What Are Boaters’ Rights When a Lender Seeks to Repossess a Vessel?

My boat was repossessed last year, and the lender is now pursuing me for a deficiency claim after the sale of the boat. The repo and sale were both conducted by private companies, and the entire process seems to have been conducted in a big hurry, with no concern for my rights. I did a little research, and since this was a Coast Guard-documented vessel with a preferred ship mortgage, I was under the impression that a federal court procedure should have been used. If this is not the case, is the lender subject to any oversight at all?
A Preferred Ship Mortgage is the device used by a lender to secure a Coast Guard-documented vessel as collateral for a loan. The use of the term “preferred” is a little confusing, but in fact any mortgage, security agreement or collateral agreement for a boat that is accepted for recording by the Coast Guard is a “preferred” mortgage — regardless of the title of the document.

The foreclosure of a mortgage on a documented vessel is governed by federal statute (46 U.S.C. sec. 31325), and as noted by our reader the procedure may require a lawsuit to be filed against the vessel in federal court. The court will order the vessel to be “arrested” by U.S. Marshals, and it may ultimately be sold at a court-ordered auction.

This is a powerful tool, since it involves the participation of a federal judge and a federal marshal with a badge and a gun. It is also a very effective tool, because only a federal court, with jurisdiction over the vessel, may order a boat to be sold free and clear of all liens. But as we have pointed out many times in this column, the procedure is also very expensive (see for example, “Ask a Maritime Attorney — Foreclosing on Lien Not Necessarily Worth the Cost,” The Log, Dec. 14, 2006).

Courts have ruled that the foreclosure of a mortgage on a documented vessel may proceed under state law, which may save the lender a lot of time and money. The most significant case in support of this procedure was a 1996 decision by the U.S. Court of Appeals for the 11th Circuit in a case called Dietrich vs. Key Bank.

The court in that case looked at the specific language of the federal statute, which provides that a lender “may” use the federal court procedure, and the court therefore found that a lender may opt to proceed under state law if it wishes to do so. As a consequence, private repossession and sale for boats that are worth less than $300,000 is very common, since the cost of a federal court procedure is hard to justify for a less-expensive boat.

When a lender opts out of the federal procedure, it must nonetheless comply with the guidelines for repossession and sale of personal property that exist under state law. In most states, these guidelines are found in Article 9 of the Uniform Commercial Code, though some states may have consumer protection laws that are found elsewhere in state law.

In connection with the repossession itself, state law typically requires that it be performed by a licensed repo agent and that it be performed without a breach of the peace. After the repossession, the lender must send certain notices to the boat owner relating to the pending sale and the recovery of personal effects. The sale itself must be conducted in a commercially reasonable manner, and a post-sale accounting must be sent to the boat owner, detailing any deficiency or surplus.

I should note that the repo and sale guidelines for California-registered boats are a little more extensive than for Coast Guard-documented boats. But these laws are generally skewed in favor of the lender.

The one exception is Commercial Code section 9626, which prohibits a lender from pursuing a deficiency claim against a borrower if the lender fails to follow any of the repo, sale and notification guidelines that are mentioned above. It’s a bit of a technicality, but if you are a borrower who is staring down the barrel of a big deficiency claim, this may be your only opportunity to defend against that claim.

As always, the claims and defenses that surround a repossessed boat will vary a lot from case to case, so you should talk to an experienced maritime lawyer before making any assumptions about your own case.

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