SDNY Bankruptcy Court Tackles Jurisdiction of Federal Maritime Commission

by Cadwalader, Wickersham & Taft LLP

SDNY Bankruptcy Court Tackles Jurisdiction of Federal Maritime Commission

On February 10, 2012, Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York denied the motion of 22 defendants in adversary proceedings filed by the Debtor, The Containership Company, seeking to lift the automatic stay to file complaints before the Federal Maritime Commission (“FMC”).  In re The Containership Company, Case No. 11-12622 (Bankr. S.D.N.Y. Feb. 10, 2012).

In April 2011, the Debtor filed a petition for “reconstruction” in Denmark, which the U.S. bankruptcy court recognized as a foreign main proceeding under chapter 15 of the Bankruptcy Code.  In August 2011, the Debtor commenced adversary proceedings in the U.S. against certain shippers that had entered into prepetition service contracts with the Debtor.  The Debtor alleged that the shippers breached the service contracts by failing to tender the minimum amounts of containers required by the contracts.  In response, the shippers sought relief from the automatic stay to file complaints with the FMC, which they argued had exclusive or primary jurisdiction to hear their causes of action.

Under the Shipping Act of 1984, a federal statute established to regulate the ocean commerce of the United States, the FMC has exclusive jurisdiction to resolve claims involving possible violations of the Shipping Act.  However, the Shipping Act expressly provides that unless the parties agree otherwise, the exclusive forum for asserting breach of contract actions is another “appropriate court.”  Thus, where a complaint includes only contract claims, there is a presumption that the matter falls outside the realm of the FMC jurisdiction.

In The Containership Company, the shippers argued that the FMC had exclusive jurisdiction over their breach of contract claims.  The court rejected their argument, however, finding that the shippers’ allegations were “in the nature of affirmative defenses to the underlying beach of contract claims” that involved “common law principles” and “matters commonly addressed by federal courts.”

Next, the shippers argued that the FMC had primary jurisdiction because continuing with the adversary proceedings in the bankruptcy court would “waste judicial resources and raise the possibility of inconsistent determinations.”  The court also rejected this argument, explaining that that it would defer to the jurisdiction of another tribunal if an issue involved “technical questions of fact uniquely within the expertise” of that tribunal.  The court found that the shippers made only “conclusory allegations” that failed to explain “why or how the [FMC]’s expertise would be needed to resolve” the issues in their complaints and that therefore the FMC did not have primary jurisdiction.

The court also rejected the shippers’ argument that the recent Supreme Court decision in Stern v. Marshall, which held that a bankruptcy court lacked the constitutional authority to enter a final judgment on a state law counterclaim, prevented the court from adjudicating the adversary proceedings.  The court found that argument was premature because the shippers had not yet filed answers to the Debtor’s complaints.

In denying the request for stay relief, the court noted that the automatic stay under section 362 of the Bankruptcy Code applies equally to a debtor in a chapter 15 case where there has been recognition of a foreign proceeding as a foreign main proceeding.  The shippers argued that they had “cause” to lift the automatic stay because the FMC had jurisdiction to hear their complaints.  The court found, however, that the shippers had not established cause to lift stay under the factors enunciated in the Second Circuit’s In re Sonnax Indus., 907 F.2d 1280 (2d Cir. 1990).  In short, the court determined that the interests of judicial economy did not favor permitting the filing of the complaints before the FMC, which lacked both exclusive and primary jurisdiction to hear the breach of contract allegations.

The Containership Company reaffirms the supremacy of bankruptcy court jurisdiction in maritime disputes when the technical expertise of another tribunal is not required.  Although this case concerned the FMC, its principles will likely apply to other specialized tribunals.  The case also reiterates that the automatic stay applies with equal force in a chapter 15 case.

Tagged in Chapter 15, Stern v. Marshall Updates.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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