The law of the sea

by George L. Canfield; J. Y. Brinton; George W. Dalzell

III. Preferred Mortgages Under Merchant Marine Act

The law in regard to ship mortgages is highly technical and reference only will be made here to the general provisions of the Merchant Marine Act which makes far-reaching changes in the existing system in an effort to give added value to mortgage security on a ship, a form of security which heretofore has been of very limited value on account of the subordination of the mortgage, which is not a maritime contract, to all maritime liens, whether arising out of contract or tort.

The present law gives to a duly recorded preferred mortgage priority except as to (1) liens arising prior to the recording of a mortgage in strict conformity to the provisions of the act; (2) liens for damages arising out of tort; (3) liens for wages of stevedores when employed directly by the owner, operator, master, ship's husband or agent of the vessel; (4) liens for wages of the crew of the vessel; (5) liens for general average; (6) liens for salvage, including contract salvage; and (7) court costs and expenses.

If a mortgage covers a ship of over 200 gross tons the material facts regarding it must be endorsed on the ship's papers. There must also be filed an affidavit that the mortgage was made in good faith, without the intent to delay or defraud. It must appear that the mortgagee is a citizen of the United States and that the mortgage does not stipulate that the mortgagee waives its preferred status. If the mortgage includes property other than a vessel it must provide for the separate discharge of such property by the payment of a specified amount, and if it includes more than one vessel it must similarly provide for the separate discharge of each vessel on the payment of a specified amount, in default of which, the court, in a suit on the mortgage, is to determine the proportionate charge.

Two certified copies of every preferred mortgage are to be delivered by the collector to the mortgagor, who is required to use due diligence to retain one copy on board the vessel, and to cause it and the ship's documents to be exhibited by the master to any person having business with the vessel which may give rise to a maritime lien or to the sale of the vessel. Upon request, the master is required to exhibit to such person the ship's documents and this copy of the mortgage. Upon request of the mortgagee, the mortgagor is required to disclose in writing, before the execution of any preferred mortgage, the existence of any maritime lien prior to the mortgage, that is known to the mortgagor, and, without the consent of the mortgagee, the mortgagor is forbidden, after the execution of the mortgage and before the mortgagee has had reasonable time to record the mortgage and have the necessary endorsements made, to incur any obligations creating liens on the vessel other than those for wages, for general average or for salvage.

The law permits the preferred mortgage to bear any rate of interest agreed to by the parties. It provides severe penalties upon the master for failing to exhibit the ship's documents or the copy of the mortgage, when demanded, and permits local inspectors to suspend or cancel the master's license for any such violation. As to the mortgagor who fails to make disclosure of liens already referred to, or who incurs new liens with attempt to defraud, the law provides a maximum fine of $1,000 and imprisonment for two years, and makes the mortgage then immediately payable. It also subjects the collectors of customs and the mortgagor to personal liability for loss occasioned by their failure to perform their duties under the act and opens the federal courts to such suits.

Under the same act jurisdiction of all suits to foreclose a preferred mortgage is vested exclusively in the District Courts of the United States. Authority is also given to bring suit in personam in the admiralty, in the United States District Courts, against the mortgagor.

The surrender of the documents of mortgaged vessels without the approval of the Shipping Board is prohibited, and the Board is directed to withhold such approval unless the mortgagee consents to the surrender. By resolution of the Board this law is interpreted as not applying to cases in which owners merely renew licenses or change documents incident to change of trade and where the ownership remains the same.

Elaborate provisions are also to be found covering the formal procedure in case of sales of mortgaged vessels, together with a provision that no rights under a mortgage shall be assigned to any person not a citizen of the United States without the approval of the Board, and that no vessel shall be sold in a suit in the admiralty to any person who is not a citizen.

The legality of the provisions conferring upon the federal courts the right to enforce mortgage liens which are of a nonmaritime character, is much debated and must await final decision by the Supreme Court. If the court should decide against the legality of these provisions serious and difficult questions will be presented as to whether the act as it now stands will be effective to give preferred status to such a mortgage, under the radically different procedure which must then be resorted to.

The act also revises the law on the subject of the creation of maritime liens for necessaries. It provides that persons furnishing repairs, supplies, towage, etc., on order of the owner or an authorized agent shall have a maritime lien on the vessel without being required to prove the credit was given to the vessel; defines the persons who are to be presumed to have authority from the owner to procure repairs, etc., including the agents of a charterer; and permits the waiving of such liens by those furnishing the supplies or services, subject to certain existing specified rules of law.