A Lien Is a Lien Is a Lien, but a Maritime Lien Is Not

Recent Case Law

The recent case of Bank One Louisiana N.A. v. M/V Mr. Dean, 293 F3d 830 (5th Cir 2002), amply demonstrates the difficulty with wrapping one's arms around the concept of a maritime lien. In Bank One, BargeCaribe, Inc., chartered the Mr. Dean from Offshore Supply Ships, Inc., for a period of 1 year. During that timeframe, Offshore sold the vessel to Global Towing, LLC.

To finance the purchase, Global obtained a loan from Bank One for $2 million. Bank One obtained a preferred ship mortgage as security for repayment of the loan and recorded the mortgage toward the end of the charter agreement. The new owner thereafter breached the charter agreement by failing to make the vessel available to BargeCaribe for its intended use. Unquestionably, the charter was breached after the ship mortgage was obtained and filed with the Coast Guard.

The new owner, Global, also defaulted on the loan to the bank and the bank filed suit in federal court, and seized the vessel pursuant to its ship mortgage. The charterer, BargeCaribe, intervened in the lawsuit and asserted a maritime lien based on the breach of the charter agreement, which is a long recognized basis for assertion of a maritime lien against a vessel. BargeCaribe and Bank One then disputed the priorities of their respective claims as there would not be enough money from the proceeds of the sale of the Mr. Dean to satisfy both the charterer and the bank.

When Does a Maritime Lien Arise?

The main issue in the case involved the purely legal question of when a maritime lien for breach of charter "arises." The bank asserted that a maritime lien for breach of charter arises at the time the charter is breached. On the other hand, BargeCaribe contended that its lien arose at the inception of the charter agreement. Quite interestingly, the court noted that there were very few recent cases that even hinted at when a maritime lien arises and that the U.S. Supreme Court had last discussed the priority of maritime liens in 1898. It also noted that there were no recent circuit court of appeals cases and that various district courts addressing the issue were split in their results. (The author notes that it happens more frequently than one might think that extremely old legal decisions end up providing the basis for maritime issues.)

The Fifth Circuit Court of Appeals began its analysis by reviewing the older case law and harkening back to the concept that once cargo was loaded aboard a vessel, a lien attached as soon as the cargo was aboard the vessel. Thus, a lien attached to the vessel related to such cargo without there having been any problems which might give rise to a claim by the cargo owner. For that proposition, the court cited the 1860 case The Edwin, 65 U.S. (24 How.) 386, 394 (1860).

The cornerstone for the Bank One court's ruling is the generalized statement contained in an 1867 case as follows.

A maritime lien is the foundation of the proceeding in rem, a process to make perfect a right inchoate from the moment the lien attaches; and whilst it must be admitted that where such lien exists, a proceeding in rem may be had, it will be found to be equally true, that in all cases where a proceeding in rem is the proper course, there a maritime lien exists, which gives a privilege or claim upon the thing, to be carried into effect by legal process. The Bold Buccleugh, 7 Eng. Rep. 267, 284 (1851) quoted in The Rock Island Bridge, 72 U.S, (6 Wall.) 213, 215 (1867).

The Fifth Circuit used that generalized statement for the proposition that a maritime lien can attach at the beginning of a charter—yet only be enforceable at the time of breach—because the lien remains "inchoate" until "perfected." [The author hastens to add that any discussion of "inchoate rights" and "perfection" of liens is enough to bring a cold sweat to the typical practitioner.]

The court thus concludes that a maritime lien attached at the commencement of the charter between BargeCaribe offshore supply ships, that the subsequent breach of the charter perfected the lien and that the lien related back to the time of the beginning of the charter.

The Executory Contract Doctrine

The court then goes into a discussion of the "executory contract doctrine." Again, not satisfied that it had cited a full quotient of mid-1800s Supreme Court cases, the Bank One court cites several more. Bank One had attempted to argue that the charter agreement was an executory contract in that it was still in the process of being performed at the time of the breach and thus no lien attached until the contract was actually breached, which was a date after the recording of its ship mortgage.

That argument has support at least from one of the most respected admiralty treatises, Schoenbaum, Admirality and Maritime Law, Section 9-2, at 506-507 (3rd ed. 2001). The Bank One court noted that, but stated: "We choose instead to rely on the above case law and on other treatises." The court goes on to note that the executory contract doctrine "merely restates the fact that an inchoate maritime lien attaches once the cargo is loaded. This is the meaning of our more recent statement that 'under the executory contract doctrine, a maritime lien for breach of charter party arises once (and to the extent that) cargo is loaded on board.' Cardinal Shipping Corp. v. M/V Seisho Maru, 744 F2d 461, 467 (5th Cir 1984)."

Additionally, the court noted that a charter agreement ceases to be executory once performance of the charter is begun, and from that proposition made the leap of logic that since the time charter was not an executory contract, a lien "attaches" as soon as the vessel is put at the disposal of the charterer under the charter agreement. The court thus concluded that BargeCaribe's maritime lien "arose" before the preferred ship mortgage was recorded—because it "attached" as soon as the vessel began performing under the charter—despite the fact that the charter was being performed perfectly well for many months.

The Bank One court had to do some dancing around recent case law and did so in certain instances by finding that the statements contrary to its current holding were dicta in the other cases. To get around one of its own recent decisions, the court stated, "While we were apparently under the impression that breach of charter confers a maritime lien at the moment of breach, we don't think our passing dicta should lead us to disregard Supreme Court precedent."

The Bank One court had one final hurdle to jump which related to the Ship Mortgage Act, 46 U.S.C. Sec. 31301, et seq. Bank One took the position that while the statute says nothing explicitly on the subject issue, the statute itself would be undermined if maritime liens for breach of charter attached at the beginning of the charter, thus making a lender subordinated for a longer period of time than would have been originally contemplated.

That hurdle was jumped by concluding that a rule establishing an inchoate maritime lien at the beginning of charter would result in greater certainty, which would assist parties in maritime transactions. The author submits that this result neither gains greater certainty nor does it assist the parties to maritime transactions. Any result that allows a contract that is clearly breached after a preferred ship mortgage is recorded, and the breach can not be traced back to a point before the mortgage, can do nothing but add to the uncertainty in the law of maritime liens.

The difficulty faced by practitioners in this area is superbly demonstrated by the Bank One court's statement as follows.

The parties therefore advanced two different readings of the law, each of which may demonstrate a congressional purpose. Because of this equivocation, we cannot find guidance in either, instead, we choose to follow the precedent begun by the Supreme Court in the 1860s and carried forward into this century by the circuit and district courts.

The court held that BargeCaribe's maritime lien became perfected when the vessel owner breached the charter but the lien "arose" before the mortgage was filed and thus the charterer had priority to the sales proceeds over the bank.

Conclusion

In the author's view, practitioners in this area should rightfully view the Bank One decision with shock and horror. A logical extension of this holding would seem to be that any maritime contract that might give rise to a maritime lien if breached trumps a preferred ship mortgage. Arguably, a supplier of necessaries to the vessel who is not in breach prior to a ship mortgage being recorded but has a lien against the vessel for some breach of that contract after the recording of a mortgage might trump a mortgage, and there would be virtually no way for a reasonable lender to have determined that eventuality as even a remote possibility short of knowing every detail of the vessel's operation from many months prior to the taking of a ship mortgage up to the very moment of the recording of such mortgage.

Undoubtedly, that was not the intent Congress gave to both the federal Maritime Lien Act and the Ship Mortgage Act. As can be readily seen, a maritime lien is anything but a typical "lien."