A Bankruptcy Court May Not Sell a Vessel Free and Clear of a Maritime Lien When A District Court Has Jurisdiction

            An automatic bankruptcy stay applies to “any act to create, perfect or enforce any lien against property of the estate.”[13] In holding that the automatic stay did not apply to the Tehani, the Ninth Circuit relied on its holding in United States v. Z.P. Chandon, where it held that automatic stay provisions of the Bankruptcy Act do not apply to a maritime lien for a seaman’s wages.[14] In Chandon, the court reasoned that “Congress’ omission of any reference to maritime law in § 362(a)(4) evidences its intention to limit the reach of that statute to land-based transactions . . . .”[15] Although Chandon involved a maritime lien for wages rather than for maintenance and cure, the court in Barnes held that its reasoning applies equally to both.[16] Further, the court held that the bankruptcy court did not have jurisdiction over the Tehani because the district court—sitting in admiralty—had “constructive control” over the Tehani. The court relied on the principle that when two courts have concurrent jurisdiction, the court which first obtains jurisdiction is entitled to retain it without interference. [17]

            In Barnes, the Ninth Circuit held that a bankruptcy court may not sell a vessel free and clear of a maritime lien unless the lien is adjudicated pursuant to admiralty law.[18] The Ninth Circuit ruled that even if the Bankruptcy did have in rem jurisdiction over the Tehani, the sale of the Tehani was improper because the bankruptcy court applied bankruptcy law rather than admiralty law and Barnes did not consent to the bankruptcy court’s jurisdiction.[19] The circuit court reasoned that the law states that a maritime lien accompanies the property into the hands of a bonafide purchaser and can only be extinguished through the application of admiralty law.[20] The Ninth Circuit also distinguished In re Millennium Sea Carriers, in which the Second Circuit held that a bankruptcy court could extinguish a maritime lien in an admiralty adversary proceeding to which the lienors voluntarily submitted.[21] In that case, the court’s decision turned on the lienor’s consent to bankruptcy jurisdiction; in contrast to Barnes, where the bankruptcy court’s decision turned on the application of bankruptcy law rather than admiralty law and Barnes.[22] Therefore, unlike in Millennium Sea Carriers, the bankruptcy court’s attempt to dispose of the lien was inadequate.[23]

            Under the Ninth Circuit’s holding in Barnes, if a debtor’s assets include a maritime vessel, care must be taken both by the court and the Debtor in determining and implementing whether it can be sold under the Bankruptcy Code. If the vessel is subject to maritime liens for maintenance and cure, Section 363 may not be available as a device to strip those liens to facilitate a sale. Instead, the parties may have to proceed in admiralty to address those liens before the vessel is sold.