Ask a Maritime Attorney: Two-Title Boat Fraud

Question:

I loaned money to a start-up boat builder for him to complete the renovation of a classic motor yacht. The deal called for him to restore the boat, to hopefully sell it at a substantial profit, and the for us to split the profit as partners after he repaid my loan. To secure the loan, my partner transferred the California titles (the pink slips) for this boat and another boat into my name, with the understanding that I could sell both boats if he failed to complete the restoration project by a certain date. That deadline expired months ago so I took possession of the boats and prepared to sell them. Last week I was contacted by his attorney, who disclosed to me the boats were documented with the U.S. Coast Guard and, as such, the California pink slips were worthless. Is this true? How can a boat be documented with the Coast Guard and still have a California pink slip? Can he default on our contract and just walk away? Help!

 

Answer:

Ugh. Our reader is facing a few problems, starting with the fact that he has probably been defrauded by his partner. The short answers for our reader are: (1) his partner’s attorney is wrong; and, (2) a boat cannot legally be currently documented and also have a current California title or pink slip. Let’s unwind all of this, starting with the basics.

Establishing ownership of a vessel in the United States is a lot more complicated than it would be for a house or even for a car. This is due in large part to the fact a vessel may be registered or titled in any state or territory, or it may be documented with the U.S. Coast Guard.

The boating laws of each of the 50 states provide for some form of vessel registration.  The registration system for most states includes a form of title to evidence ownership of the boat. Our California readers are familiar with the “pink slip” issued by the California Department of Motor Vehicles to evidence ownership of a vehicle or a boat in California.

Coast Guard documentation is a system of vessel titling and registration that is maintained by the U.S. Coast Guard rather than by a state agency such as the California DMV. Any boat that measures more than 5 net tons may be documented with the Coast Guard. “Net tonnage” is a rather complicated measurement, but a boat measuring 5 net tons usually works out to around 25 feet in length.

The owner of a recreational boat may choose freely between state registration or Coast Guard documentation, but in most cases that choice is dictated by his or her lender. Marine lenders prefer Coast Guard documentation because the federal registration system provides stronger protections for their security interest in the vessel as collateral for their loan. But regardless of which registration system is chosen, federal law and state law both expressly prohibit the issuance of a California title for boats with current Coast Guard documentation (see 46 U.S. Code §12106 and 13 Cal. Code of Regs §190.12(a)). In other words, you must choose one or the other, and it is illegal to create a California title for a boat that is currently documented with the Coast Guard. And this brings us to our reader’s case. Our reader’s partner applied for, and received, California pink slips for boats that are currently documented with the Coast Guard. When applying for California registration on a Coast Guard documented vessel, DMV regulations require a letter from the Coast Guard evidencing “deletion” from documentation. Our reader’s partner was able to circumvent this regulation because, as a registered boat builder, he was able to issue a “Builder’s Certificate” and represent to the DMV that these were new vessels. They were not new vessels, they were not constructed by our reader’s partner, and he broke the law when he made those representations to the DMV and applied for a California title without deleting the boats from Coast Guard documentation.

Our reader has a very strong basis for a lawsuit against his partner for fraud. He loaned money to his partner because he was led to believe that he could sell the boats if and when his partner defaulted. The fact that Coast Guard documentation remains in his partner’s name will prohibit the use of the California pink slips to sell the boats to third parties. The lawsuit will therefore also include a request for the Court to “quiet title” in the yacht and order the Coast Guard to consolidate the two titles under our reader’s name.

This case is unusual because it involved fraud in the tendering of security for a loan, but a fraudulent title can easily find its way into a yacht purchase transaction. There are, unfortunately, no “silver bullets” that will guarantee that a buyer will not be a fraud victim, but a little investigation can go a long way. Physical inspection of the boat, for example, can identify certain anomalies. Compare the Hull Identification Number stamped on the boat’s transom to the number recorded on the DMV title or the Coast Guard records. And, look for a Coast Guard Official Number marked on the inside of the boat. Federal law requires the Official Number to be permanently affixed to the vessel, so that alteration, removal or replacement would be obvious.

Anomalies and unanswered questions surrounding a vessel’s title history may be perfectly innocent, but they nonetheless inject a significant level of risk into the purchase process. As always, we encourage the parties to a vessel purchase transaction to consult with an experienced maritime attorney.

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 (www.weilmaritime.com) in Seal Beach. He is an adjunct professor of Admiralty Law, 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 562-799-5508 or at dweil@weilmaritime.com.