All questions

Security and enforcement

i Security documents

Lenders typically require a package of security documents, enforceable against the shipowner, or the ship itself, in the jurisdictions into which the ship calls. These include preferred ship mortgages, assignments of a vessel's earnings, insurances, charters and requisition compensation, share pledges by owner holding companies, undertakings by vessel managers, guarantees and assignments of deposit accounts.

Under US law, the most common form of US vessel security is the 'preferred ship mortgage' under the Commercial Instruments and Maritime Liens Act (CIMLA). To gain preferred status, a mortgage must meet several requirements, including being made in favour of a mortgagee that is either a United States state, the United States government, a federally insured depository institution, a citizen of the United States, a person qualifying as a citizen of the United States under Section 50501 of Title 46 of the United States Code, or a person otherwise approved by the Secretary of Transportation. A preferred ship mortgage is perfected by filing the mortgage with the central registry at the NVDC.

ii Enforcement, arrest and judicial sale

The primary mechanism for enforcement of a preferred ship mortgage on either a US or foreign-flagged ship in the United States is an in rem action under a federal court's admiralty jurisdiction. Such an action may be brought in any US district where the vessel is physically present. The court may appoint a receiver to operate the mortgaged vessel in global trade so the vessel may continue to earn revenue while maintaining in rem jurisdiction over the vessel, or, if the court finds that the lender's mortgage is valid and in default, the court may order that the vessel be arrested by the US Marshals Service and sold in a judicial sale. The US marshal for that judicial district will then serve the warrant and related documents to the vessel and effectuate the arrest. If the owner is unable to post a bond or other security for the mortgage claim, the vessel will remain in the custody of the court pending an interlocutory sale thereof. When a vessel is sold by order of a US district court in an in rem action, all claims against the vessel are terminated and subsequently attach to the proceeds of the sale.

Ranking of liens

Judicial sale does not guarantee the lender full repayment. The proceeds from a judicial sale are used to satisfy maritime liens in order of relative priority; for example, competing maritime liens are ranked according to class and top-ranked claims are paid out first, while among maritime liens of equal class, later liens have priority according to the 'inverse order' rule.

Preferred ship mortgages rank highly as maritime liens, taking priority over all claims (except the costs of administering the sale) that are not 'preferred maritime liens', consisting of seaman's liens, salvage and general average liens, tort liens, and any other maritime liens arising before a preferred mortgage was filed. As between two mortgages, each is prioritised according to the 'first-in-time' filing rule, subject to the application of the 'voyage rule', which provides that two claims of the same class arising during the same voyage are paid pro rata. The date a mortgage is filed is the relevant date for the ranking analysis, not the date the funds are actually advanced, provided the mortgage covers the subsequently advanced debt. If a mortgage is amended to provide for an advancement of new funds not covered by the original agreement, then the new funds are likely to be treated as being covered by a separate, newly created mortgage.

A lender is not bound by the remedies afforded it by operation of US federal law. A lender can exercise private and extrajudicial remedies – such as taking possession of the vessel – if such remedies are permitted under the contract (mortgage or loan agreement) and under the laws of the state where the vessel is located. CIMLA expressly allows lenders to 'enforce [a] preferred mortgage lien or a claim for the outstanding indebtedness secured by the mortgaged vessel [. . .] by exercising any other remedy (including an extrajudicial remedy) against a documented vessel [or] a foreign vessel [. . .] for the amount of the outstanding indebtedness or any deficiency in full payment of that indebtedness', but only if the remedy is allowed under the law of the state where the vessel is docked. For example, in the Dietrich v. Key Bank case, the court held that a bank could repossess a vessel that was docked at a Florida harbour because the bank specifically contracted for such a self-help remedy and the right of repossession existed under Florida state law.

Repossession by a non-citizen

Complications can arise when a vessel with a coastwise endorsement is repossessed or purchased at a judicial sale by a non-citizen mortgagee. Such a right of purchase by a mortgagee is specifically provided for in 46 USC, Section 31,329, notwithstanding the strict regulation of the citizenship of entities that own and operate coastwise-qualified vessels under the Jones Act. If a coastwise-qualified vessel is repossessed or purchased by a non-US citizen mortgagee, the vessel may only be held temporarily for resale subject to emergency sale restrictions. It may not be 'operated, or caused to be operated, in commerce'. As long as it complies, the vessel should also not permanently lose its coastwise trading privilege, which it would if it were sold to a non-citizen.