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THE EFFECT OF BANKRUPTCY ON ADMIRALTY RULE B ATTACHMENTS

By Rick Steinberg, Of Counsel

INTRODUCTION

This article will give an overview of the effect of a bankruptcy filing by a maritime debtor on Admiralty Rule B attachments under the Supplemental Rules for Admiralty or Maritime Claims.

WHAT IS A MARITIME ATTACHMENT?

The maritime attachment lien is an ancient device that predates the grant of general admiralty jurisdiction to federal courts.  Maritime attachment liens are governed by Rule B of the Supplemental Rules for Admiralty or Maritime Claims to the Federal Rules of Civil Procedure.  In re Atlas Shipping A/S, 404 B.R. 726, 731 (Bankr. S.D.N.Y. 2009).

Historically, Rule B attachments served two purposes: (1) they ensured satisfaction if a suit against a shipping company is ultimately successful; and (2) they ensured a defendant’s appearance in an action.  In re Atlas Shipping A/S, 404 B.R. at 731-732, citing Aurora Maritime Co. v. Abdullah Mohamed Fahem & Co., 85 F.3d 44, 48 (2d Cir. 1996).  Because shipping company assets can circumnavigate the world, the liens are intended to maintain the status quo pending litigation of a dispute.  Id., citing DSND Subsea AS v. Oceanografia, S.A. de C.V., 569 F. Supp.2d 339, 348 (S.D.N.Y. 2008).  Ships are considered effects within admiralty practice governing attachment and garnishment, so vessels are subject to Rule B attachments.  Frontier Acceptance Corp. v. United Freight Forwarding Co., 286 F. Supp. 367 (D.N.J. 1968).

WHAT IS RULE B?

            Rule B(1)(a) states that: “[i]f a defendant is not found within the district where a verified complaint praying for attachment and the affidavit required by Rule B(1)(b) are filed, a verified complaint may contain a prayer for process to attach the defendant’s tangible or intangible personal property—up to the amount sued for—in the hands of garnishees named in the process.”

            Rule B(1)(b) states that: “[t]he plaintiff or the plaintiff’s attorney must sign and file with the complaint an affidavit stating that, to the affiant’s knowledge, or on information and belief, the defendant cannot be found within the district.  The court must review the complaint and affidavit and, if the conditions of this Rule B appear to exist, enter an order so stating and authorizing process of attachment and garnishment.  The clerk may issue supplemental process enforcing the court’s order upon application without further court order.”

            Rule B(1)(c) states that: “[i]f the plaintiff or the plaintiff’s attorney certifies that exigent circumstances make court review impracticable, the clerk must issue the summons and process of attachment and garnishment.  The plaintiff has the burden in any post-attachment hearing under Rule E(4)(f) to show that exigent circumstances existed.”

Under Rule B, a plaintiff may obtain an order of attachment against a defendant’s property that is in the hands of a garnishee.  In re Atlas Shipping A/S, 404 B.R. at 732.  Once the property has been restrained, Admiralty Rule E(4)(f) provides the defendant an opportunity to appear before the court to contest the attachment.  Id.

Admiralty Rule B, like other types of attachment actions, allows for attachment of a defendant’s assets prior to entry of a judgment against a defendant, upon filing a verified complaint and an affidavit, when the defendant is not otherwise subject to jurisdiction in the federal district where the complaint is filed.  Thus, Rule B is a powerful tool for a plaintiff to help secure and collect a judgment against a defendant.

THE EFFECT OF BANKRUPTCY ON RULE B ATTACHMENTS

            Bankruptcy has the effect of invalidating or voiding maritime Rule B attachments on the debtor’s property.  See In re Daebo Int’l Shipping Co., Ltd., 543 B.R. 47, 55 (Bankr. S.D.N.Y. 2015) (to the extent the attachments are directed against the debtor, Daebo, and its property, they are barred by the stay order and should be lifted).  The filing of a Chapter 11 or a Chapter 15 bankruptcy petition in the U.S. allows the debtor in bankruptcy to seek to vacate any Rule B attachments against its property.

            In Daebo Int’l Shipping Co., Ltd., the United States Bankruptcy Court for the Southern District of New York invalidated various maritime attachment liens that had been placed on a vessel allegedly owned by a Korean company that had filed an insolvency proceeding in Korea under the Republic of Korea’s Debtor Rehabilitation and Bankruptcy Act (the “DRBA”).  543 B.R. at 49.  The Korean debtor company also filed a Chapter 15 ancillary, cross-border insolvency proceeding in the Southern District of New York, in order to seek to vacate the various Rule B attachments that had been placed against its vessel in the port of New Orleans, pursuant to a Rule B attachment action filed in the Eastern District of Louisiana.  Id. at 50-51.

The Bankruptcy Court in New York vacated the Rule B maritime attachments placed against the debtor’s vessel in New Orleans.  Id. at 55.  The court reasoned that, to the extent that the attachments were directed against Daebo and its property, they were barred by the stay order and by the terms of the DRBA and should be lifted as a matter of comity.  Id., citing In re Atlas Shipping A/S, 404 B.R. at 739.  However, due to the possibility of irreparable harm if the maritime attachments were vacated and the Bankruptcy Court’s decision were reversed on appeal, the Bankruptcy Court Judge stayed his own order vacating the Rule B maritime attachments pending appeal.  In re Daebo Int’l Shipping Co., 2016 Bankr. LEXIS 356 (Bankr. S.D.N.Y. February 4, 2016).

The Daebo Bankruptcy Court opinion is part of a growing body of case law holding that the effect of filing of a bankruptcy proceeding in the U.S., whether under Chapter 11 or Chapter 15 of the Bankruptcy Code, is to invalid Rule B attachments to the debtor’s property in the U.S.

CONCLUSION

The effect of the filing by a maritime entity of a bankruptcy petition is to invalidate or void a Rule B maritime lien that attached after the foreign main bankruptcy proceeding was filed.  In re Atlas Shipping A/S, 404 B.R. at 730.  This result obtains whether the Rule B maritime attachment was issued before or after the order for relief was entered in the U.S. Bankruptcy Court, if the Rule B attachment was obtained after the foreign insolvency proceeding was filed in the debtor’s home country.

 

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