The Ship Mortgage Act (supra) makes a sweeping exception to the foregoing rule in cases of American vessels where the mortgagee is an American citizen and where the parties fulfill certain formalities required by the Act and discussed in the next section. The Act provides that these mortgages shall be known as "preferred mortgages" and confers upon the courts of admiralty exclusive jurisdiction to foreclose them. There has yet been no judicial interpretation of this Act. Some doubt may be entertained whether it is within the power of Congress to convert ship mortgages into maritime contracts; that is to say, can Congress take a transaction, which has always been regarded as wholly foreign to the admiralty and confer upon it a maritime quality? The decision of this point is of the utmost importance and will be awaited with the greatest concern by every one interested in ships and shipping.

7. When Postponed to Other Liens.—

An ordinary vessel mortgage is a very inferior grade of security because it is subordinate to all maritime liens and has only a qualified and dubious standing in the only courts which enforce them. One who advances money to a ship or her owner on mortgage is bound to know that the ship navigates on credit, and must continue to accumulate liens in order to earn freight, and that she may be pledged for bottomry or incur liability for torts. He is therefore postponed to sailors' wages, salvage, towage, advances, bottomry, general average, repairs, supplies, collision, personal injury, damage to cargo, breach of contract, penalties, and liens created by local law which the admiralty will enforce.

Here again the Ship Mortgage Act, 1920, makes a radical change in the case of "preferred mortgages" given upon American vessels to secure American investors. The Act makes the lien of a "preferred mortgage" inferior to liens of prior date and liens for damages arising out of tort, for wages of stevedores when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of crew, general average and salvage, including contract salvage; but superior to all other liens, such for example as repairs, supplies, towage, pilotage, etc.

8. Form.—

No particular form is essential to a vessel mortgage except that the requisites of the Federal Statutes in regard to recording and conveyance must be observed if it is to be placed on record in the office of a collector of customs. They require that every instrument in the nature of a bill of sale or other conveyance or incumbrance of any ship or vessel, shall be duly acknowledged before a notary public or other officer authorized to take acknowledgments of deeds (7 U. S. Comp. St. §§ 7778, 7779). It should contain a copy of the last certificate of registration or enrollment. Government blank mortgages can usually be obtained at the custom house and are preferred, although any instrument following their general form will be sufficient. A bill of sale may be used, although absolute in its terms, and the fact that it is only security can be shown by parole.

Trust-deeds or mortgages securing issues of bonds are in general use where large amounts are involved. These forms are very elaborate and resemble railroad mortgages in their elaborate details. In all vessel mortgages, important provisions are those in regard to the insurance, the amount of liens which the ship may incur, the waters which she may navigate, and the rights of the mortgagee on default. It is desirable to provide for contingencies, as far as possible, by clear and definite agreements in the instruments.

To entitle a mortgage of an American vessel to an American mortgagee to the status of a "preferred mortgage" under the Ship Mortgage Act, 1920, giving its lien the superiority described in the preceding section, it is necessary that it should be recorded; that an affidavit be filed at the time of recordation to the effect that the mortgage is made in good faith and without design to hinder, delay or defraud any existing or future creditor of the mortgagor or any lienor; and that there be endorsed upon the ship's documents the names of the mortgagor and mortgagee, the time and date of the endorsement; the amount and date of the maturity of the mortgage. The formalities to be observed in the creation of "preferred mortgages" are described in detail in the Act which is printed in full in the Appendix and should be observed with scrupulous exactness.

9. Recording.—

No mortgage of any vessel of the United States is valid against third parties unless it is duly recorded in the office of the collector of customs where such vessel is registered or enrolled. She must be registered or enrolled by the collector of that collection district which includes the port to which such vessel shall belong at the time of her registry; which port shall be deemed to be that at or nearest to which the owner, if there be but one, or, if more than one, the husband or acting and managing owner of such vessel usually resides. Unless a mortgage is properly recordable in the custom house, the mere fact that it is recorded there is insufficient to give it validity against others than the mortgagor. Record in the wrong office and premature record in the right office are equally invalid. Thus a mortgage was held bad against general creditors in the case of the Empire Shipbuilding Company, 221 Fed. 223, where it was made before the ship was completed and recorded on the same day she was enrolled. The proper course would have been to first enroll the ship as a vessel of the United States and then execute and record the mortgage. As we have observed in Chapter II, § 16, supra, where a vessel at sea is mortgaged it is wise, in order to be safe until she returns, to record the mortgage at the home port, as shown by her outstanding document, as well as at the new home port if there is to be a change of home port.