From Bad to Worse:
When Things Go Wrong in Vessel Financing and Foreclosure
May 9, 2014
Federal Bar Association
San Francisco, CA
Charles S. Donovan
Sheppard Mullin Richter & Hampton LLP
Four Embarcadero Center, 17th Floor
San Francisco, CA 94111-4109
415-434-9100
[email protected]
www.sheppardmullin.com
1.
Introduction
While global ocean shipping has recovered somewhat from the dark days of late
2008 and early 2009,1 the industry remains overtonnaged, short of cargo2, and thus very
frequently short of cash. The worldwide recession has affected all players in the industry. A
corollary of Murphy’s Law is that bad times end only to have worse times follow. In
anticipation of that possibility, this paper examines several cases in which things went wrong or
nearly did in the hope they may serve as a lesson to those trying to make it through these difficult
times.
2.
Snared by the Long Arm and Wide Reach of the U.S. Bankruptcy Court
When a company files for bankruptcy in the United States, an “automatic stay,”
arises that protects the debtor from action against its property.3 Can a creditor avoid the stay by
1
The Baltic Dry Index stood at 1017 on May 2, 2014, having fallen more than 50% since
mid-December 2013. That is still significantly above its nadir of 663 on December 5,
2008. The Index reached its all-time high of 11,793 on May 20, 2008. See
http://www.bloomberg.com/quote/BDIY:IND (last visited May 2, 2014).
2
According to one recent commentator, we are in a period of “limited freight-rate growth”
accompanied by an enormous “tonnage overhang.” Julian Bray, Tradewinds p.10 (April
18, 2014).
3
[A bankruptcy] petition . . .operates as a stay, applicable to all entities, of –
(1) the commencement or continuation, including the issuance or employment of process,
of a judicial, administrative, or other action or proceeding against the debtor that was or
could have been commenced before the commencement of the case under this title, or to
recover a claim against the debtor that arose before the commencement of the case under
this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment
obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or
to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the
extent that such lien secures a claim that arose before the commencement of the case
under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the
case under this title against any claim against the debtor; and
(footnote continued)
1
proceeding against the debtor by legal action in another country? Generally not. Creditors
who’ve tried have come to regret it.
A fuel supplier learned the hard way in the United States Lines bankruptcy. After
the steamship line filed for Chapter 11 reorganization, the supplier seized the debtor’s ships by
judicial process issued in Hong Kong and Singapore. The Bankruptcy Court in New York held
the supplier in contempt and assessed significant fines against it for violating the automatic stay.4
It didn’t matter that the fuel supplier wasn’t a U.S. company or that it took its action outside the
U.S. The automatic stay protects an entity that files for bankruptcy in the U.S. from action
against it anywhere. “It matters not that the property of the estate was located beyond the
territorial borders of the United States. Section 541(a) [of the Bankruptcy Code] makes clear
that property of the estate is not so confined but consists of all property ‘wherever located’ in
which the debtor has an interest.”5
For a creditor to be subject to sanction by a U.S. bankruptcy court, it need only be
subject to the court’s personal jurisdiction. The fuel supplier, with an office in New Jersey
office, had done substantial business with the debtor. That provided sufficient contact with the
U.S. to subject the supplier to the Bankruptcy Court’s personal jurisdiction.6 The court imposed
a fine of $5,000.00 a day to coerce the supplier into releasing the arrests.
The fuel supplier then made things even worse by not immediately releasing its
arrests. It attempted, instead, to avoid the consequences of its action by assigning its claims to a
different non-U.S. company and then petitioning the Hong Kong and Singapore courts for an
order substituting that company as the plaintiff in the cases it had started. The supplier claimed,
having assigned its claim, it was powerless to do anything in the Hong Kong and Singapore
cases. The Bankruptcy Court wasn’t buying this attempt to wriggle off the hook. In an opinion
handed down a little over two months after its initial ruling, the court excoriated the supplier.
“[I]nstead of taking steps to discontinue those arrest proceedings as the contempt decree
required, GAC Marine took the active steps of ensuring their continuation.”7 By then, contempt
fines in excess of $220,000.00 had accrued.
(8) the commencement or continuation of a proceeding before the United States Tax
Court concerning a corporate debtor’s tax liability for a taxable period the bankruptcy
court may determine or concerning the tax liability of a debtor who is an individual for a
taxable period ending before the date of the order for relief under this title.
11 U.S.C. § 362(a).
4
United States Lines, Inc. v. GAC Marine Fuels Ltd. (In re McLean Industries, Inc.), 68
B.R. 690 (Bankr. S.D.N.Y. 1986), subsequent proceedings, 79 B.R. 291 (Bankr.
S.D.N.Y. 1987).
5
68 B.R. at 694.
6
68 B.R. at 697-700.
7
79 B.R. at 295.
2
The moral of the story? The automatic stay protects the debtor’s property
anywhere. U.S. Bankruptcy Courts will enter orders stopping foreign creditors from taking
action against the debtor’s property. The only limiting factor is the court’s power to exercise
personal jurisdiction over the creditor who has taken action against that property. As the United
States Lines case makes clear, U.S. Bankruptcy Courts take a broad view of their power to
exercise judicial power over parties who have violated the automatic stay.
What then is the debtor’s property? Clearly the ships involved in United States
Lines, which the debtor owned, constituted its property. The concept of “property,” though, goes
well beyond what one might ordinarily consider tangible and intangible assets. The Eastwinds
Shipping bankruptcy illustrates the expansive view American law takes of “property” and the
Bankruptcy Court’s power to protect the debtor’s interests in it.
Eighty-nine different Eastwinds affiliates filed for Chapter 7 liquidation. The
Manhattan bankruptcy court appointed a trustee who, soon after taking over, brought an
emergency motion to stop two P&I insurers from canceling insurance coverage on the debtors’
ships.8 The court found “[t]here is no question that . . . their insurance rights constituted property
of the debtors.”9 The P&I clubs argued that a “cesser” clause in the insuring rules of each club
caused insurance to terminate before the bankruptcy filing. The clause provided, “that insurance
automatically terminates in the event that a member of the Club (the insured) passes ‘resolution
for a voluntary winding up.’”10 American bankruptcy law makes ineffective “ipso facto” clauses
that cause a party to be in breach or a contract to terminate automatically upon the party’s filing
for relief under the U.S. Bankruptcy Code.11
The clubs argued this prohibition did not apply because their rules effected
termination “even before a bankruptcy or insolvency filing . . . “12 with termination taking effect
upon the directors of the company adopting a resolution authorizing the liquidation, not at the
moment of the actual filing. The court rejected this contention treating the termination
provisions of the clubs’ rules to be the equivalent of an ipso facto clause. The court left open the
possibility the clubs might, at a future time, challenge the court’s personal jurisdiction over them
or otherwise challenge the decision as unfair. For the time being, however, the clubs had to keep
cover in effect.
8
LaMonica, v. North of England Protecting& Indemnity Assoc. (In re Probulk Ltd.), 407
B.R. 56, 59 (Bankr. S.D.N.Y. 2009).
9
Id. at 60, citing, MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988),
cert. denied, 488 U.S. 868 (1988)..
10
407 B.R. at 60.
11
11 U.S.C. § 541(c)(1)(B).
12
407 B.R. at 61.
3
3.
The Vessel Owner Who Wasn’t – The Long-term Charter As Security Interest
The bankruptcy filing of Lykes Bros. Steamship Co. in 1995 brought to an end the
operation of a venerable American ship operator.13 As is so often the case, Lykes’ bankruptcy
filing was only the last step in a prolonged and painful series of corporate contractions. Several
years before its collapse, Lykes terminated its trans-Pacific service. Unfortunately for Lykes, it
had, at the time of termination, already contracted to purchase several ships for use in the
service. They were under construction in Japanese shipyards. Fortunately for Lykes, it arranged
to charter out the ships as the shipyards completed them to American President Lines, another
American steamship line that still operated in the Pacific. In a complicated transaction entered
into after those charters went into effect, Lykes then “sold” the ships to a new owner, specially
formed for that transaction, and chartered back the ships by bareboat charter party from that
entity, which became the titled owner of the ships. In effect, with this sale-leaseback transaction,
the charters to APL became subcharters.14
U.S. law will disregard the name the parties put on their transaction and treat a
“lease” or “charter”15 as a disguised security interest if it is “in fact, a financing transaction . . .
.”16 Lykes, as debtor in possession,17 challenged the transaction, contending it was a financing
13
CP Ships bought certain Lykes assets and continued to operate a service under the name
“Lykes Lines.” In 2005, it stopped using the name opting to operate all its services under
the CP Ships name. http://refrigeratedtrans.com/news/CP-Ships-single-operating-brand/
(last visited March 11, 2010).
14
American President Lines Ltd. v. Lykes Bros. S.S. Co. (In re Lykes Bros. S.S. Co.), 196
B.R. 574, 576-79 (Bankr. M.D. Fla. 1996).
15
A “charter party” is the sea-going equivalent of a “lease.” This paper uses the terms
“charter” and “lease” interchangeably. See, e.g, The American Heritage Dictionary of
the English Language, (4th ed. 2009).
16
196 B.R. at 585. UCC § 1-203(b) provides:
A transaction in the form of a lease creates a security interest if the consideration
that the lessee is to pay the lessor for the right to possession and use of the goods
is an obligation for the term of the lease and is not subject to termination by the
lessee, and: (1) the original term of the lease is equal to or greater than the
remaining economic life of the goods; (2) the lessee is bound to renew the lease
for the remaining economic life of the goods or is bound to become the owner of
the goods; (3) the lessee has an option to renew the lease for the remaining
economic life of the goods for no additional consideration or for nominal
additional consideration upon compliance with the lease agreement; or (4) the
lessee has an option to become the owner of the goods for no additional
consideration or for nominal additional consideration upon compliance with the
lease agreement.
17
The Bankruptcy Code’s “strong-arm” clause, 11 U.S.C. § 544(a), gives a bankruptcy
trustee the rights of hypothetical lien creditor. This enables the trustee to challenge
(footnote continued)
4
transaction and not a true “lease” or “charter.” The court noted that New York law, which the
parties had chosen as governing their transaction, provided a two-part test. First, if the
agreement provides the lessee may acquire the collateral for “nominal consideration” at the end
of the lease, the court will “conclusively deem” the transaction to be a security interest.18 If the
lessee has a purchase option for a price that is not nominal, the court then examines the economic
substance of the transaction to determine whether it is a lease or security interest. Under the
lease, Lykes had an option to purchase. “The net effect of exercising the option . . .is . . . that
Lykes in fact doesn’t have to pay any additional consideration for the vessels.”19 The court
concluded the transaction was a security interest, that the lessor had failed to perfect, and that
Lykes, not the lessor, was the ships’ owner free and clear. The lessor had only a claim as an
unsecured creditor.
What could the hapless lessor have done differently? The Uniform Commercial
Code, which governs security interests in movables, including ships, to the extent federal law
does not apply, states that its provisions regarding security interests and their perfection “apply
whether title to collateral is in the secured party or the debtor.”20 The UCC also provides that a
lessor may make a precautionary security filing without prejudice to its ability to contend the
transaction is a true “lease” or “charter” and not a security interest.21 A lessor who thinks its
transaction runs any risk of being labeled a “financing” or “security interest” thus loses nothing
by perfecting its interest by filing as if it held a security interest. Had the lessor of the Lykes
ships done so, it would have come out of the case with its interest in the ships intact.
4.
A Lease to the Wrong Lessee – No Protection for Innocent Lessor in Case of
Forfeiture
Failure to perfect as a secured creditor isn’t the only risk a lessor faces. A lessor
can also find its interest in a vessel forfeited by circumstances beyond its control. The U.S.
Supreme Court’s opinion in Calero-Toledo v. Pearson Yacht Leasing Co.22 stands as a warning
to finance lessors and owners of vessels who charter them out on a bareboat basis. In that case,
Pearson leased a pleasure yacht to two individuals in Puerto Rico. The lessees used the yacht to
carry marijuana. Puerto Rican authorities seized the yacht and commenced forfeiture
proceedings by giving notice to the lessees who had registered the yacht with the Puerto Rican
unperfected security interests of the type the “lessor” in the Lykes transaction claimed. A
debtor in possession has all the rights of a trustee, including rights under the strong-arm
clause. 11 U.S.C. § 1107(a).
18
196 B.R. at 581, citing, National Equipment Rental, Inc. v. Priority Electronics Corp.,
435 F. Supp. 236, 238 (S.D.N.Y. 1977).
19
196 B.R. at 582.
20
UCC § 9-202.
21
“[T]he filing or compliance is not of itself a factor in determining whether the collateral
secures an obligation.” UCC § 9-505(b).
22
416 U.S. 663 (1974).
5
Ports Authority.23 The lessor/owner received no notice of the forfeiture proceedings. When no
one responded within the 15 days Puerto Rican law provided for a party to contest forfeiture, the
yacht was forfeited to the Commonwealth of Puerto Rico.24
Pearson didn’t learn of the forfeiture until after it was over. It then filed suit
against the Puerto Rican officials involved in the forfeiture proceeding contending their failure to
give it notice of the proceedings resulted in a denial of due process and wrongful deprivation of
Pearson’s property.25 The lower court ruled in Pearson’s favor, holding the failure to give it
notice violated Pearson’s rights to due process and issuing an injunction preventing Puerto Rico
from enforcing its forfeiture statute.26
The Supreme Court reversed. It found Puerto Rico’s failure to give pre-forfeiture
notice to the owner did not violate Pearson’s Constitutional rights. “[P]reseizure notice and
hearing might frustrate the interest served by the [Puerto Rico] forfeiture statutes, since the
property seized as here, a yacht – will often be of a sort that could be removed to another
jurisdiction, destroyed or concealed, if advance warning of confiscation were given.”27 It noted
that, in forfeiture cases, “the innocence of the owner of property has almost uniformly been
rejected as a defense.”28 It found that because Pearson “voluntarily entrusted the lessees with
possession of the yacht . . .” it must suffer the consequences of their illegal activity.29
What could the lessor have done to avoid this harsh result? Assuming this was a
financing, Pearson would have been better off documenting the vessels with the U.S. Coast
Guard, transferring title to the lessees, and taking back a federal preferred ship mortgage. The
Commercial Instruments and Maritime Liens Act provides that forfeiture shall not affect the
rights of an innocent ship mortgagee.30 If a lease or charter was its only option, Pearson should
have obtained insurance against the possibility of forfeiture or required its lessees to do so,
naming it as assured and loss payee..
23
Id. at 665-67. The opinion doesn’t disclose whether the transaction was a “finance
lease.” The fact that the lessees were the registered owner of this yacht suggests it was.
24
Id. at 668.
25
Id..
26
Id. at 669.
27
Id.
28
Id. at 683, citing, The PALMYRA, 25 U.S. (12. Wheat.) 1, 14-15 (1827).
29
Id. at 690.
30
“The interest of a mortgagee in a documented vessel or a vessel covered by a preferred
mortgage under section 31322 (d) of this title may be terminated by a forfeiture of the
vessel for a violation of a law of the United States only if the mortgagee authorized,
consented, or conspired to do the act, failure, or omission that is the basis of the
violation.” 46 U.S.C. § 31327.
6
5.
Don’t Overdo the Workout – Equitable Subordination of Mortgage Holder’s
Interest
While financiers of shipping interests, especially in these parlous times, may
believe the more security they have the better, a party financing a ship can actually go too far.
Warldey International Bank v. The NASIPIT BAY31 was just such a case.
There, as part of a transaction by which a sale of The NASIPIT BAY occurred
between two related companies, the mortgage-holding bank received a mortgage on the ship
securing not just the sale price, but also large amounts owed to it by the vessel owner and related
companies that had, apparently, previously been unsecured.32 Between the sale date and the date
of the ship’s seizure by U.S. lien claimants for unpaid fuel bills, the vessel owner had, in fact,
paid the bank substantially more than the ship’s purchase price.33 The bank had applied a large
portion of the money received from the shipowner to the previously unsecured obligations, not
the ship’s purchase price.34
The Ninth Circuit held the district court had properly subordinated the bank’s
mortgage rights to the interest of the maritime lien creditors. It highlighted several facts
supporting its conclusion. The promissory note the new owner signed was for almost three times
the ship’s purchase price. The bank advanced no new consideration for its improved security
position. By applying payments not solely to the purchase price but also to other debt, the bank,
in effect, extended the term of its mortgage beyond when it otherwise would have terminated.
By taking a guaranty from the new owner of the old owner’s debt, the bank interposed an
obligation to the potential prejudice of lien claimants that was much larger than the new
shipowner’s obligation to pay the purchase price. The bank “was completely aware of the
transaction . . .” and “used its position of control to obtain an advantage at the expense of the
[fuel] suppliers . . . .”35
In essence, as the result of a paper shuffle between two related companies, the
bank materially enhanced its security position, neither advancing additional funds nor providing
any other consideration. The Court of Appeals held this inequitable and refused to enforce the
mortgage to the detriment of subsequent suppliers to the ship who obtained maritime liens.
Lenders who, as part of a workout, improve their security against their shipowner borrowers
should be careful to show they too sacrifice something. Under The NASIPIT BAY, a mortgage
holder who appears to get something for nothing may actually itself end up with nothing.
31
841 F.2d 259 (9th Cir. 1988).
32
Id. at 260.
33
Id. at 261.
34
Id.
35
Id. at 263-64.
7
6.
One Vessel, Two Owners
The United States has a two-tiered state/federal system for registration of vessels.
With certain exceptions, vessels over five net tons operating in the coastwise trade or engaged in
fisheries must be federally documented.36 Recreational vessels above that limit may, however,
be documented federally or under state law.37 Maryland National Bank v. The Vessel MADAM
CHAPEL38 shows what can go wrong when an unscrupulous vessel owner registers its vessel
under both the state and federal schemes.
In that case, an individual purchased a new pleasure vessel with financing from a
bank and applied for federal documentation. While that application was pending, he also
obtained documentation under New York state law. The Coast Guard issued federal
documentation on the vessel. The bank recorded its mortgage as required by federal law. The
owner then sold the vessel to another party transferring title by endorsing the New York state
title certificate. The original federal documentation remained unchanged. The original owner
helped the new buyer obtain a different federal certificate of documentation on the vessel on the
strength of the New York title certificate. The parties to this transaction represented to the Coast
Guard that the Builders Certificate, which commences a federal chain of title for a vessel, had
been lost – when, in fact, the original owner had used it to establish a different chain of title on
the craft. The new “owner” transferred the vessel to Jones, who in turn sold it to other buyers,
taking back a federal mortgage on the vessel recorded in the second federal chain of title on the
vessel. When the original owner defaulted on his mortgage obligations, the bank foreclosed.
Jones, now the holder of a competing mortgage, also claimed a mortgage on the vessel.39
Jones contended the court should equitably subordinate the bank’s mortgage to
his because the bank “left a title document in the [original owner’s] hands sufficient to begin a
second federal documentation chain unrelated to the first one.”40 The document of title to which
Jones referred was the “manufacturer’s statement of origin.” The Court of Appeals observed that
a new boat has two different “origination documents:” a “manufacturer’s statement of origin,”
generally used to start a state registration and a “builder’s certificate,” which starts a federal
chain of title.41 The Court found, however, that once the boat became a “vessel of United
States,” New York law governing registration of vessels and recordation of security interests no
longer applied. 42 Thus, the New York title, which started the second chain, was a nullity. The
36
46 CFR § 67.7 & 67.9. The exceptions are vessels not used in U.S. waters and unmanned
vessels used in inland waters.
37
“Any vessel of at least five net tons wholly owned by a citizen or citizens of the United
States is eligible for documentation . . . . “ 46 CFR § 67.5.
38
46 F.3d 895 (9th Cir. 1995).
39
Id. at 897-98.
40
Id. at 898.
41
Id. at 899.
42
Id. at 900.
8
court went on to hold that “the bank’s failure to control the state titling process, even though that
may have started an unfortunate chain of circumstances from Jones’ point of view, is not
inequitable conduct of the sort required to subordinate a preferred ship mortgage . . . .”43
What could Jones have done to protect himself? Clearly, a lender should be
suspicious of a chain title that starts with an affirmation that an origination document was lost.
Had Jones searched federal documentation records, he would have found another vessel with the
exact same name – but a different official number. Apparently, he never made the search. While
the bank came out the winner on appeal, it lost at the trial court level, and no doubt spent
considerable sums on lawyers, not to mention lost management time. A lender can snuff out the
possibility of competing chains of title by taking control of all origination documents relating to
a ship.
Things can turn out much worse for the financing bank. In Branch Banking &
Trust Co. v. M/Y BEOWULF, 883 F. Supp. 2d 1199 (S.D. Fla. 2012), the bank lent $1 million to
the president of a yacht building company, who gave security that included a ship mortgage on a
multimillion dollar vessel under construction in the company’s yard. Some of the documentation
surrounding the transaction showed the president as owner. Some showed the company.
A surveyor the bank hired to do a valuation survey noted that, in violation of
applicable Coast Guard regulations,44 there was no Hull Identification Number (“HIN”)
permanently marked on the vessel under construction. The survey report also disclosed the
company’s intention to show the vessel in an upcoming boat show and stated the company might
install certain additional optional items as its “buyer’s” request. In March 2003, on the
president’s application, the Coast Guard issued a certificate of documentation showing him as
the owner. The application did show a HIN on the vessel.
A few months later, the company sold the yacht to another buyer, who applied for
a certificate of documentation. The buyer’s application included a builder’s certification from
the company that showed the same HIN the president’s earlier application had used. Someone
apparently noticed this. The company’s general manager sent a letter to the Coast Guard stating
the company had mistakenly assigned the same HIN to two different vessels and provided a new
and different HIN. The Coast Guard issued a second certificate of documentation with a second
official number for the same vessel. The buyer then transferred title back to the shipyard who
eventually sold the vessel to another party.
Circumstances almost came to a head five years in 2008 later when the president
defaulted on a “balloon” payment due under the note securing his mortgage. He’d already had a
history of late payments. Updated financial data the bank obtained at this time revealed several
ominous facts: the president’s net worth had shrunk from over $11 million in 2003 to
$435,000.00 in 2008; he’d incurred tax liens totaling nearly $400,000.00; and his own accounts
payable had grown from zero at the inception of the loan to $1.3 million. Despite this, the bank
43
Id. at 902.
44
33 CFR § 181.29(c).
9
entered into a loan modification agreement that extended the president’s time for repayment an
additional five years. At this point, the bank did not have the vessel re-surveyed and, in fact, did
nothing to ensure the president still had the yacht. In fact, he didn’t. In its internal collateral file,
the bank did change the name of the owner of the yacht from the president’s to the company’s
name but did not take steps to amend its mortgage.
Meanwhile, at about this same time, in 2008, an unwitting buyer took title to the
vessel under the later chain of title.
The president died in 2009. Finally, in 2011, the bank declared a default and
brought an in rem action to enforce its preferred ship mortgage. The court refused to enforce the
bank’s mortgage for two reasons. First, the bank failed to prove the president was the owner of
the vessel and held title at the time he executed the preferred ship mortgage. Second, the court
equitably subordinated the bank’s interests because of its “irresponsible, grossly reckless,
egregious lending practices undertaken for the sole purpose of protecting the Bank's own
financial interests to the foreseeable detriment of future creditors of the debtor and lienors and/or
purchasers of the collateral.”45 Apparently, the bank had decided, in 2008, not declare the loan
in default because it would have had a negative impact on the bank’s own financial position.
Because the bank had “failed to take the most elementary, reasonable precautions to protect its
security interest in the collateral . . .,”46 the court found the doctrine of equitable subordination
required the court to disregard its mortgage against the vessel.
7.
Even Stronger North of the Border – U.S. Liens In Canada
The United States grants suppliers of necessaries a maritime lien against the ship
to which they “provide” goods or services.47 This can cause real headaches for a mortgage
holder who attempts to foreclose in the U.S. If foreclosure occurs in our neighbor to the North, a
mortgagee bank may find U.S. lien claims that U.S. law puts behind it ahead of it in rank in the
Canadian court.
In Todd Shipyard Corp. v. The IOANNIS DASKALELIS, 48 the Supreme Court of
Canada held that U.S. maritime liens are enforceable against ships in Canada. There, a
mortgagee and a U.S. shipyard both asserted rights against a Greek-flag ship arrested in
Vancouver, B.C. Even though a Canadian shipyard similarly situated would not have obtained a
45
Id. at 1210.
46
Id. at 1218.
47
46 U.S.C. § 31342(a).
48
[1974] S.C.R. 1248. The Court reaffirmed its holding in a subsequent case, Marlex
Petroleum Inc. v. The HAR RAI, [1987] 1 S.C.R. 57, affirming, [1984] 2 F.C. 345, 4
D.L.R. (4th) 739, 53 N.R. 1. Canada thus rejects the view of the Privy Council in The
HALCYON ISLE, [1980] 3 All E.R. 197, 1980 AMC 1221, [1980] 2 Lloyd’s Rep. 32,
which held maritime liens to be enforceable only if recognized in the forum in which the
claimant seeks enforcement.
10
lien under Canadian law,49 the Court nevertheless enforced the lien of the American shipyard.
The Court stated, “a maritime lien may be created by foreign law . . . and if it be so created . . . it
can be equally enforced here . . . .”50
A U.S. supply lien claimant will generally be better off enforcing its lien claim in
Canada than doing so at home. Under U.S. law, a validly recorded ship mortgage ranks behind
only “preferred maritime liens.”51 Preferred liens include claims arising from crew wages, tort,
salvage and general average, and supply liens that arose before recordation of a preferred ship
mortgage.52 Liens for supplies incurred after recordation of a mortgage do not fall within the
“preferred” category, however, and thus rank behind a mortgage.53 In Canada, a lien claimant
always has priority over a ship mortgage. Thus, a U.S. lien claimant arresting a U.S. vessel in
Canada will trump a mortgagee, even when the opposite result might occur in the U.S. In
Canada, “[t]he claim of a mortgagee . . . ranks below the claims of persons having a maritime
lien on the mortgaged ship.”54
The advantages in Canada to a U.S. lien claimant don’t end there. Under
Canadian law, a lien claimant may proceed against a “sister ship” of the vessel it supplied. The
Federal Courts Act provides that a Canadian Federal Court may exercise jurisdiction “in rem
against any ship that, at the time the action is brought, is beneficially owned by the person who is
the owner of the ship that is the subject of the action.” 55 That means a U.S lien claimant may
enforce its claim against a different ship beneficially owned by the same owner as the ship on
which it claims a lien – a valuable right when the ship in question is part of a larger fleet. This is
a right U.S. lien claimants do not have in their home forum.
8.
Conclusion
The perils and pitfalls of international ship finance preclude it as a vocation for
the timid. This paper has attempted to shed light on a few common and uncommon legal
challenges and to suggest ways to defuse them. A final word of encouragement for those
49
In 2009, Canada , by amendment to the Marine Liability Act, 2001, enacted legislation
that gives Canadian suppliers of goods and services to ships a lien on “foreign,” i.e., nonCanadian, vessels. Marine Liability Act, 2001 § 139 (Stat. Can. 2009, chapt. 21, § 12.).
50
[1974] S.C.R. at 1252, quoting, The Ship STRANDHILL v. Walter W. Hodder Co.,
[1925] S.C.R. 680.
51
46 U.S.C. § 31326(b).
52
46 U.S.C. § 31301(5).
53
For non-U.S.-flag vessels, liens for supplies provided in the United States also have
priority over a ship mortgage. 46 U.S.C. 31326(b)(2).
54
[1974] S.C.R. at 1259, quoting, E.C. Mayers, Admiralty Law and Practice in Canada 71
(1916).
55
Federal Courts Act, 1984, R.S.C § 43(8).
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intrepid enough to try these waters – until times improve, take heart, and keep your lawyer’s
contact details close at hand. Mine are on the cover page.
********************************
Charles Donovan's practice focuses on international and domestic finance, leasing and related
arbitration and litigation, with particular emphasis on transportation matters. Mr. Donovan has
lectured and written on topics relating to international law, ocean shipping, air and land
transport, satellites, and cross-border leasing. He practices as a partner in the Finance and
Bankruptcy Practice Group at the San Francisco office of Sheppard Mullin Richter & Hampton
LLP and teaches as a member of the adjunct faculty at the University of Southern California Law
School. The U.S. District Court in San Francisco has appointed him an Early Neutral Evaluator
in its Alternative Dispute Resolution Program. Best of the Best USA has chosen Mr. Donovan
as one of the top 25 "Shipping and Maritime" attorneys in the United States. He has been listed
in Best Lawyers in America, Northern California Super Lawyers, Who's Who in America, and
Legal Media Group's Guide to the World's Leading Shipping and Maritime Lawyers. He
received his law degree from Cornell University and his undergraduate degree from Haverford
College.
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