Article by George A. Rutherglen
Maritime liens have never fit very well with bankruptcy law. They are creatures of admiralty law whose sole distinguishing feature, according to Gilmore and Black, is that they have virtually nothing in common with ordinary liens. As these authors have said, “A lien is a lien is a lien, but a maritime lien is not.” This also appears to be the position of the Ninth Circuit, which recently held that maritime liens for seamen's wages could be enforced independently of reorganization proceedings because they were not liens within the meaning of the Bankruptcy Code.
But if maritime liens have little in common with security interests, they have still less in common with simple unsecured claims. A maritime lienor has a right to proceed against the asset subject to the lien, typically a vessel, through the summary procedure of maritime arrest, followed by an in rem action against the vessel itself. If the lienor prevails, the vessel is sold to satisfy the lien. Maritime liens can also be asserted against freights and the receipts for carrying cargo, which are usually treated as part of the vessel. Almost all litigation over maritime liens concerns the functional equivalent of security interests in vessels in maritime commerce.
Maritime liens are ranked according to a unique, not to say peculiar, system of priorities. They are first ranked by class: liens for seamen's wages, for instance, take priority over other contract liens. They are then ranked in reverse temporal order: the latest lien within each class receives the highest priority. Maritime liens as a whole take priority over all other security interests. They are also unique among statutory liens in reaching tort claims, such as those for collisions and unseaworthiness. These peculiar characteristics of maritime liens make the most difference, of course, when the debtor is at or near insolvency. Apart from insolvency, the maritime lienor can proceed against the debtor personally without the need to seek recourse against the specific asset bearing the lien.
The special system of enforcement and priority of maritime liens can be reconciled with bankruptcy law only on the assumption that maritime liens are security interests entitled to the special treatment and subject to the same conditions as other security interests under the Bankruptcy Code. Before the Bankruptcy Code was extensively revised by the Bankruptcy Act of 1978, judicial decisions tried to reconcile admiralty and bankruptcy law by allowing maritime lienors to pursue a separate admiralty action if they arrested the vessel before a petition for bankruptcy was filed. This method of enforcing maritime liens concurrently with bankruptcy led to a wasteful race to the courthouse that was costly to both creditors and the bankrupt's estate. In several provisions, and especially through the automatic stay, the Bankruptcy Act of 1978 attempted to put an end to such jurisdictional disputes based on control of the debtor's assets. Apart from some persistent doubts about the constitutional power of bankruptcy judges appointed under article I, these provisions should have put to rest any question about the exclusive jurisdiction of the bankruptcy court over the debtor's assets. Together with a preliminary discussion of the status of maritime liens in bankruptcy, this jurisdictional question forms the subject of Part I of this Article.
The jurisdictional dispute between bankruptcy and admiralty courts should now be replaced by litigation in the bankruptcy court over when relief should be granted from the automatic stay. Part II of this Article argues that, notwithstanding its jurisdictional power, the bankruptcy court should normally grant relief from the automatic stay and allow separate admiralty proceedings to go forward. In the typical case, in which the debtor is a shipping firm that has fallen victim to one of the periodic recessions in the shipping industry, there is little chance for a successful reorganization that would justify continuation of the automatic stay. A liquidation of the debtor's assets would not be obstructed by a sale of the debtor's vessels in separate admiralty actions; usually, the debtor would not have equity in the vessel above that necessary to satisfy outstanding maritime liens, and even if it did, that surplus could be remitted to the bankruptcy court for distribution to unsecured creditors and owners. If the debtor is a firm engaged in international shipping, there is all the more reason to allow separate admiralty proceedings to go forward because the debtor's vessels may be seized in foreign ports effectively beyond the reach of the automatic stay.
About the Author
George A. Rutherglen. John Allan Love Professor of Law, University of Virginia.
Citation
65 Tul. L. Rev. 503 (1991)