I Signed a Purchase Agreement, Then My Dealer Went Bankrupt. What Now?

We are in the process of buying a new boat from a dealer, but we just learned that he filed a Chapter 7 bankruptcy several days before we finalized the purchase agreement. Now his office is closed and he won’t return our calls. Is there any way that we can follow through with the purchase?

The purchase of a vessel from a bankrupt seller is rarely a simple “vanilla” deal. The transaction will likely involve an interaction between bankruptcy law and maritime law, and the buyer may need assistance from lawyers experienced in both of those practice areas.

When a company files for bankruptcy under Chapter 7 of the Bankruptcy Code, the company ceases all operations, its assets are liquidated and the proceeds from the sale of assets are distributed to creditors. Once the bankruptcy is filed, the managers of the bankrupt company are no longer authorized to speak for the company, and a purchase contract is unenforceable unless the transaction closes before the bankruptcy was filed.

The liquidation of the company’s assets is managed by a bankruptcy trustee under the supervision of a bankruptcy judge. The trustee is authorized to renegotiate contracts, or even void a contract altogether, to get the best deal for the bankrupt company’s creditors. Under the circumstances described by the reader, the trustee would probably accept the terms of the original agreement, but there are other roadblocks that could stand in the way of a sale.

The trustee is authorized to sell the assets of the bankrupt company if those assets are held for resale in the ordinary course of the company’s business, and if there are no liens held against the asset be secured creditors. A vessel held in inventory by a boat dealer would certainly be sold “in the ordinary course of business,” but it would probably be subject to a lien in connection with the bankrupt dealer’s inventory line of credit. These lines of credit, frequently referred to as a “flooring line,” are usually secured by a “blanket lien” against all of the company’s assets. This type of lien is not a maritime lien, but it is nonetheless a valid security interest in the vessel and it must be satisfied or released before title can transfer to a buyer. The trustee would therefore need to work with the lender to secure a release of that lien, before the boat could be sold to our reader.

Another area of concern is the possibility that the boat may be subject to a maritime lien. A brand-new boat sold by a dealer will rarely be subject to a maritime lien, but it is possible, especially if the dealer is unable to pay for commissioning and other services. Readers of this column may recall that a maritime lien may be perfected, and therefore valid, without recording anything with the Coast Guard. These “secret” liens will stay with a boat after it is sold, regardless of whether the buyer has knowledge of the lien. And, since all maritime liens are senior in priority to all non-maritime liens, the release of the lien held by the inventory lender may not have any bearing on whether the boat can be sold free and clear of liens.

The only mechanism that exists to sell a boat free and clear of all liens, requires a judge to enter such an order when a boat is sold in a court proceeding. Without a court order, a buyer should consider a vessel title insurance policy when purchasing a boat through a bankruptcy proceeding.

A complete discussion of the interaction between bankruptcy law and maritime law would consume an entire law school semester, and experienced attorneys disagree about some of the issues that may confront the parties to a vessel purchase during a bankruptcy. For example, some maritime lawyers will argue that a bankruptcy judge does not have jurisdiction to sell a vessel free of liens, and that such an order may only be entered by a District Court judge. That argument is obviously beyond the scope of this article, but it does point out the need for expert advice.