Lochner Law Firm, P.C.

Todd D. Lochner
Chase A. Eshelman
Chris J. McNally*
Eugene E. Samarin
Gregory R. Singer

Lochner Law Firm, P.C.
Donner Building
91 Main St., 4th Floor
Annapolis, MD 21401

P: (443) 716-4400
F: (443) 716-4405

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* Barred in RI & MA

Preferred Ships Mortgage

Editors Note: USCG has proposed to allow for mortages to be available under state title. Read more HERE.

The Preferred Ships Mortgage provides a lender or financier of a vessel competitive status among competing claims that might arise against a vessel. Historically, under the laws of maritime, a mortgage was not considered a maritime contract. Thus, it could not be foreclosed under maritime law and it was given low preference among creditors that sought to reclaim debts owed by a vessel. Congress saw that this loophole in the common law gave little incentive to finance a vessel. For that reason, among others, it enacted the Ship Mortgage Act, which created the Preferred Ship Mortgage. The only other viable option for the lender was to secure its loan with a bottomry bond. However, under maritime law, a debt that is secured by a bottomry bond will be discharged if the ship itself is lost. Thus, the bottomry bond today remains an option for only the daredevil or thrill seeking financier.

A Federal Circuit Court summarized the Ship Mortgage Act as fulfilling three important purposes: "it set forth the requirements for recording preferred mortgages, established that only maritime liens would have priority over ship mortgages, and provided for a means of enforcing preferred mortgage liens in admiralty." Dietrich v. Key Bank, 72 F.3d 1509 (11th Cir. 1996).

The creation of a Preferred Ship Mortgage requires both eligibility requirements and documentation requirements. Among the eligibility requirements, the vessel owner must be a United States citizen and the vessel must be documented in the United States. Proper and effective documentation requires close adherence to time, place, and manner procedures. Since a vessel can have multiple mortages on her, the financier must be sure that it is securing the "whole" vessel, including its appurtenances to be given "preferred" status. Further, a mortgage can cover more than one vessel.

Most lenders and/or financiers will require a Ships Mortgage to secure the advance of funds as anyone who has ever stood on the shore's edge to feed ducks knows that the competition for your offerings can become fierce. Aside from the squabbling ducks, seagulls may be competing from above. Various fish may be competing from below. In the end, only the most viable competitors will leave with a full stomach. When the creditor of a vessel wishes to foreclose on its debt, a similar scene ensues. There may be various liens on a vessel and each lien holder hopes to collect its claim in full. However, maritime law assigns preference to the various liens, which means that some claimants in the distribution process will not be paid.

The Ship Mortgage Act provides two primary enforcement remedies against a deficient borrower. The lender may enforce its lien against the vessel itself in a federal court. The lender may also bring an action against the vessel's owner in either federal or state court. The Preferred Ship Mortgage itself will often contain a provision that empowers the mortgage holder to utilize self help methods for repossessing the vessel upon default. The typical bank is probably not going to foreclose on a vessel after a single missed payment or contractual infraction. The vessel owner will probably receive a letter from its lender that identifies the default and how that default should be cured. It may also inform the borrower of its intent to foreclose on the vessel if the borrower is unable to cure its default. Then, if the borrower remains in default, he or she should expect that the vessel will be arrested and repossessed. The repossessed vessel will then be sold in either a private or public auction/sale. The Ship Mortgage Act and Federal Judicial Sales Act provide procedures for the judicial sale of a foreclosed vessel. As an aside, a judical sale clears all liens on the vessel, known and unknown, so buying a boat at this sale is actaully the only way to get a clean title to a vessel (yes, even new purchaed vessel titles can have strings attached to them).

Further, if the lender followed proper federal procedures, the borrower should also expect that further action will be taken against her personally to collect any deficiency between the debt owed and amount received from the vessel's sale. If federal procedures were not properly followed, courts are inconsistent in whether they will apply state law to allow for a deficiency judgment.

Please note that other nations have their own version of a Ship Mortgage. General requirements are similar to those of a a mortage filed under the Ship Mortgage Act, but there are differences in how to record and perfect mortage. Since there are over 193 countries recognized by the international community, and most have their own registry rules (even Mongolia, which as you know is landlocked), it would be very difficulat to summarize all the nuances between each registry. However, some of the major differences we see revolve around the particular rules of what vessels can have mortage on them, specific language in the mortages that establish security, and the costs of recording a registry (some have flat rates, while others charge by the foot/ton).

The peculiar nature of Admiralty law requires that both lender and borrower consider applicability of the Act when analyzing their lending/borrowing options. We recommend that our clients always use Preferred Ships Mortgages where the requirements can be met. If you are a borrower under a Preferred Ships Mortgage, it is important to read the agreement so you know your rights and responsibilities. In the event of a dispute, it is imperative that one obtain representation that is familiar with this interesting, but complex, area of the law.

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