Ship mortgages and other liens over vessels
Types of ship mortgage
What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardised forms?
A US-flagged vessel must be owned by a US citizen to be documented with the NVDC. However, there are different levels of citizenship with respect to certain entities and for certain trades. For example, a corporation seeking to register a vessel must be formed under the laws of the US or a state thereof, its chief executive officer must be a US citizen and no more of its directors may be non-citizens than a minority of the number need to constitute a quorum of the board, but the shareholders need not be US citizens. However, if the vessel is intended to be used in the US coastwise trade (or the American fisheries trade) the corporation must be at least 75 per cent owned by US citizens.
The complete rules and procedures for determining when an entity (as opposed to an individual) is a US citizen are voluminous and the foregoing is a mere example. A full analysis is beyond the scope of this summary and each case must be looked at thoroughly and independently.
Required form
Give details of any required form for ship mortgages in your jurisdiction.
While no form is required, a mortgage must:
- identify the vessel;
- state the name and address of each party to the instrument;
- state the amount of the direct or contingent obligations (in one or more units of account as agreed to by the parties) that is or may become secured by the mortgage, excluding interest, expenses and fees;
- state the interest of the grantor, mortgagor or assignor in the vessel;
- state the interest mortgaged; and
- be signed and acknowledged.
Registration of mortgages
Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the effect of registration?
The NVDC maintains the register of vessels. The effect of a proper recording of a mortgage is that it becomes a ‘preferred mortgage’ entitled to the priority set out in the applicable statute (formerly the Ship Mortgage Act and now codified in Title 46 of the US Code section 31322 et seq).
Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt instrument be filed with or attached to the recorded mortgage?
The total amount of the mortgage must be stated therein. The underlying debt instrument does not need to be filed with or attached to the recorded mortgage, but if the debt instrument is not attached, the mortgage instrument itself should set forth sufficient information to be able to allow a court being asked to enforce the mortgage (or a third party inspecting the documents on file with the NVDC) to determine what debts are in fact secured by the mortgage and in what instances the can mortgage be enforced. Hence, the practice has developed that the principal debt instruments are filed as annexes to the mortgage document itself.
Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?
Yes. Because of the historical antecedents of ship mortgage law, a mortgage is generally viewed at law as being a contingent grant of title to the vessel and not a mere grant of a security interest. Since a trustee can hold property for one or more beneficiaries but an agent cannot hold title for its principal, the mortgage is usually granted in favour of the collateral agent for a syndicate of banks acting in capacity as trustee.
Filings on transfer
If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender?
If a member of the syndicate is transferring its interest in the underlying debt to another party, no filing need be made with the NVDC unless the mortgagee itself is changing. If the latter is the case (which is typical in a bilateral loan transaction or if the agent or trustee was the principal lender and is exiting the transaction), an assignment of mortgage should be recorded with the NVDC.
If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?
The mortgage assignment should contain the same formalities as those for a mortgage, other than the requirement of a reference to a total amount.
Maritime liens
What other maritime liens over vessels are recognised in your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?
With certain very limited exceptions, any person providing ‘necessaries’ to a vessel is entitled to a maritime lien claim enforceable by a civil action in rem in the federal courts. What comprises a ‘necessary’ has been the subject of extensive litigation in the courts. Obvious necessaries are fuel oil and repairs, but particular contexts give rise to more esoteric issues. Litigation has taken place in the courts over whether a fishfinder on a fishing vessel is a necessary, whether a piano is a necessary on a cruise vessel and whether seismic equipment on an oil exploration vessel is a necessary. As in the case of other areas of the law, each asserted claim must be independently examined in the context in which it arises, but one can state as a general rule that the supplier of goods and services to a vessel essential for the operation and navigation of that vessel is likely to have a lien for the supply of necessaries. It is important to note that in many circumstances the US courts will look to the law of the jurisdiction in which the claim arose to determine the existence of the lien. Hence, notwithstanding the foregoing, if the jurisdiction where fuel oil was supplied to a vessel does not grant the supplier a lien under local law, the federal courts might not recognise it.
Other liens recognised under US law include:
- those for the wages of the master and the crew of a vessel and for any stevedore employed directly by a vessel;
- liens for damages arising out of maritime tort;
- liens for general average; and
- liens for salvage, including contract salvage.
What maritime liens rank higher than a mortgage lien?
The following liens and any that arose before the recording of the relevant mortgage, will have priority over the mortgage, as will expenses for the vessel while in the possession of the court during a foreclosure proceeding:
- those for the wages of the master and the crew of a vessel and for any stevedore employed directly by a vessel;
- liens for damages arising out of maritime tort;
- liens for general average; and
- liens for salvage, including contract salvage.
Additionally, a lien for necessaries supplied in the US has priority over the lien of a preferred mortgage on a foreign-flagged vessel.
Non-mortgage liens
May non-mortgage liens be recorded over a vessel?
A party asserting a maritime lien claim against a US flag vessel may file a notice of claim of lien with the NVDC. The filing of such a notice does not alter or change the priority of the claim or, by itself, create a lien. However, creditors sometimes file these notices to create procedural hurdles for future sales of the relevant vessel or to put mortgagees and other third parties on notice of the claim.
‘Foreign’ flag vessels
Will mortgages on ‘foreign’ flag vessels be recognised in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?
Yes, assuming they were properly executed and recorded at the vessel’s home port or in a central registry in accordance with the laws of such foreign jurisdiction. Except for liens for necessaries supplied in the US, which have priority over the lien of a preferred mortgage on a foreign-flagged vessel, the priorities are the same.
Enforcement of mortgages
What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?
A mortgage foreclosure proceeding is started by the mortgagee filing an ex parte motion for the arrest of the subject vessel with the federal district court of the jurisdiction wherein the vessel is found at the time the arrest is sought. If such motion is granted (upon the successful demonstration of a prima facie case), the vessel will be arrested. 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. Once such sale occurs at a public auction any lien claims asserted against the vessel (including the mortgage lien) shall attach to the proceeds of the sale and the parties will either settle or litigate their competing claims before the court.
The length of the process is variable and will depend on the circumstances at hand, including whether the owner contests the arrest as unlawful, the court’s docket and any claims brought by creditors with respect to the setting of a minimum sales price at auction. Nonetheless, while the eventual litigation over the priority of lien claims may take upwards of a year, the process from arrest to interlocutory sale is measured in months.
Sale by mortgagee
May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?
While a vessel may be sold by a mortgagee at a private sale if the mortgage instrument provides for such a right, such private sale will not be deemed to discharge liens against the vessel. Such a discharge can only occur through a judicial process.
Default under mortgage
Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?
The court in which a civil action in rem has already been commenced may appoint a receiver and authorise the receiver to operate the mortgaged vessel, but such a court shall retain in rem jurisdiction over the vessel even if the receiver operates the vessel outside the district in which the court is located. This procedure is seldom, if ever, used in the United States, and is different from the type of receiver that may be appointed under the laws of other jurisdictions.
Limitations on rights of self-help
What are the limitations on rights of self-help by a mortgagee?
Self-help remedies cannot be exercised if the exercise thereof would cause a breach of the peace.
Duties to owner or third-party creditors
What duties does a mortgagee owe to an owner or third-party creditors?
Generally, beyond the duty to act in good faith, a mortgagee owes no duties to an owner in default or to a third-party creditor. However, there have been cases brought in the US courts by third-party creditors that have alleged that due to its continued support of an otherwise insolvent debtor, a mortgagee was essentially a co-venturer with the vessel owner and should have its claim equitably subordinated to that of the third-party creditor. Historically, these claims have met with little success, but the risk thereof should not be completely discounted.
