Case Note, LADY B.October 2003 | New York Law Journal
Case Note, Lady B Gone October 2003
In Mullane v. Chambers, 333 F.3rd 322, 2003 (1st Cir. 2003), the owner of a U.S. flag yacht lost his vessel to a judgment creditor of the seller as a result of failing promptly to record his bill of sale.
The Court held that a judgment creditor of a seller of a vessel is entitled to levy execution upon the vessel prior to the buyer’s filing the bill of sale as long as the creditor does not have actual knowledge of the sale.
The case involved a motor yacht named at one time the “LADY B.” Upon the owner’s divorce, it was renamed “LADY B GONE.” The buyer renamed it “CENT’ANNI,” but as events transpired, the yacht lived up to its former name. The yacht was a “documented” vessel, meaning that it was registered under U.S. flag with the National Vessel Documentation Center (the “NVDC”) administered by the U.S. Coast Guard under the Secretary of Transportation.
The buyer of the yacht received a bill of sale from the seller, but neglected to file it with the NVDC for a period of sixty days. Before the bill of sale was filed, a creditor of the seller caused the county Sheriff to seize the yacht to enforce a state court judgment against the seller. The owner-buyer then invoked the Rule D of the Supplemental Admiralty Rules of the Federal Rules of Civil Procedure in a maritime action seeking to regain title to and possession of the yacht.
The issue was whether the seller’s judgment creditor or the owner-buyer was entitled to the yacht.
The District Court, recognizing that vessel sales contracts are outside admiralty jurisdiction, purported to apply state law Uniform Commercial Code (“UCC”) principles, and held that the buyer was a bona fide purchaser for value and was entitled to the yacht. The court below also awarded punitive damages of $100,000 against the judgment creditor for intentionally interfering with the buyer-owner’s property rights in the yacht.
On appeal, the Circuit Court reversed, holding that the federal vessel recording statute was applicable because the yacht was a documented vessel, and the recording statute rendered an unrecorded bill of sale invalid against a seller’s judgment creditors who levy on the vessel without notice of the sale. The recording statute was originally adopted in 1850. It was reenacted in the Ship Mortgage Act of 1920 and again in the 1988 recodification of the Ship Mortgage Act in 46 U.S.C. § 31321(a)(1) (the “Recording Statute”).
Implicit in the Court’s holding is that the Recording Statute preempts state law. UCC § 2-402, entitled “Rights of Seller’s Creditors Against Sold Goods,” provides essentially that the buyer shall prevail under the facts of this case, except in cases of fraudulent conveyance.
The Recording Statute provides that a bill of sale for a U.S. flag vessel must be filed with the Secretary of Transportation (the NVDC) “to be valid … against any person” except the grantor and his successors and persons having actual notice of the sale.
A majority of state court decisions considering the Recording Statute were consistent with the appellate court’s holding. Two minority state court decisions holding that the Recording Statute was intended to protect only subsequent purchasers and mortgagees based on the common law rule that a creditor’s rights are limited to the debtor’s actual title in the property, were considered and rejected by the Circuit Court on the ground that the common law rule is abrogated by the Recording Statute.
The Circuit Court remanded the case for further findings as to whether the sale of the yacht was a fraudulent conveyance under state law and whether the creditor had actual knowledge of the sale. The punitive damage award was reversed. The Court indicated that if the original sale was not fraudulent and the creditor did not have actual knowledge of the sale, the creditor would prevail.
The relegation of vessel sale and construction contracts to state law and their exclusion from admiralty jurisdiction has been often criticized as anomalous (see, e.g. Flota Maritima Browning de Cuba S.A. v. The CIUDAD DE LA HABANA, 363 F.2d 733 (4th Cir. 1966), cert. denied 385 U.S. 837 (1966)). This anomaly probably caused the difficulties experienced by the parties and the District Court. While the contract rights of a buyer and seller of a documented vessel are governed by state law, some aspects of the validity of the bill of sale obtained by the buyer and all aspects of maritime liens on the vessel are governed by federal law.
Had the CENT’ANNI not been found to be a documented vessel, the District Court’s result would have been correct, although its drawing on Article 8 of the UCC, governing investment securities, for guidance was questionable. Article 2 of the UCC dealing with the sale of goods is directly applicable to vessel sales (except to the extent preempted by the Recording Statute), unlike Article 9 on security interests which is largely preempted by the Ship Mortgage Act. Apparently, the parties did not refer to UCC § 2-402 or to the Fifth Circuit’s decision in Jones v. One Fifty Foot Gulfstar Motor Sailing Yacht, 625 F.2d 44 (5th Cir. 1980), applying Article 2 of the UCC to a dispute over a new undocumented vessel between a buyer who purchased the vessel from a dealer, and the manufacturer’s secured party (awarding the vessel to the buyer). Had the District Court followed Jones, the Circuit Court presumably would not have criticized it for having used “a hodgepodge of definitions and standards.”
The parties apparently also did not dispute the status of the yacht as a “documented vessel.” Under the documentation regulations, it is doubtful that the yacht had such status. A “documented vessel” is defined in the regulations as a vessel which is the subject of a “valid Certificate of Documentation.” 46 C.F.R. § 67.3. See also 46 U.S.C. § 30101(1). Under 46 C.F.R. §167(b)(1), a certificate of documentation becomes “invalid immediately” when ownership in the vessel changes. This rule is subject to several exceptions which can be characterized as “deemed documented notwithstanding invalidity,” such as enforcing a mortgage if a mortgage remains recorded against the vessel (none of the exceptions would have been applicable to the LADY B). 46 U.S.C. § 12111(c)(1). The regulations governing deletion from U.S. flag, however, appear to be inconsistent with the definition of a “documented vessel” quoted above. Section 171 states that a vessel whose certificate of documentation is invalid is “subject to deletion from the roll of actively documented vessels,” implying that a vessel that is still on the roll is in some sense a documented vessel. Others have suggested that the statute and regulations should be more straightforward in describing the vessels to which they apply instead of relying on a “deemed documented” approach.
Both this case and the Jones case were brought under Rule D, a seldom used provision of the federal rules. Rule D provides, in essence, that claims for possession, petitory actions (i.e. actions claiming title) and partition actions that are otherwise within admiralty jurisdiction shall be commenced by an in rem seizure of the vessel, cargo or other property in dispute. The most frequently asserted claims to acquire title to a vessel are based on a sales contract or vessel construction contract. Such claims are held not to be maritime in nature because the rights of the parties arise from a non-maritime contract. However, once a party holds title to a vessel, the title holder’s claim to the vessel is deemed to be a maritime matter even though the challenger’s claims are non-maritime (such as the state court judgment in Mullane and the non-maritime security interest in Jones), the source of the title holder’s rights is a non-maritime sale contract, and the vessel is not federally documented (as in Jones). If the jurisdictional anomaly as to sales contracts were to be eliminated, Rule D would undoubtedly find wider use.
The case presents a cautionary tale for participants in transactions under several flags. The laws of Liberia, the Marshall Islands and Vanuatu all contain the provisions of the Recording Statute, and each incorporates the general maritime law of the U.S. by reference. Thus, in transactions involving vessels of these flags and U.S. flag, the delay between the time of payment for a vessel and the recordation of the Bill of Sale should be minimized.
Postscript March 2006 - Is the LADY B Finally Gone?
After a second trial in the District Court and an additional Circuit Court opinion published on February 24, 2006, the LADY B may finally be gone. In the latest decision, the First Circuit held that the buyers of the yacht did not have an equitable maritime lien on the yacht as a result of their paying about $98,000 to the seller’s mortgagee to discharge the mortgage, nor did they have a maritime lien for advances.