Can My Boat Be Taken by a Lien Holder If I Declare Bankruptcy?

Last year, I was sued when I withdrew from an agreement to buy a boat. The agreement called for me to give my boat and cash to the seller in exchange for his boat, but I had to back out when I learned that I could not transfer my liveaboard status to a bigger slip. I won’t go into the details, but I lost the lawsuit — and a sizeable judgment was entered against me. The judgment has been recorded with the Coast Guard as a maritime lien against my boat — which I thought was pretty unfair, since the dispute actually involved both boats. I now plan to file bankruptcy, but I am concerned that the lien may allow the plaintiff to seize the boat, even with the bankruptcy. Can I do anything to protect the boat?
Our reader is facing at least three important questions: First, does a claim relating to a dispute over the sale of a boat give rise to a maritime lien against the boat? Second, if no lien arises from such a dispute, how can a lien be filed under those circumstances, and what can be done to remove the lien? And third, what are the consequences of all of this if he files bankruptcy?

Let’s take a brief look at each of these questions.

A dispute over a boat sale transaction will never give rise to a maritime lien, regardless of how many boats are involved and regardless of whether a lawsuit is filed. Generally speaking, maritime liens arise when services are provided to a vessel that relate to the operation and maintenance of the vessel. There are exceptions to this definition, but a dispute between a buyer and a seller of a boat cannot give rise to a maritime lien, because the underlying transaction does not provide any service to the vessel.

So, since there is theoretically no basis for a maritime lien, what can be done about a lien that is filed? Frequent readers of this column are aware of the various idiosyncrasies that surround maritime liens. This includes the fact that the Coast Guard will essentially accept anything for recording, whether or not it amounts to a valid maritime lien.

The Coast Guard takes no position whatsoever on the validity a claim against a vessel. In fact, the instrument that is recorded is not even called a lien. It is a “Notice of Claim of Lien,” and the title of the document describes it perfectly.

It is simply a notice that somebody CLAIMS to have a lien. It is NOT necessarily a lien, and as such, recording the notice has no legal effect whatsoever.

If the claim actually does give rise to a valid maritime lien, the lien is instantly perfected without the need to record it anywhere. The only purpose of the recording procedure is to provide notice of the claim.

What can be done if a Notice of Claim of Lien is filed when the underlying claim is not a valid maritime lien? This is one of those times when you really do need to hire an experienced maritime attorney. The attorney would probably start with a demand letter that would explain the nature of a maritime lien, but in the end it may be necessary to file a lawsuit against the claimant to resolve the dispute. The good news is that a federal statute allows the boat owner to recover attorney’s fees if litigation is necessary to clear up a Notice of Claim of Lien that was recorded in bad faith.

Unfortunately, even if the claim is removed from the vessel’s title, a judgment creditor may still come after the boat. A judgment creditor may pursue any of the debtor’s assets, including bank accounts, cars, boats or bicycles to satisfy the judgment. This means that they may ask the judge in the underlying lawsuit to order the boat to be seized and sold to satisfy the judgment. However, the fact that the claim is not a maritime lien does have several consequences that will complicate the creditor’s efforts to collect.

First, the claim of a judgment creditor is junior to all valid maritime liens or mortgages. This won’t help the boat owner very much, but lien priority is critical in a case where multiple creditors are seeking custody of the same asset.

Second, since the claim is not a lien against the boat, the claim of a judgment creditor is an unsecured claim. This could be very important if the boat owner files bankruptcy, since the claim would be lumped in with other unsecured claims such as a credit card bill or a utility bill. And in the case of our reader who lives aboard his boat, he may seek protection under California’s “homestead exemption” (Code of Civil Procedure sec. 704.710), which may protect a homeowner’s equity from being seized by unsecured creditors.

As always, each specific case will bring different facts and legal issues that should be discussed with an experienced attorney. A case like this may, in fact, require the expertise of attorneys from several different practice areas, since it involves both bankruptcy and collection law in addition to the maritime law questions.

Share This:


Your email address will not be published. Required fields are marked *