Resolving an unsatisfied lien at the eleventh hour before close of sale

Q: I am a yacht broker in California, and a problem with a yacht’s title surfaced just before the close of a sale. The abstract of title reflected a $5,000.00 unsatisfied lien. The seller claims that the lien was asserted in bad faith by a mechanic who worked on the boat several years ago, and he refuses to pay the mechanic. The buyer, on the other hand, does not want to buy a boat with a lien recorded against the title. The purchase agreement requires the seller to deliver the boat free and clear of all liens and encumbrances, but since the seller believes that the lien is not valid he won’t do anything about it. What are the respective legal positions of the parties in a case like this? And, as their yacht broker, is there anything I can do to facilitate the closing?

A: Our reader discovered a Notice of Claim of Lien by reviewing the Abstract of Title for the yacht. We need to take a quick look at how the Abstract works before we review our reader’s case.

A Coast Guard Abstract of Title is a record of all of the documents submitted to the Coast Guard and accepted for recording for a particular boat. An Abstract is available for all Coast Guard documented vessels, either through a vessel documentation service or directly from the Coast Guard’s National Vessel Documentation Center (www.uscg.mil/hq/cg5/nvdc/).

As we have discussed in this column many times, the recording of a lien with the Coast Guard is optional (technically the recorded document referred to as a “Notice of Claim of Lien”).  When the Coast Guard accepts a lien for recording, they take no position on whether the lien is actually a valid claim against the boat. As such, a valid lien may not be listed on the Abstract, and a claim that is listed may not be a valid lien. We should note that this treatment is different for a mortgage, which in fact must be recorded to be valid.

In our reader’s case, the validity of a Notice of Claim of Lien is disputed by the current owner of the boat, and the buyer wants the problem cleared up before he buys the boat. Like most yacht purchase contracts, the agreement in this case requires the current owner of the yacht to deliver the boat free and clear of all liens and encumbrances.

The boat owner has several options. He should first contact the mechanic and determine whether a compromise may be possible. If that fails, he may need to sue the mechanic. If the judge agrees that the lien is invalid, he may issue a court order instructing the Coast Guard to remove the claim from the yacht’s title history.

The problem here is the timing. The claim was discovered by the broker at the eleventh hour, when the deal is about to close. A lawsuit, or even a negotiated compromise, will take time, which will probably cause the buyer to walk away from the deal. For this reason, we always recommend that our yacht broker clients order an Abstract of Title from the Coast Guard when they first accept a listing to sell a boat. This leaves time to carefully review the Abstract and clear up any problems. But in this case our yacht broker waited until the eleventh hour, and there is simply no time to negotiate a compromise or sue the lien claimant.

Our reader really has only one option in this case, assuming he can get the buyer and seller to agree to this approach. The broker should accept the buyer’s money for the purchase of the boat and deposit those funds into his trust account. Then at closing, he should release the funds to the seller net of the amount of the lien claim, and retain those funds in trust pending resolution of the dispute within an agreed-upon period of time. Title may then be transferred to the buyer, since the Coast Guard will allow the transfer with a claim of lien on the title (title may not be transferred if an unsatisfied mortgage remains on the title).

After title is transferred, the seller will have time to negotiate a compromise or sue the lien claimant. If he is succeeds, the broker will release the retained amount to the seller and the transaction will be final. However, if he fails to resolve the problem, the broker will return the retained amount to the buyer, who may then take steps to resolve the problem himself or simply ignore the problem and enjoy the boat until the time comes for him to sell it.

As always, an experienced maritime attorney should be consulted if confronted with a problem like this. This seller’s dispute with the mechanic would have been a lot easier to resolve if the broker had ordered an Abstract of Title when the boat was first offered for sale.

 

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, a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-438-8149 or at dweil@weilmaritime.com.

 

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