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 Exposure to foreclosure
By MARK ERCOLIN
Waterfront News Law Columnist
It’s impossible to have a conversation about Florida’s economic health without mentioning “foreclosure.” There’s now an estimated backlog of 90,000 home foreclosure cases on Broward’s court’s docket, and it probably won’t get any better during the summer. Florida’s Supreme Court has even set up a special program to conduct mediations on home foreclosures to help expedite some of the state’s pile-up.
Needless to say, foreclosures have become as much of an issue in the boat-owning community as in the home-owning equivalent. In some ways, boat foreclosures can be even more vexing due to the potential legal complexities in holding paper on a vessel. Legal schemes controlling liens and mortgages on a vessel are very different from those used in land law.
First, liens on a vessel are based on a special system that ranks priorities, including “preferred maritime liens,” generally listed as court custodianship, pure salvage, crew wages, maritime torts, and cargo loss based on mishap.
What follows these liens is usually referred to as “necessaries,” which generally grants a lien against a vessel for goods delivered and labor performed for the benefit of the vessel (e.g., think marina repairs, hardware installations, dockage, and food supplies).
Another confusing feature of all these liens is that within their designated “classes,” priorities are based on the concept of “first in - last out, meaning that the most recent lien against a vessel in a particular category has priority for collection over earlier liens — the exact opposite of land law.
Now, you might notice that I have not yet mentioned the priority placement of a boat mortgage. Under traditional maritime law, boat mortgages were not considered a maritime lien and were therefore among the lowest of priorities.
Pressure from financial institutions changed this policy around the turn of the 20th century. Congress created a statute recognizing vessel mortgages as maritime liens with priority rights, providing the transaction met certain conditions. The vessel had to remain a U.S.-documented vessel and the institution holding the mortgage had to file it in appropriate fashion with the U.S. Coast Guard. Once this criteria was met, the lender would have what is known as a preferred ship’s mortgage.
Although a preferred ship’s mortgage will not have priority over other preferred maritime liens (i.e. salvage, seamen wages, maritime torts, etc.), it will have priority over the class of liens called necessaries — dockage, marina bills, etc. — which can afford quite a bit of protection to the lender.
Even with these protections, lenders may not find the system to their complete liking. The lender will not be protected from liens against the vessel that were incurred before the filing of the mortgage with the U.S. Coast Guard. This can be particularly problematic since traditional maritime liens do not require public filing before they can be enforced.
Further, the perfecting of a preferred ship’s mortgage does not specifically give the lender a possessory right against the vessel. The lender can put language in the mortgage allowing the vessel to be taken upon a default and even sold.
However this by itself will not expunge any other liens, nor give a new purchaser clear title. To give clear title, the lender will still be required to go to the expense of having the vessel arrested by U.S. Marshals under a federal court order, and sold at auction to pay its debts.
If dealing with a preferred ship’s mortgage seems complex, it becomes even worse for lenders if they choose to use another type of mortgage.
Essentially, should a lender choose to file their mortgage through a state’s uniform commercial system (usually because the boat is not, or can not, be U.S. documented), then every maritime lien will have a priority over the mortgage should the lien holder choose to enforce it through federal courts.
To put it another way, under maritime law a state-filed mortgage would have a lower priority for collection purposes than an invoice for a bilge pump.
Both lenders and purchasers should stay aware of these issues regarding boat mortgages and foreclosures so they understand their rights and responsibilities — both at the time of purchase or at any point where they might potentially default.
As you can guess, if mortgages and foreclosures seem difficult for land properties, they can get even rockier when dealing with boats.
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Mark Ercolin is an admiralty attorney based in Fort Lauderdale.
The information offered in this column is summary in nature and should not be applied to specific cases or situations.
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