The Maritime Lien

The August 31, 2016, bankruptcy of container shipper giant Hanjin Shipping Co. Ltd. has thrown ports and retailers around the world into confusion.  With its fleet of more than 100 container ships, Hanjin is South Korea’s largest container carrier, seventh largest in the world, and accounts for eight percent of trans-Pacific trade volume for the U.S. Market.  Worldwide ports and companies that provide necessary services and supplies to its ships have denied them access for fear of not being paid.  This has stranded billions of dollars of cargo at sea.  On September 9, 2016 courts in South Korea and the United States cleared the way for Hanjin to spend $10 million to unload four ships headed to the U.S. west coast.  The ships will be allowed to dock and unload their cargo without fear of seizure by creditors. However, Hanjin ships have been seized in in ports in China and Singapore.

 

Given these circumstances, now is a good time for a brief review of the maritime lien which often is the only security that a provider of necessaries to a ship can rely upon.  Simply stated, the maritime lien is designed to furnish security to a creditor, and to enable the vessel to obtain goods and services even though it may be a world away from its home port.  The notion of the maritime lien arose in those long ago days when there did not exist technology that facilitated rapid communication and financial transactions.  Then suppliers of goods and services were reluctant to do business with vessels whose owners were unknown to them or located far away.  After receiving goods or services, the vessel could sail away leaving the owner unpaid.  To ensure payment, the master or vessel’s agent or representative was enabled to pledge the vessel as security.  In the United States the Federal Maritime Lien Act, 46 U.S.C. § 31301, et seq., first enacted in 1910, codified the maritime lien to all suppliers of “necessaries” to a vessel on the order of the owner, master, or charterer.  The lien, which is a non-possessory property right or privilege, attaches to the ship and its appurtenances.  It gives the aggrieved provider the right to seize the vessel, force its sale, and extract payment.  Maritime liens can attach to a vessel under a number of circumstances such as personal injury, property damage, preferred ship mortgages, seaman’s wages, or contractual disputes.  As a result, the courts have ranked the liens in order of priority, with those ranked first having first claim on assets realized from the sale.

 

The Act defines “necessaries” as including “repairs, supplies, towage, and the use of a dry dock or marine railway”. § 31301.  The courts have been more inclusive and recognized services of a marine surveyor, taxi fare for crew member to get to the vessel, insurance premiums, and gambling equipment furnished to a cruise ship.  Also included are pilotage, wharfage and dockage, stevedoring services, advances made by the ship’s agent, damage to cargo, and bills for unpaid bunkers or other necessaries.

 

The lien attaches when the supplies or services are provided.  While it is not necessary to record or file a maritime lien, it is recommended that the lien holder file a formal Notice of Lien with the U. S. Coast Guard Office of Vessel Documentation, if the vessel is documented.  The Coast Guard has General Instructions for Filing and Recording of liens that are easily accessible.  If not documented, the lien may be filed where the shipowner’s headquarters are located.  The benefit of filing is that it serves to notify the public of the lien.  The cost is negligible.  The lien follows the vessel, even if sold.  The lien is extinguished if the vessel is lost or destroyed.

 

The lien can be enforced only by filing a complaint in federal court, which has original jurisdiction, naming the vessel as a defendant and petitioning the Court to arrest the vessel pursuant to a warrant of arrest issued by the Court.  Acting on the warrant the U.S. Marshall is authorized to serve the Master and take custody and control of the vessel by placing a custodian aboard.  The vessel remains in the jurisdiction of the Court until ordered released by the Court.  This can be an expensive.  A deposit (as much as $10,000) is required to cover marshal costs, costs of custodian and insurance.

 

Once arrested in order to achieve its release, the vessel’s owner must file an answer and claim of ownership.  To secure its release, the owner must post security approved by the Court.  This may be a bond, cash, or letter of undertaking.  The amount is usually equal to the lien, plus interests and costs.  If no agreement as to the value can be agreed upon by the parties the Court may exercise its discretion and set the amount.  If security is not provided the Court may, after due process has run its course, order the vessel sold and the proceeds distributed to the lienholder.  If there are multiple lienholders, the funds are distributed by order of privilege.  Vessels may be seized wherever found and if not in a U.S. port will require the U.S. lienholder to access the courts in that country which has jurisdiction over the vessel.

 

It is important to note that there are circumstances where a lien may be lost or waived.  In charter agreements between the owner and bareboat charter there may be provisions that provide that any services furnished are for the account of the charterer, not the vessel.  This may not be binding on the provider if the provider has no knowledge of the provision.  A lien may be lost if the holder waits an unreasonable period of time to enforce it and the owner is prejudiced.  This is left to the discretion of the Court which will rule after hearing the evidence.  Prompt action is always the best course for the provider to set.

 

Thanks to Robert Jablon, Associated Press, and Lisa Richwine, Reuters, for their informative articles on the Hanjin bankruptcy.

The Implications of Hanjin’s Bankruptcy

Hanjin Shipping Company originates in South Korea but is internationally recognized in the maritime industry. Responsible for a substantial portion of the industry’s shipping needs, Hanjin is the world’s seventh-largest container shipper. The company is now facing a detrimental dilemma: too many ships and not enough cargo. In order to protect its remaining assets, the company filed for bankruptcy in the United States. So far, eight of Hanjin’s ships have been seized. Approximately 80 more are awaiting their fate and are, in the meantime, preventing approximately $14 billion worth of cargo orders from being delivered. On September 9, 2016, a U.S. judge granted an order allowing Hanjin provisional protection from U.S. creditors, thus enabling some of its vessels to dock and unload.

Despite the court ordered protection, the company’s collapse has already made waves across the board. Retailers are predicting delayed shipments in advance of the holiday season, the impact of which will be felt by the consumer. U.S. exporters are estimating a 50% increase in shipping fees as a direct result of Hanjin’s bankruptcy. Additionally, commentators are noting that the bankruptcy is reflective of an industry-wide problem, citing Maersk Line’s $114 million loss in the first six months of 2016. Though the fate of the company and its vessels is uncertain, we can be sure that all members of the industry will feel the impact, either directly or indirectly.

Tides Are Turning: The Arrival of Subchapter M

*This article was prepared by our summer law clerk, Ridge Miguez.

 

On June 20, 2016 the U.S. Coast Guard posted a preview of the final version of the long-awaited Subchapter M regulation, which will extend inspection requirements to the majority of tugs and towboats for the first time. In 2004, Congress reclassified towing vessels as vessels subject to inspection, and consistent with 46 U.S.C. 3305, this rule sets out the scope and standards of inspection. Now with the implementation of Subchapter M the U.S. Coast Guard has created a comprehensive safety system that includes company compliance, vessel compliance, vessel standards, and oversight in a new Code of Federal Regulations (CFR) subchapter dedicated to towing vessels. This rule, which generally applies to all U.S. flag towing vessels 26 feet or greater, and those less than 26 feet moving a barge carrying oil or hazardous material in bulk, lays out both inspection mechanisms as well as new equipment, construction, and operational requirements for towing vessels.

 

To provide flexibility, vessel operators will have the choice of two inspection regimes. Under the Towing Safety Management System (TSMS) option, routine inspections of towing vessels will primarily be performed by third-party organizations (TPOs), including certain classification societies, and this rule creates a framework for oversight and audits of such TPOs by the Coast Guard. The TSMS will provide operators with the flexibility to tailor their safety management system to their own needs, while still ensuring an overall level of safety acceptable to the Coast Guard. Alternatively, under the Coast Guard inspection option, routine inspections would be conducted by the Coast Guard, providing an option for those operators who choose not to develop and implement their own TSMS.

 

Subchapter M also creates many new requirements for design, construction, equipment, and operation of towing vessels. Those requirements are typically based on industry consensus standards or existing Coast Guard requirements for similar vessels.

 

The most important change to the final revision of Subchapter M has been the changes made to the Coast Guard’s proposal in the NPRM. They have clarified the system for Coast Guard oversight and inspection of towing vessels that complements the TPO system. To address concerns about the cost impact of the rule, they have added “grandfathering” provisions to several requirements, so the requirements will not apply to existing vessels or vessels whose construction began before the effective date of the rule. Also, they have reorganized several parts for greater clarity or to better align with the existing text of other parts of the CFR. As noted in the NPRM (7 FR 49985), the Coast Guard still plans to promulgate a separate rulemaking for an annual inspection fee for towing vessels that will reflect the specific program costs associated with the TSMS and Coast Guard inspection options. As of now the Coast Guard is establishing the existing fee of $1,030 in 46 CFR 2.10-101 for any inspected vessel not listed in Table 2.10-101, as the annual inspection fee for towing vessels subject to Subchapter M. Furthermore, this fee will not be charged for a vessel being inspected for the initial issuance of a certificate of inspection (COI), however the fee will be charged annually starting the following year.

 

The Coast Guard released a statement that Subchapter M will affect approximately 5,509 U.S. flag towing vessels engaged in pushing, pulling, or hauling alongside, and the 1,096 companies that own or operate them. Towing vessels exempt from this rule include towing vessels inspected under Subchapter I, work boats, and recreational vessel towing vessels.

 

The estimate for total industry and net government costs is $41.5 million annualized at a 7 percent discount rate over a 10 –year period of analysis. The estimate for monetized benefits is $46.4 million annualized at a 7 percent discount rate, based on the mitigation of risks from towing vessel accidents in terms of lives lost, injuries, oil spilled, and property damage. Thus, a net benefit of $4.9 million is estimated from implementing Subchapter M.

 

The new rule became effective July 20, 2016. However, certain existing towing vessels subject to this rule will have an additional 2 years before having to comply with most of its requirements. It will be interesting to see how small operators are affected by the changes Subchapter M brings their way. Only time will tell, but it seems the rule change is in the greater interest of the industry as a whole.

 

Advanced Technology from U.S. Military will soon find its way into Commercial Diving Operations

The United State Navy has developed the Divers Augmented Vision Display, which is a high-resolution, heads-up display installed directly into a diver’s helmet.  The system will allow the diver to access sonar, text messages, diagrams, and photographs. Significantly, the display will allow for augmented reality videos; technology that allows images and video to be superimposed in real time (think the “monocle” mode in your Yelp app).

 

This technology will assist divers in recovery and salvage operations by offering real-time positional awareness.  The Naval Sea Systems Command is also working on development of enhanced video systems that will increase diver sight in near zero visibility situations.  Like so many other advancements before, it is only a matter of time before these technologies make their way into commercial diving operations.