Fifth Circuit Holds That Creditor Lacks Constitutional Standing to Appeal

The Bottom Line

The Fifth Circuit in Nustar Energy Services, Inc. v. M/V Cosco Auckland, Case No. 17-20246 (5th Cir. Jan. 14, 2019), recently held that a subcontractor creditor lacked constitutional standing to appeal a lower court’s ruling that a secured creditor held maritime liens where the subcontractor creditor could not show that it would benefit from a favorable ruling on appeal. The case, while focused on technical considerations of standing, reflects the risks associated with tracing funds through a series of intercompany transactions and the way customer payables are treated.  

What Happened?

This action stems from the bankruptcy of OW Bunker, which supplied fuel for ships. After OW Bunker filed for bankruptcy, numerous subcontractors asserted maritime liens on the ships (owned by nondebtor third parties) to which they delivered fuel. ING Bank (ING), a secured creditor, also asserted maritime liens based on a credit facility that was provided by a group of lenders to OW Bunker pre-petition. As security, each OW entity assigned ING its interest in amounts owed for the sale of oil products and fuel to third-party customers. This action arises from such a sale and involved a series of transactions by various parties, including intercompany transactions within the larger OW Bunker organization.

Factually, subcontractor NuStar Energy Services Inc. (NuStar) physically supplied fuel to ships owned by third-party customers but was not paid prior to OW Bunker’s bankruptcy. NuStar sued the third-party ship customers that it provided the fuel to, asserting maritime liens against the vessels. The third-party ship customers deposited the nearly $3 million owed for the fuel into escrow and then filed a third-party claim interpleading NuStar and other parties to the transactions, including OW Far East, OW USA and ING. ING claimed an interest in the receivables owed to the OW entities and brought maritime lien and contract counterclaims. The district court held that NuStar did not hold maritime liens because it had delivered the fuel on the order of OW USA, not “on the order of the [third-party vessel] owner or a person authorized by the owner.” The district court also found that OW Far East was entitled to maritime liens (since it contracted directly with the customer) and that those liens held in favor of OW, in turn, had been validly assigned to ING. Accordingly, ING was awarded the $3 million on account of its security interest. NuStar appealed both rulings: (i) that it did not hold maritime liens and (ii) that there was a valid assignment of the receivables to ING.

On appeal, the Fifth Circuit concluded that a prior, recent decision in another OW Bunker case, Valero Marketing & Supply Co. v. M/V Almi Sun, 893 F.3d 290 (5th Cir. 2018), controlled its decision on the first issue of whether NuStar itself held maritime liens against the third-party customer’s vessels. Under Valero, the Fifth Circuit held that the district court correctly ruled that NuStar did not hold maritime liens. As a result of this prior ruling, the Fifth Circuit then turned to the issue at hand, specifically whether, in light of its prior ruling that NuStar did not have maritime liens, NuStar had constitutional standing to appeal. In order to appeal, NuStar must show “redressability,” that is, that it would benefit from a favorable ruling on appeal. The Fifth Circuit concluded that NuStar would not receive an immediate benefit from a reversal because even if the court found that there was not a valid assignment of the liens to ING, such finding would not result in a judgment entered in NuStar’s favor. The court’s ruling on the invalidity of NuStar’s maritime liens thus mooted NuStar’s interest in challenging the assignment. 

Nevertheless, NuStar raised other potential standing grounds—that were all rejected by the Fifth Circuit. NuStar contended that it had standing as an unsecured creditor in OW USA’s bankruptcy case and that the ruling in ING’s favor deprived the bankruptcy estate of nearly $3 million. (In other words, invalidating ING’s lien would enhance OW USA’s general bankruptcy estate for the benefit of all creditors.) The Fifth Circuit noted that there may be third-party standing issues with NuStar’s ability to litigate directly a claim belonging to the estate. But in any event, the court found NuStar’s argument too speculative to be persuasive. First, the court stated that it was uncertain whether an appellate ruling rejecting ING’s maritime liens would in fact change the outcome of the case because, on remand, ING could pursue its contract claims asserting a security interest. If ING were successful, it would leave creditors in the same position as they are now. Second, even if ING were to lose on its maritime lien and contract claims, NuStar failed to demonstrate that the $3 million paid into escrow by the ultimate customer would go to OW USA’s bankruptcy estate. If there was no assignment, the ships would still have to pay OW Far East (the affiliated entity that was determined to have directly contracted with the paying customer at issue, even though services were handled through an arrangement between OW Far East and OW USA), and there is no certainty that any amounts would then reach the OW USA bankruptcy estate. NuStar also relied on a provision in OW USA’s Chapter 11 liquidation plan by which ING agreed to transfer its interest in OW USA’s receivables to OW USA’s liquidating trust. Such reliance was misplaced since the $3 million was not an OW USA receivable, but rather was owed to OW Far East. Further, the Chapter 11 liquidation plan provides that where OW USA acted as an intermediary between a contract supplier (OW Far East) and the physical supplier (NuStar), customers are to pay invoices sent by the supplier, and it is silent on whether OW USA’s liquidating trust should expect to receive any of the money paid under such invoices. Accordingly, the Fifth Circuit found that NuStar failed to show that it was likely that the nonpayment of the fuel claim would be redressed by a favorable decision on ING’s liens. Thus, the court held that it lacked jurisdiction to review the district court’s ruling that OW Far East validly assigned its maritime liens to ING, and it dismissed NuStar’s appeal of that ruling.

Why This Case Is Interesting

The Fifth Circuit rejected NuStar’s argument that its status as a general creditor of OW USA gave it standing to appeal the rights of a secured creditor that had liens and claims against multiple affiliated entities, finding that NuStar’s arguments were too speculative. While the decision goes through a series of technical arguments around jurisdiction, it underscores that a creditor of one entity does not have standing to appeal a decision concerning another affiliated entity, even if there was an intercompany transaction between the two related entities impacting the transaction at issue. NuStar provided services to the end customer. OW USA acted as an intermediary between the contract supplier (OW Far East) to the customer and the physical supplier (NuStar). The customer’s receivable was deemed owed to OW Far East as the contract supplier. The intercompany transaction between OW USA and OW Far East provided no standing to NuStar, deemed (at best) to be a general unsecured creditor of OW USA. Because NuStar failed to show that it was “likely, as opposed to merely speculative” that nonpayment of the fuel claim will be “redressed by a favorable decision” (aka, reversing) on ING’s lien, the Fifth Circuit determined that it lacked jurisdiction to determine the appeal. The decision underscores the necessity to focus on the specific claims relating to intercompany transactions and who has what direct interest in the outcome.