In Re Hsf Holding, Inc.

Citations: 421 B.R. 716; 2010 Bankr. LEXIS 54; 2010 WL 129668Docket: 19-10398

Court: United States Bankruptcy Court, D. Delaware; January 13, 2010; Us Bankruptcy; United States Bankruptcy Court

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HSF Holding, Inc. and Hawaii Superferry, Inc. (collectively, the "Debtors") filed a motion under 11 U.S.C. §§ 105(a) and 554(a) seeking approval for the abandonment of their interests in a Spare Main Engine. The motion was granted by Bankruptcy Judge Walsh. 

The Debtors had entered into two shipbuilding contracts with Austal USA, LLC, for constructing high-speed ferries named "Alakai" and "Huakai." An amendment to the Huakai contract in October 2005 included the delivery of the Spare Main Engine alongside the Alakai. The engines were custom manufactured in Germany and not readily available. 

The financing for the vessels was guaranteed by the United States Department of Transportation's Maritime Administration (MARAD), which received a promissory note and established a security interest in the collateral associated with the ships, including the shipbuilding contracts and related assets. This collateral encompassed all rights and interests that Superferry had in the contracts and any goods related to the vessels, whether on board or ashore, and not covered by MARAD's Preferred Mortgage.

The Huakai Shipbuilding Contract was amended on October 26, 2005, requiring Austal to deliver the Spare Main Engine alongside the Alakai. Austal retained ownership of the Vessels and their "Components," which encompassed all elements intended for the Vessels, including hulls, engines, and machinery. Austal granted a first priority lien and security interest in the Vessels to a collateral trustee for the benefit of Superferry, MARAD, and ABN Amro Bank N.V., with Wilmington Trust Company filing a UCC-1 financing statement (10-27-05) on October 27, 2005. This filing established MARAD's first priority security interest in Austal's rights under the Shipbuilding Contracts, including all present and future materials and components related to the Vessels.

Subsequently, on October 28, 2005, MARAD filed another UCC-1 financing statement (10-28-05) to perfect its security interest in Superferry's rights under the Shipbuilding Contracts and all related proceeds. Austal delivered the Alakai and the Spare Main Engine on May 30, 2007, along with executing a Preferred Mortgage in favor of MARAD, which was recorded with the U.S. Coast Guard. This mortgage conveyed a 100% interest in the Alakai and encompassed all associated equipment and appurtenances, both current and future, ensuring MARAD's secured interests were comprehensive and legally recognized.

The Preferred Mortgage, which includes the MARAD Security Agreement, secures a debt of $139,731,000 guaranteed by MARAD for the financing of the Alakai and Huakai vessels. The Alakai was operational from August 2007 to March 2009, transporting passengers and vehicles between Hawaiian islands. To ensure minimal downtime, Superferry purchased a Spare Main Engine intended for use on the Alakai and, later, the Huakai if needed. The Alakai was the only vessel eligible to utilize the Spare Main Engine during its operation, while the Huakai was never put into service and remained docked at Austal's shipyard in Mobile, Alabama, after its delivery on April 21, 2009.

Following a Supreme Court of Hawaii ruling on March 16, 2009, which deemed a state law allowing operations without an environmental impact study unconstitutional, Superferry ceased operations, returning the Alakai to Alabama while the Spare Main Engine stayed in Hawaii. The Spare Main Engine was never installed or utilized on either vessel. Superferry and HSF filed for Chapter 11 bankruptcy on May 30, 2009, and on July 1, 2009, the court approved the abandonment of both vessels.

The Debtors filed a motion to abandon their interests in the Spare Main Engine, arguing it held inconsequential value for the estate as any potential recovery would benefit MARAD due to its first priority preferred ship mortgages. Austal and MARAD supported this motion, while the Official Committee of Unsecured Creditors opposed it, arguing neither held perfected security interests in the Spare Main Engine. The Committee contended that the Spare Main Engine could only be deemed an appurtenance to one vessel, and additionally, it could not be classified as a "proceed" of the Huakai Shipbuilding Contract. The court maintains jurisdiction over this matter under 28 U.S.C. 157(b) and 1334, with the legal basis for relief being 11 U.S.C. 105(a) and 554(a), and Bankruptcy Rule 6007.

Congress has established a statutory program under Title XI of the Merchant Marine Act of 1936 to guarantee ship construction financing, requiring the U.S. to hold a security interest, often in the form of a mortgage, on financed vessels. This mortgage, defined as a "preferred mortgage," is recognized as a lien once filed in compliance with federal regulations. The definition of a "vessel" includes its apparel and appurtenances, as interpreted by courts. The key issue is whether the Spare Main Engine qualifies as an appurtenance to the vessel Alakai. Under the United States Commercial Instruments and Maritime Liens Act (CIMLA), a preferred ship mortgage serves as a lien on the vessel for the mortgage amount. It is valid against third parties once recorded with the National Documentation Center. MARAD’s Preferred Mortgage for the Alakai was properly recorded on May 30, 2007, giving it a perfected status covering the vessel's engines, spares, and spare parts, regardless of ownership status or location. Legal interpretation of documents must align with their plain language.

The Spare Main Engine was delivered to Superferry alongside the Alakai on the same day MARAD's Preferred Mortgage was perfected. The mortgage grants MARAD a 100% interest in spare parts and engines for the Alakai, making the Spare Main Engine subject to this mortgage. The Committee argues that for the mortgage to perfect a security interest in the Spare Main Engine, it must be considered an appurtenance of either the Alakai or the Huakai, but not both. An appurtenance is defined as a specifically identifiable item essential for the navigation, operation, or mission of a specific vessel. The Committee asserts that items in a fleet's spare parts inventory do not qualify as appurtenances. It challenges the interpretation of a precedent case, Gonzales v. M/V Destiny Panama, suggesting that the statement regarding appurtenances being destined for one identifiable vessel is misinterpreted. The Committee finds that the cited cases do not support this restriction and notes that a previous case, Stewart, found that spare parts for multiple vessels can be appurtenances to the vessel covered by a preferred mortgage.

The vessels in question are the "Chris Way," which sank near New Orleans, and the "Donald Cargill," a sister ship. Following the sinking, the owner received advice that the Chris Way could not be economically refurbished but that certain components could be used as spare parts for other vessels. The owner subsequently removed propellers and tail shafts from the Chris Way, which were deemed part of the spare parts inventory, including three propellers and three tail shafts for the Donald Cargill located at two repair facilities. However, these components were never installed on the Donald Cargill. Later, the owner decided to refurbish the Chris Way and sent two propellers and one tail shaft to the dry dock for this purpose.

The court ruled that once the propellers and tail shafts were delivered to the owner with the intent of incorporating them into the repaired Chris Way, they became appurtenances of that vessel and were thus subject to the lien of the preferred ship mortgage. The ruling established that spare parts for a vessel, even if compatible with another vessel in the fleet, remain appurtenant to the original vessel. Additionally, references to other cases, including Anderson v. United States and Scott v. Trump Indiana, Inc., were deemed not advantageous to the Committee's position. The Anderson case concluded that an aircraft was appurtenant to the USS Kennedy at the time of an accident but did not support the notion that it was intended solely for use with that specific vessel.

The Anderson court determined that the aircraft involved in Anderson's injury was an appurtenance of the USS Kennedy at the time of the incident, as it was executing the carrier's mission. It suggested that the aircraft may have subsequently become an appurtenance to another carrier after departing the USS Kennedy. In the Scott case, the court ruled that while a life boat was an appurtenance to the cruise ship, the injury to the plaintiff was caused by a truck crane that was not an appurtenance to the cruise ship, as it was a land-based piece of equipment hired independently and not connected to the vessel. The court emphasized that the crane operated by a third party was not under the control of the cruise ship, thus not qualifying as an appurtenance.

The court adopted the definition of an appurtenance from the Anderson case but noted the questionable validity of this definition as interpreted by the Committee. It found that the cases of Anderson and Scott were not relevant to the current facts. In the present situation, the Spare Main Engine was deemed an appurtenance to the Alakai, as it was possessed simultaneously with the vessel and specifically transported for its use. The Huakai had no operational status when the Spare Main Engine was on the Alakai, making it irrelevant to the latter vessel's appurtenance status. The court also addressed the Committee's argument that the Spare Main Engine was not essential for the Alakai’s navigation due to its functional main engine, and expressed disagreement with this assertion.

Courts assess the necessity of tangible or intangible assets for a vessel's function by evaluating if the vessel's purpose can still be fulfilled without them. In Gowen, Inc. v. F/V Quality One, the First Circuit held that fishing permits significantly enhance a vessel's value and creditworthiness, qualifying as appurtenances and subject to maritime liens. Similarly, The Augusta recognized a wireless telegraph as appurtenant despite no legal requirement for its installation, due to its commonality in steamers. The Eleventh Circuit in Motor-Services Hugo Stamp, Inc. v. M/V REGAL EMPRESS deemed telecommunications essential to a luxury cruise ship's operations.

In the Joint Statement of Facts, parties agreed that HSF purchased the Spare Main Engine to reduce downtime for the Alakai, crucial for maintaining uninterrupted high-speed ferry service. The Spare Main Engine is thus deemed essential and an appurtenance to the Alakai. The Committee's argument to distinguish the Spare Main Engine from the Alakai based on separate insurance and its location in Hawaii lacks explanation. The separate insurance may reflect a business decision for cost-effectiveness, and the engine's presence in Hawaii does not negate its appurtenant status, especially as it aligns with the operational context of the ferry service's conclusion in Hawaii.

Furthermore, MARAD claims it perfected its security interest in the Spare Main Engine as a proceed under the Huakai Shipbuilding Contract by filing a UCC-1 financing statement. The Committee contests this classification under Hawaii law, but the statutory definition of "proceeds" includes items acquired from the disposition of collateral and rights arising from it. The law imposes a limitation requiring proceeds to be collateral eligible for a perfected security interest via a financing statement, which will be further analyzed.

MARAD asserts that the Spare Main Engine qualifies as "equipment" under the definition provided in Haw. Stat. Ann. 490:9-102, which includes goods that are not inventory, farm products, or consumer goods. The Committee's argument that proceeds and goods are mutually exclusive under the UCC is countered by the UCC's Official Comment, which clarifies that a security interest in proceeds can remain perfected if a financing statement covers the original collateral and the proceeds are capable of being perfected by filing. The Spare Main Engine, fitting the definition of equipment, can be classified as collateral eligible for a perfected security interest.

The definition of "proceeds" in the UCC was amended to include "Rights arising out of collateral," with caution advised against extending this category too broadly to avoid unexpected interests in a debtor's assets. Commentator Julian B. McDonnell emphasizes this caution, particularly regarding intangible property, which does not apply to the tangible Spare Main Engine.

The Committee argues that the UCC-1 financing statement filed on 10-28-05 does not sufficiently notify other creditors of the claimed security interest in the Spare Main Engine, referencing In re Bollinger Corp. The Bollinger case established that when a separate security agreement is absent, courts should examine the overall transaction to find any signed documents that indicate an intent to create a security interest in the collateral.

Bollinger's assertion that a security interest must notify other creditors is acknowledged, but the court applies a lenient standard that does not precisely resolve the current issue. The transaction involves Superferry granting MARAD a security interest in shipbuilding contracts and related equipment, with MARAD filing a UCC-1 on the same day as the security agreement. This suggests that the Spare Main Engine, classified as equipment, is covered by both the security agreement and the UCC-1. The court references In re Collated Products Corp., where "proceeds" are broadly defined, establishing that a customer's fulfillment of payment obligations constitutes a disposition of collateral. In this case, Austal's delivery of the Spare Main Engine to Superferry fulfilled Austal's obligations under the Huakai Shipbuilding Contract, thereby classifying the Spare Main Engine as a proceed. Under Hawaii law, a security interest in proceeds is perfected if the original collateral's interest is perfected. MARAD filed a UCC-1 financing statement on October 28, 2005, which perfected its interest in the original collateral, thus also perfecting interest in the Spare Main Engine. Consequently, the Debtors' motion to abandon their interests in the Spare Main Engine is granted. Additionally, due to the Debtors' failure to make the final payment for the Huakai vessel, they issued a promissory note to Austal for $1,622,109, with MARAD subordinating its security interest in the Spare Main Engine to this obligation.