Opinion ID: 536603
Heading Depth: 2
Heading Rank: 1

Heading: SMA Filing Requirements

Text: 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).