Must a Foreclosure Occur Before a Bank Sells a Repossessed Boat?

We are in the process of buying a boat that is a bank repo, and we would like to know a little about the process. We were advised that the boat is Coast Guard-documented, so we asked the broker to obtain a title history for us. It now appears that title is still in the name of the previous owner and that the bank never foreclosed on its mortgage. Is this a proper method for the sale of a repossessed boat? We had always understood that a foreclosure sale of a documented vessel must be conducted through a U.S. Marshals’ auction.
Our reader is partially correct. The enforcement of a maritime lien against a documented vessel must usually be performed by the filing of a lawsuit in federal court and the accompanying “civil arrest” of the vessel by U.S. Marshals. There are limited circumstances where this procedure may not be necessary, but for the most part, the enforcement of a maritime lien is a complicated process. A mortgage, however, is a unique type of claim against a vessel and enforcement may be possible through a simplified procedure.            

Maritime liens arise from a wide range of claims involving a vessel, but all maritime liens fall under one of two umbrellas: They either involve services that provide some direct benefit to the vessel (such as shipyard work or a fuel purchase), or they arise as a consequence of some event that directly concerned the vessel (such as a personal injury aboard the vessel or a salvage claim involving the vessel).            

A mortgage does not fit within either of these categories. It provides no benefit to the vessel and it does not relate to any particular event. Instead, a mortgage provides a benefit to the vessel owner by allowing him or her to borrow money, and to the lender by providing collateral for the loan.            

As we have discussed many times in this column, most maritime liens arise without the need for a written document and without the need to record the claim with the Coast Guard, or anywhere else (see, for example, “Ask a Maritime Attorney — A Lesson on Liens,” The Log, August 24, 2006). A mortgage is the exception to this rule because it is technically not a maritime lien. A mortgage against a documented vessel (technically known as a “Preferred Ship Mortgage”) must be in writing, it must properly identify the vessel, it must include the notarized signature of the vessel owner and it must be recorded with the Coast Guard.            

A conventional maritime lien may include a contract between the parties, and we often see work orders or similar paperwork in connection with a shipyard project or a significant engine repair. However, since these forms are not required for the perfection or enforcement of a maritime lien, the language in that paperwork varies quite a bit between the various service providers, and we often see no paperwork at all.            

Conversely, since a mortgage must be in writing, the form contracts that are used have evolved to the point where the rights and responsibilities of the parties are set out in considerable detail, and the language is very common from lender to lender.  From the standpoint of our reader’s question, the most significant language found in almost all Preferred Ship Mortgages is a provision that allows the lender, upon default by the vessel owner, to repossess and sell the vessel “without judicial process.” Courts have upheld this provision and interpreted it to mean that the lender may proceed without the involvement of the court, repossess the vessel through a private repossession and sell the vessel through a private sale.            

A potential buyer may therefore purchase a repossessed vessel in a private sale without concern about the lender’s legal authority to sell the vessel — assuming, of course, that the lender had a properly recorded mortgage and that the boat owner had, in fact, defaulted on the loan and mortgage. The lender must prepare an affidavit of repossession attesting to its right to foreclose (authorized pursuant to the Code of Federal Regulations, Title 46, sec. 67.83), and the affidavit will be submitted to the Coast Guard with the Bill of Sale.            

So, a lender may repossess and sell a vessel through the simplified procedure described above without a court order, but this may not always be the best approach for the lender or a potential buyer.            

A lender may wish to use the federal court procedure, because it is performed with the participation and oversight of a U.S. Marshal and a federal judge. The marshal has a badge and a gun, and as such, any possibility of a confrontation with the boat owner at the time of the repossession is minimized. The judge is involved at every step — and questions involving the disposition of personal property aboard the boat, claims by competing creditors or disputes about whether the vessel was sold at a fair price are quickly and conclusively resolved by the judge.            

Buyers may prefer the federal court procedure because they are assured of obtaining clear title at the time of their purchase. Only a federal judge may issue an order that is recognized anywhere in the world to sell a vessel free and clear of all liens.            

In the end, lenders will typically choose the foreclosure method that makes the most sense under the circumstances presented, based upon the value of the boat, the amount of equity involved and the likelihood of competing creditors. The federal court procedure is quite expensive, and they will avoid that cost if they can.            

A buyer who is considering the purchase of a repossessed vessel through a private sale should consult an experienced maritime attorney if he or she has any questions about the issues discussed here.

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