183 F.3d 1242 (11th Cir. 1999).

[15] Id. at *6 (quoting Galehead, 183 F.3d at 1245).

[16] Id. (quoting 46 U.S.C. § 31341(a)).

[17] Id. at *5.

[18] Id.

[19] Id.

[20] The Martin court acknowledged that out of all of the interpleader actions arising from O.W. Bunker’s bankruptcy, its decision is the only one to have held in favor of a physical supplier, as opposed to O.W. Bunker. See id. at *7. The Martin approach does not appear to be followed outside of the Eleventh Circuit.

 

 

This article was originally published in the October 2017 edition of the Secured Credit 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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