Opinion ID: 1345920
Heading Depth: 1
Heading Rank: 1

Heading: exclusivity of the ship mortgage act

Text: There are two issues this court must address: the exclusivity of the Ship Mortgage Act and the effect of a failure to comply with applicable foreclosure procedures on the recovery of a deficiency. We first address the exclusivity of the act, beginning with a brief history. Prior to the enactment of the Ship Mortgage Act, 1920, a ship mortgage could not be foreclosed in admiralty. J. Ray McDermott & Co. v. Vessel Morning Star, 457 F.2d 815, 817 (5th Cir.), cert. denied, 409 U.S. 948 (1972). As a result, mortgage securities on ships were practically worthless at a time when the country was trying to build up a strong merchant marine. Detroit Trust Co. v. The Thomas Barlum, 293 U.S. 21, 39, 79 L.Ed. 176, 55 S.Ct. 31 (1934). The act was passed to promote the merchant marine and to encourage financing essential to the development of the fledgling shipping industry. McDermott, at 817. A mortgagor who perfects a marine mortgage under the act is granted preferred status over other lienholders. 46 U.S.C. § 922. The act also brought foreclosure of such mortgages within the admiralty jurisdiction of the federal courts. 46 U.S.C. § 951. Congress recognized the impact of shipping on interstate and international commerce. In Senate hearings, the need for exclusive jurisdiction of the admiralty court and uniformity of procedure in ship mortgage foreclosure proceedings was stressed. McDermott, at 817. Uniform procedures were also important because the United States was the principal source of credit for such mortgages. Seattle-First Nat'l Bank v. Bluewater Partnership, 772 F.2d 565 (9th Cir.1985). The intention of the drafters was to [provide] for a speedy and uniform practice of foreclosure in the Federal Courts instead of leaving the mortgagees to the varying procedures of the courts of the several states. McDermott, at 818 (quoting Hearings Relative to the Establishment of an American Merchant Marine Before the Senate Committee on Commerce, 66th Cong., 2d Sess. 933 (1919)). The McDermott court went on to say that [i]t is clear that Congress intended that the ready availability of credit to support interstate commerce should not be impeded by parochial limitations and that the Act would wholly and completely supersede state law and practice in every respect. McDermott, at 818. The Ship Mortgage Act, 1920, codified at 46 U.S.C. §§ 911-984, applies to all vessels registered or licensed under the laws of the United States, with certain exceptions not relevant here. 46 U.S.C. §§ 911, 922(a). No such vessel may be sold or mortgaged unless the proper documents are recorded with the customs office. 46 U.S.C. §§ 921. Any mortgage that is perfected in compliance with the act has a preferred status over other security interests in a vessel. 46 U.S.C. § 922. The act provides that upon default the mortgagee may bring a suit in rem in admiralty to enforce the lien, and that the district courts of the United States have exclusive jurisdiction over all in rem actions under the act. 46 U.S.C. § 951. The mortgagee may also bring suit in personam in admiralty against the mortgagor for the amount of the outstanding mortgage indebtedness secured by such vessel or any deficiency in the full payment thereof. 46 U.S.C. § 954. State and federal courts have concurrent jurisdiction over in personam actions under § 954. Reedsburg Bank v. Apollo, 508 F.2d 995, 999 (7th Cir.1975). The Supreme Court has said that the jurisdiction granted to the admiralty by the Ship Mortgage Act is exclusive. If a mortgage is within the Act, there can be no suit to foreclose it in a state court; if the mortgage is not within the Act, there can be no suit for foreclosure in the admiralty. (Footnote omitted.) Thomas Barlum, 293 U.S. at 42. Thus, a secured party with a mortgage perfected under the Ship Mortgage Act can bring a foreclosure action only in federal court. The sale of a vessel in such a foreclosure, whether public or private, must comply with the provisions of 28 U.S.C. §§ 2001 and 2004 of the judicial sales act. Dietrich v. Key Bank, N.A., 693 F. Supp. 1112, 1113 (S.D. Fla. 1988); McDermott, at 818. Section 2001 describes procedures for sale of realty and section 2004 makes those procedures applicable to sales of personalty. The mortgagee can then bring a deficiency action in either state or federal court. Reedsburg Bank, at 999; McDermott, at 818. In 1972, the Fifth Circuit addressed the question of whether state or federal law governs deficiency judgments under the Ship Mortgage Act. [1] J. Ray McDermott & Co. v. Vessel Morning Star, supra . The court found that while state law may be looked to occasionally to fill the gaps in an incomplete and less than perfect maritime system, the Ship Mortgage Act, when read together with [§ 2001 of the judicial sales act] forms a comprehensive procedure for the foreclosure of a preferred ship's mortgage, the sale of the vessel and any resulting deficiency adjudged against the debtor in personam.  McDermott, at 818. The court held that [state law] may not limit or restrict the application of the Ship Mortgage Act or affect the uniform application of that Act so as to defeat [congressional intent]. McDermott, at 819. While the court in McDermott found that the Ship Mortgage Act left no room for operation of state law, the Morning Star had been sold at a judicially confirmed public sale. Thus, the court was not called on to address the availability of a nonjudicial repossession and sale. In the present case, instead of pursuing the federal remedies available, Nate relied on the state Uniform Commercial Code both to conduct a nonjudicial foreclosure sale and to obtain a deficiency judgment. The utilization of state law self-help procedures to take possession of and sell a ship covered by a preferred ship mortgage appears to be a relatively new phenomenon. In 1983, Judge Beeks of the United States District Court for the Western District of Washington stated that the court has not found, nor has it been directed to, a reported case wherein a preferred ship mortgage was foreclosed privately; in all cases of which the court has knowledge, the mortgagee has always chosen to utilize admiralty procedure. Price v. Seattle-First Nat'l Bank, 582 F. Supp. 1568, 1569 (W.D. Wash. 1983). Since Price, there have been only three cases involving private foreclosure reported: Brown v. Baker, 688 P.2d 943 (Alaska 1984); Bank of Am. Nat'l Trust & Sav. Ass'n v. Fogle, 637 F. Supp. 305 (N.D. Cal. 1985); and Dietrich v. Key Bank, N.A., supra . These four cases, which form the basis of the arguments here, conflict both as to reasoning and result. In Price, the mortgagee bank relied on language in the mortgage contract to repossess the mortgaged ship without judicial intervention and sell the vessel at public auction. Price, the mortgagor, sued for wrongful taking and the bank cross-claimed for a deficiency judgment. Price, at 1569. Price moved for a summary judgment declaring a deficiency judgment unavailable because the bank failed to comply with the exclusive foreclosure procedures of the Ship Mortgage Act. Price, at 1569. The court found that allowing private foreclosures would be in derogation of the distinct public interest in a uniform practice dealing with judicial foreclosure of security interests in vessels, but nevertheless held that it was without authority, however, to declare invalid an in personam remedy similar to that provided by RCW 62A.9-504 and that the validity of `self help' provisions and the availability of a deficiency judgment after private foreclosure are both issues for the state to resolve. Price, at 1570. The court did not explain why it was without authority to declare state law remedies invalid, the court simply denied Price's motion to bar a deficiency without further explanation. One year after Price, the Alaska Supreme Court echoed McDermott, stating that the Ship Mortgage Act and judicial sales act, when read together, form a comprehensive procedure for the foreclosure of a preferred ship's mortgage, the sale of the vessel and any resulting deficiency. Brown v. Baker, supra at 949. However, the court found that, because the vessel was voluntarily returned to the mortgagee after default, there was  no foreclosure action and therefore the Ship Mortgage Act [was] inapplicable. Brown, at 949. The court then went on to apply state law to determine if the mortgagor was entitled to the surplus the mortgagee realized on the sale of the vessel. The Alaska court seems to be saying that parties who avail themselves of the protection of a preferred ship mortgage may nonetheless render the statute inapplicable simply by choosing not to follow the procedures set forth in the statute. In 1985, another District Court addressed the issue of private foreclosure sales and found that there is `simply no room for the operation of state law' on the issue of whether extrajudicial private sales are permissible. Bank of Am. Nat'l Trust & Sav. Ass'n v. Fogle, supra at 307 (quoting Nat G. Harrison Overseas Corp. v. American Barge Sun Coaster, 475 F.2d 504, 506 (5th Cir.1973)). In Fogle, the secured vessel was surrendered after default and sold at a private sale. The bank contended that federal law was silent on the availability of private sales and sought a deficiency based on compliance with state law procedures governing private sales. Fogle, at 306-07. The court disagreed stating that the Ship Mortgage Act most assuredly is not silent on the availability of such private sale procedures. Fogle, at 307. This contention [that section 2001(b) says nothing about nonjudicial private sales] is plainly without merit. It is more than slightly disingenuous to say that when a statute specifically authorizes a specific, detailed procedure for something, that statute is to be deemed silent on the question of whether some entirely different procedure can be substituted for it. Section 2001(b) authorizes private sales so long as certain requirements are met. One of those requirements is court approval. By specifically and explicitly requiring judicial approval for private sales, Congress obviously meant to disapprove of extrajudicial private sales. There is, therefore, simply no room for the operation of state law on the issue of whether extrajudicial private sales are permissible. Harrison Overseas Corp. v. American Barge Sun Coaster, 475 F.2d 504, 506 (5th Cir.1973). The Bank's purported reservation of the right to apply state law contrary to federal law is, of course, completely without effect. The validity of the Bank's private foreclosure sale will be determined under § 2001(b) alone. Fogle, at 307. The most recent case to address the issue of private foreclosure of a preferred marine mortgage is Dietrich v. Key Bank, N.A., 693 F. Supp. 1112 (S.D. Fla. 1988). After Dietrich defaulted, the bank seized the vessel from storage and sold it at a private sale. Dietrich, at 1113. The bank relied on a separate security agreement between the parties giving the bank all rights of a secured party under the Florida Uniform Commercial Code .... Dietrich, at 1113. Dietrich brought a claim against the bank for conversion and sought to bar a deficiency judgment based on the bank's failure to follow the exclusive procedures of the Ship Mortgage Act. Dietrich, at 1113-14. After discussing the relationship between the Ship Mortgage Act and § 2001, the court stated that [n]o reported circuit court decision has expressly held that the above scheme for judicial foreclosure nonetheless permits a contractual agreement between the parties for the private, extra-judicial foreclosure of a ship mortgage. Dietrich, at 1114-15. The court then addressed, and tried to reconcile, two related cases: Challenger, Inc. v. Durno, 227 F.2d 918 (5th Cir.1955), reh'g denied (Jan. 10, 1956); and J. Ray McDermott & Co. v. Vessel Morning Star, 457 F.2d 815 (5th Cir.), cert. denied, 409 U.S. 948 (1972), previously discussed. In Challenger, the mortgagee took possession of the secured vessel which had been virtually abandoned in British Honduras. He then took 16 months to bring the vessel to the United States and bring an in rem foreclosure action. The court stated that a party who does not avail himself of the existing contractual right to a private foreclosure ... cannot continue to hold the vessel indefinitely awaiting ... an admiralty foreclosure .... Challenger, at 922. While acknowledging that the Challenger court was not presented with an extrajudicial sale, Dietrich found that the court clearly stated that such an option was available. Dietrich, at 1115. The court then addressed the McDermott case, stating that while the McDermott court clearly held that state law cannot of its own accord vary the requirements [of] section 2001, because there was no contractual agreement between the parties, the court had no reason to analyze the parties' ability to contractually incorporate state remedies. Dietrich, at 1116. The Dietrich court uses this same reasoning to conclude that McDermott in no way undercuts the earlier decision in Challenger. Dietrich, at 1116. Stating that the import of the McDermott [decision] is that the Act provides the exclusive judicial mechanism for foreclosure of a ship mortgage, the court concluded by expressly rejecting Fogle's conclusion that § 2001 permits only judicially approved private sales. Dietrich, at 1117. In sum, the cases dealing with private foreclosure of a preferred ship mortgage have varied both as to reasoning and result. However, as noted earlier, McDermott is the only circuit court opinion which has directly addressed the relationship between the Ship Mortgage Act and state law. That court held that the Ship Mortgage Act, in conjunction with the judicial sales act, forms a comprehensive procedure, and state law could not be used to override congressional intent. McDermott, at 819. Our holding in this case rests squarely on the foundation laid by McDermott. Both Nate and the court in Dietrich try to distinguish McDermott as not having directly addressed the issue of the validity of a nonjudicial sale. However, nonjudicial sales of vessels have only begun to reach the courts in the last 6 years, and the fact that McDermott did not address that issue should not diminish the strongly worded, clear holding in that case. [2] [1] As to the cases dealing with private foreclosures, we look primarily to Dietrich and Fogle. Those two cases are in direct opposition: Dietrich would allow the parties to look to state law; Fogle held that the Ship Mortgage Act is exclusive. Neither case is controlling, but given the history and purpose of the act, Fogle appears to be the better reasoned of the two. Also, the analysis in Fogle rests squarely on McDermott's clear statement that there is no room for state law in such foreclosures. Accordingly, we adopt the reasoning in Fogle and hold that the Ship Mortgage Act provides the exclusive remedy for foreclosure of a preferred ship mortgage. We find support for our conclusion in recent legislative action. On November 23, 1988, portions of the Ship Mortgage Act were amended. Act of Nov. 23, 1988, Pub. L. No. 100-710, 1988 U.S. Code Cong. & Ad. News (102 Stat.) 4735. While the amendments do not control this action, the relevant changes do appear to support the argument that Congress intended the mortgagee's options to be limited to those within the act. Under the amendments, the language of §§ 951 and 954 have been combined into one section and a third option has been added. The relevant portions now state that a mortgagee may enforce the lien in (1) a civil action in rem, (2) a civil action in personam in admiralty for the debt or deficiency, and (3) a civil action against the mortgagor. Act of Nov. 23, 1988, Pub. L. No. 100-710, 1988 U.S. Code Cong. & Ad. News (102 Stat.) 4745 (to be codified at 46 U.S.C. § 31325(b)(1)-(3)). Prior to the amendments, in rem and in personam actions could only be brought when the vessel was in the United States. H.R. Rep. 100-918, 100th Cong., 2d Sess. 21, reprinted in 1988 U.S. Code Cong. & Ad. News 6114. The new provision was added to make it easier to enforce the mortgage and remove the incentive for owners to move a vessel overseas to avoid United States jurisdiction. It would appear that the committee intended for a mortgagee to proceed under the act even when the vessel was beyond the court's jurisdiction and not to have state law applied by default. Because we hold that the Ship Mortgage Act, in conjunction with the judicial sales act, provides the exclusive remedy for foreclosure of a preferred ship mortgage, there is no need to decide if Nate complied with the terms of the mortgage in repossessing and selling the Santa Anita. [3]