Bankruptcy, Maritime Law, and the Holiday Season Collide in
In re Hanjin Shipping Co., Ltd.
The Business Advisor
As media reports have made clear, the shipping industry is not exempt from financial turmoil. On August 31, 2016, Hanjin Shipping Co., Ltd. (“Hanjin”) filed an application to commence a bankruptcy proceeding in the Republic of Korea. A commencement order was entered the following day. On September 2, 2016, Tai-Soo Suk, the foreign representative of Hanjin, filed a chapter 15 bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey (“Bankruptcy Court”), seeking the recognition of Hanjin’s bankruptcy case in Korea as a foreign main bankruptcy case, as well as certain protections including a stay of actions against either Hanjin or its assets in the United States.1
Hanjin has differed from other chapter 15 cases. In other cases, there has been extensive litigation over whether the foreign insolvency proceeding is entitled to comity. See, e.g., In re Interpool, Ltd., v. Certain Freights, 102 B.R. 373, 377-79 (D.N.J. 1989) (decided under 11 U.S.C. § 304, the predecessor to chapter 15, declining to extend comity to an Australian bankruptcy case in part because the Australian bankruptcy law failed to provide notice to creditors of major agreements between liquidators and insiders), appeal dismissed on procedural grounds, 878 F.2d 111 (3rd Cir. 1989). The entitlement of Hanjin’s Korean bankruptcy proceeding to comity was never in question. U.S. courts have repeatedly recognized Korean insolvency and restructuring proceedings as bankruptcy proceedings. See e.g., In re STX Pan Ocean Co. Ltd., Case No. 13-12046 (SCC) (Bankr. S.D.N.Y. 2013); In re Daebo Int’l Shipping Co., Ltd., Case No. 15-10616 (MEW) (Bankr. S.D.N.Y. 2015); In re Daehan Shipbuilding Co., Ltd., Case No. 14-12391 (SHL) (Bankr. S.D.N.Y. 2014); In re Daewoo Logistics Corp., Case No. 09-15558 (BRL) (Bankr. S.D.N.Y. 2009). Historically, there has been similar litigation over whether the foreign proceeding, with respect to which recognition as a foreign main bankruptcy case has been sought, has been filed in the “center of main interests” (COMI) of the debtor. See, e.g., In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 130 (Bankr. S.D.N.Y. 2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2008). It is beyond question, however, that the Republic of Korea is Hanjin’s COMI.
Three major factors have controlled developments in the Hanjin chapter 15 case: (i) the interface between admiralty/maritime law and the Bankruptcy Code; (ii) the then-impending U.S. holiday season; and (iii) the clash between the major constituencies. For example, Hanjin has been trying to (pardon the pun) remain afloat long enough to sell valuable assets on a going concern basis and, if possible, restructure. To that end, among other actions, Hanjin has aggressively sought to collect substantial accounts receivable to partially fund its reorganization to the point, in one case, of refusing to release cargo to the owner until the owner had paid its outstanding payables to Hanjin in full.
While Hanjin struggled to restructure, beneficial cargo owners (BCOs) desperately attempted to acquire millions of dollars of cargo sitting in containers on Hanjin-chartered vessels to shore. To avoid arrest by Hanjin’s creditors, however, Hanjin-chartered vessels remained in international waters. The BCOs faced looming deadlines to get goods on U.S. store shelves in time for the holiday season or to deliver goods to end customers. Of particular concern to BCOs were deliveries on government contracts that could be terminated for late delivery. BCOs also faced potential increases in charges to transport their cargo from port inland, because Hanjin had amended bills of lading covering BCO cargo to provide that it would only deliver that cargo to the marine terminal (so-called “port-to-port delivery”) and not to previously agreed on inland destinations (so-called “port-to-door” delivery).
Further delaying the delivery of BCOs’ cargo, marine terminals refused to allow Hanjin-chartered ships to dock for fear that stevedoring charges would not be paid. Owners of the containers in which cargo was shipped and the owners of the chassis on which the containers were transported inland discovered that Hanjin had rejected its lease agreements with them, subjecting them to risk of non-payment. Additionally, because Hanjin was not shipping goods (or the containers) back to the Republic of Korea, marine terminals were not accepting returns of empty Hanjin containers from BCOs. Finally, creditors who had provided services and supplies to Hanjin vessels asserted maritime liens and attempted to arrest Hanjin-chartered vessels.
At a hearing on September 9, 2016, the Bankruptcy Court considered the impact of the inability of BCOs to ship goods to stores in time for the holiday season and urged the parties to reach an agreement for offloading cargo. During and following the conclusion of the September 9, 2016 hearing, the BCOs and Hanjin engaged in negotiations that resulted in a protocol for: (i) the unloading of cargo from Hanjin-chartered ships at U.S. ports; (ii) the payment of ocean freight charges due Hanjin on that cargo; (iii) the payment of terminal charges; and (iv) the release of cargo to the BCOs. After that agreement was reached, on the evening of September 9, 2016, the Bankruptcy Court entered an order approving the proticol. By the same order and over the objection of maritime lien claimants, the Bankruptcy Court also stayed attempts to arrest Hanjin-chartered vessels in U.S. waters, allowing them to dock at U.S. ports, unload cargo, and depart without fear of arrest. Meanwhile, as of September 9, 2016, Hanjin had received approximately $10 million to finance the unloading of four Hanjin-chartered vessels. Thereafter, Hanjin received financing to unload other BCOs’ cargo.
Controversy did not end with the approval of the protocol. Various parties sought orders “clarifying,” “enforcing,” or modifying the protocol and urged various interpretations of the language of the protocol in support of or in opposition to those motions. Hanjin, for example, interpreted the protocol to allow it to withhold the release of cargo to any BCO who had an outstanding payable to Hanjin regardless of whether the payable related to the cargo being unloaded. By contrast, one BCO sought authorization to avoid paying a significant payable to Hanjin, so that it could offset the payable against the additional charges it had incurred and would incur to obtain port-to-door delivery of its cargo. Maritime lienholders continued to seek leave to realize on their liens, notwithstanding the stay contained in the Bankruptcy Court’s September 9, 2016 order.
In response to these various attempts to reinterpret and modify the protocol, the Bankruptcy Court repeatedly ruled that, to obtain release of cargo from Hanjin, BCOs had to pay the ocean freight due and owing only with respect to the cargo being released. Hanjin could not condition the release of cargo on the payment of other amounts due Hanjin from a BCO. Consistent with the protocol, however, the Bankruptcy Court insisted that BCOs must pay the ocean freight charges, notwithstanding any additional transportation charges as a result of Hanjin’s repudiation of the port-to-door provisions of its earlier agreements with them. Claims for those charges, concluded the Bankruptcy Court, should be asserted in Hanjin’s Korean bankruptcy proceeding. As to the maritime lien claimants, the Bankruptcy Court reiterated its earlier position that the automatic stay protected Hanjin-chartered vessels in U.S. waters.
The initial whirlwind of activity in Hanjin is winding down. On December 14, 2016, the Bankruptcy Court entered a final order recognizing Hanjin’s Korean bankruptcy proceeding as a foreign main bankruptcy proceeding. Almost all U.S. bound cargo on Hanjin-chartered vessels has been delivered to port and unloaded. Indeed, the U.S. parties who have achieved the best results in the Hanjin chapter 15 case are the BCOs who carefully monitored the vessels carrying their cargo, paid the ocean freight charges for those goods, and monitored the situation concerning the establishment of locations to which empty Hanjin containers could be returned and ensured that they were returned.2 They obtained their cargo on a reasonable and timely basis and minimized additional charges they might have faced as a result of Hanjin’s repudiation of the port-to-door provisions of its agreements with the BCOs.
At this point, Hanjin appears to be headed toward liquidation. Korea Line Corporation (KLC) has agreed to purchase Hanjin’s Asia-U.S. Route sales network, and the bankruptcy court in Seoul authorized the parties to proceed with the transaction. KLC has expressed a willingness to purchase other Hanjin assets, including vessels. Hyundai Merchant Marine Co. (“Hyundai”) was chosen the preferred bidder of Hanjin’s interest in Total Terminal International Algeciras S.A.U. in Spain. Hyundai and Mediterranean Shipping Co. are the leading contenders to purchase Hanjin’s interest in the largest container terminal at the Port of Long Beach, California. Meanwhile, Hanjin’s Korean bankruptcy case proceeds forward, with a restructuring plan due in early February 2017.
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1 In re Hanjin Shipping Co., Ltd., (Bankr. D.N.J. Case No. 16-27041 (JKS).
2 Gibbons P.C. represented four BCOs in the Hanjin chapter 15 case. Gibbons’ representation in chapter 15 cases is not limited to creditors. Gibbons is currently co-counsel to the foreign representative in the chapter 15 bankruptcy case filed on behalf of STX Offshore & Shipbuilding Co., Ltd. pending before the U.S. Bankruptcy Court for the Southern District of Texas in Houston. See In re STX Offshore & Shipbuilding, Co., Ltd., (Bankr. S.D. Tex. Case No. 16-35248-jb). A final order recognizing the Korean bankruptcy case of STX Offshore as a foreign main bankruptcy proceeding was entered on November 17, 2016.