Crunch Time for a Maritime Lien

May 18, 2015

Crunch Time for a Maritime Lien

A maritime lien gives a provider of fuel, repair services etc. an automatic lien on the ship to which the services were provided. The lien allows the provider to seize the ship in court and sell it in satisfaction of the lien and the costs of sale.

By “automatic lien” I mean the lien exists the moment the fuel is pumped, the ship is repaired etc. No writing is required, and the lien not be recorded anywhere (although it’s a good idea to record). If the boat sells the day after I pump the fuel, I can go to the new owner and demand payment, even if the buyer didn’t know about the lien or the fuel.

The federal law of maritime liens is found in the “general maritime law”, which is the court opinions, and in Title 46 United States Code Sections 31301 – 31343, the Commercial Instruments and Maritime Liens Act.

What gives a person a vessel lien? A vessel lien must reflect the provision of “necessaries” to the ship. Necessaries are those goods and services necessary to keep the ship in navigation. Fuel, provisions, repairs, wages, wharfage, and insurance premiums are all necessaries, and there are many other examples. By illustration, brokerage commissions are not necessaries, because the commissions are not necessary to keep the ship operating.

If the ship is arrested and sold at auction, or if it is refinanced or just sold in the market, the liens get paid – if there’s enough money. If the ship will be sold in the market (not at court auction) but not for enough to pay all the liens, the result is often some high-stakes negotiating, about which more below.

The liens listed above are all “contractual liens”, incurred deliberately by the ship. If the ship has a Preferred Vessel Mortgage, a creature of federal statute, the Preferred Vessel Mortgage gets paid ahead of any contractual liens incurred after the mortgage was recorded. Just about any loan to a ship is secured by a Preferred Vessel Mortgage, if the bank was on the ball and used the right magic words.

Salvage, crew wages, stevedoring, claims stemming from the death or injury of a sailor, and collision claims also create maritime liens, but these get special priority – they get paid ahead of even an earlier-recorded Preferred Vessel Mortgage. Each of these liens reflects a public policy favoring the lien.

In summary, lien priority is like this:

First, extra-contractual liens for salvage, crew wages, personal injury, collision etc.

Second, Preferred Ships Mortgages

Third, contractual-type maritime liens for fuel, repairs, insurance premiums etc., with the last in time paid first.

It’s not unusual for a ship with lots of liens and mortgages to be arrested and auctioned or sold. If a ship is arrested and sold at a Marshall’s Auction, the priority of maritime liens applies strictly. For example, suppose a ship has a $300,000 personal injury lien, and a $700,000 Preferred Ship’s Mortgage, and $300,000 in various non-priority maritime liens. The ship is arrested and auctioned with a net sales price of $1 million. Result: the injured sailor get his $300,000, the bank gets its $700,000, and the non-priority lienholders get nothing. Their liens are “stripped”, and the new owner gets title free and clear of all liens.

It’s generally altogether different if a ship sells without arrest. If a ship is sold without any federal arrest, the liens are only in theory paid in accordance with their priority. I say “in theory” because in reality the buyer of a ship will insist that all liens are discharged at or before sale, so even a low ranking lien which wouldn’t get a dime if the strict lien priority applied can dig in and often get at least some cash in return for agreeing to discharge the lien.

For example, suppose a ship will sell for $1.5 million. There is a Jones Act personal injury judgment for $500,000, a Preferred Ship’s Mortgage for $1.1 million, and a raft of maritime liens totaling $300,000. In theory the personal injury lien gets paid in full, and the Mortgage gets the next million, leaving a $100,000 shortfall for the bank and thus nothing for the other lienholders. In practice, to procure a sale and clear the liens the bank and maybe the injured sailor may agree to contribute to a pot of say $200,000 to be distributed pro rata (by proportion to their lien size) to the non-priority lienholders, in return for lien releases.

The best deal may go to a lienholder who really digs in, who threatens with some credibility to be willing to arrest the ship no matter what the result for his low-priority lien, and who has the strongest case that he’s actually owed the money. (A lienholder with a weak case on the merits – say a marine contractor who screwed up the repair – is likely to fare badly in such negotiations.)

The negotiations that lead to a deal in these complex cases are typically hard. The non-priority lienholders will be told to take an offer or leave it, and that if no deal is reached the bank will arrest the ship and sell it at a Marshall’s Auction. In distributing the proceeds of a court auction the strict priority of maritime liens will apply, and the non-priority lienholders will get nothing. On the other side of the coin, the non-priority lienholders will, in effect, dare the bank to arrest and auction, knowing that the cost of arrest is high and that ships rarely sell at auction for as much money as may be reached in a regular sale.

It’s high stakes poker, exciting and tension-filled for the various lawyers, and just tension-filled for the lienholders themselves.

Nicholas Walsh is an admiralty attorney with an office in Portland, Maine. He may be reached at 207-772-2191, or nwalsh@gwi.net.





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