IN RE CONTAINERSHIP CO. (TCC) A/S No. 11-12622 (SHL).
466 B.R. 219 (2012)
In re The CONTAINERSHIP COMPANY (TCC) A/S, Debtor in a Foreign Proceeding.
United States Bankruptcy Court, S.D. New York.
February 10, 2012.
Winston & Winston, P.C., By: Aleksander Powietrzynski, Esq., New York, NY, for Howard Berger Company.
MEMORANDUM OF DECISION
SEAN H. LANE, Bankruptcy Judge.
Before the Court is a motion to modify the automatic stay (the "Motion"), pursuant to Section 362(d)(1) of the Bankruptcy Code. The Motion was filed by 22 parties, and joined by more than a dozen others (collectively, the "Movants"), all of whom are defendants in adversary proceedings filed by the Chapter 15 debtor alleging breach of contract. The Movants seek to lift the stay to file complaints before the Federal Maritime Commission alleging violations of the federal Shipping Act of 1984 (the "Shipping Act") by the debtor. The Motion further requests that the Chapter 15 debtor's adversary proceedings against the Movants be stayed indefinitely. For the reasons set forth below, the Court denies the Motion because it concludes that the Federal Maritime Commission does not have exclusive or primary jurisdiction over the Movants' allegations, which are in the nature of defenses to the Chapter 15 debtor's breach of contract actions.
The relevant facts are undisputed. On April 8, 2011, the Containership Company (the "Debtor") filed a petition for "reconstruction" in Denmark and a Danish court approved the "restructuring plan" on April 27, 2011. On May 31, 2011, the Debtor, through its Danish court-appointed trustee or "Reconstructor," filed a petition in this Court pursuant to Sections 1504 and 1515 of the Bankruptcy Code, seeking recognition of the Danish reconstruction as a foreign main proceeding and other related relief. On July 1, 2011, this Court entered the Order Granting Recognition and Relief in Aid of a Foreign Main Proceeding Pursuant to 11 U.S.C. §§ 1517, 1520 and 1521 [ECF No. 24], recognizing the Danish reconstruction as a foreign main proceeding and the Reconstructor as the Debtor's foreign representative.
On August 1st and August 2, 2011, the Debtor filed approximately 77 adversary proceedings against certain shippers alleging breach of pre-petition service contracts entered into between the Debtor and the shippers. The relevant contracts each included a minimum quantity commitment ("MQC"), requiring the shipper to tender a certain quantity of containers to the Debtor within the term of the contracts. The complaints in the adversary proceedings assert that the shippers breached these service contracts by failing to meet the specified MQCs, and they seek liquidated damages plus interest and reasonable attorneys' fees. The service contracts provide that, "[i]n case of a dispute arising under or relating to this contract, the Shipper and the Carrier each agree to jurisdiction in the United States District Court for the Southern District of New York." Motion, Exhibit D.
On August 19, 2011, some of the defendants in the adversary proceedings filed a Motion to (A) Modify the Automatic Stay to Allow Movants to File Claims Against the Debtor and Permit the Federal Maritime Commission to Exercise Jurisdiction Over Actions Alleging Violations of the Shipping Act of 1984 and (B) Stay Related Adversary Proceedings [ECF No. 107]. The Motion was filed on behalf of 22 parties
Motion, at 16-18 and Exhibit C. The Movants further assert that the FMC has exclusive and primary jurisdiction to address these allegations, and that continuing with the adversary proceedings would waste judicial resources and raise the possibility of inconsistent determinations.
The Debtor opposes the request to lift the stay, asserting that the Shipping Act violations alleged by Movants are merely disguised affirmative defenses to the breach of contract claims asserted in the adversary proceedings. The Debtor further notes that, by statute, breach of contract disputes for service contracts are to be addressed in an "appropriate court," and not the FMC. The Debtor, therefore, contends that the FMC does not have exclusive or primary jurisdiction over Movants' allegations. Finally, the Debtor relies on the forum selection clause in the service contracts to justify jurisdiction in this Court over all these disputes.
A. Standard for Relief from the Automatic Stay
Section 362 of the Bankruptcy Code provides that "a petition filed under section 301, 302, or 303 of [the Bankruptcy Code] . . . operates as a stay, applicable to all entities," of certain actions taken against a debtor or the property of the estate. 11 U.S.C. § 362(a). The automatic stay prohibits, among other things, "the commencement or continuation" of any "judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case" or "to recover a claim against the debtor that arose before the commencement of the case." 11 U.S.C. § 362(a)(1). Such a stay is effective in a Chapter 15 case where, as here, there has been a "recognition of a foreign proceeding [as a] foreign main proceeding." 11 U.S.C. § 1520(a). In such circumstances, the stay under Section 362 of the Bankruptcy Code shall apply "to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States." 11 U.S.C. § 1520(a).
Section 362(d)(1) of the Bankruptcy Code provides that a court may modify the automatic stay for "cause." 11 U.S.C. § 362(d)(1). "Cause" is not defined in the Bankruptcy Code. In evaluating a motion to lift the automatic stay, courts evaluate the following twelve factors set forth by the Second Circuit in In re Sonnax Indus,
Id. at 1286 (citing In re Curtis,
In deciding whether to lift a stay and allow a creditor to continue litigation in another forum, a bankruptcy court should consider the "particular circumstances of the case, and ascertain what is just to the claimants, the debtor and the estate." In re Touloumis,
B. The Jurisdiction of the FMC
Central to the Movants' request for stay relief, they contend that the FMC has exclusive jurisdiction over all their allegations relating to the Shipping Act or, alternatively, that this Court should defer to the FMC's primary jurisdiction as the regulatory body with expertise over the Shipping Act. In resolving this Motion, therefore, the Court must first address the parties' core disagreement over the role and jurisdiction of the FMC.
In determining the exclusive jurisdiction of the FMC, the Court looks to the statutory mandate of the FMC. The FMC is an independent regulatory agency responsible for regulating "common carriers by water and other persons involved in the oceanborne foreign commerce of the United States" under provisions of various federal statutes, including the Shipping Act. 46 C.F.R. § 501.2. See also 46 U.S.C. §§ 40101-413. Furthermore, the legislative history of the Shipping Act reveals that Congress intended for the FMC to exercise jurisdiction over the administration of the Shipping Act. See Seawinds Ltd. v. Nedlloyd Lines, B.V.,
The FMC's responsibilities under the Shipping Act include regulating service contracts. See 46 U.S.C. § 40502. The Shipping Act defines a "service contract" as a written contract, other than a bill of lading or receipt, between one or more shippers, on the one hand, and an individual ocean common carrier or an agreement between or among ocean common carriers, on the other. 46 U.S.C. § 40102(20). To qualify as a service contract under the Shipping Act, a contract must provide for a certain minimum level of services by requiring that:
46 U.S.C. § 40102(20).
The Shipping Act sets forth certain requirements for service contracts. For example, the Shipping Act requires that all executed service contracts be filed confidentially with the FMC and also specifies certain "essential terms" be included in each, including the origin and destination port ranges as well as specifications of the commodities and service commitments involved. See 46 U.S.C. §§ 40502(b) and 40502(c). Notwithstanding the FMC's regulatory jurisdiction over service contracts, however, it lacks jurisdiction to decide actions for breach of such service contracts:
46 U.S.C. § 40502(f). Consistent with the statutory limits of its jurisdiction, the FMC reviews complaints brought before it to determine "whether a complainant's allegations are inherently a breach of contract claim, or whether they also involve elements peculiar to the Shipping Act." Cargo One, Inc. v. COSCO Container Lines Co., Ltd., FMC No. 99-24, at 12 (Oct. 31, 2000). When making its determination, the FMC places the burden upon the party alleging a Shipping Act violation before the FMC to overcome any presumption to the contrary. See, e.g., Anchor Shipping v. Alianca, FMC No. 02-04 (FMC May 10, 2006) (applying the Cargo One test and concluding that movant's complaint was prematurely dismissed since the party alleged certain violations that were "particular" to the Shipping Act).
In discerning the dividing line between a mere contract dispute and an alleged violation that is "particular" to the Shipping Act, this Court turns to guidance from the decisions of the district courts and courts of appeals that have addressed this question. On the one hand, courts have deferred to the FMC to address issues that are specifically and expressly addressed in the Shipping Act, such as whether an entity should be considered a "common carrier" or whether certain shipping practices are illegal and discriminatory and in violation of the Act. See, e.g., American Ass'n of Cruise Passengers, Inc. v. Carnival Cruise Lines, Inc.,
On the other hand, courts have concluded that disputes not involving matters of
Even if this Court concludes that the FMC does not have exclusive jurisdiction over Movants' allegations, however, the Court may defer to the FMC under the doctrine of primary jurisdiction. As the Second Circuit has explained, "[p]rimary jurisdiction is a doctrine that is used to determine whether a given issue should be passed on first in a judicial or administrative forum. In other words, it fixes priority for passing on a given issue." General Elec. Co. v. MV Nedlloyd,
In an analysis that addresses some of the same considerations of efficiency and expertise as the Sonnax test, the Second Circuit utilizes a four-prong balancing test to determine whether a "deferral" under the doctrine of primary jurisdiction is appropriate:
Schiller v. Tower Semiconductor Ltd.,
C. The FMC Does Not Have Exclusive or Primary Jurisdiction Over Movants' Allegations
Turning to the specific Shipping Act violations alleged here, the Movants have not demonstrated that their allegations are within the exclusive or primary jurisdiction of the FMC. Movants' allegations revolve around a central theme: whether the Debtor prevented the Movants from meeting their contractual obligations. See, e.g., Motion, at 17 (alleging that Debtor agreed to amend these service contracts to reflect the amount of cargo actually moved and Movants relied to their detriment on these representations); Motion, at 3 (contending that Debtor "prevented the [Movants] from performing under [the service contracts]"); Motion, at 16 (asserting that, by ceasing operations, Debtor made it impossible for Movants to satisfy their contractual requirements). Such allegations are in the nature of affirmative defenses to the underlying breach of contract claims in these adversary proceedings
At oral argument, the Movants relied heavily upon a FMC Circular Letter from 1989, noting that it "raises the question of whether . . . the MQC contracts in which there is no real valid commitment on behalf of the carrier to satisfy certain trade levels, whether those are illusory." Transcript of Hearing, dated Sept. 26, 2011 [ECF No. 153] ("Transcript"); id. at 40 (characterizing the FMC Circular as "crucial"); see Movants' Reply Brief [ECF No. 144], at 9. Movants' counsel maintained that answering this question "require[s] the specialized expertise of the FMC." Transcript, at 28. The FMC Circular Letter in question explains that MQCs in service contracts are essential terms of a service contract because use of a MQC is the "quid pro quo for departing from the published tariff rates of the carrier that would otherwise apply." FMC Circular Letter No. 1-89 (FMC Apr. 12, 1989) (Exhibit L to Movants' Reply Brief). The MQC must be "meaningful" for the service contract to be valid and enforceable because:
Id. (citation omitted).
But Movants have not explained why or how the FMC's expertise would be needed to resolve this question in these cases. Movants do not provide any factual allegations regarding the actual MQCs at issue in these contracts, the amount of cargo actually shipped, or Debtor's practices in connection with the use of MQCs. Moreover, the Movants have not explained how the FMC's concern about whether MQCs are "meaningful"—presumably whether the MQCs are so small as to be of no real consequence—is implicated here given that Movants were allegedly unable to satisfy such MQCs.
A more apt comparison to the instant case is the Second Circuit's decision in River Plate and Brazil Conf. v. Pressed Steel Car Co.,
D. Application of the Sonnax Factors
Turning back to the Sonnax factors in light of the jurisdictional discussion above, the Court concludes that, on balance, they favor denying relief from the automatic stay. The most relevant Sonnax factor—the fourth factor—concerns whether a specialized tribunal with the necessary expertise has been established to hear the cause of action. Given that Movants have not demonstrated that these cases implicate the exclusive or primary jurisdiction of the FMC, the fourth Sonnax factor favors a denial of the Motion.
The first and tenth Sonnax factors also favor the denial of the Motion. These factors address whether stay relief would result in a partial or complete resolution of the issues, and whether the interests of judicial economy would be served. Movants seek to lift the stay based upon the inefficiencies of proceeding with the multiple adversary proceedings on the same or similar issues. See Motion, ¶ 22 ("Absent allowing the [FMC] to hear the Causes of Action, this Court would be forced to . . . hear and determine seventy-seven affirmative defenses (one in each repetitive adversary proceeding)"). But that difficulty will exist regardless of whether the issues are before the FMC or this Court. As noted by Debtor, this Court may address this problem through the appropriate use of Rule 7042 of the Federal Rules of Bankruptcy Procedure. Rule 7042 provides that, where there are common issues or law or fact, the Court may join for hearing or trial all matters at issue, consolidate the actions, or "issue any other orders to avoid unnecessary cost or delay." In any event, factors one and ten favor the Debtor given that the FMC lacks jurisdiction to hear the breach of contract allegations. See New York State Thruway, 734 F.Supp.2d at 270 (denying motion to stay breach of contract litigation based on primary jurisdiction, noting that "there is no petition, nor can there be, before the FCC to determine a breach of contract claim").
The second Sonnax factor addresses whether there is a lack of connection or interference with the bankruptcy case. As this is a Chapter 15 case where foreign recognition has already occurred, Movants argue that lifting the stay does not raise the same concerns about the cost of delay as would exist in a large Chapter 11 case. See In re SPhinX, Ltd.,
The remaining two Sonnax factors also are not implicated. As to the seventh factor, the Court does not believe that allowing the FMC to proceed will prejudice or favor the interests of other creditors. The eleventh factor, whether the parties are ready for trial in the other proceeding, is similarly of little relevance given that the Debtors and Movants are not ready for trial in this Court or the FMC. See Transcript, at 58 (counsel to movant, UPS Freight Service, Inc., stating on the record that "[w]hether the parties are ready for trial" is "not really relevant" as "the cases are both in their infancy").
The Movants raise one final argument requiring the Court's attention. They claim that the automatic stay should be lifted because this Court lacks jurisdiction to adjudicate these adversary proceedings in light of the Supreme Court's recent decision in Stern v. Marshall, ___ U.S. ___,
Indeed, nothing in today's decision implicates Stern. The Supreme Court in Stern held that, while the bankruptcy court had the statutory authority under Section 157 of the Bankruptcy Code to enter judgment on a widow's counterclaim in a bankruptcy adversary proceeding, the bankruptcy court lacked the constitutional authority to do so under Article III. The heart of the Stern decision goes to a bankruptcy court's ability to render a final judgment, a matter that is not at issue today. See Walker, Truesdell, Roth & Assocs. v. The Blackstone Group, L.P. (In re Extended Stay), 2011 WL 5532258, at *6 (S.D.N.Y. Nov. 10, 2011) ("Withdrawing the reference simply due to the uncertainty caused by Stern is a drastic remedy that would hamper judicial efficiency on the basis of a narrow defect in the current statutory regime identified by Stern."); In re Refco,
For the reasons set forth above, the Court denies the Motion to lift the automatic stay. The Debtor shall settle an order on three days notice.
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