The global insolvency of Hanjin Shipping Co. Ltd. represents a case study of what can go wrong for an international transportation company that files for insolvency protection in an uncontrolled fashion and in the wrong country. The significant negative impact on international creditors as well as international commerce resulting from Hanjin’s filing suggests that a more deliberate and well-thought-out plan for future international transportation insolvency filings is imperative.
By way of background, Hanjin is the largest shipping company in South Korea and the world’s ninth-largest shipping company, operating approximately 60 regular lines worldwide. Hanjin’s business never fully recovered from both the global recession in 2008 and the excess global supply of vessels. Facing a severe liquidity crisis in 2016, Hanjin was unable to negotiate an out-of-court restructuring with its creditor banks, led by Korea Development Bank and its largest investor, Korean Air. On August 31, 2016, Hanjin filed for protection under the Debtor Rehabilitation and Bankruptcy Act in the Seoul Central District Court of South Korea.
Lesson One: Don’t File Without Having Funding to Support Continued Operations
Because Hanjin did not have immediately available funding for its worldwide operations and the Korean court was either unable or unwilling to order the use of cash collateral, Hanjin’s filing resulted in the seizure/arrest of Hanjin vessels around the world. To avoid seizure where possible, Hanjin anchored its vessels outside of various ports. Certain vessels that made it to port were arrested and made subject to maritime liens. In addition, terminal owners and labor unions refused to service the vessels and unload cargo without first receiving payment.
At the time of filing, Hanjin vessels were carrying $14 billion in cargo (3.2 percent of the world’s global container capacity). See “Hanjin Bankruptcy Hits West Coast Ports,” The Wall Street Journal, Oct. 13, 2016. Eight vessels were arrested in port, 43 vessels were at sea, 39 vessels were outside ports waiting for some indication that they would not be arrested, and many other vessels were stopped and unable to pass through the Panama or Suez Canal. To date, 29 vessels remain outside of port; at least four vessels have docked at terminals, but cargo owners are having trouble obtaining their goods. Even as of mid-October (six weeks after the initial Korean filing), some vessels have yet to cross the Panama Canal. Critically, much of the goods on board Hanjin vessels were vital components for manufacturers such as HP and Samsung Electronics during the height of their seasonal demand.
While technically, the Korean proceeding stays all of Hanjin’s creditors from taking actions against Hanjin and its assets wherever located (Article 59 of the DRBA), Hanjin quickly realized that there was a genuine risk that Hanjin’s creditors would attempt to take enforcement actions in the U.S. as well as other countries. To protect against this risk in the United States and to assist the ordinary course flow of cargo in the U.S., Hanjin’s foreign representative filed a Chapter 15 case in the U.S. Bankruptcy Court for the District of New Jersey on September 2, 2016, and sought a final order (i) granting recognition of the Korean proceeding, (ii) giving full force and effect in the U.S. to the Korean commencement order, and (iii) applying Sections 362 and 365 of the Bankruptcy Code to the Chapter 15 case. Hanjin believed that the entry of the recognition order would, among other things, extend the protections of the stay to Hanjin’s assets located in the U.S. and prevent contract counterparties from modifying or terminating U.S.-based contracts.
On Friday, September 9, 2016, the bankruptcy court entered an order for preliminary relief implementing a stay against the assertion of maritime liens and the seizure of vessels, and granting cargo owners the right to negotiate the transfer of their cargo directly with the terminal owners. The U.S. bankruptcy court intended to insure that cargo flowed in the ordinary course by leveling the playing field for cargo owners while at the same time balancing the needs of Hanjin and terminal owners to receive payment. Ongoing tensions remain between Hanjin, terminal owners and cargo owners in the U.S. over such issues as damages against Hanjin and Hanjin’s efforts to protect its receivable base from setoff. All of these issues are likely to be sorted out in the South Korean court. But, even with the U.S. Chapter 15 filing in place, the South Korean proceeding was unable to prevent the piecemeal attacks on Hanjin’s ships as its ships remained subject to lack of funding for operations, seizure/arrest and the assertion of maritime liens by creditors around the globe. This in turn adversely affected the flow of global commerce and left thousands of cargo owners stranded and searching the globe for their goods.
Lesson Two: Choosing the Right Forum for a Debtor’s Main Case
At the outset, one has to question Hanjin’s decision to commence its main case in South Korea rather than file a Chapter 11 case in the United States. U.S. bankruptcy law is highly developed with a wide body of case law precedent. While the filing of the Chapter 15 case has been beneficial to cargo creditors and terminal creditors as a result of the efforts of the bankruptcy court to level the playing field for all parties, the court’s impact mainly has been on U.S. creditors with property located in the U.S. That is because a Chapter 15 proceeding does not affect foreign creditors and their actions against Hanjin’s assets located in foreign jurisdictions. A Chapter 15 case is a limited proceeding built under the principle of comity. Chapter 15 is meant to deal with the debtor’s assets located in the U.S., and the U.S. bankruptcy court defers for the most part to the foreign main proceeding, which in this case is South Korea.
By contrast, a Chapter 11 bankruptcy case is a plenary proceeding, and the bankruptcy court has the authority and jurisdiction over all of the estate’s assets wherever they are located. Violation of the automatic stay could result in contempt charges as well as other claims against the offending creditors’ property in the U.S. See Lykes Bros. S.S. Co. v. Hanseatic Marine Service (In re Lykes Bros. S.S. Co.), 207 B.R. 282 (Bankr. M.D. Fla. 1997).
U.S. bankruptcy courts have asserted broad jurisdiction over foreign creditors in shipping cases where those creditors have had some presence or assets in the U.S. For example, in one well-known case, a U.S. bankruptcy court asserted in personam jurisdiction over two foreign creditors with disputes in Hong Kong and Singapore. In re McLean Industries (U.S. Lines v. GAC Marine Fuels Ltd.) 68 B.R. 690 (Bankr. S.D.N.Y. 1986). The debtors in McLean Industries asked the bankruptcy court to enforce the automatic stay against GAC, a fuel supplier to the debtor, U.S. Lines. GAC had arrested the debtor’s vessels in Hong Kong and Singapore for failure to pay prepetition fuel charges. GAC’s principal office was located in London, but its invoices stated that it also had offices in Hong Kong, Norway, the United Arab Emirates and New Jersey. GAC’s presence in the U.S. was limited to soliciting business, checking fuel price quotes and confirming the transaction for foreign deliveries through correspondence with its London counterparts. The bankruptcy court held that it had in personam jurisdiction to proceed with the stay proceeding because GAC was (1) transactionally doing business and (2) generally doing business in the U.S.
Even if the bankruptcy court failed to maintain in personam jurisdiction, as long as the creditor has property in the U.S., the bankruptcy court likely would maintain in rem jurisdiction in such circumstances. The expansive reach of a bankruptcy court’s jurisdiction over actions against a debtor in other countries derives from a court’s in rem jurisdiction over the worldwide estate. See In re Atlas Shipping A/S, 404 B.R. 726, 739 (Bankr. S.D.N.Y. 2009) and In re JSC BTA Bank, 434 B.R. 334, 346 (Bankr. S.D.N.Y. 2010). Also, U.S. bankruptcy courts have been aggressive in enforcing their jurisdiction even to the point of asserting jurisdiction normally held by the U.S. admiralty courts and districts courts, as seen in the Cal Dive International and the Hanjin Chapter 11 cases.
In Cal Dive, the U.S. Bankruptcy Court for the District of Delaware required all holders of maritime liens to file proofs of claim with the bankruptcy court as a condition to participating in distributions from the estate, thus effectively requiring maritime lien holders to submit to core bankruptcy court jurisdiction for the adjudication of their claims. Arguably, determination of certain lien and lien priority rights is an issue of admiralty law reserved for the admiralty and district courts. In Hanjin, the U.S. Bankruptcy Court for the District of New Jersey extended the automatic stay against the post-petition maritime arrest of Hanjin vessels, which issue creditors argued should be determined by a court in admiralty.
Furthermore, given the size and breath of the U.S. economy, even those foreign trade creditors without a presence or assets in the U.S. would think twice before thumbing their noses at a U.S. bankruptcy court’s stay or 105(a) injunction order issued in a Chapter 11 case if they or their business dealings may become subject to U.S. jurisdiction in the future. Also, in a plenary Chapter 11 case, South Korean lenders might have been compelled by the bankruptcy court (and the Bankruptcy Code) and/or have had the good business sense to work with Hanjin to immediately fund their operations either through debtor-in-possession financing or use of cash collateral, thus avoiding the current chaos facing Hanjin cargo owners.
But, in a Chapter 15 case, a foreign representative seeks assistance solely for the purpose of gathering assets and making distributions through a foreign main proceeding. The bankruptcy court’s powers are limited because jurisdiction over property of the debtor is expressly limited to property located “within the territorial jurisdiction of the United States.” See, e.g., In re Atlas Shipping A/S, 404 B.R. at 739 (noting that Section 1520(a) “refers to ‘property of the debtor’ to distinguish it from the ‘property of the estate’ that is created under 11 U.S.C.S. § 541(a)”). In British American Insurance Co. v. Fullerton (In re British American Insurance Co.), 488 B.R. 205, 225-226 (Bankr. S.D. Fla. 2010), the bankruptcy court noted that Chapter 15 cases are limited to assets of the debtor located in the United States. See 488 B.R. at 225-226 and Bankruptcy Code Sections 1521(a)(5) and 1521(b). This means in the Chapter 15 context that, if the foreign representative wishes to realize a recovery on assets in another country, the foreign representative is forced to seek recognition there and/or utilize the laws of that country under the principles of comity or similar body of law. This can be a prolonged process that does no good for a debtor whose assets are under attack in real time throughout the world. In fact, the Hanjin foreign representative has been forced to file multiple ancillary proceedings in foreign jurisdictions just to preserve what is left of the Hanjin estate.
The following is a list of ancillary insolvency proceedings that have been commenced so far by Hanjin’s foreign representative:
|Japan||Commenced and provisional relief granted|
|United Kingdom||Commenced and provisional relief granted|
|Singapore||Commenced and provisional relief granted|
|Germany||Commenced and provisional relief granted|
|Belgium||Commenced and provisional relief granted|
|Spain||Applied for recognition and provisional relief|
|Italy||Applied for recognition and provisional relief|
|France||Applied for recognition and provisional relief|
|Australia||Commenced and provisional relief granted|
|Canada||Commenced and provisional relief granted|
The shipping industry is in a state of distress and there are likely to be other insolvency filings for other shipping and transportation companies. It is abundantly clear that the application of U. S. bankruptcy law by a U.S. bankruptcy court in Chapter 11 could have had a powerful effect on global commerce and may have helped avoid Hanjin’s current global chaos. Given the size and scope of the U.S. economy and the presence of many foreign lenders and cargo customers in the U.S., the U.S. should be given greater consideration as the location for the main insolvency proceeding in future filings.
 According to the Oct. 26, 2016, Operating Vessel Status report released by Hanjin Shipping.
 “’Arising from‘ the business transacted in the state might convey the implication that the business transacted must itself give rise to the claim, the courts have construed the phrase far more broadly, holding, in effect, that the claim need only relate to that business in a general way.” 68 B.R. 690, at 698.
 See In re Cal Dive International Inc., No. 15-10458, Notice of Deadlines for Filing Proofs of Claim against Debtors (Bankr. D. Del. June 22, 2015) (ECF. No. 524), In re Hanjin Shipping Co. Ltd., Decision and Order on Maritime Lienholders’ Motion for Reconsideration (Bankr. D.N.J. Sept. 20, 2016) (ECF. No. 191), and Oceanconnect Marine Inc. v. Glencore, McAllister Towing & Transportation Inc. (In re Hanjin Shipping Co. Ltd.), Memorandum and Order (D.N.J. Sept. 16, 2016) (ECF. No. 7).
 Where a bankruptcy court has recognized a foreign main proceeding and the foreign representative has filed a plenary bankruptcy case for the debtor in the U.S., but the foreign representative does not have the benefit of another foreign proceeding for the debtor recognized by this court having jurisdiction over the asset, then this court may exercise its extraterritorial in rem jurisdiction under Section 1334(e). Id.
A version of this post was originally published on Law360 and can be read on their website here.