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Distressed Shipping Companies: Look to Airplane SLV Case Law

Distressed Shipping Companies: Look to Airplane SLV Case Law

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Despite record-low oil prices and a global economy that has been steadily improving, the shipping industry has yet to truly emerge from the recession that began in 2008. A variety of problems have led to the current state of affairs, including sluggish demand that caused revenues to plummet, but one issue has bedeviled the industry in particular: the overabundance of ships. Thanks to incredibly thin margins, many shipping companies have found themselves filing for chapter 11 bankruptcy. Unfortunately, as many shipping companies only lease, or “charter,” ships from owners, the inconsistent handling of stipulated loss value (SLV) provisions in the courts presents numerous legal issues.

SLV provisions are designed so that the owner of a piece of equipment can recover liquidated damages that are higher than its market value, even if the charterer has successfully made all scheduled payments, because of the way it factors in depreciation and projections regarding the owner’s return on investment. However, the enforcement of SLVs remains uncertain, despite considerable case law on the subject developed through airline bankruptcies. In these cases, SLVs have been enforced somewhat inconsistently.

Generally, courts have been reluctant to award liquidated damages if the actual damage incurred is significantly smaller, and airline SLVs have often been treated no differently. In cases such as Atel Financial Corp. v. Quaker Coal Co. or In re Northwest Airlines, courts have criticized SLVs that do not decline over the term of the agreement, or those that create an effect of double recovery. In the most famous of these cases, the Third Circuit’s decision regarding Trans World Airlines’ bankruptcy, the SLV avoided both of those issues but still was found unenforceable due to the fact that, by including “market risks” in its projections, the aircraft owner was claiming damages of $5.5 million per plane, when the actual damages incurred were $100,000 per plane.

However, ship owners concerned about the enforceability of SLVs may be comforted by a number of other rulings, such as General Electric Capital Corporation LLC v. G. Howard Associates Inc. Given these developments, ship owners and charterers alike continue to face uncertainty when entering into bankruptcy proceedings.

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