13. Foreclosure.—
A mortgage upon an American vessel, although necessarily recorded according to Federal law, is still only a chattel mortgage for many purposes and must be foreclosed in accordance with local law. This will be in one of three ways: by a suit in a court of competent jurisdiction to obtain a decree of foreclosure and sale, by a sale in accordance with local statutory provisions in respect of chattel mortgages, by exercise of the power of sale which is usually contained in the instrument itself. The last is the method best adapted to vessel property and carefully drawn mortgages usually contain plain and adequate provisions for that purpose. If, however, the mortgagee be an American citizen and the requirements of the Ship Mortgage Act, 1920, with reference to "preferred mortgages" have been complied with, the foreclosure proceeding is to be instituted in a United States District Court sitting in admiralty, and no one except an American citizen may purchase an American ship at a sale by admiralty decree in a suit in rem. The mortgagor's title can only be extinguished by foreclosure but stipulations giving the mortgagee the power, on breach of condition, to dispose of the mortgaged property, at public or private sale, and after applying the proceeds to his expense and debt, to account for the surplus to the mortgagor, are valid and may be executed without resort to a court. The mortgagor may appoint the mortgagee, as well as any other person, to sell his property for the purpose of satisfying his debts. The mortgagee should proceed strictly in accordance with the power of sale and carefully observe its terms in regard to notice, time and place. The conduct and fairness of such sales are open to investigation at the instance of the mortgagor and will be set aside on proof of unfair or oppressive conduct or deviation from the terms of the power or statute. It is not necessary to hold the sale on board the ship if the mortgage provides another place, but, in the absence of such a provision, it would be safer to so make the sale as there are authorities holding that the mortgaged property must be in view when the sale is made. There are numerous rules in the general law of foreclosure of chattel mortgages which are quite inapplicable to ships and much embarrassment may be avoided if the instrument is drafted with these in mind. The courts will enforce the contract as the parties make it, if its provisions are plain and are carefully observed. As in other cases, the sale may be adjourned from time to time and the mortgagee may employ an agent or attorney to make it. The debt may be used instead of money; the mortgagee may bid in the property himself and execute an appropriate bill of sale. The power of sale is merely cumulative and will not prevent a suit for foreclosure or an action at law on the debt. The sale is, of course, subject to all maritime liens superior to the mortgagee, but will extinguish all subordinate liens and subsequent titles if the mortgage was duly recorded.
Where an American ship subject to a "preferred mortgage" is sold at an admiralty sale at the suit of a lienor whose lien is inferior to that of the mortgage, the Ship Mortgage Act, 1920, provides that the vessel shall be sold free from all preëxisting claims, but the court shall, at the request of the mortgagee, the libellant or any intervenor, require the purchaser to give and the mortgagor[19] to accept a new mortgage of the vessel for the term of the original mortgage, and in that case the mortgagee shall not be paid from the proceeds of the sale and the purchase price shall be diminished in the amount of the new mortgage debt.