‘PREFERRED’ MORTGAGE MEANS LITTLE TO BANK IN APPEALS COURT CASE

The M/V Alexander’s Unity case (41 F. 3rd 1007), recently decided by the 5th Circuit Court of Appeals, raises a point of some importance to those engaged in ship finance (preferred ship mortgages) as well as those concerned with marine insurance (cargo underwriting). The central issue on appeal was whether a cargo claim is a tort and entitled to preferred maritime lien status over ship mortgages.

By way of background, a maritime lien is a security device that creates a non-possessory property right in a vessel in favor of the creditor for a maritime debt or claim. The creditor has a right in admiralty law to have a vessel arrested and sold to satisfy a delinquent debt. The lien is non-consensual and need not be recorded. The lien attaches the instant the claim occurs, follows the vessel throughout the world and is valid against a good-faith purchaser of the ship.

This indelible debt can be enforced only by an admiralty judicial sale. The sale frees the vessel of all liens, and the purchaser gains clear title against the world.

Determining lien priorities is important if there is not enough money to satisfy all claims at the time of the admiralty sale. Liens will be ranked by class and time. Generally, the last claim within a class to accrue is the first to be paid. Under general maritime law, class priorities are allocated in the following order: seaman’ wages, salvage, general average, tort, statutory mortgages and contract liens.

Act meant to promote private investment
In 1920, Congress passed the Ship Mortgage Act and gave ship mortgages lien status to encourage private investment in shipping. the act provides that holders of preferred ship mortgages have priority over almost all other liens against vessels, except for preferred maritime liens and court costs. Under the act, a preferred maritime lien means a lien for damages arising out of a maritime tort (a private wrong for which the law provides damage remedies).

In the Alexander’s Unity case, funds from a sale of an arrested vessel were inadequate to pay both the ship’s preferred bank mortgages and the owner of steel cargo damaged on the vessel during a voyage from India to New Orleans.

The bank appealed a lower court ruling that rust damage to the steel cargo was caused not only by a breach of contract of carriage, but also by the vessel owner’s negligence. The lower court determined the cargo owner had a claim in tort for negligence, entitling it to a preferred maritime lien.

The bank argued that the cargo action is only a contract claim and subordinate to its preferred ship mortgage lien. Additionally, the Carriage of Goods by Sea Act (Cogsa) governs the contract of carriage, and Congress pre-empted tort actions for the damage of cargo to which Cogsa applied.

The Appeals Court rejected the argument. It said that while Cogsa governs certain aspects of cargo damage claims and defenses, it does not preclude claims in tort for the negligence damage of cargo.

“Plain words” of Congress
The bank also argued that granting preferred status to cargo claims would defeat the purpose of the Ship Mortgage Act. The Appeals Court rejected this argument as well. “(H)ad it wished, Congress could have prioritized tort liens resulting from damaged cargo differently than other tort liens; it did not. The Ship Mortgage Act plainly states that all tort liens are preferred maritime liens, and we will not depart from Congress’ plain words by granting tort liens for damaged cargo a different status than other tort liens.”

Undoubtedly, the Alexander’s Unity case will be looked upon favorably by shippers of cargo and their underwriters. However, it may also cause those engaged in ship finance to re-examine the effectiveness of the word “preferred” in the Ship Mortgage Act.


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