17-02-2017 OW Bunker battles drag on as New York caseload lightens, By Greg Miller, Senior Editor, IHS Maritime
It has now been over 27 months since the sudden collapse of Denmark’s OW Bunker. For maritime lawyers in the United States, particularly in New York, it has been ‘the gift that keeps on giving’ – and the end is not yet in sight. When OW Bunker failed, it had yet to reimburse millions of dollars to physical bunker suppliers who had provided fuel to shipowners and operators on OW’s behalf. In the hundreds of US legal cases that followed, physical suppliers sought liens against vessel interests, as did OW entities and lender ING – the lead agent for a USD700 million revolver that had an assignment for OW’s receivables.
While district court judges across the country have overwhelmingly sided with OW and ING on the question of who has the right to the lien, a ruling was recently made in favour of a physical bunker supplier in a Florida district court. According to Seward & Kissel partner Bruce Paulsen, who represents ING, “The law is pretty clear, we think, which is why we’ve had so many decisions that have gone contrary to the one outlier decision in Florida. A number of judges have expressed sympathy for the physical suppliers’ situation, but that doesn’t change the statute, which makes clear that for the supplier to have a lien, it has to supply the necessaries on the order of the owner or the person authorised by the owner. The physical suppliers didn’t have relationships with the owners or charterers in these cases. They had relationships with OW. That’s the way they did business,” Paulsen told Fairplay. “If they thought – and I know some of them did – that they could always rely on a lien, well, I am not sure they looked hard at the statute or the case law. The Florida decision flies in the face of the statute and the case law on the lien question, and the judge also ignored the OW bankruptcies,” maintained Paulsen. “The fact is that ‘the music stopped’ and the money didn’t flow through the chain of contracts to the physical supplier as it would have had there been no bankruptcy. This is what happens when companies go insolvent. When the physical suppliers’ contract counterparties [the OW entities] went bankrupt, they went looking for someone else to sue [the vessel interests].”
Ultimately, the Florida decision in favour of the physical supplier is not pivotal to the shipping industry. The central question of whether physical bunker suppliers can have a lien against vessel interests will not be decided at the district court level, but rather, at the appellate court level. Already, there are nine OW-related district court rulings that have been appealed to the appellate court level in four circuits: six cases in the 2nd Circuit, and one each in the 5th, 9th, and 11th Circuits (at press time, ING had yet to decide whether it would appeal the Florida ruling). A ruling on the 5th Circuit case – Valero v M/V Almi Sun – is expected shortly.
“As for the timing of these cases, we’re certainly at the end of the beginning,” said Paulsen. “What was really time-consuming was when many, many of these cases were in discovery and we had depositions and document productions ongoing for months and months. Then there were trials and summary judgement motions, some of which are still pending, and now we’re moving into the appellate phase, and the appellate courts move at different speeds, so we’ve still got a ways to go.”
“I’d say we’re in the middle – about the fourth or fifth inning,” said Holland & Knight’s US maritime practice leader Jim Hohenstein, when asked to judge how far along the overall OW legal process had progressed. “The legal standards are yet to be determined and the appellate courts are really going to set the law,” said Blank Rome partner John Kimball, adding that the decision “will probably remain at that level, but you never know”.
If appeals panels in different circuits reach opposing conclusions, it would set the stage for a possible showdown before the US Supreme Court, assuming the high court opts to take the case. “It’s too early to tell if that’s going to happen,” said Paulsen. According to Hohenstein, “It may well end up in front of the US Supreme Court.”
A definitive decision on whether or not a physical bunker supplier can obtain a lien against a vessel interest will have major implications for shipping. “It is a big issue, because there’s a lot of money at stake and a lot of people are affected by it on a daily basis, as fuel suppliers provide the fuel and there are questions about who’s going to pay that bill,” said Kimball. “What this [the OW case] has exposed is the risk between the physical supplier of bunkers and its counterparty, which is typically not the vessel owner,” said Hohenstein. “Everything runs on credit, so it could well be that credit arrangements would tighten considerably, and it wouldn’t surprise me if that hadn’t happened already.”
In addition to the OW Bunker saga, another major case that has generated significant work for New York maritime attorneys is the collapse of South Korea’s Hanjin Shipping. “That has had broad impacts because of how precipitous it was,” said Hohenstein. “There were a myriad of different interests affected, including terminals that we represented, as well as companies that had boxes on the ships, or who had ships chartered to Hanjin, or where Hanjin had slot charters with other carriers.”
Although legal action from Hanjin’s insolvency is not expected to last nearly as long as fallout from OW Bunker’s demise, there will be lasting after-effects. According to Holland & Knight partner Chris Nolan, “Because people thought Hanjin was too big to fail and it did fail, charterers and shipowning interests and everyone in the logistics chain is looking at other carriers and asking themselves, ‘What if this happens again? How can we be ready to move in a fashion that will not be as haphazard?’ They’re being much more proactive when thinking about contractual counterparties.” Beyond work related to Hanjin and OW Bunker, prospects for billable hours in New York are less positive. Although there has been an increase in risk-advisory services following the election of Donald Trump, several of the attorneys speaking to Fairplay acknowledged that the current level of legal activity – excluding OW cases – is relatively modest, if not subdued. In general, legal work surges when markets are booming and when they are crashing, and pulls back when they are neither, as is currently the case.
“As far as maritime litigation in New York, if you took the OW cases away, things would seem quieter than they have been in the past,” said Paulsen. “In my space [securities litigation], share prices have been so low for so long that we’re not seeing a lot of activity with securities cases involving public shipping companies. I haven’t seen a lot of maritime arbitration over the last couple of years either. I think things will have to recover a bit more in the industry before we start seeing more activity. At this point, people are just taking their USD8,500/day, hoping to cover expenses and hoping for better times.”
According to Brad Berman, Americas head of shipping at Norton Rose Fulbright, “I think some of the firms, and I don’t count us as one of them, have been suffering because they over-hired. We haven’t. We’ve been able to be lean and mean when there hasn’t been as much work. “If you’re a shipowner and money is tight, one of the things you cut expenses on is your lawyer,” Berman said in an interview with Fairplay. “If you only have enough money to pay operating expenses and you don’t have any debt service and no capital expenditures and your bank is on top of you because your loan-to-value [ratio] is off, you’re not going to go after a USD100,000 claim to prove you’re right and spend USD50,000 in court, you’ll just try to settle for USD40,000.”
“For smaller claims work, there’s going to be a problem and I think some of the smaller, more boutiquish, old-line firms are really going to start to feel the squeeze,” said Brian Devine, Americas head of transport at Norton Rose Fulbright.
Kimball agreed that the current state of shipping markets is less conducive to a high volume of legal work. “When people are getting out of contracts, we are busy, and when people are getting into contracts, we are also busy,” said Kimball, adding, “There are just not as many cases. There haven’t been significant casualties – which is good for the shipping industry – and the P&I clubs have the lowest claim level they have had in as long as anyone can remember.” Kimball also noted that one of the strengths of New York’s maritime law community is ship finance, “but that is slower because the capital markets have pulled back and there is definitely not the same level of investment we saw before”.
“Our practice is broad enough that we have been busy, just in a different way,” affirmed Kimball, who believes that “all the New York firms are still doing okay. It’s not the boom years, but it’s pretty steady. And we do have a very positive outlook. I think we have probably seen the bottom for the shipping industry and we’re looking at some good years ahead”.