JORDAN, Circuit Judge.
In a bankruptcy proceeding, OEC Group, New York ("OEC") asserted maritime liens on goods then in its possession, and it now appeals a ruling of the United States District Court for the Eastern District of Pennsylvania that certain contractual modifications to those liens were unenforceable.
Although the parties dispute the legal consequences of the facts, what happened is not in dispute. World Imports, Ltd., World Imports Chicago, LLC, World Imports South, LLC, and 11000 LLC (collectively, "World Imports")
On or about January 26, 2009, World Imports, Ltd. entered into an Application for Credit with OEC (the "Application"). Page two of the Application, titled "Notice Concerning Limitation of Liability," was signed by the vice president of World Imports, Ltd. and included the following language:
(A 40.)
Page three of the Application, titled "Terms for Credit Accounts," was signed by the bookkeeper of World Imports, Ltd. and said:
(A 37 (emphasis added).)
For each container of goods it transported for World Imports, OEC provided to World Imports an invoice (the "Invoice") which contained, in its "Terms and Conditions of Service," the following provisions:
(A 42 (emphasis added).)
As required by federal law, OEC also publishes a tariff (the "Tariff") with the Federal Maritime Commission, which governs its shipments. Included with the Tariff is a Bill of Lading whose terms and conditions provide, in pertinent part, as follows:
(A 54-55 (emphasis added).)
On July 3, 2013 (the "Petition Date"), World Imports filed voluntary petitions for
World Imports responded by filing an adversary proceeding against OEC and a motion for an expedited hearing to compel OEC to turn over all of World Imports' "Current Goods," which World Imports defined to include both the Landed Goods and goods then in transit for which OEC was to provide delivery in the near future. (A 60.) World Imports represented its willingness to pay OEC for the freight charges on those Current Goods but not for the outstanding charges associated with the Prepetition Goods. After a hearing, the Bankruptcy Court granted the injunctive relief sought by World Imports, ordering that:
(A 105.) After OEC timely filed its notice of appeal from the Bankruptcy Court's order, that court issued an opinion in support of its order. See In re World Imports, Ltd. Inc., 498 B.R. 58 (Bankr. E.D.Pa.2013).
OEC did not seek a stay of the Bankruptcy Court's order. Rather, on appeal to the District Court, it requested entry of an order requiring World Imports to pay all outstanding amounts due for OEC's transportation services or, in the alternative, providing OEC with "valid, fully enforceable replacement liens on assets of [World Imports] in the amount of $1,926,363." (A 243.) The District Court ordered the parties to brief "whether the specific contract at issue between the parties created a maritime lien...." (A 299.) After that briefing, the Court entered an order on January 22, 2015, affirming the order of the Bankruptcy Court. Specifically, the District Court held that OEC did not possess a valid maritime lien on the Prepetition Goods because "the provisions in OEC's contract with [World Imports] purporting to give OEC a lien on goods in its possession for freight charges for the Prepetition Goods [are] unenforceable." World Imports, Ltd. v. OEC Group New York, 526 B.R. 127, 135 (E.D.Pa.2015). Accordingly, OEC could not assert a maritime lien to supersede interests secured according to the Uniform Commercial Code as adopted in various jurisdictions. Id. at 136. OEC timely appealed.
OEC frames its appeal as a single question, namely, whether the Bankruptcy Court and District Court erred in holding that the contract provisions at issue, which purported to give OEC maritime liens on goods in its possession both for freight charges on those goods and for unpaid charges on prior shipments, were unenforceable. In its response, World Imports has added the further question of whether OEC's failure to obtain a stay of the Bankruptcy Court's order renders the appeal moot. We address the latter question first.
World Imports argues that OEC's appeal should be dismissed as constitutionally moot because OEC failed to obtain a stay of the Bankruptcy Court's order and, instead, fully complied with that order by releasing the Current Goods to World Imports in exchange for payment for the charges on those goods. That argument, however, fails to account for remedies that may still be granted to OEC. As we observed in In re Continental Airlines,
91 F.3d 553, 558 (3d Cir.1996) (internal quotation marks omitted); see also Church of Scientology of California v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992). In this case, although OEC complied with the Bankruptcy Court's order by delivering the Current Goods, it has asked for relief that would remedy its loss from the surrender of those goods, specifically, a court order either requiring World Imports to pay its outstanding debts to OEC or granting OEC enforceable replacement liens on other assets of World Imports. Because we are not precluded from granting any effective relief, OEC's appeal is not moot.
The District Court concluded, and World Imports does not dispute, that a valid maritime lien would supersede any UCC security interests that may exist in the World Imports cargo. World Imports also concedes that OEC possessed a valid maritime lien on the Current Goods "for the actual freight charges associated with the
"A maritime lien is a privileged claim upon maritime property, such as a vessel, arising out of services rendered to or injuries caused by that property." 1 Thomas J. Schoenbaum, Adm. and Mar. Law § 9-1, at 683 (5th ed.2011). Maritime liens are a security device intended "to keep ships moving in commerce while preventing them from escaping their debts by sailing away." Id. at 684-85. Thus, such a lien attaches to the maritime property from the moment a debt arises, and adheres, even through changes in the property's ownership, until extinguished by operation of law. Id. at 683.
Because maritime liens enjoy a special priority status and may operate without notice, courts are hesitant to recognize new forms of them or new circumstances under which such liens may arise. See Osaka Shosen Kaisha v. Pacific Export Lumber Co., 260 U.S. 490, 499, 43 S.Ct. 172, 67 L.Ed. 364 (1923) ("The maritime privilege or lien, though adhering to the vessel, is a secret one which may operate to the prejudice of general creditors and purchasers without notice and is therefore stricti juris and cannot be extended by construction, analogy or inference." (citing Vandewater v. Mills, Claimant of Yankee Blade, 60 U.S. 82, 19 How. 82, 15 L.Ed. 554 (1856))). Federal courts nevertheless "have full authority to update old doctrines and to recognize new forms of liens if warranted by new conditions." Logistics Mgmt., Inc. v. One (1) Pyramid Tent Arena, 86 F.3d 908, 913 n. 7 (9th Cir.1996) (internal quotation omitted) (collecting cases).
In much the same way that traditional maritime liens against a ship were based on the legal fiction that the ship was the wrongdoer, see 1 Schoenbaum, supra, § 9-1, at 683-84, maritime law recognizes a reciprocal claim against the ship's cargo for debts associated with it.
Subject to the exception that the lien of the shipowner may be displaced by an unconditional delivery of the goods before the consignee is required to pay the freight, or by an inconsistent and irreconcilable provision in the charter-party or bill of lading, the rule is universal as understood in the decisions of the Federal courts, that the ship is bound to the merchandise and the merchandise to the ship for the performance on the part of the shipper and shipowner of their respective contracts.
The Maggie Hammond, 76 U.S. (9 Wall.) 435, 449-50, 19 L.Ed. 772 (1869). As the Supreme Court acknowledged in its influential opinion in a case captioned simply The Bird of Paradise, such liens on cargo may arise out of contracts to pay freight. 72 U.S. (5 Wall.) 545, 18 L.Ed. 662 (1866); see also 2 Thomas A. Russell, Benedict on Admiralty § 44, at 3-50 n. 2 (7th ed. rev. 2010) (collecting cases).
A lien for unpaid freight "arises from the right of the ship-owner to retain the possession of the goods until the freight is paid," and thus is lost upon "unconditional delivery to the consignee." Bird of Paradise, 72 U.S. at 555 (emphasis added). Yet, because it would frustrate commerce to require shipowners to retain their liens only by actual possession of the implicated cargo,
Both the Bankruptcy Court and the District Court appear to have assumed, without analysis, that OEC did not merely deliver the Prepetition Goods to World Imports, but did so unconditionally and thus in waiver of its liens on those goods.
We further note that the persistence of a lien through substitution is not a novel practice, as "[i]t is familiar doctrine of the admiralty courts that a maritime lien attaches not only to the original subject of the lien, but also to whatever is substituted for it, and that the lienholder may follow the proceeds wherever he can distinctly trace them." Bank of British N. Am. v. Freights, etc., of the Hutton, 137 F. 534, 536 (2d Cir.1905). Cf. N.H. Shipping Corp. v. Freights of the S/S Jackie Hause, 181 F.Supp. 165, 171 (S.D.N.Y.1960) (holding that a shipowner had not waived its cargo lien when its release of the cargo was conditioned on the substitution of freight money, held in escrow, for such cargo).
World Imports disputes that the parties could have created valid maritime liens entirely through contract, but it has not attempted to dispute that, as a general proposition, OEC's carrier services created enforceable maritime liens by operation of law. Indeed, World Imports' consistent acknowledgment that "OEC possessed a maritime lien on the Current Goods for the actual freight charges associated with the Current Goods" is also, by implication, a tacit concession that OEC, at least initially, must have possessed comparable maritime liens on the Prepetition Goods for freight charges associated with those goods. (Appellees' Br. 10.) Hence, if one concludes, as we do, that OEC never waived those liens on the Prepetition Goods, then the question of whether the parties could and did create the liens solely through contract is a red herring. Instead, the dispositive
World Imports argues against the enforceability of the parties' contractual lien modifications by pointing to portions of the Supreme Court's opinion in Bird of Paradise which state that maritime liens on cargo are established by operation of law rather than agreement of the parties and arise from the shipowners' possessory interest in the cargo. Attempting to place on OEC the burden of proving both that the parties intended to preserve the maritime liens for the Prepetition Goods and that the delivery of those goods was not unconditional,
To recap, our analysis of the facts begins from a very different premise than that adopted by the District Court and Bankruptcy Court. They assumed that OEC waived its liens on the Prepetition Goods through unconditional delivery but nevertheless tried, through contract, to revive those liens and place them on the Current Goods. We conclude that OEC did not waive its previous liens but rather agreed with World Imports in advance that such liens would survive delivery and would be applied to any of World Imports' goods currently in OEC's possession. On that foundation, we hold that their agreement to extend the liens is enforceable.
Despite World Imports' contentions, the opinion in Bird of Paradise made clear that there is no internal contradiction in recognizing a lien as a creature of maritime law that, once created by operation of law, may be extended or modified by agreement of the parties. In that case, the Court affirmed that a maritime lien "arises from the usages of commerce, independently of the agreement of the parties...." Bird of Paradise, 72 U.S. at 555; see also Osaka, 260 U.S. at 499-500, 43 S.Ct. 172 (clarifying that "[t]he contract of affreightment itself creates no lien, and this court has consistently declared that the obligation between ship and cargo is mutual and reciprocal and does not attach until the cargo is on board or in the master's custody"); Krauss Bros. Lumber Co. v. Dimon S.S. Corp., 290 U.S. 117, 121, 54 S.Ct. 105, 78 L.Ed. 216 (1933) (affirming that, while contracts may form the basis of a maritime lien, it is "[o]nly upon the lading of the vessel or at least when she is ready to receive the cargo" that the lien
On the contrary, immediately after recognizing that a cargo lien, being possessory, "is lost by an unconditional delivery to the consignee," Bird of Paradise used broad language supporting contractual modification and extension of the lien beyond delivery, stating:
72 U.S. at 555 (emphasis added)
The Bankruptcy Court interpreted that passage more narrowly than the language calls for, hanging great weight on the opinion's prior use of the definite article "the" before the word "freight" to conclude that a maritime lien was limited to the immediate circumstances in which it arose:
In re World Imports, 498 B.R. at 61-62 (original emphasis). Besides its underlying assumption that OEC waived its prior liens through unconditional delivery, we think the Bankruptcy Court's analysis is flawed by two significant oversights. First, it overlooks the context and sequence in which the supposedly limiting language appeared in the Bird of Paradise opinion. As mentioned above, the Supreme Court's opinion began by describing the origins and traditional form of maritime liens, but then, in its transition between paragraphs, signaled that the parties may depart from the norm by contractual agreement. See Bird of Paradise, 72 U.S. at 555 ("[T]he lien ... arises from the right of the ship-owner to retain the possession of the goods until the freight is paid, and is lost by an unconditional delivery to the consignee. Parties, however, may frame their contract of affreightment as they please, and of course may employ words to affirm the existence of the maritime lien, or to extend or modify
The Bankruptcy Court's second oversight is its casual citation to language appearing in the report of another Supreme Court case, Newell v. Norton, language that is not the Supreme Court's but is merely a summary of one party's position in the syllabus of that case, on a point which ultimately played no role in the Court's analysis. See Newell, 70 U.S. at 261-62 (documenting the arguments of counsel for the appellants in that case). World Imports has pushed that erroneous reliance on Newell's syllabus at every stage of the proceedings (see A 65, 258, 318; Appellees' Br. 13), even after OEC has repeatedly, and correctly, drawn attention to the citation's complete absence of authoritative value (see A 223, 227, 231, 274, 280, 307; Appellant's Br. 22, 25 n. 8; Reply Br. 8-9). The dogged determination of World Imports to perpetuate a clear error of citation is both troubling and revealing.
Especially in light of the "familiar doctrine" that a maritime lien may attach to property substituted for the original object of the lien, Bank of British N. Am., 137 F. at 536, we see no sound reason why the parties' contractual transfer of the unwaived liens to the Current Goods should not have been enforceable.
Both the District Court and World Imports raise the policy argument that an extended maritime lien on cargo could hurt innocent third parties. In doing so, they rely primarily on Atlantic Richfield Co. v. Good Hope Refineries, Inc., 604 F.2d 865
Id. at 873 (emphasis added).
The Fifth Circuit's policy concerns were apparently ancillary to what the court considered a question of contractual interpretation, but the District Court in the present case decided that the lien clauses now at issue are unenforceable on policy grounds alone. Specifically, it worried that "[a] third-party purchaser of the undelivered goods would have no notice that the goods it purchased could be withheld pursuant to a maritime lien on previously-shipped goods." World Imports, 526 B.R. at 134.
Putting aside the real and immediate harm of depriving OEC of the benefit of its bargain with World Imports, at least three other considerations weigh against the District Court's policy concern. First, any risk to third parties is mitigated by the fact that, unlike the voyage charter at issue in Atlantic Richfield, OEC's Tariff not only specifies the applicability of the maritime lien to unsatisfied debts of previous shipments in unambiguous language, but does so in a published document.
Second, the potential of harm to third parties is implicated regardless of whether the maritime lien is intended to satisfy the consignee's immediate charges or past ones. In either case, the lien creates the danger that the consignee's failure to meet its obligations to the carrier will impede its ability to put the cargo into the hands of a third party. "[T]his is a characteristic of all maritime liens." Usher v. M/V Ocean Wave, 27 F.3d 370, 374 (9th Cir.1994). Any marginal increase in the risk to third parties (above the risk inherent in a traditional lien on cargo) is limited in this case because, as already noted supra n. 13, the goods to which the previous liens attached were still in the carrier's possession. In other words, the type of lien asserted in this case was still, at bottom, a possessory lien over goods that had not yet entered the stream of commerce.
Third, we must consider the potential benefits to commerce of enforcing the parties' voluntary decision to enter into this type of credit arrangement. Although World Imports has argued that commerce is hindered by allowing a current shipment of goods "to be held hostage" to secure the payment of prior shipments, that argument ignores the commercial benefit implicit in that or any other credit arrangement that facilitates the exchange of goods or services with a guarantee of future payment. The relevant fact is not simply that the most recent shipment was held up, but that numerous prior shipments were not held up because the shipper had assurances that it could release those shipments conditionally, without surrendering its
Besides its public policy argument, the District Court also relied on the oft-cited principle that maritime liens should be strictly construed, reasoning that
World Imports, 526 B.R. at 132-33.
The case which the District Court cited, Osaka Shosen Kaisha v. Pacific Export Lumber Co., reaffirmed that "[t]he maritime privilege or lien ... is a secret one which may operate to the prejudice of general creditors and purchasers without notice and is therefore stricti juris and cannot be extended by construction, analogy or inference." 260 U.S. at 499, 43 S.Ct. 172. And while that principle is sound, we think the District Court has misapprehended its import. The principle does not restrain the private modification of liens arising out of the traditional relationship between ship and cargo — e.g., the lien of the cargo owner on the ship or the lien of the shipowner on the cargo — but rather limits the judicial creation of new circumstances, outside that reciprocal relationship, under which liens may attach in the first instance. The language proscribing the expansion of the lien universe "by construction, analogy or inference" curtails a court's ability to recognize, by mere legal implication, previously unanticipated circumstances under which liens may arise by operation of maritime law, but says nothing about private parties' ability to modify traditional liens by express agreement. Reading that language to limit private lien modifications to those forms previously and specifically blessed by the Supreme Court renders meaningless the same Court's affirmation that parties may extend or modify liens and otherwise frame their contracts of affreightment as they
One last argument against enforceability of OEC's liens is embodied in the Bankruptcy Court's conclusion that the contractual arrangement presented here cannot stand because, if permitted, it would effectively negate the utility of general lien laws adopted by the states. According to the Bankruptcy Court: "[I]f OEC's position were correct, parties would never need recourse to the general lien laws of the several states. An agreement to extend the shipper's maritime lien to any unpaid debt would co-opt the field and suffice to render any further security arrangements wholly unnecessary." In re World Imports, Ltd. Inc., 498 B.R. at 62 (original emphasis). Besides being overstated, that conclusion rests on a faulty premise. Implicit in the stated concern is, once again, an assumption that all previous liens on goods from prior shipments were unconditionally waived. In that view, OEC is attempting a post hoc resurrection of liens that it had already surrendered by unconditional delivery — a contractual cheat that would allow it to essentially jump back to the front of the creditor line after relinquishing its spot.
Given the express agreement that OEC would not waive its liens upon delivery, however, the parties' contractual modification is better regarded as an ex ante agreement that OEC would simply retain the position already afforded to it by operation of maritime law. Put differently, the contractual extension of OEC's outstanding liens from the Prepetition Goods onto the Current Goods allowed OEC, at most, to do in the aggregate what maritime law already permitted it to do piecemeal with
In sum, we do not think the policy concerns roused by World Imports and accepted by the Bankruptcy Court and District Court are sufficient to either outweigh the benefits to commerce of allowing two sophisticated businesses to contract for a mutually agreeable transportation and credit arrangement, or to curtail the broad contractual freedom that Bird of Paradise on its face allows.
Given the strong presumption that OEC did not waive its maritime liens on the Prepetition Goods, the clear documentation that the parties intended such liens to survive delivery, the familiar principle that a maritime lien may attach to property substituted for the original object of the lien, and the parties' general freedom to modify or extend existing liens by contract, we conclude that the parties' agreement to apply those unwaived liens toward the Current Goods is enforceable. Thus, we will reverse and remand so that OEC may be granted relief appropriate to its valid maritime liens.
See also N.H. Shipping Corp. v. Freights of the S/S Jackie Hause, 181 F.Supp. 165, 169 (S.D.N.Y.1960) ("This right of the vessel [to a cargo lien] is so strong in the eyes of the admiralty that it will only be considered relinquished by the most unequivocal and express terms or the most absolute and unconditional surrender." (citing Bird of Paradise, 72 U.S. 545)); 1 Schoenbaum, supra, § 9-7, at 728-29 ("A lienholder may waive his lien either expressly or by implication, but waiver is not favored, and the courts will require a clearly manifested intention to forego the lien." (internal footnote omitted)).