I loaned money to a former business partner and took a security interest in his boat as collateral for the loan. I perfected the security interest by recording a Financing Statement (a “UCC-1”) with the California Secretary of State. This is something that I have done through my company many times, and perfecting my security interest in the collateral in this manner has always been an effective way to secure these private party loans. I recently learned that the boat was siezed by the U.S. Marshals in a Federal Court proceeding to foreclose on a shipyard lien that was never recorded anywhere. I contacted the shipyard’s attorney and he said that we have no claim because our security interest in the boat was not properly recorded. Can you shed some light on this?
The rules that govern marine lending and indebtedness can be complicated and somewhat arcane. A wrong turn can be messy. We will dive into the weeds in a minute, but the short answer for our reader is that all perfected maritime liens against a boat are senior to all non-maritime claims. As such, the maritime liens must be satisfied in a foreclosure action before any of the non-maritime claims are paid. Our reader’s claim is secured through a recorded UCC lien, which makes it a non-maritime claim, which will complicate things significantly. So, let’s look at the details.
A lien – any lien – is a financial security device that provides collateral to secure payment of an obligation. For maritime liens, the underlying claim must be something that provides a service or benefit to the vessel (rather than to the owner), and that service must have been requested by the owner or the owner’s representative. Regardless of the nature of the particular lien, the question of whether a lien is valid depends on whether various requirements have been met, all separate from the question of whether the money is actually owed. This is known as “perfecting” the lien.
Our reader is familiar with the requirements for perfecting a lien on collateral for business loans that he has funded. These liens are typically against business equipment, machinery, or other types of personal property that don’t have a separate title recorded with a government agency (such as a boat or a car). Perfecting a lien against this type of property requires the recording of a Financing Statement, known as a “UCC-1” form, with the Secretary of State for the state where the property is located.
The lien perfecting process is the area where maritime liens differ most significantly with land-based liens. A maritime lien, assuming it relates to services performed for the benefit of the vessel, is automatically perfected without recording anything anywhere. So, there is no need to “lien a boat.” A Notice of Claim of Lien (“NCL”) may be recorded with the Coast Guard’s National Vessel Documentation Center (“NVDC”), but the recording is entirely optional. The Coast Guard expressly warns that their acceptance of a NCL for recording provides no evidence one way or another about the validity of the claim. Validity is established and the lien is enforced through a complicated and expensive procedure that requires the filing of a lawsuit in Federal Court and a “civil arrest” of the vessel by the U.S. Marshals.
Our reader was confronted by a lien foreclosure lawsuit relating to an unrecorded shipyard lien, but he may also need to deal with other maritime claims, including ship mortgages. A Preferred Ship Mortgage (“PSM”) is a federally governed security device under which a boat owner pledges the boat as collateral for a loan or other obligation, and it has priority over all tax liens, state-law liens, and most other maritime liens in the event of a foreclosure. It is technically not a maritime lien, because it provides a benefit to the owner rather than to the boat itself, but its senior lien status is provided by a federal statute. Unlike other types of maritime liens, a PSM must be recorded with the NVDC to perfect the claim against the boat.
Looking at these rules for perfecting a claim against a boat, it appears that our reader’s efforts to recover some of the funds owed to him through the sale of the boat may be in jeopardy. But he is not entirely out of luck. If the market value of the boat exceeds the combined amount of the valid maritime liens against the boat, his filing of the UCC-1 with the Secretary of State may allow him to make a claim against that surplus under two scenarios. First, his recorded non-maritime lien protects him against other non-maritime creditors. Second, his lien gives him a claim against the surplus funds from the sale, which might otherwise be returned to the boat owner.
The bottom line is that the boating world usually comes with its own set of rules, whether through lending laws or employment laws or the rules of the road, and a consultation with a maritime attorney is usually a good idea when you operate within that world.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at ,www.weilmaritime.com, or via email firstname.lastname@example.org.