I purchased a Vessel and originated a loan with an institutional lender in 2003. At the time of the purchase the lender recorded a “Preferred Ship Mortgage” with the Coast Guard. Unfortunately the boat sank several years ago and the insurance company refused to pay the claim. We filed suit against the insurance company but we lost, and the claim denial was upheld. Several months after the completion of the lawsuit, my lender filed a notarized “Satisfaction of Preferred Ship Mortgage” with the Coast Guard. The Coast Guard subsequently provided me with a certified copy of that document, but apparently that was not the end of my journey. Last month I was served with a lawsuit by a company that had purchased my loan from my lender, demanding payment of the balance of the boat loan. Can a lender demand payment of a loan after a “Satisfaction of Preferred Ship Mortgage” has been notarized, recorded and signed off by the Coast Guard? If so, what does the filing of the satisfaction trigger? What additional documents must be filed to release a mortgage other than a recorded “Satisfaction of Preferred Ship Mortgage?”
It seems that our reader does not understand the difference between a “loan” and a “mortgage.” But before we get into that it may be helpful to explain a little about the Coast Guard recording system.
Title records for all documented vessels are maintained by the Coast Guard’s National Vessel Documentation Center (NVDC), located in Falling Waters, West Virginia. We have written about maritime liens many times in this column but we haven’t talked a lot about mortgages. This is because liens and mortgages are treated differently by both the NVDC and by general maritime law, and mortgages are a lot easier to understand.
Maritime Liens and ship mortgages are both encumbrances against the vessel and they may both be enforced by filing a lawsuit in federal court to initiate a “vessel arrest” through the U.S. Marshals. Maritime liens are services provided directly to the vessel, such as wharfage, repairs, and crew wages. A ship mortgage is not a lien because it does not provide a service to the vessel. Instead it provides a service to the lender, by securing the vessel as collateral for a loan, and to the owner, by enabling the loan to be made under circumstances where it may not otherwise have been possible.
Maritime liens and mortgages are also similar because they serve a similar purpose. They are devices by which a vessel may be used a collateral or security to enforce the payment of a debt. Notably, they are not evidence of the debt itself and they may function separate and apart from the underlying debt. Remember that point when we discuss our reader’s case in a minute.
Significantly, maritime liens do not need to be recorded to be valid. Recording is optional, and the sole purpose of a recorded “Notice of Claim of Lien” is to provide notice to the world that someone claims to have a lien. Recording has not other legal significance, and the NVDC web site expressly warns that “neither the filing of a notice of claim of lien nor the acceptance by the coast guard of such a notice is a guarantee that the claim is valid or enforceable. ”
Conversely, mortgages MUST be recorded. The recording date, the language of the mortgage, and the proper identification of the vessel are all significant. The signature of the boat owner must be notarized when the mortgage is recorded, and the signature of the lender must be notarized when the lender records a “satisfaction” of the mortgage.
So with this in mind let’s look at our reader’s case. He is concerned because his loan was sold to a new lender and that lender has demanded the unpaid balance, even though a satisfaction of the mortgage was filed with the NVDC.
As noted above, the loan and the mortgage are separate obligations. The loan carries with it an obligation to repay the loan proceeds to the lender, and the mortgage obligates the boat owner to give up the boat if he or she defaults on the loan. The filing of a satisfaction of mortgage relieves the boat owner of the obligation to give up the boat upon default of the loan, but it has no effect on the obligation to repay the loan. And, in our reader’s case, the filing of the satisfaction was insignificant since the boat had been lost by that time.
The satisfaction or release of a lien or mortgage against a vessel is in most cases a significant event because it clears the vessel’s title, but it has no effect on the underlying obligation. Unless our reader has another defense to the lender’s demand (such as the expiration of a statute of limitations), he will need to negotiate a payment with the lender.
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 (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at [email protected].
Ask your question online at thelog.com.
