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 (usually a note and a mortgage or security agreement).
Commercial lenders will always assign a repossession to a licensed repo agency. In California, a repo agency must be licensed by the Department of Consumer Affairs. A person who acts as a repo agent without a license, and a lender who knowingly assigns a repossession to an unlicensed person, are both guilty of a crime (Calif. Business and Professions Code sec. 7502). Private party lenders may repossess a boat themselves, but they should resist the temptation to do so. A repossession is subject to a list of regulations that are designed to protect the legal rights of all parties and to avoid a violent confrontation. A licensed repo agency understands those rules and will keep the lender out of trouble.
No notice is required prior to a repossession, so a “surprise attack” is authorized. However, pursuant to California Commercial Code § 9626, the debtor is liable for a deficiency only if certain conditions are met (a “deficiency” is the balance of the amount owed by the debtor after the vessel is sold). Most notable among these conditions are that the collection, enforcement, disposition, and acceptance by the secured party were conducted in good faith and in a commercially reasonable manner (§9626(c)) and that the debtor and any secondary obligor were given notice of the disposition of the collateral after the repossession (§9626(b)).
A notice of disposition must include information regarding the intended method of sale, a description of the default, an accounting of the total amount owed, and phone numbers and mailing addresses for obtaining more information about the sale and the deficiency calculation. This is spelled out in Commercial Code Code § 9614, and a template for the notice is actually spelled out in § 9614(3).
The debtor must also be notified under § 9623 that he or she may recover possession of the vessel if the default is cured. This may be frustrating for a lender, who may be concerned that the debtor will default again, but this is rarely a problem since most boat loans include a provision which requires the entire loan balance to be paid to cure a default.
After the boat is sold, a final accounting must be delivered to the debtor, and in the unlikely event that a surplus is realized, that money must be promptly refunded to the debtor. Otherwise the lender will make a demand to the debtor to pay the deficiency, and then decide whether to initiate litigation to collect that amount.
So, one way or another, the parties are likely to end up in court if a borrower defaults on a boat loan. But an experienced attorney should be contacted even if the lender does not intend to pursue a deficiency.
David Weil is licensed to practice law in the state of California and, as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at email@example.com.
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