Last month, in Bank of the Pacific v. F/V ZOEA, 2017 WL 823298, Case No. 3:15-cv-05758-RSL, the United States District Court for the Western District of Washington ruled that the federal Ship Mortgage Act, 46 U.S.C. §§ 31321 – 31330, preempts a Washington state statute prohibiting commercial fishing licenses and permits from serving as collateral for ship mortgages. The ruling on the plaintiff’s summary judgment motion held that when commercial fishermen rely on mortgages to fund the purchase of vessels and accompanying fishing permits, these borrowers cannot shield the very permits they purchased with the mortgage from seizure. The Court explained that “to make their investments worthwhile, lenders need a security interest in the valuable permits where vessels are valuable significantly, and sometimes almost entirely, because of their permits.” Id.

The plaintiff, Bank of the Pacific (Pacific), sought to enforce its maritime lien under a preferred ship mortgage secured by vessel F/V ZOEA and the vessel’s commercial fishing licenses. At issue in the case was whether a Washington Dungeness crab permit could serve as valid collateral for a ship mortgage obtained by N&M Fisheries, LLC (N&M) to purchase vessel F/V ZOEA and the permit.

In order to raise the funds to purchase the vessel and the permit, N&M obtained a ship mortgage from Pacific, which was there after recorded with the United States Coast Guard. The F/V ZOEA, and its commercial fishing rights and licenses were secured by the ship mortgage as collateral. The ship mortgage constituted a preferred maritime lien against the F/V ZOEA. When N&M apparently failed to meet its repayment obligations, Pacific sought to foreclose its maritime lien against the F/V ZOEA and its accompanying fishing rights and licenses, including the Washington Dungeness crab permit, in rem. The plaintiff further sought in personam relief against N&M and the individual members of the LLC.

N&M argued that Pacific did not have a security interest in the permit because RCW 77.65.070 prohibits commercial fishing licenses and permits from serving as collateral for ship mortgages. The Court was unimpressed with N&M’s arguments, finding that “maritime actors have a reasonable settled expectation that maritime liens can attach to permits,” and where state laws, like the Washington statute at issue, “defeat reasonably settled expectations of maritime actors,” those laws are preempted by contradictory federal laws. Id. Moreover, the Court reasoned, the very purpose of the federal Ship Mortgage Act is to stimulate private investment in United States shipping by facilitating financing and establishing the priority of preferred ship mortgages in relation to other liens. The effect of the Washington state law — preventing a mortgage holder from collecting on validly listed collateral — is in direct contradiction with this effort and is preempted by federal law.

Bank of the Pacific is clear that “ship mortgage lenders can have a security interest in Washington commercial fishing permits appurtenant to a mortgaged vessel,” but whether a particular permit is subject to seizure by a lender will depend on the specific language of the closing documents. The decision clearly establishes that RCW 77.65.070 (2) is preempted by federal law.