Case Note, M.V. MR. DEAN - Lien Priority Issue
October 2002The case of Bank One Louisiana N.A. v. M.V. MR. DEAN, 293 F.3d 830 (5th Cir. 2002) illustrates a potential trap for ship financing lenders and their lawyers. The Court resolved ambiguity and conflict among lower court decisions as to when a maritime lien for breach of a time charter “arises.” The Court relied upon old, but still valid, Supreme Court cases holding that a lien for breach of charter arises when the time charter is no longer executory, that is when performance has commenced by delivery of the vessel under the charter, and that the lien remains inchoate until it is perfected by a breach of the charter.
The U.S. Ship Mortgage Act, 1920 (as amended and codified) subordinates ship mortgage liens to maritime liens that “arise” before the mortgage is recorded. 46 U.S.C. § 31301(5). Because the Ship Mortgage Act was intended to encourage ship financing and to provide lenders with meaningful security, it is likely that Congress meant to subordinate mortgages only to those maritime liens which become perfected before a mortgage is filed, but instead used “arise” in the statute.
In the case, a mortgage was placed on the MR. DEAN after a time charter had commenced. After the mortgage was recorded, the shipowner breached the charter. The Court held that the charterer’s lien arose when the charter commenced and was, therefore, senior to the ship mortgage.
The same rule would apply to a mortgage that is recorded when the vessel is on a voyage. Loss or damage to the cargo occurring after the mortgage is recorded would result in liens that “arose” when the cargo was loaded, and the liens would be senior to the mortgage.
The lien provisions of the maritime laws of Liberia and Vanuatu are substantially identical to the U.S. Ship Mortgage Act. Both use “arise” with respect to priority, and they incorporate by reference the general maritime law of the United States. Although the Maritime Act of the Marshall Islands also incorporates the general maritime law of the United States, it avoids the problem by providing that ship mortgages are senior to all maritime liens based on contracts, except contract salvage.