Contributed by Elizabeth Hendee
In a recent decision out of the United States Bankruptcy Court for the Southern District of New York, In re Containership Co., No. 11-12622 (Bankr. S.D.N.Y. Feb. 10, 2012), Judge Lane found that the Federal Maritime Commission (“FMC”) does not have exclusive jurisdiction over all shipping-related claims in a chapter 15 case. Accordingly, he continued to preside over adversary proceedings in the bankruptcy court. This decision comes at an important time – as the shipping industry is struggling to stay afloat, more and more shipping companies are choosing to restructure in chapter 11 or analogous foreign proceedings. See e.g., In re TBS Shipping Servs., Inc. and In re PT. Arpeni Pratama Occean Line Tbk. The bankruptcy court’s refusal to cede jurisdiction to the FMC over shipping-related claims may influence the restructuring decisions of other distressed shippers.
The Containership Company filed a petition for reconstruction in Denmark in April, 2011 and, shortly thereafter, sought, and was granted, recognition of the Danish reconstruction in the Southern District of New York under chapter 15 of the Bankruptcy Code. Containership subsequently filed adversary proceedings against certain shippers alleging breach of contract because the shippers had not satisfied the “minimum quantity commitment” requirements in their contracts with Containership. The other shippers responded by seeking relief from the automatic stay so they could bring claims against Containership before the FMC, which, they argued, had “exclusive” jurisdiction over such claims. Judge Lane disagreed.
To determine whether the FMC has exclusive jurisdiction over the claims, the court looked to the statutory mandate of the FMC. The court determined that Congress had intended the FMC to have exclusive jurisdiction over the administration of the Shipping Act and that “service contracts,” the type of contract at issue in this case, fall within the purview of the Shipping Act. Judge Lane, however, noted an important distinction between regulating service contracts and deciding actions for alleged breaches of such service contracts. The FMC has exclusive regulatory jurisdiction over the contracts, but, unless explicitly provided for in the service contract, it does not have jurisdiction over breach of contract actions—jurisdiction for those claims lies with the appropriate state or federal court. The court found that the debtor’s allegations in its complaints were actually affirmative defenses to underlying breach of contract disputes and thus, did not fall within the FMC’s regulatory jurisdiction.
Even though the FMC did not have exclusive jurisdiction over the issue, the bankruptcy court could still have deferred to the FMC under the doctrine of “primary jurisdiction.” The primary jurisdiction doctrine allows a court to defer to a specialized court when the issue involves technical questions of fact or policy considerations uniquely within the expertise of an agency. In this case, no such issues were present. The non-debtor shippers did not provide any evidence that the FMC’s expertise would be helpful in resolving the breach of contract issues.
Accordingly, the bankruptcy court refused to modify the automatic stay to allow the other shippers to bring claims against the debtor before the FMC. The relevant Second Circuit test for lifting the automatic stay (the Sonnax test) requires the court to balance various factors to determine whether modifying the stay would be appropriate. These factors include whether a specialized tribunal has been established to hear the cause of action. In this case, the factors weighed in favor of maintaining the stay. Although the FMC is a specialized tribunal that deals with Shipping Act violations, it was not established to hear breach of service contract cases.
Only time will tell whether this decision will influence other distressed shipping companies when deciding what course of action to take. Judge Lane’s decision, though friendly to the debtor, could have easily gone the other way had the issue been more than a simple breach of contract dispute. Regardless, it is clear that bankruptcy courts will not defer to the FMC simply because a debtor is regulated by the Shipping Act.
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