I have three very important rules that I apply to every boat transaction. First, the transaction documents should always track the actual intent of the parties. Second, fully executed documents that are ready to be filed with a government agency should not be held by anyone, whether they are held “in trust” or otherwise. And third, ambiguity almost always leads to litigation. The plan proposed by our reader and his yacht broker violates all of these rules.
In this case, all three of my rules would require the documents to reflect the sale of a boat with a loan for the purchase price. Our reader, however, is reluctant to sign over title to his boat before the purchase price is paid in full. He wants to have some control over the boat and security to enforce the buyer’s payment obligation. These are the same concerns that a bank will have when it loans money to a buyer, but they never take title to a boat. Instead they use a preferred ship mortgage filed with the Coast Guard.
A preferred ship mortgage is a security device that is recorded with the Coast Guard’s National Vessel Documentation Center. It is a powerful claim against the vessel that may be enforced without regard to what the boat is used for, or whether anyone lives aboard, or whether the owner can be located.
A properly recorded mortgage is senior to most other liens or claims against the boat. This is an important consideration for our reader, since we know that the buyer of his boat is already short of funds and he may not have a great credit rating. If our reader keeps the boat in his own name, his interest in the boat will be at risk when a lien arises from unpaid services provided to the boat. Conversely, if he transfers title and records a mortgage against the boat, his interest will be protected because the mortgage will be senior to the claims asserted by the service providers.
Retaining title to a boat after it is sold presents a number of other problems relating to the ambiguous relationship between the buyer and seller. The “buyer” has possession of the boat and is operating it without adding his name to the title. So what exactly is his legal interest in the boat? If he had actually purchased the boat his name would be on the title, so it must be something else. Is he chartering it? Did he borrow it? Did he steal it? Each of these possibilities brings a different set of rights, responsibilities and consequences.
There is no written agreement to clarify the buyer’s interest in the boat so we have no legal guidance if – and when – his interest in the boat is challenged by a third party. Marine insurance companies, for example, require complete disclosure of all aspects of a boat’s operation and physical condition. This disclosure also extends to the ownership of the boat. If title is retained by the seller, what exactly will the parties disclose to the insurance company? If they disclose that the boat has been sold but title won’t transfer for a year, the insurance company may refuse to insure the boat. But anything short of full disclosure may lead to a denial of a claim, even if the claim has no relationship to the information that was withheld.
The list of potential problems associated with the proposed arrangement is extremely long. Remember, ambiguity leads to litigation. How will the parties respond to an accident? How will the buyer transfer title into his name if the seller passes away?
Our reader has been trying to sell his boat for a year, and at this point he is ready to try something new. His agreement to finance the sale to the buyer is a risky proposition under the best of circumstances, but he is able to draw upon an established set of tools that are available to protect a lender’s interest in the vessel. He, and anyone else who is contemplating a similar transaction, should contact an attorney who is familiar with maritime liens and mortgages.
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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