What’s the Difference Between Maritime Liens and Mortgages?

I reviewed one of your recent columns in The Log, discussing the fact that maritime liens will amount to a valid claim against a boat, even if the claim is never recorded with the Coast Guard. Can you explain whether this is true for mortgages, as well? We have a mortgage on a boat that was properly drafted and notarized, but never recorded. We recently learned that several people have filed liens against the boat after the date of our mortgage, and we are concerned that our security interest in the boat may be compromised.

The answer to this question requires an understanding of the differences between maritime liens and mortgages.

As we have noted in previous installments of this column (for example, “A Lesson on Liens,” The Log, Aug. 24, 2006), maritime liens are complicated security devices that have little in common with liens against real property. One of the more confusing distinctions between the two types of liens may be found in the respective recording systems.

A maritime lien may be valid without recording anything with the Coast Guard, and the Coast Guard will allow practically anything to be recorded against the title of a vessel. In recognition of this, the instrument that is recorded is actually described as a “Notice of Claim of Lien” rather than a “lien.”

The Coast Guard’s National Vessel Documentation Center warns that “neither the filing of a notice of claim of lien nor the acceptance by the Coast Guard of such a notice is a guarantee that the claim is valid or enforceable.” The recording of a maritime lien therefore has almost no legal significance, other than to give notice to the world that somebody thinks they have a claim, and to require anyone else with a claim to give notice to the other recorded claimants.

A vessel mortgage is the one exception to this rule. A mortgage must be recorded to be a valid claim against the vessel, and the document must include all of the information set forth in the Coast Guard’s recording regulations. The reason for the different treatment is that a mortgage is not technically a maritime lien — and until Congress acted in 1920, a lender was unable to take a vessel as security for a loan.

Generally speaking, any service that is actually provided to a boat will automatically qualify for a maritime lien when the work is completed, so long as the work did something to benefit the vessel and it was done with the consent of the person in charge of the vessel. A mortgage provides assistance to the buyer of a boat, but it does not provide any benefit to the boat itself. As such, a mortgage will not give rise to a maritime lien. The U.S. Supreme Court recognized this distinction as far back as 1854, by explaining that “the mere mortgage of a ship … is entered into without reference to navigation or perils of the sea.”

After World War I, risk capital was required to finance the sale of a substantial fleet of government-owned ships to private buyers. But lenders were understandably reluctant to advance funds for these transactions if they could not take the ship as collateral for the loan. The Federal Ship Mortgage Act of 1920 was enacted to fill this void, and to encourage the establishment of a strong U.S. merchant marine fleet.

Today, maritime liens are covered by various federal statutes, but they existed for centuries without the help of any government legislation. Vessel mortgages did not exist until the Ship Mortgage Act was enacted in 1920, and all of the rules regarding the enforceability of a vessel mortgage are set forth in that body of law. The regulations promulgated by the Coast Guard to enforce the Ship Mortgage Act include a recording requirement. Simply put, there is no such thing as a vessel mortgage that is not properly recorded with the Coast Guard as a “preferred ship mortgage.”

The mortgage that our reader refers to in his question may well be a valid promissory note between that specific borrower and that specific lender, but it is an unsecured note with no relationship to the vessel. In other words, assuming the promissory note is properly drafted, the money will be validly owed by the borrower to the lender, but the lender cannot repossess the boat to enforce the obligation.