In re Muma Services, Inc.

• Decision Date: 30 March 2005
• Docket Number: No. 01-927(MFW).,No. 01-946(MFW).,No. 01-947(MFW).,No. 01-929(MFW).,No. 01-932(MFW).,No. 01-943(MFW).,No. 01-939(MFW).,No. 01-950(MFW).,No. 01-940(MFW).,No. 01-942(MFW).,No. 01-926(MFW).,No. 01-938(MFW).,No. 01-948(MFW).,No. 01-945(MFW).,No. 01-930(MFW).,No. 01-936(MFW).,No. 01-928(MFW).,No. 01-944(MFW).,No. 01-931(MFW).,No. 01-941(MFW).,No. 01-937(MFW).,No. 01-935(MFW).,No. 01-949(MFW).,01-926(MFW).,01-927(MFW).,01-928(MFW).,01-929(MFW).,01-930(MFW).,01-931(MFW).,01-932(MFW).,01-935(MFW).,01-936(MFW).,01-937(MFW).,01-938(MFW).,01-939(MFW).,01-940(MFW).,01-941(MFW).,01-942(MFW).,01-943(MFW).,01-944(MFW).,01-945(MFW).,01-946(MFW).,01-947(MFW).,01-948(MFW).,01-949(MFW).,01-950(MFW).
• Citation: 322 B.R. 541
• Parties: In re MUMA SERVICES, INC. (f/k/a Murphy Marine Services, Inc.), et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

322 B.R. 541

In re MUMA SERVICES, INC. (f/k/a Murphy Marine Services, Inc.), et al., Debtors.

No. 01-926(MFW).

No. 01-927(MFW).

No. 01-928(MFW).

No. 01-929(MFW).

No. 01-930(MFW).

No. 01-931(MFW).

No. 01-932(MFW).

No. 01-935(MFW).

No. 01-936(MFW).

No. 01-937(MFW).

No. 01-938(MFW).

No. 01-939(MFW).

No. 01-940(MFW).

No. 01-941(MFW).

No. 01-942(MFW).

No. 01-943(MFW).

No. 01-944(MFW).

No. 01-945(MFW).

No. 01-946(MFW).

No. 01-947(MFW).

No. 01-948(MFW).

No. 01-949(MFW).

No. 01-950(MFW).

United States Bankruptcy Court, D. Delaware.

March 30, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Daniel K. Astin, Esquire, The Bayard Firm, Wilmington, DE, Alfred E. Yudes, Jr., Esquire, Watson, Farley & Williams, New York, NY, for the trustee.

Richard Riley, Esquire, Duane Morris LLP, Wilmington, DE, for the Bank Group.

Michael Kaminski, Esquire, DKW Law Group, PC, Pittsburgh, PA, for CSX Intermodal, Inc.

Jami B. Nimeroff, Esquire, Buchanan, Ingersoll, Wilmington, DE, for S.C. Engineering Co., Inc.

Susan E. Kaufman, Esquire, Heiman, Gouge & Kaufman, LLP, Wilmington, DE, for the Unions.

John J. Hession, Esquire, Dogherty, Ryan, Giuggra, Zambito & Hession, New York, NY, for Stewart Dixon.

Paul Matthews, Esquire, New York, NY, for Keenan & Haber.

Charles J. Brown, Esquire, Elzufon, Austin, Reardon, Tarlov & Mondell, PA, Wilmington, DE, for Saravello, Birch, Coney, Casper & Bilbow.

OPINION¹

MARY F. WALRATH, Chief Judge.

Before the Court is the task of resolving the validity and priority of competing claims to approximately $10 million from the sale of the assets of NPR, Inc. ("NPR"), one of the Debtors in these jointly administered cases. The claims include preferred ship mortgages, seamen's wage claims, penalty wage claims, personal injury claims, an artisan's possessory lien for repairs, an interline constructive trust fund claim, and a claim under section 522(b) to subordinate claims under the "equities of the case" doctrine. After trial and briefing, we determine the priorities of the claims are as set forth in the attached Order.

I. BACKGROUND

On March 21, 2001, Murphy Marine Services, Inc., and certain affiliates including NPR (collectively "the Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors were in the shipping industry, where they operated maritime facilities and provided integrated cargo transportation and logistics management services.

On April 26, 2002, we authorized the sale of substantially all of the assets of NPR, including certain leases, accounts receivable, and four vessels: the M/V Carolina, M/V Guyama, M/V Humacao and M/V Mayaguez. The assets were sold free and clear of all liens and encumbrances to Sea Star Line, LLC ("Sea Star"). The sale proceeds were used to repay the post-petition financing obligations and related fees owed to Wells Fargo and to satisfy unpaid wages, withholding taxes and other current obligations due to employees. The remaining sale proceeds (which currently total in excess of $10 million) were deposited into segregated accounts pending the Court's determination of the claims and liens thereon.

On July 25, 2002, we granted the U.S. Trustee's Motion to convert the Debtors' cases to chapter 7. Charles A. Stanziale ("the Trustee") was appointed the trustee. Subsequently, a deadline was set for the Trustee and claimants asserting liens against the NPR sale proceeds to file their claims. A hearing to consider the claims and respective priorities of the liens was held on May 13, 2003. Thereafter, briefs were submitted by the Trustee and some of the claimants. The matter is ripe for decision.

II. JURISDICTION

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (B), (K) & (O).

III. DISCUSSION

Because the sale proceeds include proceeds from the sale of NPR's vessels,² we must determine the priority of claims to those proceeds under maritime law.

A. Maritime Liens Generally

"The federal maritime lien is a unique security device, serving the dual purpose of keeping ships moving in commerce while not allowing them to escape their debts by sailing away. The lien is a special property right in the vessel, arising in favor of the creditor by operation of law as security for a debt or claim." Equilease Corp. v. M/V Sampson, 793 F.2d 598, 602 (5th Cir.1986) (citations omitted). A maritime lien is grounded in "the legal fiction that the ship itself caused the loss and may be called into court to make good." Ventura Packers, Inc. v. F/V JEANINE KATHLEEN, 305 F.3d 913, 919 (9th Cir.2002). This "personifies a vessel as an entity with potential liabilities independent and apart from the personal liability of its owner," giving the maritime lien claimant the right to seize the vessel and have it sold to satisfy the debt owed. Equilease, 793 F.2d at 602 (citations omitted). See generally, Robert Force & Martin Norris, 1 The Law of Seamen § 20:3 (5th ed.2004).

When a maritime lien attaches to a vessel, it accompanies the ship everywhere and through all transfers of ownership, even into the hands of a bona fide purchaser without notice, unless the transferee has acquired title through an in rem judicial proceeding that extinguishes the lien. See Michael J. Ende, Adrift on a Sea of Red Ink: the Status of Maritime Liens in Bankruptcy, 11 Fordham Int'l L.J. 573, 588 (1988) (arguing that bankruptcy courts, as courts with in rem jurisdiction over the debtor's assets, should have the power to sell vessels free and clear of maritime liens).

The perfection of a maritime lien does not require that a creditor record his lien, obtain possession of the vessel, or file a claim against the ship. See, e.g., Bermuda Express, N.V. v. M/V Litsa (Ex. Laurie U), 872 F.2d 554, 557-58 (3d Cir.1989). Rather, the lien attaches and is perfected when the underlying debt or claim arises. See, e.g., Equilease, 793 F.2d at 603. For these reasons, maritime liens are often characterized as "secret liens" because third parties may have no notice that they exist. Id. See also, Bermuda Express, 872 F.2d at 558. Although maritime liens were created by common law, they have largely been codified in the Commercial Instruments and Maritime Lien Act ("the Maritime Lien Act"). See 46 U.S.C. §§ 30101-31343 (1989).

A preferred ship mortgage is not a maritime lien created by common law; it is a creature of statute. See, e.g., U.S. v. TRIDENT CRUSADER, 366 F.3d 391, 394 (5th Cir.2004); Long Island Tankers Corp. v. S.S. Kaimana, 265 F.Supp. 723, 725 (N.D.Cal.1967) (preferred ship mortgages were created "to provide for the promotion and maintenance of the American merchant marines ... to make private investment and credit in the shipping industry more attractive and also to protect the United States as one of the principal sources of credit for ship financing."). A preferred ship mortgage is not a secret lien and is perfected only when filed in substantial compliance with the requirements of the Maritime Lien Act. 46 U.S.C. § 31322(a)(3)(B). See, e.g., Prudential Ins. Co. of Am. v. S.S. American Lancer, 870 F.2d 867, 874 (2d Cir.1989) (preferred ship mortgage was valid where party attempted in good faith to perform all statutorily required procedures to perfect the mortgage and subsequent lienor had actual knowledge of clerical error).

The Maritime Lien Act provides that when a vessel is sold in an in rem action by order of a court of competent jurisdiction the maritime lien claims attach to the proceeds of the sale in accordance with their priorities. 46 U.S.C. § 31326(a) & (b). This is similar to the sale of property free of liens under section 363 of the Bankruptcy Code. 11 U.S.C. § 363(f). See also, In re Trans World Airlines, Inc., 322 F.3d 283, 290-92 (3d Cir.2003) (holding that section 363(f) permits sale free and clear of interests as well as traditional liens on property, with such claims relegated to the proceeds of sale).

Generally, maritime liens must be satisfied before non-maritime liens. See, e.g., McAllister Towing v. Ambassador Factors (In re Topgallant Lines, Inc.), 154 B.R. 368, 376 (S.D.Ga.1993). Maritime liens are ranked first by class and then by priority within each class. All maritime liens of the same class must be satisfied in full before payment can be made on any lien of a lower class. See, e.g., U.S. v. One (1) 254 Ft. Freighter, the M/V Andoria, 570 F.Supp. 413, 415 (E.D.La.1983) ("If the funds are insufficient to pay the next lower ranked class in full, the available funds will be distributed among claimants in that class according to the rules operating within that class.") Within a class, a maritime lien that arises later in time primes earlier liens. See, e.g., Gowen, Inc. v. F/V Quality One, 244 F.3d 64, 69 (1st Cir.2001) ("among liens of `equal rank,' later liens have priority").

Preferred ship mortgages have priority over all claims against the vessel, except expenses and fees imposed by the court selling the vessel and preferred maritime liens. 46 U.S.C. § 31326(b)(1). A preferred maritime lien is defined as

a maritime lien on a vessel — (A) arising before a preferred mortgage was [duly] filed ...; (B) for damage arising out of maritime tort; (C) for wages of a stevedore when employed directly by [an officer or agent of the vessel]; (D) for wages of the crew of the vessel; (E) for general average; or (F) for salvage.

46 U.S.C. § 31301(5)(A)-(F).

B. Priority of Claims in this Case

1. Preferred ship mortgage liens

Wachovia Bank, National Association, as agent for itself, Fleet National Bank, Wilmington Trust Company of Pennsylvania and MBC Leasing Corporation (collectively "the Bank Group") hold first preferred ship mortgages on the NPR vessels. The Trustee has stipulated that the Bank Group claim totals approximately $62 million and concedes the validity of its first preferred ship mortgages on the NPR vessels, as well as its liens on NPR's other assets. None of the other p...