Question:
I am a boat mechanic and I am trying to collect the unpaid balance owed to me from a large job that I completed last year. I recorded a lien against the boat with the Coast Guard and I was speaking with a maritime attorney about arresting the boat to foreclose on the lien. Unfortunately, the boat sank and was totally destroyed before I was able to take any action regarding the lien. I recently learned that the boat owner recovered a large insurance settlement related to the sinking, and I have been advised that I may be able to transfer my lien to the insurance proceeds. Is this true? How would I enforce that type of lien?
Answer
We have devoted quite a few installments of this column, over the years, to the subject of maritime liens — but there always seems to be a new twist out there that we have not addressed. In this case, our reader wants to chase the insurance money from the loss of a boat that he had worked on. The short answer here is that our reader will not be able to enforce a lien against the insurance proceeds, but let’s look at this more carefully.
First, I will agree that he probably did have a maritime lien against the boat before it sank. A maritime lien may arise from a wide variety of maritime services, but generally speaking, a valid maritime lien will arise from services performed for the boat with the authorization or approval of the boat’s owner. The procedure for the enforcement of the lien can be quite expensive, but our reader was talking to a maritime lawyer and they would have done a cost / benefit analysis as a part of that discussion. But then the boat sank.
A lien – any lien – is a financial security device that provides collateral to secure payment of an obligation. So what happens when the collateral is destroyed?
A lien against some types of property can be transferred to insurance proceeds in specific circumstances, depending on the nature of the lien, the contractual agreements between the parties, and applicable state or federal laws. This is usually because a federal or state statute has been enacted to address a particular issue. For example, under New York’s “Lien Law,” insurance proceeds become trust assets for lienholders, such as contractors, when a casualty (such as a fire) damages property on which they performed labor or services (we should note that California has no such statute).
Similarly, under federal tax law, tax liens attach to property and any identifiable proceeds from its sale or destruction. And, in a bankruptcy case, insurance proceeds may be treated as part of the bankruptcy estate if they are considered “proceeds of or from property of the estate.”
All of this is interesting, but let’s get back to maritime liens. There is no federal or state statute that addresses this scenario, where a lienholder loses his “collateral” due to the loss of a boat. Courts have universally held that maritime liens on a vessel are extinguished upon the vessel’s total destruction and do not attach to the proceeds of the insurance. They have emphasized that the right to participate in the division of insurance money depends on the terms of the insurance contract, not the maritime lien itself
This has been my long-winded attempt at explaining why our reader can’t just go after his customer’s insurance proceeds from the loss of his boat. But he still has options. A claim that arises from services provided to a boat is essentially a claim for the breach of a contract — and it may be enforced in state court, like any other breach of contract case. A state court may not take the boat into custody, and it may not preemptively grab insurance proceeds from a bank account, but it may render a judgment against the boat owner. And, when a judgment is rendered in a lawsuit for breach of contract, the plaintiff may look to any of the defendant’s assets for satisfaction of the judgment. A bank account, a car, a boat or even real property may be seized by a county sheriff pursuant to a writ of execution issued by the court that rendered the judgment.
Maritime debts live in their own world. And, like most areas of maritime law, it pays to contact an attorney who is well versed in the nuanced concepts that come with owning or working on a boat.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at www.weilmaritime.com, or via email at [email protected].
