Court of Appeals Issues Significant Ruling

November 7, 2003

The Fifth Circuit Court of Appeals recently issued a significant ruling benefiting ship mortgagees and other maritime creditors with decisions in two related cases stemming from the bankruptcy of Commodore Cruise Lines (“Commodore”). In one case, the Fifth Circuit Court of Appeals in New Orleans ruled that AmWest Surety Ins. Co. ("AmWest") and other sureties who provided the $15 million bond required by the FMC for cruise operators calling at U.S. ports to secure refunds for passengers (an "FMC Bond"), had no lien on the Commodore Ships, and also ruled that Harris Trust & Savings Bank ("Harris Bank") which provided credit card services to Commodore under a merchant services agreement (and which provided refunds to passengers), also did not have a lien. If AmWest and Harris were to succeed on their claims, they would have had priority over not only the ships' mortgagee banks in collecting the proceeds from the auctions of the Commodore vessels, but would also have greatly diminished, if not eliminated, recoveries by holders of traditional maritime lien claims. Concerning AmWest, the Fifth Circuit ruled that despite the fact that the law requires an FMC Bond for a cruise line to operate, the Bond was not a maritime contract, and that the Bond was not a "necessary" giving rise to a lien. The court also rejected the sureties’ alternative argument that they were subrogated to the claims of the passengers. Passengers do not have liens for refunds when a cruise vessel does not sail. Similarly, the Fifth Circuit found that Harris’ generic credit card merchant services agreement was not a maritime contract and that the credit card processing services provided by Harris were not “necessaries” giving rise to a maritime lien. Bruce G. Paulsen of Seward & Kissel LLP represented the mortgagee EffJohn International Cruise Holdings, Inc. in both cases.

Court of Appeals Issues Significant Ruling

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