Alter Ego Trip: Daebo International Challenges an International Vessel Lease

by Michael B. Schaedle and Gregory F. Vizza Monitor 100 2017
Blank Rome’s Michael Schaedle and Gregory Vizza dissect the New York Bankruptcy Court’s Daebo International Shipping decision that upholds the independence of vessel lenders and lessors from their borrowers’ and lessees’ general obligations while reaffirming the power of Chapter 15 to protect foreign collective remedies from opportunistic individual creditor action in the U.S.

In late 2015, the U.S. Bankruptcy Court for the Southern District of New York issued a memorandum opinion in Daebo International Shipping Co., Ltd., vacating a set of Rule B attachments of M/V DAEBO TRADER, a Panamax dry bulk container ship leased to Daebo International Shipping Co. from Shinhan Capital Co., a major Korean equipment financier.

Earlier in 2015, the New York Bankruptcy Court had recognized Daebo’s rehabilitation proceeding under Korea’s Debtor Rehabilitation and Bankruptcy Act (the DRBA), a collective remedy similar to Chapter 11 of the U.S. Bankruptcy Code, as a “foreign main proceeding” and that Daebo’s representative in the Chapter 15, Chang-Jung Kim, the company’s custodian and CEO, was a duly authorized “foreign representative.”1

Recognition in this context enables a foreign representative to exercise bankruptcy power under Chapter 15 to support the foreign bankruptcy and to appear in U.S. courts to do so. Chapter 15 is not itself a substantive bankruptcy law, but it integrates foreign law and parts of the U.S. Bankruptcy Code to enable international bankruptcy and reorganizations. The idea is that there is a universal interest in seeing fair collective remedies implemented across borders.

If a foreign debtor or insolvent has assets or key interests in the U.S., upon recognition of the DBRA proceeding the automatic stay under U.S. Bankruptcy Code §362 protects the foreign debtor’s assets and the foreign representative can sell assets free and clear of interests and claims under U.S. Bankruptcy Code §363.

In the Daebo case, the DAEBO TRADER was attached in the U.S. District Court of the Eastern District of Louisiana after Daebo had filed its rehabilitation and after its assets were protected by a stay, under Korean law. The Rule B actions were commenced by general trade creditors of Daebo; none of the plaintiffs had provided necessaries to the vessel itself. Since the registered owner of DAEBO TRADER was Shinhan and not Daebo, in order to maintain a Rule B attachment, each plaintiff asserted that the 2007 vessel lease arrangement between Daebo and Shinhan was fraudulent as to Daebo creditors and that Shinhan was an alter ego of Daebo.

The practical effect of the attachment was to trap the DAEBO TRADER, and its very valuable cargo, in New Orleans for several months. Daebo had limited liquidity and was unable to post a bond on its own credit. Daebo (and Shinhan), therefore, faced substantial cargo, insurance and regulatory risks — which would negatively affect Daebo’s rehabilitation — if the attachment was not lifted. And if the attachments were honored, each plaintiff would wind up doing substantially better than other Daebo general creditors.

Shinhan and other vessel interests sought to vacate the Rule B attachment in New Orleans District Court. To make the Rule B attachment stick, the plaintiffs needed to convince the court to re-characterize the lease as granting ownership to Daebo. Among other arguments, the plaintiffs asserted that the charter hire was below market and therefore the lease was merely a financing arrangement by Shinhan rather than an ownership interest. However, that argument foundered on the observation that the rent (charter hire) when the lease was entered into in 2007 was equivalent to the fair market rental value for the vessel at that time. In any event, a below market rental actually constitutes evidence that the lessor is the true owner, because in a non-true lease, the discounted present value of the rental needs to be high enough to repay the lessor for its purchase price for the equipment plus its profit margin.

Several lease provisions supported Shinhan’s position that, as the registered owner of the vessel, it was, in substance, the vessel owner. Separate sections declared that Shinhan was the vessel owner, the vessel would be registered in the name of Shinhan and the vessel would be marked to indicate Shinhan was the ship owner. Other sections of the lease required Daebo to return the vessel to Shinhan after the contract was terminated, forbade Daebo from asserting any ownership interest or transferring any rights in the vessel and prohibited Daebo from permitting any liens to be placed on the vessel. The contract terms provided ample evidence that re-characterization of the lease was not appropriate.

Nevertheless, the District Court refused to vacate the attachment because it found that the plaintiffs in New Orleans, solely for purposes of a Rule B attachment, had “submitted sufficient allegations and evidence concerning their position that the M/V DAEBO TRADER is Daebo’s property, not Shinhan’s.” In doing so, the District Court cited certain elements of questionable relevance:

  • Daebo “publicly stated that it purchased the DAEBO TRADER.”
  • “Daebo advertises the vessel to third parties as its own.”
  • Shinhan “is a financing company, not a company traditionally focused on maritime commerce.”
  • “Nowhere in its annual report does Shinhan mention that it is the registered owner of 40+ oceangoing vessels.”
  • The liability coverage is provided “in favor of Daebo, not Shinhan.”

On that basis, the District Court determined that the “attachment of the DAEBO TRADER [was] supported by probable cause,” requiring the preservation of the attachments under possibly applicable law. But the decision observed that post-attachment proceedings would target the “pivotal issue: the extent of Daebo’s attachable interest in the DAEBO TRADER.”

At the same time Shinhan and others were seeking to vacate the attachments in New Orleans under non-bankruptcy law. The foreign representative invoked U.S. Bankruptcy Code §507, §1519-21 and long-standing case law under Chapter 15 and its predecessor provision under the U.S. Bankruptcy Code §304, which permits a bankruptcy court to entrust U.S. assets to a foreign representative for administration in the U.S. free and clear of Rule B attachments of the foreign debtor’s property after a stay had been commenced in the foreign proceeding (so long as the attaching party is afforded an opportunity to participate ratably in the foreign proceeding with other general creditors). In order to resolve the business crisis facing Daebo and Shinhan by virtue of the attachment, pursuant to provisional relief ordered by the New York Bankruptcy Court, Shinhan posted a bond to secure the DAEBO TRADER’s release on condition that the vacated action in New York would go forward and, if granted, the attachments would be released in Louisiana.

In the New York proceeding, the plaintiffs (realizing that the foreign representative’s ability to require the entrustment and turnover of foreign debtor assets to his dominion and control would invalidate the their attachment of the vessel) reversed their approach and asserted claims against Shinhan — as the registered owner of the vessel — arguing that their fraudulent transfer/alter ego claims against Shinhan were independent maritime claims against Shinhan. These assertions conflicted with the arguments they had just made to the New Orleans District Court, namely that the DAEBO TRADER belonged to Daebo as a matter of economic substance.

The New York Bankruptcy Court vacated the attachments because it observed that grounds existed (such as a nominal purchase option) to claim that the DAEBO TRADER in substance was owned by Daebo and that the plaintiffs had advanced that very argument aggressively in New Orleans. Accordingly, the Rule B attachments would have to be vacated in the Chapter 15 proceeding because if the DAEBO TRADER was Daebo property, the attachments were taken after the Korean stay was imposed to protect all Daebo assets, including the DAEBO TRADER and entrustment of the TRADER (or the substitute bond) to the foreign representative, voiding the attachments.

The New York Bankruptcy Court also dismissed the plaintiffs’ claims that Shinhan was the alter ego of Daebo, as there was no evidence that Daebo and Shinhan had anything but a lessor/lessee, debtor/creditor relationship and suggested that the fraudulent transfer claims would be time barred under any applicable law.

As a separate supporting basis for the decision, the New York Bankruptcy Court noted that since the primary maritime claims in the New Orleans action were against Daebo and since those claims had to be released under Bankruptcy Code §1507 and §1521, there was no independent basis at admiralty to maintain fraudulent transfer or alter ego claims against Shinhan. The court also rejected attempts by the plaintiffs to suggest that Shinhan (as a lessor) would be deemed to be an involuntary guarantor of Daebo trade creditors, since no law exists to support such a claim.2

This was an important decision. Because of the court’s orders, Daebo avoided cargo damage and loss, risk on its insurances and it was able to monetize the DAEBO TRADER in order to reduce its exposure to Shinhan and certain other lenders in its recently approved Korean rehabilitation plan. The decision upholds the independence of vessel lenders and lessors from their borrowers’ and lessees’ general obligations to their trade creditors and non-collateral/lease specific obligations, while reaffirming the power of Chapter 15 to protect foreign collective remedies from opportunistic individual creditor action in the U.S.


  1. In re Daebo International Shipping Co., Ltd., Bankr. Case No. 15-10616(MEW) (Bankr. S.D.N.Y., Dec. 15, 2015).
  2. This “involuntary guaranty” concept asserted by the plaintiffs in Daebo is novel and inconsistent with all applicable principles of commercial and equipment finance law governing the general relationship between a lessor and its lessee. The equipment finance law is predicated on the importance of allocating risk between sophisticated counter-parties by the letter of arms-length agreements. To make a vessel lessor or lender directly liable for a lessee’s or borrower’s general trade obligations (particularly obligations that are not subject to the lessor’s or lender’s interests in their vessel), simply because of the existence of a lease or other financing arrangement, would upset fundamental pricing assumptions in the industry and restrict shipping lines’ access to capital.

Leave a comment

No categories available