Bankruptcy Trumps Admiralty

The U.S. Court of Appeals for the Second Circuit ruled that a bankruptcy court may extinguish maritime liens on vessels where the lienors are before the court, even though the ships are not within the jurisdiction of the court. A shipowner filed for reorganization under Chapter 11 of the Bankruptcy Code. Defendant financial institutions, which held preferred ship mortgages, succeeded in getting the court to convert the action into an involuntary bankruptcy under Chapter 7. Plaintiff lienors filed maritime lien claims and contended that the bankruptcy court lacked authority to extinguish liens on ships that were not within the jurisdiction of the court. The bankruptcy court offered plaintiffs the opportunity to withdraw from the proceeding. After plaintiffs elected to remain, the court ruled that the priority of the preferred ship mortgages was superior to that of the various lien claims. Plaintiffs appealed. The appellate court held that the congressional grant of subject matter jurisdiction to district (and bankruptcy) courts to adjudicate in bankruptcy all property, wherever located, extends to ships that have not been arrested within the court’s jurisdiction and, in the circumstances, the bankruptcy court had equitable jurisdiction to extinguish the lienors’ maritime claims. In re Millenium Seacarriers, Inc., No. 04-0631 (2nd Cir., HK Law).