Given the current economic climate, more and more companies are filing Chapter 11 in an attempt to shed debt. We receive many calls from vessel suppliers inquiring whether the yacht’s or ship’s owner filing of Chapter 11 has any impact upon their right to enforce a maritime lien and arrest the vessel. The answer is no!
Maritime law gives a person or company who supplies “necessaries” to a vessel the right to have an admiralty court seize and sell the vessel, its earned freight and cargo to satisfy any unpaid invoices. This right is commonly known as a maritime lien right. Maritime lien rights are given a higher priority under the law since its purpose is to encourage necessary services to ships whose operators are unable to make contemporaneous payments.
Given the nature of maritime liens, courts have found the bankruptcy code has no impact upon the right to enforce a maritime lien against a vessel even though the owner filed Chapter 11. In fact, courts have held that maritime lien rights can arise in favor of a company supplying necessaries to a vessel during the time the owner is operating under Chapter 11. It is important to note that even though Chapter 11 proceedings have no impact upon maritime lien rights against the vessel, if the vessel is sold at a Marshal auction and the proceeds of the sale do not fully cover the unpaid invoices, the remainder of the debt owed may be discharged by the Bankruptcy court.