FEBRUARY 2002

Jurisdictional Showdown: Federal Court Order Prevails Over Bankruptcy Court's Exercise of Jurisdiction Over Bankrupt Shipowner's Vessel

It was a jurisdictional confrontation of sorts between the Quebec Superior Court exercising Bankruptcy jurisdiction and the Federal Court of Canada exercising Maritime law jurisdiction on both federal and international levels. In the opening words of the Supreme Court of Canada in Re Antwerp Bulkcarriers, N.V.: "Two courts exercising authority granted by Parliament over their respective subject matters came into collision over the sale of a ship."

Holt Cargo Systems Inc. ("Holt") rendered stevedoring services to the Ship M/V "Brussel" and thereby acquired a maritime lien against the Ship itself under the law of the United States which is enforceable in Canada with the same priority as is given to maritime liens created here. Invoices sent to the shipowner for stevedoring services remained unpaid.

The Ship entered Canadian waters at Halifax harbour. Holt commenced an in rem action for the collection of the secured debt and procured the Ship's arrest by order of the Federal Court of Canada. The Ship's owner, Antwerp Bulkcarriers N.V., was subsequently adjudged bankrupt by order of a Belgian bankruptcy court. The trustees in bankruptcy sought to realize on the assets of the bankrupt worldwide for distribution to the creditors according to the law of Belgium.

At no time did the shipowner declare bankruptcy in Canada. There were no Canadian bankruptcy proceedings separate and apart from recognition of the Belgian bankruptcy.

Trustees obtained a declaration from the Quebec Superior Court (not at that stage specified to be sitting in bankruptcy) recognizing and declaring executory "in Quebec" the Belgian bankruptcy order of April 5, 1996, and vesting in the appellant Trustees the property of the bankrupt, "subject however, to the rights, if any, of any creditors with claims secured under the laws of Canada, as by law provided".

In concurrent proceedings in the United States and before the Federal Court of Canada, the Trustees attempted to prevent Holt and other creditors from realizing on their security. A temporary order was granted, with respect to proceedings in the United States, but the U.S. court declined to order U.S. creditors to halt proceedings elsewhere. The Trustees obtained intervenor status at the Federal Court in the in rem proceeding against the Ship. Nevertheless, the Federal Court refused to grant a stay and proceeded to grant default judgment to Holt in its undefended action against the Ship. (This decision in Holt Cargo v. ABC Containerline was affirmed by the Federal Court of Appeal and subsequently by the Supreme Court of Canada at the same time this appeal was decided.)

The Trustees then obtained an order from the Belgian bankruptcy court purporting to command the delivery of the Ship to the Trustees for sale and distribution of the proceeds, and praying in aid the help of "all Canadian courts" to give effect to this order. This was followed by an order from the Quebec Superior Court sitting in bankruptcy directing the proceeds of the sale of the ship to be paid to the trustees "for distribution amongst the creditors of the Bankrupt in observance of all their rights and in conformity with Belgian law".

The bankruptcy court order also requested the aid of the Supreme Court of Nova Scotia with jurisdiction in bankruptcy, and ordered that the judgment be served on the Marshal of the Federal Court of Canada in Halifax where the ship had been arrested under Federal Court order. This bankruptcy court order was in conflict with the rules and procedures and, eventually, the order of the Federal Court.

The Quebec Court of Appeal allowed Holt's appeal, finding that in the circumstances it was not open to the Canadian bankruptcy court to make the orders it did. The trustees appealed to the Supreme Court of Canada.

The trustees argued that while the Federal Court had jurisdiction to make the in rem order under its maritime law jurisdiction, the supervening bankruptcy transformed the maritime law action into a bankruptcy matter and this overrode the powers of the Federal Court which has no bankruptcy jurisdiction.

The Supreme Court of Canada dismissed the appeal. The court concluded that the bankruptcy court had no power in the circumstances to take over disposal of the Ship already subject to the process of the Federal Court and to order a permanent stay of the in rem action in the Federal Court, as was the purported effect of the bankruptcy court order. The court gave three reasons for its conclusion:

1. The assertion of jurisdiction by the Canadian bankruptcy court did not oust the maritime law jurisdiction of the Federal Court. The Federal Court maritime jurisdiction, once properly exercised, was never lost by the subsequent bankruptcy.

2. The bankruptcy court had no power to deal with an asset (the Ship) already captured by the competent order of another superior court in Canada (the Federal Court). The ship was in the possession of the Federal Court Marshal, not the bankrupt. Neither the Ship nor the proceeds of its sale was available to be sent back to Belgium by a Canadian bankruptcy court.

3. In any event, the issuance of what amounted to an "anti-suit injunction" against the parties before the Federal Court improperly attempted to restrict that court's ability to exercise its jurisdiction. The maritime law jurisdiction of the Federal Court was not obliterated by the supervening bankruptcy. The order of the bankruptcy court did not "occupy the field", and on the contrary, the order of the Canadian bankruptcy court made the authority of the trustees subject to the rights of secured creditors. Once the bankruptcy court determined that the Federal Court had maritime law jurisdiction to deal with the Ship, the Canadian bankruptcy court ought to have recognized that the trustee's proper remedy was a stay application to that court.

RA

Insufficiency of Packing Triggers Exclusion Clause 4.3 of the Institute Cargo Clauses

In Rainbow Technicoloured Wood Veneer Ltd. v. Guardian Insurance Company of Canada [2002] FCA 28 (Fed. C.A.) the Federal Court of Appeal affirmed the decision of Justice Dubé who held that a machine improperly stuffed into a container and damaged during transit was not covered by the Institute Cargo Clauses (A). The court held that a container stuffed by independent contractors of the assured prior to commencement of transit was subject to exclusion 4.3 in the A Clauses.

Clause 4.3 specifies that "loss, damage or expense incurred by insufficiency or unsuitability of packing or preparation of the subject-matter insured (for the purpose of this Clause 4.3 "packing" shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants). The court rejected the assured's argument that the insufficiency of stowage is not excluded by Clause 4.3 so long as the assured was not responsible for the stowage. The court held that the stowage into the container occurred prior to the commencement of transit - the departure of the container from the assured's warehouse.

RMF

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