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Fifth Circuit Court of Appeals Affirms District Court's Denial of Fuel Supplier's Equitable Subordination Claim Against U.S.

In a consolidated appeal, the Fifth Circuit Court of Appeals has affirmed the District Court's grant of summary judgment to the United States, declining to equitably subordinate the U.S.'s preferred mortgage liens to the lien claims of two (2) fuel suppliers.  Asamarbunkers Consultadoria e Participacoes Unipessoal Lda v. New River M/V, et al., Nos. 12-40246 & 12-40248 (5th Cir. Feb. 1, 2013) (hereinafter "New River").

New River involved two Vessels, the SS NEW RIVER and the SS THE MONSEIGNEUR, which had been reconstructed by American Heavy Lift Corporation ("AHL").  The reconstruction was financed by issuing bonds, which were guaranteed by the Maritime Administration ("MARAD") of the United States pursuant to its statutory authority.  This statutory authority also provides that MARAD's mortgage on vessels it finances will receive priority over most other creditors in the event of a default by the vessel owner.  In 2009, AHL began to experience financial difficulties.  As a result, its existing fuel suppliers began demanding payment up front.  Unable to meet such terms, AHL began looking for new fuel suppliers and contacted the Appellant fuel suppliers.  After making inquiries to other fuel suppliers and satisfying themselves of AHL's creditworthiness, Appellants began supplying fuel to the Vessels.  At or about the same time, AHL requested MARAD's assistance to pay both the principal and interest payments due for December 2009.  MARAD declined to make these payments on AHL's behalf, and AHL defaulted.  Although MARAD had the option under the relevant agreements to immediately foreclose on the mortgages, MARAD instead exercised its option under the agreements to allow AHL a grace period to cure its default.  In January 2010, when AHL failed to cure its default, MARAD demanded immediate payment and eventually took control of the two (2) vessels in April 2010.  The Vessels were then sued in rem by AHL's creditors, including Appellants.  The U.S. intervened, claiming a preferred mortgage lien of approximately USD 91 million, and the Court granted summary judgment to the U.S. regarding its claim of priority over the other creditors, rejecting Appellants' argument that the mortgage lien should be equitably subordinated to their supply liens.  The Vessels were sold at judicial auction for $5.7 million, and Appellants appealed to the Fifth Circuit.

On appeal, the Appellants argued that the U.S.'s mortgage should have been subordinated to their lien for fuel supplied to AHL based on theories of equitable subordination and/or principles of laches.  Specifically, Appellants claimed that MARAD knew about AHL's financial difficulties before Appellants began supplying AHL with fuel.  The Fifth Circuit rejected both of these arguments.  The Court first outlined the elements of equitable subordination, noting that the Appellants were required to show (1) that MARAD engaged in inequitable conduct; (2) that this misconduct injured a creditor or conferred an unfair advantage on MARAD; and (3) that equitable subordination is not inconsistent with statutory provisions.  The Court highlighted that the Appellants had not alleged or demonstrated that MARAD controlled AHL, defrauded other creditors, or was a fiduciary of AHL and, accordingly, agreed with the District Court's determination that the Appellants had failed to establish any inequitable conduct by MARAD that would warrant subordinating its preferred mortgage to lower priority claims.  The Court similarly rejected Appellant's claims that principles of laches should have barred the District Court's granting of summary judgment in favor of the U.S.  The Court noted that laches apply when (1) a party delays in exercising a right; (2) the delay was inexcusable; and (3) undue prejudice resulted from the delay.  Appellants argued that MARAD should have foreclosed on AHL's vessels when AHL first experienced financial difficulties.  The Court concluded that MARAD had no obligation to foreclose on AHL's ships at that time under the relevant agreements, and that it was in creditors' interest to allow AHL time to cure its default.  Accordingly, the Court found that any delay was excusable, and affirmed the District Court's ruling on this issue.

Finally, the Fifth Circuit concluded that it was not an abuse of the District Court's discretion to grant summary judgment despite the government's failure to submit a statement of issues and undisputed material facts required by a Local Rule of the Eastern District of Texas.  The Fifth Circuit found that the relevant issues were fully briefed, and that the Court had formed "well-reasoned opinions" setting forth the relevant facts, legal issues, and analysis.

Read a copy of the Fifth Circuit's decision

For more information about the Court's decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.

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