Bank Loses Its First Preferred Ship Mortgage Status

In the case of BRANCH BANKING & TRUST CO. of VIRGINIA v. M/Y "BEOWULF," 23 Fla. L. Weekly Fed. D285a (S.D. Fla.  June 7, 2012) (Hurley, J.), a bank filed an in rem admiralty action to foreclose a first preferred ship mortgage claimed by mortgagee bank on defendant vessel, which was assigned second identification number after execution of mortgage, documented under different name, and sold to third-party purchaser for value, all without notice to bank. The third-party purchaser for value claims competing ownership interest in defendant vessel as subsequent innocent purchaser for value. The court found that the mortgagee bank is not entitled to preferred ship mortgage status under Ship Mortgage Act because the mortgage was invalid to create a security interest in defendant vessel where mortgagor did not hold good and valid legal title to vessel on day he executed the mortgage. The court reasoned that only a valid mortgage is eligible for preferred status under Ship Mortgage Act.

The court also found that notwithstanding mortgagor's failure to permanently affix the HIN to vessel in violation of federal law at time of application for initial issue of certificate of documentation, substantial compliance with recordation requirements of Ship Mortgage Act is adequate to show eligibility for preferred status, where there was no evidence of fraud or purposeful intent to evade or mislead on part of mortgagee. Irregularities in recorded mortgage documents or failure to comply with the minutiae of recording will not result in loss of preferred status of mortgagee where there is “honest and substantial compliance” with recordation requirements of Ship Mortgage Act. As a result, the court found that the bank's conduct justifies the equitable subordination of its claimed preferred ship mortgage to interest claimed by third-party purchaser for value gross, where the bank deviated from acceptable banking practices when it decided to forego a declaration of default on loan and granted a five-year extension of loan term without inspecting or reevaluating the collateral or insisting on proof of insurance and where bank failed to insist that mortgagor permanently affix the HIN on the vessel before initial documentation.The court noted the bank's handling of the loan to be "the product of egregious, reckless lending practices."

Thus based on the court's findings, it ruled that the mortgagee bank's complaint to foreclose a First Preferred Ship Mortgage was denied; entered  Final judgment is entered against the mortgagee bank and in favor of the third-party purchaser, which took the vessel free and clear of any mortgage liens claimed by the Plaintiff; and reserved jurisdiction to tax costs in favor of the third-party purchaser.

This is lengthy decision that is worth reading. The decision details the facts of the case, including the various security agreements involved, includes a discussion into the requirements of the Ship Mortgage Act (which is good reading for anyone regularly engaged in preferred ship mortgages), title and ownership issues, the legal theory of equitable subrogation, and what is required of a bank seeking preferred status under the Ship Mortgage Act. If you are interested in receiving a copy of this decision, please feel free to write to me at mov@chaloslaw.com and I would be more than happy to send you an e-copy of this decision at no charge to you.