What Happens When a Boat Is Jointly Owned and One Partner Files Bankruptcy?

My husband and I own a sailboat and keep it in a marina in Los Angeles Harbor. We have a past due balance with our marina and my husband is in the process of filing a Chapter 7 bankruptcy. I am not filing bankruptcy, but my name is on the title for the boat. Will the marina be able to place a lien, or seize the boat after the debt has been discharged?

As a preliminary matter, I should remind our readers that the recording of a Notice of Claim of Lien with the Coast Guard does not amount to “placing” a lien on the vessel. A maritime lien is automatically perfected at the time of the transaction that creates it, and a true maritime lien will be valid even if the lienholder never files a single piece of paper with the Coast Guard. Note that we have discussed this issue often in prior installments of this column (for example, “A Lesson on Liens,” The Log, August 24, 2006).

Another preliminary concern for our reader would be the fact that California is a community property state, and an individual’s assets and debts are both shared with their spouse. Various exceptions exist to this, but the bankruptcy of the reader’s husband may have the effect of simply transferring those obligations over to her. This particular aspect of the case has nothing to do with maritime law, and she should consult her husband’s bankruptcy attorney for a more accurate analysis.

Assuming that she is not concerned with the community property issue, the court will treat the husband and wife as a partnership, and the creditors will have a claim against the ownership interest of the assets of the bankrupt partner. If a specific fraction or percentage ownership has been identified, the non-bankrupt partner may be able to protect their specific ownership interest. If the asset is owned jointly with no reference to a specific division between the parties, it is likely that the creditors may pursue the entire asset.

Further complicating this analysis is the fact that in a maritime bankruptcy, the bankruptcy judge may know little or nothing about maritime liens. And, unless he or she is educated by the attorneys in the case, the claims against the vessel may not be handled properly. As such, the treatment of these claims in bankruptcy may differ from case to case regardless of the actual legal requirements.

A maritime lien is a security device that places the lienholder in the position of a secured creditor, similar to a mortgage lender, even if the lienholder never files anything with the Coast Guard. As a secured creditor, a maritime lienholder or mortgage lender will have a claim against the entire vessel, regardless of the percentage owned by any of the partners. The lienholders may therefore satisfy the claim directly from the proceeds of the sale of the boat.

In the end, the answer to our reader’s question will probably turn on the expertise and experience of the lawyers involved in the case. If the lienholders are not aware of their rights against the vessel, they may fail to identify themselves to the court as secured creditors and their recovery may be limited to the specific ownership interest of the bankrupt owner. If, on the other hand, the parties are experienced in this area of law, the boat will be subject to sale during the bankruptcy proceedings. This is obviously a very complex area of law, and it is particularly important in this type of case that the parties seek qualified legal counsel.