Vessel Documentation Rulings
What you should know about vessel documentation disputes.
There are a number of ways in which ownership of a USCG documented vessel may fall subject a dispute. If the owner's interest in the vessel comes into question, then any recorded preferred vessel mortgages could also be in question. The position of the mortgage holder can be at risk even if title is not at issue and a preferred mortgage can be unenforceable even if properly recorded. This article presents a number of actions that illustrate such circumstances.
Title Issues
Documentation Inconclusive: Federal registration does not of itself confer endowments of title and ownership to a vessel. Jones v. One Fifty Foot Gulfstar Motor Sailing Yacht, 625 F. 2nd 44 (5th Cir. 1980)
Recordation Inconclusive: Recording of title is not conclusive as to ownership of a vessel. In re Lykes Bros. S.S. Co., Inc., 196 B.R. 574 (M.D.Fla. 1996)
C.O.D. is Inconclusive: Issuance of certificate of documentation is not conclusive as to ownership of vessel, but rather, courts are guided by the underlying contract. In re Tacoma Boatbuilding Co., 81 B.R. 248 (S.D.N.Y. 1987)
Foreclosure in Admiralty: The purchaser of a vessel who takes title in any way other than by foreclosure in admiralty acquires imperfect title. His protection consists only of the warranties in his bill of sale, for whatever they are worth, and the judicial doctrine of es.” Tulane Law Review 558, 565 (1973), Introduction to the Law of Maritime Liens, 47(3) 2 Revised 8/2002
Judicial Foreclosure: A vessel foreclosure and judicial sale which appears to be valid generally cleanses the ship of maritime liens, but it can be challenged as being void or invalid for (i) not following proper procedure (e.g. lack of notice), or (ii) the assertion of fraud.
Maritime Liens Are Secret: It is of the greatest importance to the buyer that he acquire title to the vessel on the sale and that the title be free of any liens or encumbrances not known to him. The problem is particularly important in the sale of vessels, because most maritime liens are ‘secret’ and need not be recorded to be effective. Tulane Law Review 535, 550, (1973), Ship Sale Contracts 47(3)
Abandoned Vessel: Even if a vessel has been abandoned, the owner or owner’s successor retains title to that vessel no matter how long it has been abandoned. Emre E. Dluhos v. The Floating and Abandoned Vessel, known as "New York", 162 F.3d 63 (2nd Cir. 1997)
Quiet Title: In order to quiet title to a vessel against the world, an action must be pursued in rem. Court will not entertain an in rem action against a vessel to quiet title unless the vessel was arrested. Emre E. Dluhos v. The Floating and Abandoned Vessel, known as "New York", 162 F.3d 63 (2nd Cir. 1997)
Bill of Sale: Contracts for sale of U.S. flag vessels are governed by state law but federal laws are of great significance. To be effective against third parties, the bill of sale must be properly recorded and to accomplish that, it must be sufficient and acceptable for recording. Tulane Law Review 535, 538, (1973), Ship Sale Contracts 47(3)
Chain of Title: Chain of title documents for a vessel sale includes judicial proceedings (bankruptcy, receivership, probate, conservatorship, dissolution of marriage) and if the court has not authorized the sale, the order authorizing sale is subject to collateral attack, or the order is invalid because court lacked jurisdiction.
Sham Conveyances: A vessel title and mortgage would be in jeopardy (even if properly recorded) if documents are adjudicated unenforceable by application of the alter ego theory of liability or are executed as part of sham intra-corporate conveyances. Equilease Corporation v. M/V Sampson, 568 F. Supp 1259 (E.D. La. 1983); Flood v. American Oil Screw Trawler Francis L. MacPherson, 258 F. Supp 768 (D. Mass. 1966)
Statutory Limitations: Following a foreclosure and judicial sale of a vessel, a claim was made for wages. The purchaser of the vessel argued that the claim was statutorily time barred. The court permitted the claim to proceed (and ultimately found against the bank) because a claim (but not an “action”) had been filed with the U.S. Coast Guard. The court, following equitable principles, allowed the intervention against the proceeds and found that the claimant's lien survived the sale of the ship. Key Bank of Washington v. Southern Comfort, 106 F.3d 1441 (9th Cir. 1997)
Prior Sale: Hozie bought a vessel from Mignano, left it moored where it was, though Hozie was responsible for future mooring costs and for paying the bank the payments that Mignano had been making. Hozie did not record the sale. Mignano tried to rescind the sale but Hozie refused. Hozie then discovered the vessel's condition was worse than represented at the time of purchase and a dispute arose over whether Hozie should continue making payments. Mignano died, and his executrix agreed to sell the vessel to Underwood who convinced her to sign a U.S. Coast Guard bill of sale (allegedly to clear title to the 3 Revised 8/2002 vessel) which Underwood filed with the Coast Guard and he received a Certificate of Documentation. Underwood sought a summary judgment that he had title to the vessel. The court would not grant it. Hozie v. The Vessel Highland Light, 1998 AMC 2829
C.O.D. Inconclusive: Although one party has a “Certificate of Documentation” for the vessel, this is not conclusive evidence of ownership in a proceeding in which ownership is an issue. Hozie v. The Vessel Highland Light, 1998 AMC 2829
Builder's Certificate Inconclusive: For purpose of determining whether mortgagee proved mortgagor's ownership of vessel as part of its burden of establishing valid preferred ship mortgage, builder's certificate is prima facie, but not conclusive, evidence of title, as it is part of paperwork required by U.S. Coast Guard for the certificate of documentation process. Chase Manhattan Financial Services, Inc. v. McMillian, 896 F.2d 452 (10th Cir. 1990)
Liens & Encumbrances
Maritime Liens Follow the Vessel: Unlike most land-based liens, a maritime lien is unrecorded and arises from the moment the supply or service, which is the basis of the lien, is provided to the vessel. The security is the vessel itself and the lien can be enforced by an action against the vessel in which the vessel is arrested. An action to arrest the vessel is usually available wherever the vessel can be found. This includes the United States as well as many foreign jurisdictions. Note also that the lien follows the vessel, even when it is sold, such that you may recover for your goods or services even if the party who hired you no longer owns the vessel. Pacific Maritime Magazine, October 1996, Arresting a Ship: Actions In Rem
Lien for Repairs: Where repairs, being performed under contract, were begun before, but not completed until after recording and endorsement, it has reasonably been held that the entire repair claim was entitled to priority. The basis of such holding seems to be that the repair man was under a contractual duty to go forward with the work." Bank One Louisiana, N.A. v. M/V Mr. Dean, et al., 293 F.3d 830 (5th Cir. June 10, 2002); Gilmore & Black at 755-56, citing The Eastern Shore, 31 F. Supp 964 (D. Md. 1940), and The Transford, 1929 A.M.C. 727 (E.D. NY 1929)
Lien is Non-consensual: A maritime lien is non-consensual and unrecorded; it also follows the vessel into the hands of even a good faith purchaser. Admiralty and Maritime Law 3rd Ed., Thomas J. Schoenbaum, Vol. 1, pg. 504; United States v. Z. P. Chandon, 889 F. 2d. 1990 (9th Cir. 1989)
Uniform Commercial Code: The Uniform Commercial Code does not apply to maritime liens. The ship owner's charter lien upon sub-freights earned by the charterer prevailed against the bankruptcy trustee, even though the lien was not filed. Admiralty and Maritime Law 3rd Ed., Thomas J. Schoenbaum, Vol. 1, pg. 504, footnote 55; Walsh v. Placedo Shipping Corp. of Liberia (In re Pacific Caribbean Shipping), 789 F.2d. 1406 (9th Cir. 1986)
Maritime Lien: A maritime lien arises from the moment of the service or occurrence that provides its basis. Admiralty and Maritime Law 3rd Ed., Thomas J. Schoenbaum, Vol. 1, pg. 50; Riffe Petroleum Co. v. Cibro Sales Corp., 601 F.2d 1385 (10th Cir. 1979)
Contractual liens: Maritime contracts giving rise to a maritime lien against the vessel include: dockage; stevedoring; loading and unloading of the vessel; and stowage and securing of cargo aboard the vessel. Inbesa America, Inc v. M/V Anglia, (11th Cir. 1996)
Statutory Liens: The maritime lien for “necessaries” includes not only the services included in the statute, but is “broadly construed to mean any goods or services that are useful to the vessel, keep her out of danger, and enable her to perform her particular function…Necessaries may be money, skill, labor, and personnel services, as well as materials.” Admiralty and Maritime Law 3rd Ed., Thomas J. Schoenbaum, Vol. 1, pg. 508; Equilease Corp v. M/V Sampson, 793 F.2d. 598 (5th Cir. 1986)
State Liens: A lien may be recognized under state law for something furnished to a vessel that is not accorded lien status under the Lien Act. Such state legislation, maritime in nature but applicable to areas not covered by federal maritime law, may be enforced in rem in federal court under the maritime jurisdiction of the United States. Stephens Boat Co. Inc. v. The Barge Orr 1 et al., 791 F. Supp, 145, ( E.D. La. 1992); City of Erie v. S.S. North American, 267 F.Supp. 875 (W.D. Pa. 1967); Burdine v. Walden, 91 F.2d. 321 (5th Cir. 1937); Goudy & Stevens Inc. v. Cable Marine, Inc., 665 F.Supp. 67 (D. Me 1987); Cary Marine, Inc. v. M/V Papillon, 872 F.2d. 751 (6th Cir. 1989) 5 Revised 8/2002
Maritime Liens: A maritime lien is an incident of most maritime transactions. (A) court has the right to create new [maritime] liens as the need arises.Tulane Law Review 558 (1973), Introduction to the Law of Maritime Liens, 47(3)
Legal Presumption: Under the Federal Maritime Lien Act, a presumption arises that one providing supplies to a vessel acquires a maritime lien, which would prime the preferred ship mortgage if it was earlier in date.
Maritime Liens Under Treaty: The 1999 treaty on arrest of vessels provides the basis for the arrest of a vessel in a foreign port to enforce maritime liens against the vessel. It revised the 1952 Convention and added and expanded types of maritime liens which would be covered by the treaty: costs of repatriation of the crew; marine insurance; brokerage fees; commissions and agency fees; ship reconstruction and repair costs; etc. The International Convention on Arrest of Ships 1999
Secret Liens: “The maritime ‘privilege’ or lien is adopted from the civil law, and imports a tacit hypothecation of the subject of it. …It accompanies the property into the hands of a bona fide purchaser. It can be executed and divested only by a proceeding in rem. …(T)his privilege or lien, though adhering to the vessel, is a secret one; it may operate to the prejudice of general creditors and purchasers without notice." The Yankee Blade, 19 How. 82 (1857)
Knowledge by Owner:The U.S. Supreme Court ruled that even though the owner of vessel was unaware that master of chartered vessel contracted for necessary supplies, the transaction created a maritime lien and thus bound the ship. (The lien would remain against the vessel when sold and would prime a subsequent preferred mortgage unless released by operation of law.) South Coast S. S. Co. v. Rudbach, 251 US 522 (1920)
Partner Renovations: In anticipation of a joint venture, potential joint venture partner began making renovations to vessel. Court found that potential joint venture partner was entitled to a maritime lien on the vessel for work done on it. Captain Mark Rose v. M/V Gulf Stream Falcon, 186 F.3d 1345 (11th Cir. 1999)
Fishing Permit: Federal fishing permit deemed to be an appurtenance of the vessel and subject to a maritime lien and therefore subject to sale together with the vessel. Often the fishing permits have more value than the vessel and are an attractive target for those with maritime lien claims. Gowen Inc. v. F/V Quality One, 244 F.3d 64 (1st Cir. 2001)
Agent Lien: Vessel charterer engaged agent to provide fuel for vessel through a third party. Court found that the agent had provided necessaries to the vessel and, thus, was entitled to a maritime lien against the vessel for the amount it paid to the fuel provider. Galehead, Inc. v. M/V Anglia, 183 F.3d 1242 (11th Cir. 1999)
Profits and Commissions: A maritime lien for necessaries can include a profit or commission earned by the beneficiary of the lien. lehead, Inc. v. M/V Anglia, 183 F.3d 1242 (11th Cir. 1999)
Subcontractor Lien: Third party to a transaction may be entitled to maritime lien against the vessel resulting from repairs the third party performed, even though the third party was engaged by a contractor. Marine Coatings Inc. of Alabama v. United States, 932 F.2nd 1370, (11th Cir. 1991); Stevens Technical Services, Inc. v. United States, 913 F.2nd 1521, (11th Cir. 1990); Gowen Inc. v. F/V Quality One, 244 F.3d 64 (1st Cir. 2001)
Canadian Lien: For vessels that call on Canadian ports, a mortgage holder or owner is particularly vulnerable. A preferred ship mortgage (whether Canadian or US) may be primed by a maritime lien even if it occurred after the date of the mortgage. Also, Canada allows “sister ship” arrests of vessels. Thus, a vessel is subject to arrest and sale for a lien incurred by another vessel commonly owned.
Insurance Premiums: Under United States law, the Federal Maritime Lien Act, 46U.S.C. §§ 31341-43, establishes a maritime lien for the provision of necessaries, which include marine insurance. Equilease Corp. v. M/V Sampson, 793 F.2d 598, 603 (5th Cir. 1986) (en banc); Liverpool and London Steamship Protection and Indemnity Association Limited v. Queen of Leman, et al. consolidated with Liverpool and London Steamship Protection and Indemnity Association Limited v. M/V Abra, et al., --F.3d--, 2002 WL 1380876 (5th Cir., June 27, 2002)
Insurance Premiums: This was a consolidated case involving a conflict of laws as to whether or not there was a maritime lien for failure to pay P & I insurance premium for a vessel. Under English law no lien existed. Under American law a lien does exist. The court found that American law applied and, thus, a maritime lien existed and the vessel was subject to being arrested in rem to enforce the lien. "The maritime lien having arisen as a result of the failure to pay a contractual debt, it attaches to the ship and binds subsequent owners…" Liverpool and London Steamship Protection and Indemnity Association Limited v. Queen of Leman, et al. consolidated with Liverpool and London Steamship Protection and Indemnity Association Limited v. M/V Abra, et al., --F.3d--, 2002 WL 1380876 (5th Cir., June 27, 2002).
Fraud & Incompetency
Preferred Vessel Mortgage: A preferred ship mortgage can be unenforceable even if properly recorded when documents in the chain of title are forged or executed under fraud, undue influence, duress or mistake.
Unauthorized Documents: A preferred mortgage can be unenforceable even if properly recorded when documents are executed without authorization and/or pursuant to false authorizing resolutions by corporations, partnerships, limited liability companies, trusts or other entities. ITT Industrial Credit Company v. M/V Richard C, 617 F. Supp. 761 (E.D. La. 1985)
Fradulent Loan: This is a criminal case in which the defendants perpetuated a scheme in which they sought and made $1,200,000 worth of loans on a non-existent vessel. United States v. Camaille, et al., No. 84-179 (E.D. La.)
MIsrepresentation by the Borrower: Buyer/Borrower Christophides purchased a vessel for $2 million that was financed by bank. The conditions of the loan included a personal guaranty, a requirement that the vessel be long term chartered to Levant, and the loan be cross-collateralized with a $5.7 million loan bank previously made to Levant for the purchase of two other vessels (which loan was then in default). Levant then breached the charter party and Christophides consequently defaulted on his loan. During litigation it was alleged that the Levant financing was secured through misrepresentation because a Levant director bribed two bank officers. The case was remanded back to the district court to unravel and determine whether the bank could collect from Christophides. Banque Franco-Hellenique de Commerce Internation ey Maritime, S.A. v. Christophides, 1997 WL 317398 (2nd Cir. 1997)
Forged Power of Attorney: An individual wanted to buy a
yacht owned by a corporation. One of the requirements of closing was a
certified copy by the corporate secretary of a resolution from the
corporation’s board of directors authorizing the sale. The “seller” showed
up at the closing with a power of attorney instead of the resolution. The
buyer and lender accepted the power of attorney and the transaction closed.
Later it was discovered that the power of attorney was forged.
Appropriate Capacity: A vessel title and mortgage would be in jeopardy (even if properly recorded) if documents are executed by one who does not have appropriate capacity, such as a minor or a person who is insane or mentally incompetent.
Untrustworthy Documents: Documents allegedly supporting ship mortgages lacked basic indicia of trustworthiness and solemnity that reasonable person would normally expect of legitimate records relating to transactions involving 9 Revised 8/2002 large sums, and thus irregularity of such documents would be considered in determining whether mortgages were gratuitous. Bergesen d.y. A/S v. Lindholm, 760 F. Supp. 976 (D.Conn. 1991)
Broker Pocketed Money: A south Florida boat broker has been accused of numerous instances of fraud in conjunction with performing his duties. The Fort Lauderdale Sun-Sentinel in two articles reported the following alleged incidences of fraud involving the broker: selling boats and pocketing the money; failing to satisfy liens on vessels he sold; writing a bad check to pay off a lien on a vessel; selling boats with funds borrowed from Deutsche Bank and failing to turn over its share of the proceeds; selling a vessel that did not exist in order to get financing from Bank of the West; using a forged certificate documenting the existence of a vessel. Fort Lauderdale Sun-Sentinel "Police: Boat broker pocketed money meant for clients," June 22, 2002; Fort Lauderdale Sun-Sentinel "Boat broker accused of fraud," June 9, 2002
Rescission of Sale: Evidence was sufficient to find that under Louisiana law the seller of a ship and the seller's principal were guilty of fraud warranting the rescission of the sale for redhibitory vices. Lynhaven Dolphin Corp. v. E.L.O. Enterprises, Inc., 776 F.2d 538 (5th Cir. 1985)
Processing Errors
Delays of Recordation: Alberto purchased a yacht financed by Maryland National Bank. The mortgage was presented to the U.S. Coast Guard for recordation but it was not recorded or endorsed on the vessel’s abstract for 6 ½ months. Meanwhile, Alberto filed for bankruptcy. Can the bankruptcy trustee avoid the bank’s interest in the vessel? Does the bankruptcy automatic stay bar recordation of the mortgage? The bankruptcy judge and the district court ruled against the bank. Under the facts, the circuit court reversed and remanded. Alberto v. Maryland National Bank, 823 F.2d 712 (3rd Cir. 1987)
Erroneous Abstract: - A preferred mortgage can be adversely affected because of administrative issues at the Coast Guard National Vessel Documentation Center (NVDC), including erroneous abstracts resulting from: home port changes in the chain of title; the establishment of the NVDC; the fire at the NVDC; and computer malfunctions at the NVDC.
Relying on a Legal Opinion: Lender pursued claim against owner's attorneys who issued an opinion on which the lender relied, but which contained false assurances. Trial court said there was no privity between the lender and the borrower’s attorney and, thus, denied the lender the right to rely on the opinion. The Prudential Insurance Company of America v. Dewey Ballantine, Bushby, Palmer & Wood, & Gilmartin, Poster & Shafto, 80 N.Y. 2d. 377, 605 N.E. 2d 318 (1992)
Escrow Agent Error: Commerce entered into an agreement with Beluga to purchase all of the stock of Sando, a subsidiary of Beluga, whose sole asset was a vessel. Beluga would surrender its stock certificates of Sando and new certificates from Sando would be issued to Commerce. The new stock certificates were to be held by an escrow agent who would hold them until the full purchase price was paid. The vessel was to be sold for cash and a promissory note from Sando to Beluga was secured by a mortgage on the vessel. The escrow agent withdrew and turned the stock certificates over to Commerce’s attorney who then turned them over to Commerce. Armed with the certificates, Commerce obtained possession of the vessel and sailed off to the Bahamas. Commerce then gave a mortgage to Beluga but refused to make the cash payment. Beluga attempted to foreclose on the mortgage in rem and the suits and counter suits started flying. Revised 8/2002 legally responsive escrow services. Beluga Holding, Ltd. v. Commerce Capital Corporation, 212 F.3d 1199 (11th Cir. 2000)
Errors by The Closing Agent: The title to a vessel may be
defective and the mortgage of the vessel may be in jeopardy if the vessel
documentation company, attorney, or closing agent hired to handle the
transaction made a mistake: in searching the records; rendering its report;
drafting documents; filing documents; releasing documents out of escrow
without authorization; etc.
Coast Guard Error: Two mortgagees were
fighting over which mortgage primed. WRT, a party to the litigation, filed
its mortgage first, but there is some question over whether there was a
transfer of funds. Regardless, the U.S. Coast Guard erred because it
reflected in the public record that the WRT mortgage had been terminated.
GECC, the other party to the litigation, entered into a mortgage almost ten
months later and almost five months after the erroneous record was
established. The court said that even though a search of public records
could not have disclosed the pre-existing encumbrance due to Coast Guard
error, that mortgage (the pre-existing encumbrance) is valid against third
parties from the time it was filed. In this case, the court overlooked the
Coast Guard error in favor of the WRT mortgage to the detriment of the GECC
mortgage. Mayfield v. The Energy VII, 1999 WL 38163 (E.D LA, 1999)
Incorrect Title Search: Misinterpretation of documents of record
by the person or company performing the lien search giving an incorrect or
misleading report on the status of title, liens, claims or encumbrances
against the vessel should be of concern to a vessel buyer or lender.
Ineffective Subordination Agreement: If a subordination agreement is
part of a transaction and it becomes ineffective or otherwise does not
accomplish its purpose, the intended junior interest may be reinstated to
priority.
Refusal to Record Amended Mortgage: Though mortgagor signed an amended preferred ship mortgage before a notary, mortgagee failed to sign the amended mortgage and the National Vessel Documentation Center refused to record the document.
Vessel Database: In an injured seaman suit where the defendant claimed that it did not own the vessel at the time of the injury, the plaintiff countered with evidence from the U.S. Coast Guard’s internet on-line vessel database. The court rejected that evidence and called it inherently “untrustworthy” and "voodoo information.” Needless to say, reliance on the Coast Guard’s internet vessel database for vessel ownership, title or related questions is extremely imprudent. St. Clair v. Johnny's Oyster & Shrimp, Inc., 76 F.Supp2d 773 (S.D.Texas)
Public Violations: The buyer does not have legal title and a lender's mortgage on the vessel would be void if the transaction (or possibly if a transaction in the chain of title) violates public policy (e.g. payment of a gambling debt or as part of a crime).
Errant Legal Opinion: "A Minnesota bank, sued its Louisiana lawyers after they gave an opinion letter that turned out to be incorrect. The firm had stated that a fleet mortgage securing the construction of two dockside casinos in Mississippi gave the bank's bondholders a security interest 'superior to all other liens.' This advice ultimately turned out to be wrong: after the mortgagor ran into financial problems, the contractor instituted litigation and a bankruptcy court in Mississippi ruled the fleet mortgage invalid and 11 Revised 8/2002 unenforceable. On behalf of the bondholders, the bank then filed a malpractice action in Mississippi. The firm responded by filing a motion to dismiss on the ground that personal jurisdiction was lacking. The court, finding this contention to have merit, granted the motion." Journal of Maritime Law and Commerce, 31 JMARLC 407, (July, 2000), The Erring Proctor: Admiralty Lawyers and Malpractice Claims, Robert M. Jarvis; First Trust National Association, as Indemnitee Trustee v. Jones, Walker, Waechter, Poitevent, Carrere & Denegre et al., 996 F. Supp. 585 (S.D. Miss., 1998)
Mortgage Amount Error: This case involves a $92 million typographical error. Prudential Insurance loaned U.S. Lines funds secured by a preferred ship mortgage. A few years later, U.S. Lines restructured its debt and GECC ended up with a second preferred mortgage. Thereafter, U.S. Lines filed for bankruptcy at which time it was discovered that the Prudential corollary ship mortgage amendment contained an inadvertent error; namely, one section stated that the outstanding balance was $92,885 instead of $92,885,000. GECC and the other creditors argued that the Prudential mortgage priority was limited to the $92,885 as, inter alia, a preferred ship mortgage is strictly construed and must comply in every respect without error with the procedures of the Ship Mortgage Act. After considerable litigation, the court moved the decimal back to where the parties originally intended and maintained the priority of the Prudential mortgage. The Prudential Insurance Company of America v. S.S. American Lancer et al., 870 F.2d 867, 1989 A.M.C. 1097 (2nd Cir. 1989)
Mortgage Priorities
Subordination of Mortgage: The lender bank, in the trial court’s opinion, failed to exercise good standard lending practices by doing such things as ensuring that the official number was properly engraved on the vessel. Thus, it was possible for a fraud to be perpetuated by allowing two vessel documents and mortgages to exist against the same vessel. The court then found that the lender bank was equitably subordinated to the second filed mortgage. The appellate court overruled the lower court based on the facts. Maryland National Bank v. The Vessel Madame Chapel, 46 F.3rd 895 (9th Cir. 1995)
Recordation Requirement: No sale or mortgage, which includes a vessel of the United States, is valid against any person other than grantor or mortgage owner and anyone with actual notice until bill of sale or mortgage is recorded with U.S. Coast Guard at vessel's home port (now the National Vessel Documentation Center at Falling Waters, WV). Maryland National Bank v. The Vessel Madame Chapel, 46 F.3d 895 (9th Cir. 1995)
Vessel Status: A preferred mortgage can be ruled unenforceable by a judge even if properly recorded if the vessel lacks legal vessel status as defined by 1 U.S.C. §3. Biloxi Casino Belle Incorporated v. MRA, Ltd. dba Casino Belle of Tunica, et al., 176 B.R. 427 (S.D. Miss., 1995); In the Matter of Treasure Bay Corp., 205 B.R. 490, 1997 AMC 2878 (S.D. Miss., 1997); Daniel v. Ergon, Inc., 892 F.2d 403 (5th Cir. 1990)
Liens for Necessaries: Preferred ship mortgage is primed by a preferred maritime lien that includes those liens arising before the preferred ship mortgage is filed, including liens for necessaries. Note that liens for necessaries do not have to be filed to be valid and prime the mortgage. Bank of America v. M/V Pengwin, et al., No. 97- 36050 (9th Cir. 1999)
Mortgage Renewal: The bank had two mortgages that predated a lien for necessaries. After the lien for necessaries attached, the bank amended, renewed and/or entered into three more mortgages each one in an amount larger than the two original mortgages. In a facts driven case, the court found that the three subsequent mortgages were renewals or amendments of the original two mortgages, which did not lose their priority to the extent of the amount of debt existing on the date the lien holder perfected its lien. Bank of America v. M/V Pengwin, et al., No. 97-36050 (9th Cir. 1999)
Mortgage Perfection: Mortgage on debtor's yacht was not perfected until U.S. Coast Guard endorsed and recorded it in accordance with Ship Mortgage Act, though mortgage had been delivered to Coast Guard by mortgagor approximately three months earlier; accordingly, trustee could exercise rights as judicial lien creditor and avoid mortgage, where debtor had filed for bankruptcy in interim. Matter of Alberto, 66 B.R. 132 (D.N.J. 1985)
False Certificate: The court ruled that the filing of a false certificate that the vessel’s official number was affixed to the vessel, when the lender did not have knowledge that the vessel was not marked, would not affect the status of the preferred mortgage. However, the mortgagee’s bad faith will defeat the preferred status. Query, what does it take for knowledge to be imputed to the mortgagee? Maryland National Bank v. The Vessel Madame Chapel, 46 F.3rd 895 (9th Cir., 1995)
Mortgage Renewal: The Mortgage Renewal Rule generally is that in the absence of an indication of contrary intent, execution of a new mortgage in renewal, or amendment of a former one, does not extinguish priority of the former one. However, it only applies to the amount of debt remaining on the date of renewal. (emphasis added) Bank of America v. M/V Pengwin et al., No. 97-36050 (9th Cir. 1999)
State Law Security: Once a vessel has become a "vessel of the United States" (which is a vessel federally documented with the U.S. Coast Guard), the validity of security interests is determined by federal law. State law security interest in yacht that became "vessel of the United States" upon issuance of its certificate of documentation was nullified by statute, which invalidates mortgage on vessel of United States as to third parties without notice, unless recorded in office of collector of customs at home port of vessel (now the 13 Revised 8/2002 U.S. Coast Guard National Vessel Documentation Center in Falling Waters, WV). This is true even though security interest and mortgage preceded issuance of certificate of documentation by U.S. Coast Guard. Recording procedures were applicable to all mortgages on vessels of United States regardless of when mortgages were made. In re Alberto, 823 F.2d 712 (3rd Cir. 1987)
Preferred Mortgage Status: In this dispute before the U.S. Supreme Court, the question was which party was entitled to priority; the party alleging a lien for necessaries or the vessel mortgagee. The Supreme Court reversed the lower courts and found in favor of the necessaries lien holder (whose lien actually arose after the mortgage was in existence but before it was endorsed). The court noted that the mortgage becomes preferred only upon compliance with the conditions specified. Morse Dry Dock & Repair Co. v. The Northern Star, 271 U.S. 552 (1926)
Construction Lender: - The buyer of three boats that were to be
built defaulted on payment for the second and third boats. The boats were
resold by the builder who recovered his damages from the breach. A creditor
of the buyer who furnished funds sought the excess proceeds from the sale.
There were no maritime liens as the boats were not yet “vessels.” The
creditor asserted it had an unperfected security interest. Because the buyer
did not attain rights in the collateral sufficient to meet the requirements
for attachment of a security interest, the creditor is not entitled to
distribution of the proceeds under Article 9 of the U.C.C. Instead, the
rights of the buyer and seller are governed by Article 2, which puts the
creditor in a less favorable position. Connister Trust Ltd. v. Boating Corporation of America and Villas-Afloat, Ltd., 2002 WL 389864 (Tenn. Ct. App., 2002)
Status of UCC Filings: In a case involving a state-registered vessel, NBS purchased a yacht in Minnesota and financed the purchase through Richfield Bank. The lender held a U.C.C. perfected security interest in the yacht. Ultimately, the yacht was sold by NBS through TBY, the original yacht dealer, to Ichelson and moved to Iowa. Borg-Warner financed that purchase and filed a U.C.C. financing statement on the vessel in Iowa. TBY represented at the time of the sale to Ichelson that no liens existed on the yacht and that representation was relied upon. TBY told NBS that it would pay off the Richfield Bank loan with the proceeds of the sale. TBY reneged and instead filed for bankruptcy. Thc court applying U.C.C. principles of law held that the Richfield security is superior to Borg-Warner’s. Additionally, it disallowed Borg-Warner and Ichelson’s
claims against NBS for breach of the warranty of title. National Business Systems, Inc. et al. v. Borg-Warner Acceptance Corporation, et al., 792 F.2d. 710 (8th Cir. 1986)
Mortgage Failures
Dual Documentations: An owner documented a vessel with the U.S. Coast Guard, filed a preferred ship mortgage, and then registered the vessel with the state. The state-registered vessel was sold and then documented with the Coast Guard under a new official number, then resold, and another preferred ship mortgage was filed. Thus, there were two documents outstanding both of which had mortgages filed against them. Which mortgage was valid and which primed? Maryland National Bank v. The Vessel Madame Chapel, 46 F.3rd 895 (9th Cir., 1995)
Joint Property Violations: A preferred mortgage can be unenforceable even if properly recorded when documents are executed in violation of community or joint property rights. Heidi Morcher v. Merry Nash, 1999 AMC 1413 (D.V.I. 1998) 15 Revised 8/2002
Vessel Status Change: A preferred mortgage can be unenforceable even if properly recorded when the vessel ceases to be a vessel triggered by an event that automatically invalidates the documentation of a “vessel” pursuant to 46 C.F.R. Sec. 67.23-9.
Valid Certificate: In order to possess first preferred ship mortgage under Ship Mortgage Act, vessel must have valid certificate of documentation outstanding at time purported first preferred ship mortgage was filed. In re Biloxi Casino Belle Inc., 176 B.R. 427 (S.D.Miss. 1995)
Proof of Ownership: Mortgagee must prove mortgagor's ownership of vessel as part of its burden of establishing valid preferred ship mortgage. Chase Manhattan Financial Services, Inc. v. McMillian, 896 F.2d 452 (10th Cir. 1990)
Ship Mortgage Act: Provisions of Ship Mortgage Act relating to perfection of ship mortgages must be strictly construed. Matter of Alberto, 66 B.R. 132 (D.N.J. 1985)
Mortgagee Breaches: When vessel was arrested and sold pursuant to a preferred ship mortgage, the owners of the vessel, in defense of the deficiency judgment against them, alleged that the bank breached its fiduciary duty, breached the duty of good faith and fair dealing by damaging the vessel and allowing it to deteriorate, and failed to provide proper notice. While under the particular facts of this case the court found for the bank, the result could have been different. The case is illustrative of the innovation and creativity of those who attack the priority and sanctity of the preferred mortgage. Maryland National Bank v. Traenkle, No. 00-1746, 10 Fed Appx. 194 (4th Cir. 2000)
Errant Legal Opinion: Law firm was sued for malpractice by trustee for bondholders because a legal opinion letter opining on the validity and priority of a preferred fleet mortgage on casino vessels was found by the bankruptcy judge to be erroneous. The opinion stated that the fleet mortgage constituted a legal, valid, binding and enforceable obligation superior to all other liens. The judge found the mortgage to be invalid and unenforceable. The malpractice case was dismissed on jurisdictional grounds that did not touch upon the merits. First Trust National Association, as Indemnitee Trustee v. Jones, Walker, Waechter, Poitevent, Carrere & Denegree et al., 996 F. Supp. 585 (S.D. Miss., 1998)
Compliance with Statute: The ship mortgage is made preferred only upon compliance with all the conditions specified in the statute. "Obviously the statute taken literally may work harshly…" Justice Holmes then stated, "We see no room for construction, and there is nothing for the courts to do but to bow their heads and comply." Morse Dry Dock & Repair Co. v. The Northern Star et al., 271 U.S. 552, 46 S.Ct. 589 (1926); The Prudential Insurance Company of America v. S.S. American Lancer et al., 870 F.2d 867, 1989 A.M.C. 1097 (2nd Cir. 1989)
Vessel Status
Houseboat: The court found that a houseboat is a boat. “That she has no motive power and must, as would the most lowly of dumb barges, be towed, does not deprive her of the status of a vessel.” Thus, she is subject to maritime liens and a mortgagee should utilize a preferred ship mortgage, which is the best protection for a lender when lending money on a vessel. Miami River Boat Yard, Inc. v. 60' Houseboat, Serial No. SC- 40-2860-3-62, 390 F.2d 596 (C.A. Fla., 1968)
Certificate of Documentation: Issuance of a U.S. Coast Guard Certificate of Documentation is not determinative of whether subject of the Certificate of Documentation constitutes a “vessel” as defined by 1 U.S.C. §3. The documentation process is not intended to be, nor is it, conclusive as to the issue of what constitutes a “vessel” for purposes of federal admiralty and maritime matters and the Ship Mortgage Act. Daniel v. Ergon, Inc., 892 F.2d 403 (5th Cir. 1990); In re Biloxi Casino Belle Incorporated, 176 B.R. 427 (USBC SD Miss, 1995)
Barge: Plaintiff was injured on a workover rig that consisted of a portable truck-mounted rig driven onto the deck of a leased barge and bolted into place. It had been bolted to the barge for two years. The barge transported the rig from well head to well head over navigable waters to service wells located in navigable waters. The court concluded that the rig was a vessel as a matter of law. Thus, presumably, it is subject to maritime liens.
Towed Vessel: Casino was towed from the shipyard to a place where it was to be permanently moored. The casino owner failed to pay for towage and the tug owner, pursuant to an alleged maritime lien for towage, sought to assert an in rem claim against the vessel. The debtor claimed that a floating casino had been found to not be a vessel for purposes of federal admiralty and maritime matters. The court ruled in favor of the tug owner and held that, though it was a floating casino, and in other cases a floating casino was found not to be a “vessel,” while the casino was being towed, it was a "vessel," such as could be made subject to maritime liens. In re Amgam Associates, 239 B.R. 737 (USBC S.D. Miss 1999)
Gap Period
Abstract Delay: The bank entered into a preferred ship
mortgage with its customer and the mortgage was timely filed and recorded.
When an abstract of title was received immediately after the closing of the
mortgage, it was discovered that a notice of claim of a maritime lien had
been filed against the vessel two days before the closing and, thus, was
undetectable from the public record at the time of closing.
Gap Period
Exposure: Preferred mortgage outranked by documents recorded by another during the gap period between the date of an abstract and the recordation of the mortgage.
Mortgage Delivery: Section of Ship Mortgage Act, providing that mortgage is perfected only when endorsed and recorded by U.S. Coast Guard, did not allow for perfection relating back to date mortgage was first delivered to Coast Guard for endorsement and recording; accordingly, where owner of vessel had filed for bankruptcy in interim, Bankruptcy Code did not permit post-petition perfection of mortgage. Matter of Alberto, 66 B.R. 132 (D.N.J. 1985)
Preferred Status: A ship mortgage doesn’t become “preferred” until the statutory steps are complete (including endorsement on the ship’s documents). A maritime lien that arises before recording/endorsement primes the mortgage. Classic statement that courts must “bow” to the statute’s timing rules.
#1 Morse Drydock & Repair Co. v. S.S. Northern Star, 271 U.S. 552 (1926)
Supreme Court.
Mortgage Priority:
Reaffirms that a preferred ship mortgage outranks all but preferred maritime liens, which include liens that arose before the mortgage was filed. Also applies the renewal/refinance rule: if a prior recorded mortgage is renewed or replaced, its priority continues at least to the amount still outstanding when the intervening lien arose.
Bank of America, N.T. & S.A. v. M/V PENGWIN, 175 F.3d 1109 (9th Cir. 1999)
Mortgage Renewal: Replacing an earlier preferred mortgage doesn’t
forfeit priority; priority “relates back” to the original mortgage to the
extent of the unpaid balance when the later lien came into being. Merchants
& Marine Bank v. The T.E. Welles, 289 F.2d 188 (5th Cir. 1961)
Conclusion
The citations presented here are gathered from various sources and not intended as conclusive interpretations of maritime case law. They are illustrative only and may contain errors, omissions or misstatements. You should consult with a qualified maritime attorney before acting on this material.
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