A Lien Is a Lien Is a Lien, but a Maritime Lien Is Not*
June 2003
Maritime liens are unique in that the vessel
itself owes obligations that may be breached and the law of maritime liens is
a confusing mix of federal statutes and case law. A recent disturbing decision
by the Fifth Circuit Court of Appeals misinterpreted a maritime lien and the
intent Congress gave to both the federal Maritime Lien Act and the Ship Mortgage
Act.
by Michael
A. Orlando
Meyer Orlando,
LLC
Maritime liens are quite unique in the law. The existence of maritime liens
rest on the principle that a vessel is a legal entity itself, apart from its
ownership. The lien is not a security interest arising from the personal obligation
of the vessel’s owner or operator under a contract, but instead the vessel itself
owes obligations that may be breached. As a consequence, the law of maritime
liens is a confusing mix of federal statutes and case law.
In general, maritime liens arise out of maritime transactions and maritime
accidents. Such liens can arise from the following.
- Seafarers’ liens for wages, maintenance, and cure
- Salvage liens
- Tort liens, which are liens from maritime accidents such as collisions
or damage to cargo
- Preferred ship mortgages recorded with the U.S. Coast Guard under the
Preferred Ship Mortgage Act
- Liens for “necessaries” furnished to a vessel such as food, fuel, and
repairs
One of the principal differences between a maritime lien and a land-law-type
lien is that a maritime lien does not depend on either notice or possession.
The only type of maritime lien which does get recorded in any type of registry
is a preferred ship mortgage. Thus, maritime liens are generally thought of
as silent liens, and possession of the subject property is not a requirement
for the existence of such a lien.
Another major difference between a maritime lien and other types of liens
is that maritime liens may only be enforced under the maritime jurisdiction
of a federal court, at which point the marine equipment can be “arrested” by
a federal marshal to be brought under the jurisdiction, and thus control, of
the federal court.
Recent Case Law
The recent case of Bank One Louisiana N.A. v M/V
Mr. Dean, 293 F3d 830 (5th Cir 2002), amply demonstrates the difficulty
with wrapping one’s arms around the concept of a maritime lien. In Bank One, BargeCaribe, Inc., chartered the Mr. Dean from Offshore Supply Ships, Inc.,
for a period of 1 year. During that timeframe, Offshore sold the vessel to Global
Towing, LLC.
To finance the purchase, Global obtained a loan from Bank One for $2 million.
Bank One obtained a preferred ship mortgage as security for repayment of the
loan and recorded the mortgage toward the end of the charter agreement. The
new owner thereafter breached the charter agreement by failing to make the vessel
available to BargeCaribe for its intended use. Unquestionably, the charter was
breached after the ship mortgage was obtained and filed with the Coast Guard.
The new owner, Global, also defaulted on the loan to the bank and the bank
filed suit in federal court, and seized the vessel pursuant to its ship mortgage.
The charterer, BargeCaribe, intervened in the lawsuit and asserted a maritime
lien based on the breach of the charter agreement, which is a long recognized
basis for assertion of a maritime lien against a vessel. BargeCaribe and Bank
One then disputed the priorities of their respective claims as there would not
be enough money from the proceeds of the sale of the Mr. Dean to satisfy both the charterer and
the bank.
When Does a Maritime Lien Arise?
The main issue in the case involved the purely legal question of when a maritime
lien for breach of charter “arises.” The bank asserted that a maritime lien
for breach of charter arises at the time the charter is breached. On the other
hand, BargeCaribe contended that its lien arose at the inception of the charter
agreement. Quite interestingly, the court noted that there were very few recent
cases that even hinted at when a maritime lien arises and that the U.S. Supreme
Court had last discussed the priority of maritime liens in 1898. It also noted
that there were no recent circuit court of appeals cases and that various district
courts addressing the issue were split in their results. (The author notes that
it happens more frequently than one might think that extremely old legal decisions
end up providing the basis for maritime issues.)
The Fifth Circuit Court of Appeals began its analysis by reviewing the older
case law and harkening back to the concept that once cargo was loaded aboard
a vessel, a lien attached as soon as the cargo was aboard the vessel. Thus,
a lien attached to the vessel related to such cargo without there having been
any problems which might give rise to a claim by the cargo owner. For that proposition,
the court cited the 1860 case The Edwin, 65 U.S.
(24 How.) 386, 394 (1860).
The cornerstone for the Bank One court’s ruling
is the generalized statement contained in an 1867 case as follows.
A maritime lien is the foundation of the proceeding in rem, a process to make perfect a
right inchoate from the moment the lien attaches; and whilst it must be
admitted that where such lien exists, a proceeding in rem may be had, it will be found
to be equally true, that in all cases where a proceeding in rem is the proper course, there a
maritime lien exists, which gives a privilege or claim upon the thing, to
be carried into effect by legal process. The Bold
Buccleugh, 7 Eng. Rep. 267, 284 (1851) quoted in The Rock Island Bridge, 72 U.S, (6 Wall.)
213, 215 (1867).
The Fifth Circuit used that generalized statement for the proposition that
a maritime lien can attach at the beginning of a charter—yet only be enforceable
at the time of breach—because the lien remains “inchoate” until “perfected.”
[The author hastens to add that any discussion of “inchoate rights” and “perfection”
of liens is enough to bring a cold sweat to the typical practitioner.]
The court thus concludes that a maritime lien attached at the commencement
of the charter between BargeCaribe offshore supply ships, that the subsequent
breach of the charter perfected the lien and that the lien related back to the
time of the beginning of the charter.
The Executory Contract Doctrine
The court then goes into a discussion of the “executory contract doctrine.”
Again, not satisfied that it had cited a full quotient of mid-1800s Supreme
Court cases, the Bank One court cites several
more. Bank One had attempted to argue that the
charter agreement was an executory contract in that it was still in the process
of being performed at the time of the breach and thus no lien attached until
the contract was actually breached, which was a date after the recording of
its ship mortgage.
That argument has support at least from one of the most respected admiralty
treatises, Schoenbaum, Admirality and Maritime
Law, Section 9-2, at 506-507 (3rd ed. 2001). The Bank One court noted that, but stated: “We choose
instead to rely on the above case law and on other treatises.” The court goes
on to note that the executory contract doctrine “merely restates the fact that
an inchoate maritime lien attaches once the cargo is loaded. This is the meaning
of our more recent statement that ‘under the executory contract doctrine, a
maritime lien for breach of charter party arises once (and to the extent that)
cargo is loaded on board.’ Cardinal Shipping Corp. v
M/V Seisho Maru, 744 F2d 461, 467 (5th Cir 1984).”
Additionally, the court noted that a charter agreement ceases to be executory
once performance of the charter is begun, and from that proposition made the
leap of logic that since the time charter was not an executory contract, a lien
“attaches” as soon as the vessel is put at the disposal of the charterer under
the charter agreement. The court thus concluded that BargeCaribe’s maritime
lien “arose” before the preferred ship mortgage was recorded—because it “attached”
as soon as the vessel began performing under the charter—despite the fact that
the charter was being performed perfectly well for many months.
The Bank One court had to do some dancing
around recent case law and did so in certain instances by finding that the statements
contrary to its current holding were dicta in the other cases. To get around
one of its own recent decisions, the court stated, “While we were apparently
under the impression that breach of charter confers a maritime lien at the moment
of breach, we don’t think our passing dicta should lead us to disregard Supreme
Court precedent.”
The Bank One court had one final hurdle to jump which related to the Ship
Mortgage Act, 46 U.S.C. Sec. 31301, et seq. Bank One took the position that
while the statute says nothing explicitly on the subject issue, the statute
itself would be undermined if maritime liens for breach of charter attached
at the beginning of the charter, thus making a lender subordinated for a longer
period of time than would have been originally contemplated.
That hurdle was jumped by concluding that a rule establishing an inchoate
maritime lien at the beginning of charter would result in greater certainty,
which would assist parties in maritime transactions. The author submits that
this result neither gains greater certainty nor does it assist the parties to
maritime transactions. Any result that allows a contract that is clearly breached
after a preferred ship mortgage is recorded, and the breach can not be traced
back to a point before the mortgage, can do nothing but add to the uncertainty
in the law of maritime liens.
The difficulty faced by practitioners in this area is superbly demonstrated
by the Bank One court’s statement as follows.
The parties therefore advanced two different readings of the law, each
of which may demonstrate a congressional purpose. Because of this equivocation,
we cannot find guidance in either, instead, we choose to follow the precedent
begun by the Supreme Court in the 1860s and carried forward into this century
by the circuit and district courts.
The court held that BargeCaribe’s maritime lien became perfected when the
vessel owner breached the charter but the lien “arose” before the mortgage was
filed and thus the charterer had priority to the sales proceeds over the bank.
Conclusion
In the author’s view, practitioners in this area should rightfully view the Bank One decision with shock and horror. A logical
extension of this holding would seem to be that any maritime contract that might
give rise to a maritime lien if breached trumps a preferred ship mortgage. Arguably,
a supplier of necessaries to the vessel who is not in breach prior to a ship
mortgage being recorded but has a lien against the vessel for some breach of
that contract after the recording of a mortgage might trump a mortgage, and
there would be virtually no way for a reasonable lender to have determined that
eventuality as even a remote possibility short of knowing every detail of the
vessel’s operation from many months prior to the taking of a ship mortgage up
to the very moment of the recording of such mortgage.
Undoubtedly, that was not the intent Congress gave to both the federal Maritime
Lien Act and the Ship Mortgage Act. As can be readily seen, a maritime lien
is anything but a typical “lien.”
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