Boatrupcty! Ninth Circuit Limits Bankruptcy Court’s Ability to Sell a Vessel Subject to a Maritime Lien

In Barnes v. Sea Hawaii Rafting, LLC, et al , Chris Barnes, a seaman injured in a ship explosion, filed suit against the shipowner for Jones Act negligence, unseaworthiness, and maintenance and cure. Barnes also sued the vessel, the M/V Tehani, in rem. After fifteen months of litigation, and shortly before trial, the vessel owner declared bankruptcy, and the district court stayed Barnes’ action. The district court concluded that the vessel was an asset of the owner’s estate, and therefore, the automatic stay barred the enforcement of Barnes’ maritime lien against the vessel for his wages.

The district court later dismissed Barnes’ claim for lack of jurisdiction because he failed to verify his amended complaint in which he sought to add a claim for negligence per se. The defendants answered the complaint with a general denial of in rem jurisdiction, but they failed to specifically challenge jurisdiction under Rule 12(b). The district court reasoned that Barnes unverified amended complaint, filed after more than fifteen months of litigation, superseded the original complaint and thus deprived the district court of jurisdiction. While the appeal was pending, the bankruptcy trustee sold the Tehani free and clear of any and all liens and subsequently moved to dismiss Barnes’ appeal as moot.

On appeal, the Ninth Circuit found numerous errors, notably that the district court did not lose in rem jurisdiction, the automatic stay did not affect Barnes’ lien against the vessel, and the bankruptcy court had no authority to dispose of the lien. The court found that Barnes properly invoked in rem jurisdiction through his verified complaint, and the defendants then answered that complaint and participated in the litigation. The court relied on the general principle of admiralty law that control of the res, while necessary to establish jurisdiction, is not necessary to maintain jurisdiction. The court observed that “in rem jurisdiction, once vested, is not divested, although a state of things should arrive in which original jurisdiction could not be exercised.” Furthermore, the court noted, Rule (C) of the Supplementary Admiralty and Maritime Rules does not mandate verification of amended pleadings.

Similarly, relying on its previous decision in United States v. Chandon, the Ninth Circuit found that the bankruptcy court lacked jurisdiction to dispose of Barnes’ maritime lien. Relying on Chandon, the court reasoned that the automatic stay does not expressly refer to maritime liens, which, when owed to seamen due to their service, are “sacred liens entitled to protection as long as the plank of the ship remains.” Furthermore, the court found that because the two courts had concurrent and coordinate jurisdiction over the vessel, the district court should not have been deprived of jurisdiction simply because it had not obtained physical possession of the vessel. The court noted that even if the bankruptcy court had in rem jurisdiction over the Tehani, the law remains unsettled as to whether a bankruptcy court can sell a vessel free and clear of maritime liens.

The Barnes court addressed the well-known Millennium Sea Carriers opinion, in which the Second Circuit held that a bankruptcy court could extinguish a maritime lien in an admiralty adversary proceeding to which the lienors voluntarily submitted. The Ninth Circuit found that case distinguishable because it turned on the lienor’s consent to bankruptcy jurisdiction, as opposed to bankruptcy court’s application of bankruptcy law rather than admiralty law and Barnes’ failure to voluntarily submit to the court’s jurisdiction. Consequently, unlike in Millennium Sea Carriers, the bankruptcy court’s attempt to dispose of the lien was ineffectual.

While the court passed on the ultimate question—whether a bankruptcy court can sell a vessel free and clear of maritime liens under bankruptcy law absent the lienor’s consent to jurisdiction—the significance of the Barnes decision should not be understated. A district court’s in rem jurisdiction arising from an action for enforcement of a maritime lien against a vessel will not be divested by the vessel owner’s subsequent bankruptcy filing. Thus, a bankruptcy court’s automatic stay resulting from the bankruptcy filing of a vessel owner will not affect the enforcement of a maritime lien. Nonetheless, because much of the law governing the interplay between admiralty and bankruptcy jurisdiction remains unsettled, a party pursuing maritime lien should always contest bankruptcy jurisdiction to avoid the risk of the bankruptcy court disposing of the maritime lien.

 

Joseph Axiak