Stipulated Loss Value (SLV) Threatens to Sink Shippers

in Bankruptcy

Stipulated Loss Value (SLV) Threatens to Sink Shippers in Bankruptcy

A partner at the international law firm of O’Melveny & Myers, Suzzanne Uhland chairs the firm’s U.S. restructuring practice, among other things. A graduate of the Yale University Law School, Suzzanne Uhland anticipates challenges to traditional practices in the establishment and enforcement of stipulated loss values (SLVs) in commercial shipping bankruptcies.

Stipulated Loss Value (SLV) Threatens to Sink Shippers in Bankruptcy

In the wake of the global recession, the shipping industry is experiencing diminished demand and declining rates, which in turn are leading several firms to seek protection under bankruptcy laws. These laws provide for the rejection of burdensome leases. Since many firms lease much of their fleets, this rejection power can enable companies to shed surplus vessels and their costs.

Stipulated Loss Value (SLV) Threatens to Sink Shippers in Bankruptcy

A problem arising from the rejection power, though, is the SLV. This is the amount that the lessee must pay the lessor if the lease is rejected in bankruptcy proceedings. The SLV often exceeds actual losses because it includes anticipated future income.

Stipulated Loss Value (SLV) Threatens to Sink Shippers in Bankruptcy

There is precedent for evaluating such SLV claims. In the Third Circuit proceedings handling the Trans World Airlines bankruptcy, the court’s decision makes it difficult for ship owners to enforce claims of damages based on SLVs when those claims far outstrip actual damages. That decision was based on the idea that the lessee should not be forced to assume the lessor’s market risk. Contemporary cases of enforcing SLVs against bankrupt shipping companies, though, are not all in the Third Circuit and do not all follow that court’s reasoning, making this an unsettled area of the law.