'Vessel Financing': Section 1110 Cast Adrift

But what about the application of Section 1110 to vessels? Section 1110(a)(3)(A)(ii) provides a special exemption from the automatic stay provisions of the Bankruptcy Code for a 'documented vessel (as defined in Section 30101(1) of Title 46) that is subject to a security interest granted by, leased to, or conditionally sold to a debtor that is a water carrier that, at the time such transaction is entered into, holds a certificate of public convenience and necessity or permit issued by the Department of Transportation.' This provision of Section 1110, applicable to vessels, sounds reasonably comparable to the provisions relating to aircraft and rail equipment. However, the seeming analog to aircraft is illusory, and no cases have made themselves readily apparent applying Section 1110 to vessels. This situation may well exist because no U.S. flag commercial vessel holds a 'certificate of public convenience and necessity or permit,' a prerequisite to the applicability of Section 1110(a)(3)(A)(ii).

By way of background, under the predecessor Bankruptcy Act of 1968, Congress initially provided special treatment in bankruptcy to equipment financiers in rolling stock (1935 amendment to Section 77(j)) and aircraft (1957 edition of Section 116(5)). In 1968, Congress added Section 116(6) to extend the special treatment to vessels. Similar to Section 116(5) relating to aircraft, the purpose of Section 116(6) was to improve the ability of water carriers to obtain financing for vessels involved in transportation within the U.S. inland waterways or coastwise trade. The Bankruptcy Reform Act of 1978 and the Bankruptcy Reform Act of 1994 changed the provision of former Section 116(6) to its current form in Section 1110(a)(3)(A)(ii) of the Bankruptcy Code to include secured creditors, but also provided the trustee an opportunity to agree to perform and cure monetary defaults within a specified amount of time.