Source: https://www.offshorewindsblog.com/2017/12/08/dont-lien-on-me-identification-and-mitigation-of-maritime-lien-risks-in-marine-leaseloan-transactions/
Timestamp: 2019-04-21 12:55:58+00:00

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This article discusses the characteristics of maritime liens, the priority of these liens in relation to the desired first-priority secured position of a lender or lessor, and prudent practices for assessing and mitigating the risks posed by such liens. The focus of this article is on transactions involving commercial (as opposed to recreational or fishing) vessels documented under the laws of the United States.
Maritime liens are a contrivance of admiralty law, which has been developed over centuries. Unlike lien laws that apply to land-based assets, which are primarily statutory state laws, maritime lien law is a non-statutory body of law developed in federal admiralty courts. A fundamental distinctive feature of U.S. maritime lien law is commonly referred to as the “personification of the vessel.” This means that a vessel is considered to be a person separate and distinct from its owner or operator, that can itself cause injury, incur debts and be sued independently. Thus, a person claiming to hold a maritime lien against a vessel may file suit in rem against the vessel in federal court, and have the court order the arrest and sale of the vessel so the claim can be satisfied from the proceeds of sale.
While maritime lien claimants’ powerful right to cause the seizure and sale of the vessel is concern enough to a prospective lender, the “secret” nature of these liens may be of even greater concern. Maritime liens on vessels are not possessory and need not be recorded or registered to come into existence. Thus, for example, a shipyard may perform repair work on a vessel and allow the vessel to depart the yard following completion of the work, but still retain its lien on the vessel until it has been paid for the work. Similarly, a bunker (fuel) supplier may provide fuel to a vessel at a port anywhere in the world, and thereafter allow the vessel to leave the port, but retain its lien against the vessel until paid for the fuel.
Maritime liens are extinguished only by payment of the underlying claim, laches, expiration of any applicable statute of limitation or by sale of the vessel in a foreclosure action in United States district court. Notably, maritime liens are not extinguished by sale of the vessel even if to a bona fide purchaser without notice of the lien claims. Instead, any maritime liens in existence at the time of sale remain and the vessel continues to be subject to arrest and sale to satisfy such preexisting maritime liens even after a sale.
cover a documented vessel or a vessel for which documentation has been applied in substantial compliance with the documentation regulations.
46 U.S.C. § 31322(a)(1)-(3); Economy Stone Midstream Fuel, LLC et al., 2009 WL 2767681 at *3.
A properly filed preferred ship mortgage is valid against third parties from the time it is filed. 46 U.S.C. § 31321(a)(2); see also United States v. Trident Crusader, 366 F.3d 391, 393 (5th Cir. 2004) (finding that the determination of whether a mortgage is a “preferred mortgage” is based on whether the vessel was “documented” as provided in the applicable statutory law, as opposed to whether the vessel is a “vessel,” which would require it to be capable of being used as a means of transportation on water). By perfecting a “preferred ship mortgage” on a vessel, the lender creates a maritime lien against the mortgaged vessel, enforceable by an action in rem in admiralty, 46 U.S.C. § 31325(b)(1), which, as discussed infra, is accorded priority over certain other maritime liens against the vessel pursuant to the CIMLA.
Unfortunately, the priority status attained by perfecting a preferred ship mortgage is not available to a lessor in a marine finance transaction structured as a lease. In maritime parlance, leases are referred to as charters and vessel leasing transactions are documented as demise or bareboat charters (with those terms synonymous).
The lender takes legal title to the vessel and becomes its record owner by documenting the vessel in its name with the NVDC. The lender charters the vessel back to the customer (the charterer) under a bareboat charter by which the owner transfers all rights and obligations of use, control, crewing, maintenance, operations, and insurance to the bareboat charterer (lessee). The owner, in turn, receives charter hire (rent) payments from the charterer and is entitled to have the vessel returned at the end of the charter term.
As the lessor is the owner of the vessel, it cannot also be the holder of a preferred ship mortgage on the vessel. Under the CIMLA, a preferred ship mortgage can only be granted by the record owner of vessel, not a lessee. Absent execution of an enforceable waiver or subordination by a maritime lien claimant, which is usually difficult to obtain for known liens and impossible for liens that arise in the context of ongoing vessel operations, the lessor is exposed to maritime liens arising against the vessel, and the lessor’s equity interest remains ever subordinate to those liens.
Expenses of justice while the vessel is in custodia legis after the vessel’s in rem arrest. Although “custodia legis” expenses are frequently referred to as the highest class of maritime liens, they actually do not give rise to a maritime lien, but instead are given their priority status as a cost of court.
Seamen’s liens for wages, maintenance and cure.
Salvage and general average liens.
Maritime tort liens, which include nearly all maritime torts, such as collision, personal injury, death or cargo damage.
State-law-created maritime liens. Due to federal supersession of state maritime lien law under 46 U.S.C. § 31307, this is a relatively limited category of claims, many of which overlap with the classes of maritime lien claims established under federal law, with a notable exception being state-conferred liens for vessel construction.
Non-maritime liens, including ship mortgages that have not attained “preferred” status under the CIMLA, state ship mortgages and security interests perfected under UCC Art. 9. United Shipping Svcs. Three, Inc. v. U.S. Express Lines, Ltd., No. 98-950, 2002 WL 1773041, at *2 (E.D.Pa. 2002).
Maritime claims that are not secured by maritime liens.
Under the “inverse order rule” applied by admiralty courts, later lien claims within each class have priority over earlier ones based on a legal fiction that earlier lien holders benefit from the services provided by later claimants that enable the vessel to continue operating and earn money. Moreover, as admiralty courts are courts of equity, ranking rules may be modified if warranted by the particular circumstances presented in a given case. General creditors of the owner of the vessel, who do not possess a maritime lien, are not entitled to intervene in an action in rem against the vessel. However, such claimants can bring an action in personam against the owner and seek recovery of their claims from any excess funds remaining after the above-listed claims have been paid.
for salvage, including contract salvage.
46 U.S.C. § 31301(5); Economy Stone Midstream Fuel, LLC et al., 2009 WL 2767681, at *3.
UCC security interests and ship mortgages perfected under state law.
See Southwest Bank of Texas, N.A. v. M/V The Whippler, No. 4:03 CV 1816SNL, 2005 WL 2647948, at *4 (E.D.Mo. 2005) (stating that a prior in time preferred mortgage is entitled to priority over all subsequently arising liens against the subject vessel, with the exception of “preferred maritime liens”).
Vessels are constantly exposed to maritime liens for necessaries arising in favor of providers of supplies, equipment, and services needed for operation. A supplier of necessaries has a maritime lien against the vessel that arises from the time the supplies or services are provided. The term “necessaries” has been expanded to encompass “any item or service which is reasonably needed for the venture for which the ship was engaged.” Trico Marine Operators, Inc. v. Falcon Drilling Co., 1996 WL 96883, at *5 (E.D. La. 1996) (Schwartz, J.) (citing Foss Launch & Tug Co. v. Char Ching Shipping U.S.A., Ltd., 808 F.2d 697, 699 (9th Cir.), cert. denied, 484 U.S. 828 (1987).
“necessaries” include fuel bunkers). The determination of what qualifies as a “necessary” is particular to the vessel in question. Gulf Marine and Industrial Supplies, Inc. v. Golden Prince M/V, 230 F.3d 178, 180 (5th Cir. 2000) (citing Equilease Corp. v. M/V Sampson, 793 F.2d 598, 603 (5th Cir. 1986) (holding that “[i]t is the present, apparent want of the vessel, not the character of the thing supplied, which makes it a necessary”)).
The decision of the U.S. Court of Appeals for the Fifth Circuit in Bank One, Louisiana N.A. v. Mr. Dean MV, 293 F.3d 830, 831 (5th Cir. 2002) has presented lenders with an additional challenge in ensuring the priority of their preferred ship mortgage in relation to maritime liens in favor of charterers of the vessel. In Mr. Dean, the court held that a maritime lien that arises out of a breach of time charter (a form of maritime contract) attaches at the moment the vessel owner places the vessel at the charterer’s disposal; and, any subsequent breach of the charter agreement relates back to the date the vessel was placed at the charterer’s disposal. Bank One, Louisiana N.A. v. Mr. Dean MV, 293 F.3d 830, 831 (5th Cir. 2002).
In that case, the plaintiff, Bank One, filed suit to foreclose on a preferred ship mortgage granted by the vessel’s owner, Global Towing. Id. at 831. Prior to the execution of the preferred ship mortgage, BargeCarib, Inc. had executed a time-charter agreement with the original owner of the Mr. Dean, Offshore Supply Ships. Id. Following the sale of the vessel, Global Towing failed to deliver the vessel or a suitable substitute to BargeCarib, thereby breaching the time charter agreement. Id. BargeCarib intervened in Bank One’s foreclosure suit and asserted a maritime lien based on the previous breach of the time charter agreement. Id.
In analyzing the ranking issue between Bank One’s preferred ship mortgage and BargeCarib’s maritime lien, the court noted that it has consistently been held that a maritime lien “attaches at the commencement of an undertaking and any subsequent breach perfecting the lien relates back to that time.” Id. at 834 (citing The Bird of Paradise, 72 U.S. (5 Wall.) 545 (1866); The Edwin, 65 U.S. (24 How.) 386 (1860); The Freeman, 59 U.S. (18 How.) 182 (1855)).
The court determined that the Mr. Dean had been placed at BargeCarib’s disposal, and was employed pursuant to the time charter agreement before Bank One recorded its preferred ship mortgage. Id. at 838. As such, BargeCarib’s maritime lien “arose” before the mortgage was filed, even though it did not become enforceable until after the recording of the preferred ship mortgage, when the charter was breached. Id; see also Vinmar Int’l Ltd. v. M/T Clipper Makishio, No. 09-3829, 2009 WL 6567104, at *1 (S.D.Tex. 2009) (citing Mr. Dean for the proposition that maritime liens for charters and shipping contracts attach at the beginning of the contract and remain inchoate until breached, and further stating that “the ‘beginning of the contract’ in the case of contracts for affreightment and voyage charters means when the cargo is loaded on board, or at least placed into the custody of the vessel’s personnel”).
The practical effect of the Mr. Dean decision is that if a vessel is under charter when a lender’s preferred mortgage is recorded, the lender faces the risk that a subsequent breach of that charter will result in a charterer’s lien that has priority over the ship mortgage.
(iii) the written assurance of the borrower’s broker is obtained that (a) there are no claims for which coverage has been denied, (b) there are no known claims which may potentially exceed policy limits, and (c) there are no known problems with the financial condition or solvency of any insurer.
As to maritime liens for wages or for stevedores, these maritime liens are not generally a significant risk, since seamen and stevedores will quickly stop working if they are not paid on time. With respect to “necessaries” that give rise to maritime liens, a prospective lender should verify the outstanding payables of the borrower that are related to the procurement of necessaries.
agreement. If so, the prudent lender should require that any charterer, ship manager or repairer, or other party that currently has possession or control over the vessel waive its maritime lien on the vessel or subordinate it in favor of the lender’s preferred ship mortgage lien and agree not to enforce such lien until either the lender is fully paid or the lender grants its consent to enforcement.
In obtaining lien waivers, the lender should be cognizant of the high legal standard applied in enforcing such waivers. “Such a strong presumption in favor of a lien places a ‘heavy burden’ on parties seeking to show a waiver of the lien, forcing them to show that a creditor ‘deliberately intended to forego the valuable privilege which the law accords’ and look solely to the owner’s personal credit.” Maritrend, Inc. v. Serac & Co. (Shipping) Ltd., 348 F.3d 469, 474 (5th Cir. 2003); see also Puerto Rico Ports Authority v. Barge Katy-B, O.N. 606665, 427 F.3d 93, 103 (1st Cir. 2005) (A court will only find a waiver when there is a showing that a creditor “deliberately intended to relinquish its lien rights,” which inquiry is necessarily fact-intensive.) The precautionary steps described above may not be feasible where the borrower has many charters of short duration in place at the time the loan is made. Further, there is no assurance that a charterer or ship manager will voluntarily give up or subordinate its lien rights and superior interest in the vessel vis-à-vis a preferred ship mortgagee. When a waiver or subordination is impossible to obtain, the lender should require, at a minimum, that the charterer or ship manager be required to provide it with written notice of any alleged breach at the time such alleged breach is discovered.
Lenders financing marine transactions must accept the reality that vessels offered as collateral likely already have maritime liens, which if they remain unsatisfied, will have priority over the lender’s secured position. Vessels also will continue to incur maritime liens post-funding, some or all of which (in the case of leases) will have priority over the lender’s interest.
By understanding the unique nature of maritime liens and employing sound underwriting and documentation practices, lenders should be able to identify and mitigate the potential impact of particular risks involved in a given transaction. Proper analysis of these risks should be viewed simply as yet another iteration of the “know your customer” rule practiced by all prudent lenders.
Reprinted with permission from the December 2017 edition of the “LJN”© 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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