Q: I loaned $62,000 to a boat owner and required him to sign a security agreement in the form of a Preferred Ship Mortgage. The collateral is a 50-foot motor yacht that is documented with the Coast Guard and currently moored in a marina in Los Angeles Harbor. The note and the mortgage are signed by the debtor, but his signature is not notarized. He missed several payments and he is now clearly in default. How do I go about repossessing the boat and selling it to help pay what he owes me?
A: Our reader may run into some problems with his planned repossession of the boat. This appears to be one of those cases where someone handles a complex process by himself without consulting a professional, and as a result he missed a few steps along the way.
In this case, our reader did understand that the pledge of a documented vessel as collateral for a loan will require the boat owner to execute a preferred ship mortgage. But that’s where his understanding of the process stopped.
The Coast Guard’s National Vessel Documentation Center (NVDC) explains that it will not accept a mortgage for recording unless it complies with all of the following requirements:
(1) The document must include a notarized signature by or on behalf of the vessel owner(s), and it must include the addresses of both the mortgagor (the boat owner) and mortgagee (the lender);
(2) The mortgage must include language to indicate that it covers the “whole” of the vessel, it must cite a definite amount of indebtedness, and it must identify the vessel by name, official number and/or hull number;
(3) The mortgage must be accompanied by the correct filing and recording fee;
(4) The vessel must have a valid Certificate of Documentation or Application for Documentation on file with the NVDC.
Our reader indicated that he failed to get a notarized signature from the boat owner, which means that the NVDC would not have accepted the mortgage for recording. And an unrecorded preferred ship mortgage is not actually a preferred ship mortgage.
So our reader does not have a mortgage, but does that leave him with no recourse against the defaulted boat owner? It depends.
A properly recorded security interest in any property serves three purposes. First, it establishes the right of the lender to recover the property in the event of a default. Second, it notifies the world that the lender has a claim and a right to recover the property upon default. And third, it establishes the rights of the lender against competing creditors who have a claim against the same property.
An unrecorded mortgage does not give notice to anyone of the claim against the boat, and as such it does not establish the lender’s rights against competing creditors. For our reader, this means that he would be treated as an unsecured creditor if the boat owner filed for bankruptcy protection, and other maritime liens and mortgages would have priority over his claim against the boat. But it does not, on the other hand, allow the boat owner to walk away from the loan obligation.
The unrecorded mortgage assigns a lender to the lowest rung on the ladder of competing creditors, but it does not diminish the lender’s claim against the debtor. The note and mortgage are enforceable agreements between the parties, and if there are no competing creditors our reader may be able to repossess the boat notwithstanding the failure to record the mortgage. His rights as a repossessing lender would be based in large part upon the language of the note and mortgage. And, he would need to comply with the enforcement provisions of Article 9 of the Uniform Commercial Code (“UCC”), which covers security interests in personal property such as furniture or office equipment — and in this case, boats.
It’s clear that our reader should have consulted a maritime attorney or a qualified marine lending professional before loaning the money, but at this point it’s too late to correct that mistake. The advice to our reader, or to anyone else facing this kind of problem, cannot be complete or entirely accurate without reviewing the loan documents. But on the surface it appears that he may be ok (upon consultation with a qualified maritime attorney) if there are no competing creditors and if he complies carefully with the provisions of the UCC and the loan documents.
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 firstname.lastname@example.org.
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