Current developmentsi Recent cases
The definition of which structures constitute 'vessels', thus capable of being the subject of preferred ship mortgages, was recently revised by the Supreme Court in the decision Lozman v. City of Riviera Beach, Florida. In that case, the Court considered whether a houseboat, permanently moored and without a propulsion mechanism, constituted a vessel subject to federal maritime law. The Court referenced the Rules Construction Act, which defines a vessel for purposes of the US maritime statutes as including 'every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water'. The Court further articulated that a floating structure is not a vessel 'unless a reasonable observer, looking to the [structure]'s characteristics and activities, would consider it designed to a practical degree for carrying people or things over water'. This has come to be known as the 'reasonable observer' test for determining vessel status. Under this test, 'not every floating structure is a 'vessel'', and the mere ability to relocate a structure over water does not automatically render it a vessel. Moreover, the subjective intent of the structure's owner is irrelevant – only the 'physical attributes and behaviour of the structure', which are 'objective manifestations' of the structure's 'purpose', affect vessel status. The decision has cast doubt over established principles of the United States Circuit Courts of Appeals, and created confusion regarding which vessels can be subject to preferred ship mortgages. The decision also creates the potential situation that, despite a structure's USCG status as a documented vessel, it may not constitute a vessel under the general maritime law as applied by federal courts.
The challenge of a public company satisfying coastwise citizenship requirements was highlighted in the USCG's recent investigation into the citizenship of Trico Marine Services Inc. In that case, a non-citizen shareholder of Trico alleged that, through its two vessel-owning subsidiaries, Trico had breached the 75 per cent US citizenship requirement of its vessels' coastwise endorsements. Trico contended that it was impossible to verify whether public shareholders were of US citizenship as certain shareholders are entitled to prohibit the disclosure of their identity under SEC regulations including the Exchange Act. In the alternative, Trico relied upon shareholder declarations obtained through the Depository Trust Company programme, which showed that no more than 25 per cent of shareholders were non-citizens. In making its decision, the Coast Guard dismissed both of Trico's defences as inadequate to establish compliance with the 75 per cent threshold. It held that if a publicly traded corporation sought the 'privilege of engaging in the coastwise trade', it must 'structure itself and its equity securities in such a way [. . .] by which it can satisfy its obligations under the Jones Act'. The Coast Guard fined Trico approximately US$6 million and recommended that the NVDC invalidate each vessel's certificate of documentation. The decision arguably left publicly traded corporations with little guidance as to how to structure their operations to ensure compliance with coastwise requirements.ii Developments in policy and legislation
The shipping industry is frequently subject to changing legislation that affects the profitability of vessels and the value of vessel security. For example, new environmental regulations and vessel security measures require shipowners to make additional capital expenditures to ensure compliance. It is important to note that these regulations are imposed by local, state, national and international authorities, and can be inconsistent.
While legislation is often proposed in the US Congress to repeal the restrictions on coastwise endorsements and to open the Jones Act trade market to foreign-flagged vessels, they have been defeated because of strong opposition from US shipyards, maritime unions and national defence interests. Notwithstanding, the US Department of Homeland Security has issued waivers permitting non-coastwise qualified ships to carry cargo in these areas to aid relief efforts following unprecedented hurricanes in the US Gulf and Puerto Rico.
There have also been recent concerns about a global trade war that could affect the US shipbuilding industry through legislation. In late 2015, Congress was considering legislation that would require all US-produced LNG to be exported on US-built-and-flagged vessels. However, the proposal failed in order to protect the competitive advantage of US energy exports.iii Trends and outlook for the future
New York will continue to be a key jurisdiction in vessel-financing transactions. While traditional sources of financing have constricted in the United States and elsewhere, the US market has adapted and responded to meet the financing demands of shipping companies. With the increase investment in shipping by US private equity investors, US-based lending through US lenders and US branches of foreign lenders has also increased. These newly created US-based companies backed by US private equity interest will continue to require US law transactions.