Under title 11 of the United States Code (the “Bankruptcy Code”), a debtor in possession or trustee may sell property of the debtor’s estate. However, a lien on a maritime vessel may make such a sale challenging, in particular because of jurisdictional issues. When a debtor’s assets become subject to the jurisdiction of both admiralty and bankruptcy cases, a complex conundrum arises. Maritime bankruptcies have generated complex legal issues and jurisdictional conflicts that have perplexed practitioners and implicated significant constitutional issues.
Under section 363 of the Bankruptcy Code, a debtor or trustee may seek authority from the court to sell property of the debtor’s estate—such as a vessel or other marine property. When granted, the court may sell property of the estate “free and clear” of all liens. But in order to do so, the bankruptcy court must have jurisdiction and certain requirements must be met. For example, one of the requirements is that the sale of the property is permitted by applicable non-bankruptcy law.
When a bankruptcy petition is filed, section 362 of the Bankruptcy Code automatically provides for a broad stay with respect to the commencement or continuation of litigation, lien enforcement, and all actions and attempts to set off against the debtor and the property of the debtor. Presumably, it would include liens enforceable under maritime law. Indeed, the filing of a bankruptcy petition will cause a vessel that is subject to foreclosure proceedings to be deemed property of the debtor’s estate, staying the foreclosure proceeding, and releasing the vessel from arrest.
However, in some cases, a vessel under in rem foreclosure proceedings that are pending prior to the filing of a bankruptcy have been held under the doctrine of custodia legis. In general, maritime principles provide that when a vessel was properly seized by a court of competent jurisdiction, the seizing court would administer the property. Therefore, a court would be prohibited from dealing with that asset, and the automatic stay would not impede or delay the pending and previously filed vessel-arrest proceeding. However, the Bankruptcy Reform Act of 1978 provided that the filing of the bankruptcy petition stayed all types of proceedings including maritime actions.
This memorandum explores whether a bankruptcy court can discharge a vessel “free and clear” of maritime liens pursuant to the Bankruptcy Code. Part I discusses the legal issues that arise regarding whether a bankruptcy court’s all empowered “automatic stay” applies to a maritime vessel, or if the property remains subject to the jurisdiction of the admiralty court under principles of custodia legis. Part II addresses how even if a bankruptcy court has jurisdiction, it may not be able to sell a vessel “free and clear” of a maritime lien.