In June 2022, the United Nations Commission on International Trade Law (UNCITRAL) approved the final draft of the Convention on the Judicial Sale of Ships produced by UNCITRAL’s Working Group VI and simultaneously recommended its adoption by the General Assembly of the United Nations at its upcoming 77th session to be held in New York, New York, beginning on September 13, 2022. UNCITRAL further recommended that the General Assembly authorize a signing ceremony to be held “as soon as practicable” in 2023 in Beijing, and that the Convention be thereafter known as the “Beijing Convention on the Judicial Sale of Ships” (the “Convention” or “Beijing Convention”). 1
If adopted by the General Assembly, the Convention will introduce important legal protections for innocent purchasers of ships sold by judicial sale, while leaving unaffected the separate stakeholder interests of shipowners and creditors involved in the judicial sales process. This article will trace the background of judicial sales and the current unmet need for comity between nations with respect thereto. It also will discuss the protections envisioned by the Convention and how those protections might affect the judicial sale of ships in the United States.
A. Background on the Judicial Sale of Ships
The arrest and judicial sale of ships to foreclose upon preferred ship mortgage liens, maritime liens and maritime claims comprise a fundamental feature of admiralty and maritime law practice worldwide. In the United States, the procedure is largely informed by the Commercial Instruments and Maritime Liens Act (“CIMLA”),2 the Supplemental Rules for Admiralty and Maritime Claims and Asset Forfeiture Actions (the “Supplemental Rules”), the local admiralty rules of the federal district courts, and judicial precedent.3
In the United States, a preferred ship mortgage4 constitutes “a lien on the mortgaged vessel in the amount of the outstanding mortgage indebtedness secured by the vessel.”5 Upon default of any term of the mortgage, the mortgagee may commence an action in rem against the vessel in a U.S. federal district court, regardless of whether the vessel is a U.S. documented vessel or a foreign flag vessel.6 When a vessel is sold by order of a district court in a civil action in rem brought to enforce a preferred mortgage lien or a maritime lien, “any claim in the vessel existing on the date of sale is terminated, including a possessory common law lien …, and the vessel is sold free of all those claims.”7
The Supplemental Rules provide that an action may be brought against a vessel in rem “to enforce any maritime lien” or whenever a U.S statute “provides for a maritime action in rem.”8 Whether the vessel is sold at judicial auction by interlocutory sale or final judgment sale, the U.S. Marshal typically conducts the sale pursuant to an order of the court having jurisdiction over the vessel.9 Upon completion of the auction, and in accordance with the terms of the order, the U.S. Marshal will issue a CG-1356 bill of sale to an otherwise qualified purchaser, whose winning bid is confirmed by the court.10
The judicial sale of a vessel in an in rem action brought in a U.S. district court effectively transfers title to the auctioned vessel to the buyer, free and clear of all pre-existing liens, mortgages and claims.
The process of transferring title and removing existing encumbrances through in rem procedures is relatively simple in the United States whenever U.S. documented vessels are involved. For example, where a judicial sale of a U.S. documented vessel occurs within or without the United States, the purchaser simply files with the U.S. Coast Guard’s National Vessel Documentation Center a certified copy of the relevant court order,11 and that is sufficient to establish the passage of title. Similarly, pre-existing encumbrances against a U.S. documented vessel sold at judicial auction by a U.S. district court will be removed from the vessel’s official record upon the filing of an order issued by the court and certified by an official of the court “requiring the free and clear sale of the vessel,” together with a certified copy of the confirmation order.12 Similar provisions can be found in the maritime laws of Liberia13 and the Marshall Islands,14 which are based upon U.S. law.
B. The Goldfish Decision
Reliance upon these principles is of critical importance to a successful judicial auction process by courts throughout the world, particularly in cross-border situations where the ship registry and auctioning court are in different jurisdictions. If potential purchasers are uncertain that the transfer of good and marketable title by the auctioning court will be accepted by courts in other port states, or that the vessel’s flag state will recognize the transfer of title for deletion purposes, then it seems inevitable that sale prices will soften or evaporate to reflect such uncertainties, to the detriment of all concerned.
In recent years, the international maritime community has witnessed several well-publicized cases in which the judicial sale of a vessel failed of its essential purpose, either because of challenges to the auctioning court’s ability to transfer title, the purchaser’s inability to delete the vessel from her flag state registry in order to reregister the ship in a different jurisdiction, or uncertainties regarding the survival of pre-existing liens and encumbrances against the ship.15 One such case, Goldfish Shipping, S.A. v. HSH Nordbank AG,16 was discussed at length by Frank Nolan in a 2011 issue of this newsletter.17
In Goldfish Shipping, a bank commenced an in rem admiralty action in the U.S. federal district court in Philadelphia to foreclose upon a preferred mortgage lien that it held against the defendant, a Turkish flag vessel named AHMET BEY. The vessel was arrested under traditional in rem process and later sold by the court following judgment pursuant to an order of sale. The purchaser of the vessel received a bill of sale from the U.S. Marshal in the usual form which, together with the sale order, effectively transferred title to the vessel free and clear of all pre-existing liens, claims and encumbrances as a matter of U.S. law.
The story did not end there.
The purchaser provisionally registered the vessel in Panama and began commercial operations as the new owner. Upon arrival of the ship in Spain, however, the former owner arrested her, claiming that it still owned the vessel because, under Turkish law, the vessel could not be sold by public auction outside of Turkey. To make matters more complicated, the vessel had not been deleted from the Turkish registry and could not be deleted unless the mortgagee first released its mortgage. However, the mortgagee (the arresting party in Philadelphia) would not release its mortgage on the grounds that doing so would compromise its deficiency claim against the former owner.
After freeing the ship from arrest in Spain, the new owner sailed her to Italy where the former owner re-arrested her. Although the new owner successfully freed the ship from arrest once again, it was facing the prospect of constant harassment and misconduct instigated by the former owner. Accordingly, the purchaser sued the mortgagee for failure to release its mortgage. The basis of the purchaser’s claim was that although the judicial sale cleansed the vessel of pre-existing liens and encumbrances, it did not eliminate the owner’s claim of ownership, a position that the court quickly rejected based upon its reading of CIMLA and judicial precedent. After various legal skirmishes in the district court in which the mortgagee prevailed, the case was heard by the federal appellate court, which also sided with the mortgagee.
C. The Beijing Convention
The Convention, consisting of 24 Articles and two corresponding annexes (Annex I and Annex II), “governs the international effects of a judicial sale of a ship that confers clean title on the purchaser.”18 It is built around the aspirational premise that “adequate legal protection for purchasers may positively impact the price realized at judicial sales of ships, to the benefit of both shipowners and creditors, including lienholders and ship financiers.”19 The goal of the Convention is the establishment of uniform rules “that promote the dissemination of information on prospective judicial sales to interested parties and give international effects to judicial sales of ships sold free and clear of any mortgage or hypothèque and of any charge.”20
Under the Convention, the expression “judicial sale” of a ship means any sale of a ship: “(i) Which is ordered, approved or confirmed by a court or other public authority either by way of public auction or by private treaty carried21 out under the supervision and with the approval of a court; and (ii) For which the proceeds of sale are made available to the creditors.”22 In the United States, an admiralty sale in rem would clearly qualify as a “judicial sale” for purposes of the Convention. A private sale conducted without judicial intervention would not. Nor would a private sale conducted under supervision of a U.S. federal court, pursuant to the Judicial Sales Act,23 if the proceeds of such private sale are not otherwise made available to creditors.
The Convention applies to the judicial sale of a ship only if: “(a) The judicial sale is conducted in a State Party; and (b) The ship is physically within the territory of the State of judicial sale at the time of that sale.”24 If the United States does not accede to the Convention by becoming a party, the Convention will not apply to judicial sales conducted within the United States. If the United States does accede to the Convention, the Convention will apply to admiralty sales in rem, but it is presently unclear whether it will apply to vessel sales approved by U.S. bankruptcy courts when the vessel is located without the United States at the time of sale.
As a general rule, the Convention respects the laws of the “State of judicial sale”25 and expressly states that the judicial sale “shall be conducted in accordance with the law of the State of judicial sale.”26 However, as the key to the effective functioning of the Convention is the issuance of a “certificate of judicial sale” by the State of judicial sale, local laws must incorporate or allow for certain provisions and requirements of the Convention, including those dealing specifically with the notice of judicial sale. Under the Convention, a certificate of judicial sale may be issued only if the notice requirements set forth in the Convention are met. Those requirements cover much territory, including the persons to whom notice must be given (including address requirements), the contents of the notice, publication of the notice, transmission of the notice to the “repository,”27 and translation(s) of the notice.28
The laws of the United States governing the judicial sale of ships, as currently constituted, do not require the detailed notice requirements contemplated by the Convention. Under CIMLA, notice of a civil action to arrest a vessel must be given to the master of the vessel, the holder of any recorded notice of claim of lien against the vessel, and the mortgagee of the vessel.29 However, there are no specific notice requirements with respect to the judicial sale of vessels, other than those contained in the local admiralty rules of the auctioning court (which vary as between such courts) and the specific requirements contained in the order of sale issued by such court.30
As mentioned above, the key to the Convention is the so-called “certificate of judicial sale,” which is issued to the purchaser of the vessel. This document must be issued by the court or other public authority that conducted the sale conferring clean title to the ship, following completion of the sale.31 The certificate must be substantially in the form of the template attached as Annex II to the Convention and must contain 11 different elements and averments, as set forth in the Convention.32 The State of judicial sale must transmit the certificate to the repository.33 Subject to certain limited exceptions, discussed below, the certificate of judicial sale will constitute “sufficient evidence of the matters contained therein.”34
The Convention’s requirements regarding the certificate of judicial sale would substantially alter the process by which the judicial sale of ships is currently practiced in the United States. At present, the court having jurisdiction over the vessel being sold will issue an order of sale, containing the detailed requirements of the sale. The U.S. Marshal conducts the sale and issues a bill of sale to the successful purchaser. The sale is typically “confirmed” by the court that issued the order. There is no separate mandate requiring the court to issue a certificate in the detailed format contemplated by the Convention. Should the Convention eventually become law in the United States, the preparation of the certificate may be delegated to the U.S. Marshal.35
The legal effect of the certificate of judicial sale lies at the heart of the problem that the drafters of the Convention aimed to correct. Under the Convention, a judicial sale for which a certificate of judicial sale has been issued will have “the effect in every other State Party of conferring clean title to the ship on the purchaser.”36 In other words, whenever a judicial sale of a ship is conducted in the State of judicial sale, and a proper certificate of judicial sale is issued by the court or other public authority that conducted the sale, the transfer of clean title to the purchaser will be recognized by every other State Party, without more, subject to certain limited exceptions.37 In addition, if requested by the purchaser of the vessel, the registrar “or other competent authority of a State Party” must take certain actions upon presentation of the certificate of judicial sale, including the following:
- Deletion of “any mortgage or hypothèque and any registered charge attached to the ship that had been registered before completion of the judicial sale;”38
- Deletion of the ship “from the register” and the issuance of a “certificate of deletion for the purpose of new registration;”39
- Registration of the ship “in the name of the purchaser or subsequent purchaser;”40
- Updating the register “with any other relevant particulars in the certificate of judicial sale;”41 and
- Deletion of the ship “from the bareboat charter register” and issuance of “a certificate of deletion,” if applicable.42
To prevent the type of abusive litigation that followed the judicial sale of the AHMET BEY, the Convention provides that if an application to arrest a vessel is made before a court in a State Party, on the basis of a claim “arising prior to a judicial sale of the ship,” that application must be denied upon presentation of a certificate of judicial sale.43 Similarly, if a ship is arrested by order of a court in a State party, on the basis of a claim “arising prior to a judicial sale of the ship,” the court must order the release of the ship upon presentation of a certificate of judicial sale.44
Lastly, the Convention contains an important savings clause which states that the Convention shall not preclude a State from “giving effect to a judicial sale of a ship conducted in another State under any other international agreement or under applicable law.”45 Moreover, despite its scope, the Convention will not interfere with local procedures for distributing the proceeds of judicial sale or establishing priorities thereto.46 Nor will the Convention affect any “personal claim against a person who owned or had proprietary rights in the ship prior to the judicial sale.”47
D. Final Observations
The Secretary-General of the United Nations is designated as the depositary of the Convention.48 Following its adoption by the General Assembly, the Convention will be open for signature by all States on a date in 2023 to be determined.49 It will be subject to “ratification, acceptance or approval” by the signatory States and open to accession by all States that are not signatories.50 The Convention will enter into force 180 days “after the deposit of the third instrument of ratification, acceptance, approval or accession.”51
The impetus for the Convention is the achievement of comity and cooperation between nations with respect to the legal effects of the judicial sale of a ship conducted in another nation. In this regard, the purposes of the Convention are not dissimilar to those which motivated the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1958. Given its purposes and legal structure, it is widely expected that the General Assembly will adopt the Convention before early 2023 and that it will be open for signature shortly thereafter.
In the United States, the President has the power to make international treaties with the advice and consent of the U.S. Senate, provided that two-thirds of the Senators present concur.52 Although the Biden Administration appears to support the Convention, it is presently unclear whether the Senate will consent to it. Nonetheless, the need for the certainty and predictability of result that the Convention aspires to deliver is obvious regardless of whether it is ratified by the United States. However, in the interest of uniformity, if the United States fails to ratify the Convention, consideration should at least be given to appropriate changes to domestic law, whether it be the Supplemental Rules, the CIMLA, or the rules and regulations of the U.S. Coast Guard, to bring judicial ship sale procedures in the United States in line with the notice provisions of the Convention