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IN RE MILLENIUM SEACARRIERS

January 12, 2004.

In re: MILLENIUM SEACARRIERS, INC., et al, Debtors Liberian International Ship & Corporate Registry, LLC; and Universal Oil, Ltd., Appellants,
v.
Allfirst Bank (f\k\a First National Bank of Maryland) and Wayland Investment Funds, LLC Appellees, Chapter 11



The opinion of the court was delivered by: ROBERT PATTERSON, Senior District Judge

OPINION AND ORDER

Appellants Universal Oil Ltd. ("Universal") and Liberian International Ship & Corporate Registry, LLC ("LISCR") appeal, pursuant to 28 U.S.C. § 158, the orders of Hon. Cornelius Blackshear, United States Bankruptcy Judge, entered on August 1, 2000, granting the motions for summary judgment of the adversary defendants, Allfirst Bank ("Allfirst") and Wayland Investment Fund, LLC ("Wayland").

  I. BACKGROUND

  A. The Preliminary Bankruptcy Proceeding

  On or about January 15, 2002, Millenium Seacarriers, Inc. and its Millenium subsidiaries (collectively, "Millenium" or "Debtors"), each of which owned a merchant vessel, commenced Page 2 Chapter 11 proceedings by filing with the Bankruptcy Court voluntary petitions for relief under Chapter 11 of Title 11, United States Code, as amended.*fn1 (L-26, ¶ 6; U-26, ¶ 6.)*fn2

  On January 28, 2003, Wayland, the purchaser of first preferred ship mortgage exchange notes issued by Millenium (the "Notes"), filed a motion to lift the automatic stay or, in the alternative, to appoint a Chapter 11 Trustee. (L-26, ¶ 7; U-26, ¶ 7.) Defendant Wayland had purchased a substantial number of the Notes in the secondary market between March 1999 and November 2001, and beneficially owned 85% of the Notes. (L-26, ¶¶ 3-4; U-26, ¶¶ 3-4.)

  The Debtors filed an objection to Wayland's motion, and a hearing was held on Wayland's motion on February 13, 2002. (L-26, ¶ 7; U-26, 17.) On February 13, 2002, Wayland and the Debtors came to an agreement entered on the record and so ordered by the Bankruptcy Court at the hearing resolving Wayland's motion. (L-26, ¶ 8; U-26, ¶ 8.) Pursuant to that agreement, on February 28, 2002, the Debtors filed an amended motion ("Sale Motion") pursuant to Section 363 of the Bankruptcy Code to sell substantially all the assets of the Debtors free and clear of liens, claims and interests; and (b) assume and assign contracts and leases in connection with such sale. (L-26, ¶ 9; U-26, ¶ 9.) On February 28, 2002, the Bankruptcy Court Page 3 accepted the Sale Motion and established bidding, notice and objection procedures pursuant to which all objections to the Sale Motion were due by March 22, 2002. (L-26, ¶ 9; U-26, ¶ 9.)

  On March 21, 2002, LISCR and Universal filed maritime lien claims and objections to the Sale Motion. (UW-1;LW-1.) On March 27, 2002, a hearing on the Sale Motion was held before the Bankruptcy Court ("Sale Hearing"). (UW-2; LW-2.) At the conclusion of that hearing, the Bankruptcy Court granted the Sale Motion and, ultimately, issued the Sale Order (L-5; U-5),*fn3 which, inter alia, ordered the sale of the Debtors' vessels "subject to such Lien and related Claim, if any," held by the objecting lien party that the Bankruptcy Court "finds, after due notice and a hearing, is superior in right to the Lien and related Claim of the Indenture Trustee." (L-5, ¶ 7; U-5, ¶ 7.) During the hearing, the Bankruptcy Court made clear that it would retain equity jurisdiction of the case and order that the Indenture Trustee be liable for any liens found to be superior to the liens of the purchaser. (L-11, Ex. A at 256-257; U-11, Ex. A at 256-57.) The Indenture Trustee (All first) was the successful and only bidder for eighteen of the vessels. (L-26, ¶ 11; U-26, ¶ 11.) The estate did not profit from these sales since the amount of each outstanding mortgage exceeded the purchase price for each vessel. (Arg. Tr. at 5.) A nineteenth vessel was sold for cash, but administrative expenses will exceed its sale price and any remaining assets of the estate. (Id. at 5-6.)

  B. The Adversary Proceeding

  On April 4, 2002, Debtors, as ordered by Judge Blackshear, filed the complaint in the Adversary Proceeding to resolve the priority of the maritime liens asserted by the Indenture Page 4 Trustee and by the parties who had objected to the sale. (L-26; U-26.) The complaint stated it was a core proceeding pursuant to 28 U.S.C. § 157(b). (L-26, ¶ 5; U-26, ¶ 5.) Each of the objecting parties claiming maritime liens, including Universal and LISCR, was named as a plaintiff in the Adversary Proceeding, and Wayland and All first were each named as defendants. (L-26; U-26.) On April 17, 2002, counsel for the appellants objected to the Debtors filing a complaint naming his clients as plaintiff. The Bankruptcy Judge responded that he had ordered the Debtors to do that to expedite matters and offered to have the appellants' counsel's clients removed from the adversary action. (L-11, Ex. B at 40; U-11, Ex. B at 40.) On April 29, 2002, defendants filed answers denying the priority of appellants' liens. (L-23; U-23.)

  On April 25, 2002, Judge Blackshear signed a scheduling order setting deadlines for discovery and ordering that any motions for summary judgment in the Adversary Proceeding be filed by May 31, 2002. (L-24; U-24.)

  On May 31, 2002, appellees moved for summary judgment with supporting memoranda of law and Local Civil Rule 56.1 Statements on the claims asserted by LISCR in Adversary Proceeding 02/8031A and by Universal in Adversary Proceeding 02/8031. (L-18, 20; U-18, 20; LW-14, 15; UW-14, 15.) Universal and LISCR filed answering memorandum of law and Local Civil Rule 56.1 Statements on June 16, 2002. (L-30, 31; U-30, 31.) On June 21, 2002, appellees filed reply memorandum and reply Local Rule 56.1 Statements. (L-11-14; U-11-14.)

  Appellees' motion for summary judgment against LISCR asserted that there was no genuine issue of material fact regarding (1) the fact that the first preferred ship mortgages held by Allfirst on its Liberian flagged vessels were validly executed and duly registered under the laws of Liberia, and (2) that LISCR's claim for Liberian tonnage taxes on those vessels were state — Page 5 created liens of a maritime nature and of a lower priority than that of its first preferred ship mortgages. (U-18.)

  Appellees' motion for summary judgment against Universal asserted that there was no genuine issue of material fact regarding (1) the foreign first preferred ship mortgage held by Allfirst on the M/V Millenium Eagle, a Liberian flagged vessel, was validly executed and duly registered under the laws of Liberia, and (2) that on November 24, 2001, and January 6, 2002, Universal delivered bunkers to the M/V Millenium Eagle in Panama. (L-20; U-20.)

  In answer, the appellants filed a joint brief with non-party Orient Shipping and separate Local Civil Rule 56.1 Statements which set forth statements of fact to substantiate a defense of lack of subject matter jurisdiction and only responded to the appellees' Local Civil Rule 56.1 Statements in the final paragraphs.*fn4 (L-30, 31; U-30, 31.) Neither of appellants' Local Civil Rule Statements contradicted All first's statement that the first preferred ship mortgages held by Allfirst on its Liberian flagged vessels were validly executed and duly registered under the laws of Liberia. (L-31; U-31.) Instead, the LISCR Local Bankruptcy Rule 7056.1 Statement stated, without citation to evidence, that (1) LISCR provided its registry services to Debtors in the United States; and (2) those services were "necessaries" under maritime law. (L-30, ¶ 21-23.) The Universal Local Civil Rule 56.1 Statement stated that (1) the bunkers were "necessaries" under maritime law, and (2) because Debtors had no intent to pay for the bunkers Universal delivered, the Debtors' consumption of Universal bunkers with knowledge of Debtors' inability to pay constituted the maritime tort of conversion, and thus Universal's liens had priority over Page 6 the ship mortgage liens of appellee. (U-31.) Appellees filed responsive Rule 56.1 Statements on June 21, 2002, noting LISCR cited no evidence to support its claim for "necessaries" and stating that the depositions of defendants* witnesses cited in Universal's Local Civil Rule 56.1 statement did not support the claim that the Debtors knew Debtors could not pay for the necessaries received. (L-14.)

  On July 10, 2002, defendants' motion for summary judgment was granted by memorandum decision. (L-10; U-10.) In granting defendants' motions for summary judgment against Universal and LISCR, the Bankruptcy Court made the following relevant findings of fact and conclusions of law:
(1) There are no facts in dispute. . . . Insofar as counsel for the non movants has included a cross motion for summary judgment in his reply papers, the cross motion is denied in its entirety because it was not filed on or before the deadline set in this Court scheduling order dated April 25, 2002.
(2) Universal has asserted a claim for conversion. The parties were dealing with one another pursuant to a contract for the sale of bunkers. The bunkers were provided to the Debtors pursuant to the contract. Apparently, the Debtors have failed to pay for the bunkers pursuant to the contract. Universal's remedy therefore, is not in tort, it is in contract, and as such, its lien occupies a position subordinate to that of Defendants. "Conversion occurs when a defendant exercises unauthorized dominion over personal property in interference with a plaintiffs [sic] legal title or superior right of possession." Rolls-Royce Motor Cars v. Schudroff, 929 F. Supp. 117, 124 (S.D.N.Y. 1996); Bankers Trust Co. v. Cerrato Sweeney. Cohn, Stahl & Vaccaro, 590 N.Y.S.2d 200, 202 (N.Y. App. Div. 1992). Furthermore, as the damages are merely being sought for breach of contract, the claim for conversion is unsubstantiated because Universal does not allege any unlawful or wrongful act on the part of the Debtors.
* * *
  (4) LISCR has liens for payment of Liberian tonnage taxes and counsel has failed to provide any legal or factual basis for the denial of the herein Motion; therefore its objections are summarily denied. Page 7

 (D-10, at 2-3.)

  An order granting appellees' motion and denying appellants' answer motion was signed by Judge Blackshear on July 30, 2002. (LW-17; UW-17.) On August 7, LISCR and Universal filed notices of appeal. (L-8, 9; U-8, 9.)

  II. SCOPE OF REVIEW

  Conclusions of law of the Bankruptcy Court are reviewed de novo by the District Court. F.R.Bankr.P. 8013; In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir. 1990). Findings of fact shall not be set aside unless clearly erroneous. F.R.Bankr.P. 8013; Ionosphere, 922 F.2d at 988.

  III. DISCUSSION

  A. The Bankruptcy Court Had Subject Matter Jurisdiction

  In his decision granting Allfirst's motion for summary judgment against LISCR and Universal, Judge Blackshear should not have denied the non-movants' cross motions for summary judgment, even though they were filed with appellants' responsive papers and not on or before May 31, 2002, the deadline set in the Bankruptcy Court's scheduling order dated April 25, 2002. ...


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