MARKETS • LAW
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Bankruptcy jurisdiction in the US is easy to find – but it comes with strings attached
This article has been submitted by Jane Freeberg Sarma, New York-based Counsel for international law firm Reed Smith LLP.
Establishing jurisdiction in the US for the purpose of seeking bankruptcy protection may be as simple as paying a retainer to an attorney. Recent bankruptcy filings in the US by shipping and offshore companies not based in the US (either as jurisdiction of organisation or location of offices) such as Toisa Ltd, Ezra Holdings, and OceanRig demonstrate the regularity with which this occurs.
A debtor’s presence in US bankruptcy court, however, may have unexpected consequences – the US Department of Treasury’s Office of Foreign Assets Control (‘OFAC’) has recently ruled that a debtor in bankruptcy is a ‘US person’ and must comply with US sanctions against Iran.
The US Bankruptcy Code provides that ‘only a person that resides or has a domicile, a place of business, or property in the US… may be a debtor’ eligible to seek the protection of the US bankruptcy courts. The amount of property that must be ‘in the US’ for a
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bankruptcy court to have jurisdiction is minimal, and decisions in bankruptcies of shipping companies have clearly stated that a retainer paid to bankruptcy lawyers may be sufficient ‘property ... in the US’ to allow the bankruptcy courts to exercise jurisdiction.
Filing for bankruptcy protection in the US, however, comes with strings attached – including the need to comply with US sanctions. Debtors ignore this requirement at their peril.
In June 2013, the TMT Group filed for bankruptcy protection in Texas. TMT, which was based in Taipei, Taiwan, asserted that the bankruptcy court had jurisdiction because, among other things, TMT had property in the US.
B Whale Corp (BWC), a member of the TMT Group and a debtor in bankruptcy, owned Suezmax tanker B Whale. In late August or early September 2013, B Whale loaded a cargo of condensate from the tanker Nainital, which was owned by NITC (National Iranian Tanker Company). Both NITC and the Nainital were named on OFAC’s List of Specially Designated Nationals and Blocked Persons (the ‘SDN List’).
Under the Iranian Transactions and Sanctions Regulations (the ‘ITSR’), US persons are prohibited from, among
other things, dealing in property of entities named on the SDN List and importing Iranian oil to the US. BWC asserted that, since it was based in Taiwan, it was not a US person, and therefore was not and could not be in violation of the ITSR.
OFAC held otherwise. On February 3, 2017, OFAC issued a notice of violation to BWC, stating that ‘OFAC determined that BWC was a US person within the scope of the ITSR because it was present in the US for the bankruptcy proceedings when the transaction occurred. Additionally, the vessel B Whale was subject to US sanctions regulations because it was property under the jurisdiction of a US bankruptcy court, and therefore the oil transferred to the vessel was an importation from Iran to the US as defined in the ITSR.’
Although BWC was not fined by OFAC, OFAC has the power to impose penalties of up to two times the transaction value for violations of US sanctions.
For shipping or offshore companies outside the US that may regularly trade with sanctioned countries, OFAC’s notice of violation to BWC should be considered as a significant factor when deciding whether to seek bankruptcy protection in the US.
Seatrade Maritime Review • Quarterly Issue 2 • June 2017
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