Maritime Financing

The Preferred Ship Mortgage and Lender Remedies

Maritime Financing

The Preferred Ship Mortgage and Lender Remedies

For some of us, we haven’t saved enough to buy our dream boat with cash. Thus, when we are ready to go boat shopping, we start looking for a boat loan. Of course, any lender will want security on its loan. There are two methods available to lenders to secure boat loans. The size of the boat determines which method is appropriate.

As a general rule, lenders require that boats under 26 feet be titled and a notation of the security interest recorded on the title.

For vessels exceeding 26 feet, a title does not adequately protect the lender.only way a lender can be fully protected in these cases is to require that the boat be federally documented and a Preferred Ship’s Mortgage be recorded against the vessel. A Preferred Ship’s Mortgage is statutorily created at 46 U.S.C. 313. The Preferred Ships Mortgage is only available on documented vessels and only to FDIC approved banks or other lending institutions which have been federally approved.

Title records for all documented vessels are maintained by the Coast Guard’s National Vessel Documentation Center (NVDC), located in Falling Waters, West Virginia. At the time of the purchase the lender will record the Preferred Ship Mortgage with the Coast Guard. The Preferred Ship’s Mortgage takes precedence over all other liens other than crew wages, pre-existing mechanics liens or salvage.

The Ship Mortgage Act provides two primary enforcement remedies against a deficient borrower. First, a Preferred Ship’s Mortgage may be enforced by filing a lawsuit in federal court to initiate a “vessel arrest” and subsequent judicial sale through the U.S. Marshals. The Ship Mortgage Act and Federal Judicial Sales Act provide procedures for the judicial sale of a foreclosed vessel. This is an expensive process for the lender.

Second, the lender may bring an action against the vessel’s owner in either federal or state court. The Preferred Ship Mortgage itself will typically contain a provision that empowers the mortgage holder to utilize self-help methods for repossessing the vessel upon default.

A 1996 federal appellate court case (Dietrich v. Key Bank) held that a private repossession may be initiated to enforce a Preferred Ship Mortgage under state law, so long as the mortgage includes language that authorizes a foreclosure without judicial process and the requirements under state law for repossession and sale of personal property are followed. In California, the procedure is governed by Article 9 of the California Commercial Code, and by the agreements between the parties.

In the event of a default, commercial lenders will assign a repossession to a licensed repossession agency, which, in California, must be licensed by the Department of Consumer Affairs.

The borrower should also expect that further action may be taken against the Borrower personally to collect any deficiency between the debt owed and amount received from the vessel’s sale.

No notice is required prior to a repossession, but, pursuant to California Commercial Code § 9626, the debtor is liable for a post disposition deficiency only if certain conditions are met; most notably that the collection, enforcement, disposition, and acceptance by the secured party were conducted in good faith and in a commercially reasonable manner and that the debtor and any other obligor were given notice of the disposition of the collateral after the repossession.

Finally, be aware that while your broker may only require a 10% deposit on your potential purchase, a marine lender will almost certainly require a 20% down payment.

If you are a borrower with a boat loan or Preferred Ships Mortgage, it is important to read the agreement so you know your rights and responsibilities. In the event of a dispute, it is imperative that one obtain representation that is familiar with this complex area of the law.

 

Michael Wales is a Maritime Law Attorney in San Diego, California. Mike also owns AGL Yacht Sales, Inc., a San Diego Yacht Brokerage, with his wife Leilani Wales. For assistance with any maritime legal matter you may contact Mike at mwales@waleslaw.com or at 619.493.1700. For information on brokerage boats please visit www.aglyachts.com.