Battling Bankruptcy

I own a dive service and perform underwater maintenance and repairs for yacht owners. I unfortunately allowed one of my clients to run up a substantial (unpaid) bill and am now exploring my options for collecting the money. In one of your recent columns (’Foreclosing on Lien Not Necessarily Worth the Cost,’ Dec. 15, 2006 issue), you suggested that a relatively small claim such as this may be pursued through small claims court, even if the claim gives rise to a valid maritime lien. Unfortunately, the boat owner in my case has filed bankruptcy, and I am informed that I cannot sue him outside of bankruptcy court. The bankruptcy court recently authorized the boat to be sold, and it appears that I will lose my lien without being paid. Is there anything I can do?

We receive quite a few inquiries regarding maritime liens, from both sides of the boat owner-vendor relationship. The bankruptcy of a boat owner adds a layer of complexity to the claim that is difficult to resolve without hiring an experienced maritime attorney.

When a boat owner files bankruptcy, the most significant problem faced by a maritime lienholder may be that the bankruptcy judge knows little or nothing about maritime liens. A maritime lien is a security device, that places the lienholder in the position of a secured creditor with an interest in the vessel. However, a bankruptcy judge may assume that a maritime obligation is processed pursuant to the more familiar rules that apply to ’land liens,’ and the maritime creditor may end up in the pool of unsecured creditors who receive a fraction of the money that is owed.

As a secured creditor, a maritime lienholder may satisfy his or her claim directly from the proceeds of the sale of the boat by the bankruptcy court. In contrast, unsecured creditors must divide up the limited funds available after the claims of secured creditors are processed. A bankruptcy judge may assume that a maritime lienholder is an unsecured creditor, because the lien recording process and the priority rules for maritime liens are quite different than for their landlocked counterparts.

In a large maritime bankruptcy, attorneys for the various creditors will educate the judge by filing papers to support their claims, but the legal fees associated with that process simply do not make sense for the small claim of the dive service described above. A complicated legal fight without the assistance of an attorney will always be an uphill battle, but there are nonetheless a few steps that may keep you afloat.

First, as a creditor in a bankruptcy case, a maritime lienholder may file a ’Proof of Claim’ form with the court. The form asks for information regarding the nature of the claim, and it includes a section where the claim may be identified as a ’secured claim.’ This is your opportunity to educate the court regarding the secured nature of your lien, so be sure to fill out this section completely.

Second, open a dialogue with the bankruptcy trustee. The trustee is the court-appointed representative of the creditors, and he or she may be able to provide some assistance. Explain to the trustee that your maritime lien is different from a land lien and that it is valid without recording.

Finally, if the size of your claim will justify the expense, the best advice is, of course, to talk to an experienced maritime attorney.