United States: Recent Ninth Circuit Decision Elevates Maritime Law Principles Over Bankruptcy Law

Arthur E Rosenberg is a partner in Holland & Knight's New York office

Clayton J Vignocchi is a attorney in Holland & Knight's New York office

In a case decided on March 28, 2018, the Ninth Circuit Court of Appeals held that a maritime lien on a vessel for the "maintenance and cure" of an injured seaman was not subject to the "automatic stay" that generally arises as the result of a bankruptcy filing by the owner of the vessel. In the case entitled Barnes v. Sea Hawaii Rafting, LLC, 886 F.3d 758, the Ninth Circuit Court of Appeals considered whether the special rules invoked by maritime law trumped the rules and equitable principles set out in the Bankruptcy Code, or whether bankruptcy law triumphed. Ultimately the Court held in favor of the maritime rules and the "sacred principles of admiralty law" that protect workers who are injured on a vessel, favoring these workers over the other creditors of the bankrupt entity that owned the vessel in question.

The facts of the Barnes case show a sympathetic plaintiff with little chance of reimbursement or compensation for his injuries and the cost of ongoing care that resulted from those injuries, other than from the value of the vessel on which he worked and was injured. Very briefly, Barnes involved a captain and crewmember of a rigid hull inflatable boat that conducted cruises in Hawaii, who was injured due to an explosion on the vessel. After several payments and negotiations, the injured seaman sued the vessel, the company that owned the vessel and the principal of the owner in Federal District Court for damages due to his injuries, including suing the vessel in rem under the maritime principle of "maintenance and cure," which provides for the seaman-plaintiff's injuries and upkeep during his recuperation and even later palliative care resulting from the severity of his injuries.

Several months into the lawsuit, the owner of the vessel and its principal each filed for bankruptcy, which should have effectuated the "automatic stay" under Section 362 of the U.S. Bankruptcy Code, which would have prevented the plaintiff—and any other parties—from taking any action, or continuing any other litigation or proceedings, with respect to the vessel or any other property of the vessel owner or its principal. After a series of procedural steps by both sides in a case that is procedurally complicated, the District Court dismissed Barnes's claim and allowed the Bankruptcy Court to continue to oversee the liquidation of the assets of the vessel's owner, ruling that the automatic stay applied to the vessel, preventing Barnes from enforcing his maritime lien and permitting the sale of the vessel free and clear of any liens to proceed under Section 363 of the Bankruptcy Code.

The Ninth Circuit then overturned the lower court's dismissal of the case and approval of the sale, holding that the maritime lien held by Barnes and the in rem suit against the vessel resulted in the District Court holding "constructive control" of the vessel, in order to permit the District Court to adjudicate Barnes's maritime lien. The court effectively ruled that the lien and in rem suit removed the vessel from the property of the owner's bankruptcy estate, meaning that the automatic stay could not apply to the vessel, as the stay only covers the debtor's property, which presumably would not include any asset that is subject to an in rem maritime lien. The Court reasoned that the automatic stay provision in the Bankruptcy Code does not expressly refer to maritime liens, and that the nature of maritime liens (i.e., secret, and "sacred") is significantly distinguishable from land-based transactional liens (which require recording and rank creditors on a first-in-time basis) so as to prevent a bankruptcy court from obtaining jurisdiction over maritime liens sub silentio. Accordingly, even though the automatic stay is considered sacrosanct in bankruptcy circles, the Ninth Circuit was willing to subordinate this right to the rights of an injured seaman as to a lien on the vessel for his "maintenance and cure."

Although this case may be special due to its sympathetic plaintiff, bad facts, procedural anomalies and unusual procedural history, parties should be warned that the even the extremely powerful automatic stay could be overridden by a maritime lien and in rem claim under the right circumstances, subordinating the equitable principles of bankruptcy law to the policies and principles of maritime and admiralty law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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