Opinion ID: 536603
Heading Depth: 1
Heading Rank: 3

Heading: Requirements for a Preferred Ship Mortgage

Text: 15 We next determine whether Chase has a valid preferred ship mortgage entitling it to first priority to the proceeds from the sale of the Patriot. A short review of the history of the SMA is in order. 16 Prior to the passage of the SMA, the Supreme Court in Bogart v. The John Jay, 58 U.S. (17 How.) 399, 15 L.Ed. 95 (1854), held that a mortgage on a ship was not a maritime contract and therefore not within admiralty jurisdiction. See Gilmore at 688. As a consequence of this decision, the value of a mortgagee's security interest was greatly reduced. As a nonmaritime claimant the mortgagee could not initiate foreclosure proceedings in admiralty. If a maritime lien claimant initiated foreclosure proceedings in admiralty, the ship would be sold and first priority given to all maritime claims, including those arising after the mortgage. See Merchants Nat'l Bank v. Ward Rig No. 7, 634 F.2d 952, 955 (5th Cir.1981); Gilmore at 688-90; Gyory, Security at Sea: A Review of the Preferred Ship Mortgage, 31 Fordham L.Rev. 231, 232-34 (1962) [hereinafter Gyory, 31 Fordham L.Rev.]; Smith, Ship Mortgages, 47 Tul.L.Rev. 608, 608-09 (1973) [hereinafter Smith, 47 Tul.L.Rev.]. 17 The primary purpose of the SMA was to stimulate private investment in the shipping industry by offering greater protection to investors. See Smith, 47 Tul.L.Rev. at 608. The SMA granted the holder of a preferred ship mortgage the right to proceed in admiralty with a preferred status over all claims except certain maritime liens and expenses, and fees and costs fixed by the court. See Merchants Nat'l Bank, 634 F.2d at 955; Gilmore at 695-805; Gyory, 31 Fordham L.Rev. at 234-37; Smith, 47 Tul.L.Rev. at 610-13. 18 The statutory requirements for a preferred ship mortgage are contained in 46 U.S.C. section 922(a), which provides in relevant part: 19 A valid mortgage which at the time it is made, includes the whole of any vessel of the United States ..., shall, in addition, have, in respect to such vessel and as of the date of the compliance with all the provisions of this subsection, the preferred status given by the provisions of section 953 of this title, if-- 20 (1) The mortgage is endorsed upon the vessel's documents in accordance with the provisions of this section; 21 (2) The mortgage is recorded as provided in section 921 of this title, together with the time and date when the mortgage is so endorsed; 22 (3) An affidavit is filed with the record of such mortgage to the effect that the mortgage is made in good faith and without any design to hinder, delay, or defraud any existing or future creditor of the mortgagor of any lienor of the mortgaged vessel; 23 (4) The mortgage does not stipulate that the mortgagee waives the preferred status thereof; and 24 (5) The mortgagee is ... a citizen of the United States. 25 46 U.S.C. Sec. 922(a). Title 46 of the Code of Federal Regulations subpart 67.37 adds the additional requirement that the mortgagor must actually hold legal title to the vessel at the time of the execution and recordation of the mortgage. 46 C.F.R. Sec. 67.37-5(c); see also C.I.T. Corp. v. Oil Screw Peggy, 424 F.2d 767, 768 (5th Cir.1970) (per curiam) (preferred ship mortgage did not attach to radar equipment leased by shipowner/mortgagor in which mortgagor did not have an ownership interest); ITT Indus. Credit Co. v. The M/V Richard C, 617 F.Supp. 761, 764 (E.D.La.1985) (It is further obvious that a [preferred ship] mortgage cannot attach to property not owned by the mortgagor.).
26 Appellants first argue that Chase has not satisfied the requirement of SMA section 922(a) because the Patriot was not a vessel or a vessel of the United States at the time of the execution and recordation of the mortgage. This argument plainly fails on the facts of this case. The trial court found that the Patriot was ninety-nine percent complete on January 1, 1987. The Patriot therefore was a vessel as of this date. See 1 U.S.C. Sec. 3; discussion supra p. 457 and infra p. 462. The Patriot became a vessel of the United States on April 7, 1987, when the Coast Guard issued the Patriot's certificate of documentation and its official number. See 46 U.S.C. Secs. 911(1), (2), (4); 46 C.F.R. Sec. 67.01-1, par. (4) (Documented vessel means a vessel for which a valid Certificate of Documentation is outstanding.). Approximately one week afterward, on April 13, 1987, Matthews executed the preferred ship mortgage on the Patriot, and on July 27, 1987, the Coast Guard recorded the mortgage. 27 Appellants also argue that Chase's preferred ship mortgage is invalid because the required documentation was inadequate. However, appellants have failed to demonstrate the existence of a single defect in the actual documentation that warrants rendering the mortgage invalid. The district court made specific findings on the Patriot's mortgage documentation, ruling that: (1) Matthews had gathered the necessary documentation and forwarded it to the Coast Guard; (2) on April 7, 1987, the Coast Guard issued the Patriot's certificate of documentation; and (3) on July 27, 1987 the Coast Guard recorded the Patriot's preferred ship mortgage and endorsed the particulars of the mortgage on the Patriot's certificate of documentation. These findings are not clearly erroneous. 28 Given the strength and specificity of the district court's factual findings regarding the documentation for the Patriot's preferred ship mortgage, it is evident that the true nature of appellants' inadequate documentation argument is a veiled collateral attack on the district court's conclusions that [t]here was no showing that [Chase] knew of the existence of any bad faith on the part of McMillian so as to taint the derivative good faith requirement imposed on [Chase that would] defeat the attainment of the preferred status provided by [section] 922(a), and that [appellant] Walters has failed to sustain his burden of establishing fraud in connection with [Chase's] and McMillian's actions in obtaining the preferred ship mortgage status for the Patriot. The essence of appellants' argument is that Chase acted in reckless disregard of the truth of the substance of the documents because the mortgage documents were signed in blank by McMillian at the October 30, 1986 sale and financing meeting and Matthews later filled in the contents when she executed the mortgage without independently verifying the information given to her by McMillian. 29 Section 922(a)(3) requires that the mortgagor file an affidavit with the mortgage to the effect that the mortgage is made in good faith and without any design to hinder, delay, or defraud any existing or future creditor of the mortgagor or any lienor of the mortgaged vessel. 46 U.S.C. Sec. 922(a)(3); see 46 C.F.R. Sec. 67.37-1(a)(3) (1988) (mortgagor is the party required to file affidavit of good faith); see generally Gilmore at 712-13. The mortgagee also has a derivative good faith requirement under section 922(a)(3). The Seventh Circuit described this derivative good faith requirement in In re Meredosia Harbor & Fleeting Service, Inc., 545 F.2d 583 (7th Cir.1976), cert. denied, 430 U.S. 967, 97 S.Ct. 1649, 52 L.Ed.2d 359 (1977): 30 The banks would have us construe Section 922(a)(3) in a pro forma manner, viz.: once the affidavit is made the Section's requirement is met without more. If the affidavit is fraudulent, the appellants argue that recourse should be had against the affiant rather than the mortgagee. We disagree. The Section 922(a)(3) affidavit requirement demands assurance that the mortgage is made in good faith. The good faith requirement applies to the mortgage transaction. This creates, in turn, a derivative good faith requirement for the mortgagee. Upon a showing that the mortgagee knew of the mortgagor's bad faith, such knowledge will trigger Section 922(a)(3). Since each of the requirements of Section 922(a) is independently necessary for a ship's mortgage to attain preferred status, the mortgagee's bad faith will defeat a mortgage's aspiration towards preferred status. 31 Id. at 587-88. Absent circumstances of fraud, however, the SMA imposes no affirmative duty on lenders to inquire as to the existence of prior liens before accepting the mortgagor's affidavit of good faith. See Pascagoula Dock Station v. Merchants & Marine Bank, 271 F.2d 53, 54-55 (5th Cir.1959); ITT Indus. Credit Co. v. The M/V Richard C, 617 F.Supp. 761, 766 (E.D.La.1985); cf. Mastan Co. v. Steinberg, 418 F.2d 177, 178-79 (3d Cir.1969), cert. denied, 397 U.S. 1009, 90 S.Ct. 1238, 25 L.Ed.2d 422 (1970) (upholding imprudent but not fraudulent affidavit of good faith where parties entered into mortgage in subjective good faith, even though mortgagor was insolvent at the time of execution of the mortgage). 32 We agree with the district court's determination that there was no evidence of fraud in connection with Chase's and McMillian's actions in obtaining the preferred ship mortgage. Given that fraud was not involved in the obtaining of the mortgage, and that Chase had no knowledge of bad faith on the part of McMillian, Chase's failure to verify independently the information given by McMillian does not render the affidavit of good faith void under SMA section 922(a)(3).
33 Appellants argue that the district court erred in concluding that title to the Patriot passed to McMillian on October 30, 1986 when the parties met to complete the sale and financing transaction for the Patriot. Chase must prove McMillian's ownership of the Patriot as part of its burden of establishing a valid preferred ship mortgage. See C.I.T. Corp., 424 F.2d at 768; ITT Indus. Credit Co., 617 F.Supp. at 765. State law defines what constitutes legal title because contracts for the sale of a ship are not maritime and thus admiralty jurisdiction does not apply. See S.C. Loveland, Inc. v. East West Towing, Inc., 608 F.2d 160, 164 (5th Cir.1979), cert. denied, 446 U.S. 918, 100 S.Ct. 1852, 64 L.Ed.2d 272 (1980); see also St. Paul Fire & Marine Ins. Co. v. Vest Transp. Co., 666 F.2d 932, 938 (5th Cir.1982) (per curiam) (adopting district court opinion); ITT Indus. Credit Co., 617 F.Supp. at 765; see generally Gilmore at 26 & n. 90 (contracts for the sale of vessels are not within admiralty jurisdiction). We thus look to the law of Oklahoma to determine when title transferred. 34 Chase's evidence of McMillian's title consisted of those documents presented at the sale and financing meeting on October 30, 1986: (1) the builder's certificate; (2) the manufacturer's statement of origin; and (3) the sales agreement. The record indicates that Bickers, a sales agent and the secretary/treasurer of OHM, signed the sales agreement form in blank at the closing. The parties did, however, complete the manufacturer's statement of origin at the closing, and Bickers signed it in his capacity as the secretary/treasurer of OHM. 35 As appellants correctly point out, the builder's certificate is prima facie, but not conclusive, evidence of title because it is part of the paperwork required by the Coast Guard for the certificate of documentation process. See 46 U.S.C. Sec. 12104(3) (certificate of documentation is not conclusive evidence of ownership where ownership is in issue); St. Paul Fire & Marine Ins. Co., 666 F.2d at 938 (ship's documentation of title is prima facie but not conclusive evidence of ownership). However, we find that the manufacturer's statement of origin and the sales agreement together constitute a valid contract and establish that under Oklahoma law title to the Patriot passed to McMillian at the sale and financing meeting on October 30, 1986. 36 Section 2-401 of title 12A of the Oklahoma statutes governs when the seller of a good conveys title to the buyer. Section 2-401 provides in relevant part: 37 (1) Title to goods cannot pass under a contract for sale prior to their identification to the contract (Section 2-501), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this Act.... Subject to these provisions and to the provisions of the Article on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties. 38 .... 39 (3) Unless otherwise explicitly agreed where delivery is to be made without moving the goods,(a) if the seller is to deliver a document of title, title passes at the time when and the place where he delivers such documents; or 40 (b) if the goods are at the time of contracting already identified and no documents are to be delivered, title passes at the time and place of contracting. 41 Okla.Stat.Ann. tit. 12A, Sec. 2-401 (1963). Section 2-501 governing the identification of goods states in relevant part: 42 (1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers ... Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement identification occurs ... 43 (b) if the contract is for the sale of future goods ... when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers.... 44 Id. Sec. 2-501. 45 Appellants focus their argument on section 2-401(3)(a) and contend that under Oklahoma law the manufacturer's statement of origin does not constitute a document of title because Bickers failed to complete the endorsement form stating all liens or encumbrances on the Patriot. Section 804.4B of title 63 of the Oklahoma statutes requires for a valid certificate of title that: 46 B. In the event of the sale or transfer of the ownership of any vessel, boat, motorboat, or motor therefor, the holder of such certificate of title and registration issued under provisions of this section shall endorse on the form provided on the back of said title a complete assignment thereof with a statement of all liens or encumbrances on such vessel, motorboat or motor and such signature of the transferor shall be made under the penalties of perjury. 47 Okla.Stat.Ann. tit. 63, Sec. 804.4B (1984). Assuming arguendo that the unendorsed manufacturer's statement of origin was not a document of title for purposes of section 2-401(3)(a), we turn to section 2-401(3)(b). 48 Bickers signed both the completed manufacturer's statement of origin and the incomplete sales agreement at the mortgage closing. Chase issued a check for $50,000, the balance of the purchase price for the Patriot after McMillian's down payment, jointly to McMillian and OHM. McMillian immediately endorsed the check over to OHM at the October 30, 1986 meeting, and Bickers accepted it. The appellants do not dispute the purchase price of the Patriot or any other terms of the sale. Rather they contend that the sales agreement signed by Bickers at the October 30th meeting could not convey title under section 2-401(3)(b) because it did not specifically identify the Patriot. Although the sales agreement itself did not specifically identify the Patriot as the good being sold, OHM's manufacturer's statement of origin, signed by Bickers at the closing in his capacity as the secretary/treasurer of OHM, clearly did: 49 The undersigned MANUFACTURER hereby certifies that the new boat or motor described below, the property of said MANUFACTURER, has been transferred this 30th day of Oct., 1986 on Invoice No. 1001 to David J. McMillian whose address is Rt. 2 Box 256, Wagoner, Okla. 74467. 50 YEAR 1986 MODEL Houseboat 14 X 62 ft. TRADE NAME Patriot SERIAL NO. OKHOKHo1F6 51 We hold that the manufacturer's statement of origin and the sales agreement taken together satisfy the requirements of section 2-501, and conclude that under section 2-401(3)(b) title to the Patriot passed to McMillian on October 30, 1986. We therefore hold that Chase has satisfied all the statutory requirements of SMA section 922 and holds a valid preferred ship mortgage on the Patriot.