Can Liens Go Unpaid When a Boat is ‘Arrested?’

I own a dive service and I have a lien against a boat that has been arrested by a bank. I don’t know anything about a vessel arrest, but I have recorded liens with the Coast Guard on other boats and I made sure to get this lien recorded before the boat was arrested. The boat will soon be sold at a marshal’s auction, and the bank has advised me that they have no obligation to pay my lien. Is this correct? How can I enforce my claim?
The reader is referring to a foreclosure proceeding initiated by a lender to foreclose upon a preferred ship’s mortgage. A “civil arrest” of a vessel may occur when a lender or other lienholder files an “in rem” lawsuit in federal court to enforce a lien or mortgage claim.

An “in rem” lawsuit involves a claim against a “thing” rather than against a person, and the process calls for U.S. Marshals to take custody of the boat. If the lender or lienholder proves its claim to the court, the judge may order the boat to be sold at an auction conducted by the marshals.

The foreclosure procedure for a diver or a marina, or other service provider with a lien, would be the same as the procedure for a lender. However, the legal fees to pursue a civil arrest may easily exceed $20,000, and as such the procedure may be too expensive for these lienholders. We discussed the arrest procedure in more detail in a prior installment of this column (“Ask A Maritime Attorney — Foreclosing on Lien Not Necessarily Worth the Cost,” The Log, Dec. 14, 2006).

The scenario described by our reader is fairly common. When a boat owner fails to stay current on his or her mortgage payments, it’s likely that other invoices will also go unpaid, including those to the vendors who maintain the boat. Those vendors may wish to record a Notice of Claim of Lien with the Coast Guard, but that procedure serves no purpose other than to give notice to third parties of the claim.

Recording a Notice of Claim of Lien with the Coast Guard does not protect the vendor’s rights if another lienholder, or a mortgage holder, initiates a vessel arrest proceeding. The creditor who initiates the arrest must notify all known lienholders, but if the boat is sold at a marshal’s auction, title will transfer to the new owner free of all liens and encumbrances. This means that the competing lienholders are completely cut off from the vessel unless they make a formal appearance in the lawsuit under which the arrest was made.

When a vessel is arrested, additional lienholders may join in the lawsuit as “intervening plaintiffs,” to notify the court of their competing claim against the boat. After the boat is sold at auction, the court will order the funds to be distributed to the various lienholders according to established rules of maritime lien priority.

After a marshal’s auction, the court will only distribute money to lienholders who make a formal appearance as an intervening plaintiff, after ruling on the validity and priority of each competing claim. Other forms of notice, whether by recording a claim with the Coast Guard or sending a letter to the judge, are completely ineffective in a vessel arrest proceeding.

The good news in all of this is that the cost of appearing as an intervening plaintiff is typically a lot less than the cost incurred by the lienholder who initiates the arrest proceeding. The bad news is that, if you sit on your rights without participating in the lawsuit, your claim against the boat will disappear. Lienholders should contact a maritime attorney with experience in lien enforcement for more information.

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