'Vessel Financing': Section 1110 Cast Adrift

Section 1110, as applied to vessels, has three fundamental prerequisites: a 'documented vessel,' a 'water carrier' and 'a certificate of public convenience and necessity or permit.'

The first prerequisite is the existence of a 'documented vessel.' It is defined at 46 U.S.C. 30301(1) as a vessel documented under Chapter 121 of Title 46 dealing with vessel documentation. This chapter of Title 46 deals generally with documentation requirements for all United States flag vessels. As such, this portion of Section 1110 can be satisfied.

The second prerequisite is that the documented vessel is subject to a security interest granted by, leased to, or conditionally sold to a debtor that is a 'water carrier.' The Bankruptcy Code does not define the term 'water carrier.' However, when the Interstate Commerce Commission Termination Act of 1995 (the 'ICC Act') established the Surface Transportation Board ('STB'), the term 'water carrier' was defined as 'a person providing water transportation for compensation.' See 49 U.S.C. '13102(22). This definition would encompass any United States documented commercial vessel, eg, vessels permitted to engage in the United States coastwise, fisheries or registry ('foreign') trades.

An alternate definition of 'water carrier' is found in the Shipping Act, 46 U.S.C. App. '801 (the 'Shipping Act'), which is a much narrower definition, encompassing only vessels engaged in the United States coastwise (sometimes referred to as 'Jones Act') trade. It defines the term 'common carrier by water in interstate commerce' to mean 'a common carrier engaged in the transportation by water of passengers or property on the high seas or the Great Lakes on regular routes from port to port between one state, territory, district or possession of the United States and any other state, territory, district or possession of the United States, or between places in the same territory, district or possession.'

If a bankruptcy court applied the ICC Act definition, Section 1110 might be available with respect to all United States commercial vessels, but if a bankruptcy court applied the Shipping Act definition, Section 1110 would be applicable more narrowly only to those commercial vessels with a coastwise trade endorsement. Unless a bankruptcy court would be willing to apply the ICC Act definition, a financier seeking to avail itself of the benefits of Section 1110 as applicable to vessels would have difficulty establishing that the debtor satisfies the definition of 'water carrier' if the relevant vessel was permitted to trade only on the registry ('foreign') trade of the United States.

And what of the third prerequisite: 'a certificate of public convenience and necessity or permit issued by the Department of Transportation?' During the period of 1940 to 1995, the Interstate Commerce Commission (ICC) had the authority to regulate interstate commerce by water in connection with both common carriage and contract carriage. The ICC issued certificates to vessels engaged in common carriage, such as container ships, and permits to vessels engaged in contract carriage, such as oil tankers. The certificate or permit, which is ICC terminology carried over from the railroad industry, authorized the water carrier to provide transportation subject to the jurisdiction of the ICC. When the ICC was terminated in 1995 and certain functions transferred to the STB, the power to issue certificates and permits to vessels was not transferred. Interestingly, the STB continues to issue certificates of public convenience and necessity for aircraft, railroads and pipelines. In discussion with the STB, we were advised that it does not, and never has, issued certificates or permits to vessels.

Further, even if a vessel had been issued a certificate or a permit by the ICC prior to the ICC's abolition, such a certificate or permit would not meet the statutory test under existing Section 1110, which requires that such certificate or permit have been issued by the Department of Transportation. In sum, an action brought in a bankruptcy court with respect to a vessel in which a creditor sought to avail itself of the benefits of Section 1110 would appear to be a case of first impression with respect to its applicability to vessels, no matter in what United States trade a vessel is engaged. It is difficult to predict whether a bankruptcy court would so liberally construe the statutory intent of the Bankruptcy Code so as to try to give meaning to Section 1110 as applicable to vessels where at least one of the factors to be satisfied is a carry over provision from a prior law that can no longer be satisfied. As such, this appears to be an example of how faulty statutory drafting can result in a loss of rights, however unintended.

Ruth L. Lansner and Nancy L. Hengen are partners in the Structured Finance practice group of the New York office of the law firm of Holland & Knight LLP.

Section 1110 of the Bankruptcy Code, 11 U.S.C. ' 1110, provides a special exemption from the automatic stay provisions of the Code, permitting a lessor to take possession of certain equipment 60 days after the lessee files for bankruptcy. This obtains unless the lessee's trustee performs the lessee's obligations, and cures all pre-bankruptcy defaults within the 60-day period. Lessors of aircraft are familiar with the myriad cases that have interpreted the application of Section 1110 to such equipment (see Section 1110(a)(3)(A)(i)).

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.

Section 1110, as applied to vessels, has three fundamental prerequisites: a 'documented vessel,' a 'water carrier' and 'a certificate of public convenience and necessity or permit.'

The first prerequisite is the existence of a 'documented vessel.' It is defined at 46 U.S.C. 30301(1) as a vessel documented under Chapter 121 of Title 46 dealing with vessel documentation. This chapter of Title 46 deals generally with documentation requirements for all United States flag vessels. As such, this portion of Section 1110 can be satisfied.

The second prerequisite is that the documented vessel is subject to a security interest granted by, leased to, or conditionally sold to a debtor that is a 'water carrier.' The Bankruptcy Code does not define the term 'water carrier.' However, when the Interstate Commerce Commission Termination Act of 1995 (the 'ICC Act') established the Surface Transportation Board ('STB'), the term 'water carrier' was defined as 'a person providing water transportation for compensation.' See 49 U.S.C. '13102(22). This definition would encompass any United States documented commercial vessel, eg, vessels permitted to engage in the United States coastwise, fisheries or registry ('foreign') trades.

An alternate definition of 'water carrier' is found in the Shipping Act, 46 U.S.C. App. '801 (the 'Shipping Act'), which is a much narrower definition, encompassing only vessels engaged in the United States coastwise (sometimes referred to as 'Jones Act') trade. It defines the term 'common carrier by water in interstate commerce' to mean 'a common carrier engaged in the transportation by water of passengers or property on the high seas or the Great Lakes on regular routes from port to port between one state, territory, district or possession of the United States and any other state, territory, district or possession of the United States, or between places in the same territory, district or possession.'

If a bankruptcy court applied the ICC Act definition, Section 1110 might be available with respect to all United States commercial vessels, but if a bankruptcy court applied the Shipping Act definition, Section 1110 would be applicable more narrowly only to those commercial vessels with a coastwise trade endorsement. Unless a bankruptcy court would be willing to apply the ICC Act definition, a financier seeking to avail itself of the benefits of Section 1110 as applicable to vessels would have difficulty establishing that the debtor satisfies the definition of 'water carrier' if the relevant vessel was permitted to trade only on the registry ('foreign') trade of the United States.

And what of the third prerequisite: 'a certificate of public convenience and necessity or permit issued by the Department of Transportation?' During the period of 1940 to 1995, the Interstate Commerce Commission (ICC) had the authority to regulate interstate commerce by water in connection with both common carriage and contract carriage. The ICC issued certificates to vessels engaged in common carriage, such as container ships, and permits to vessels engaged in contract carriage, such as oil tankers. The certificate or permit, which is ICC terminology carried over from the railroad industry, authorized the water carrier to provide transportation subject to the jurisdiction of the ICC. When the ICC was terminated in 1995 and certain functions transferred to the STB, the power to issue certificates and permits to vessels was not transferred. Interestingly, the STB continues to issue certificates of public convenience and necessity for aircraft, railroads and pipelines. In discussion with the STB, we were advised that it does not, and never has, issued certificates or permits to vessels.

Further, even if a vessel had been issued a certificate or a permit by the ICC prior to the ICC's abolition, such a certificate or permit would not meet the statutory test under existing Section 1110, which requires that such certificate or permit have been issued by the Department of Transportation. In sum, an action brought in a bankruptcy court with respect to a vessel in which a creditor sought to avail itself of the benefits of Section 1110 would appear to be a case of first impression with respect to its applicability to vessels, no matter in what United States trade a vessel is engaged. It is difficult to predict whether a bankruptcy court would so liberally construe the statutory intent of the Bankruptcy Code so as to try to give meaning to Section 1110 as applicable to vessels where at least one of the factors to be satisfied is a carry over provision from a prior law that can no longer be satisfied. As such, this appears to be an example of how faulty statutory drafting can result in a loss of rights, however unintended.

Ruth L. Lansner and Nancy L. Hengen are partners in the Structured Finance practice group of the New York office of the law firm of Holland & Knight LLP.