Ships are expensive, which means that they can be used as collateral for more than one debt at a time. This reality often leads to conflicts among competing creditors with liens on the vessel. Since ships are mobile and can traverse the waters of more than one state, the federal government has exercised jurisdiction over ship mortgages in the form of the Ship Mortgage Act. This Act and its implications form most of the law applicable to ship mortgages.
The Federal Ship Mortgage Act
The federal Ship Mortgage Act created the Preferred Ship Mortgage as an alternative to a mortgage under state law. Creditors who meet the qualifications and create such a mortgage are entitled to priority over most (but not all) possible creditors that may have claims against the ship. If the lender, instead, relies on a state mortgage (which almost never happens), the creditor will rank near the bottom of the line of creditors in the event of a foreclosure.
Requirements for a Preferred Ship Mortgage
Following are some of the requirements for a Preferred Ship Mortgage:
The mortgagee must be a U.S. citizen or an FDIC-insured, state or federally chartered, financial institution;
The vessel must have been built in the US; and
The mortgage must cover the entire vessel, including fixtures.
Other requirements exist as well. One of the benefits of a preferred ship mortgage, however, is that there are no limits on the interest rate that can be charged – even state usury laws are generally preempted under the Ship Mortgage Act.
Even with a Preferred Ship Mortgage, your lien will not necessarily enjoy priority over all other claims. Claims that enjoy superiority over preferred ship mortgage claims include:
Some claims by vessel employees
General average liens
Despite these limitations, a preferred ship mortgage is probably the most reliable way of holding a lien against a ship.
If the borrower defaults on the mortgage, the mortgage holder can choose between two possible remedies:
Take action against the ship itself in federal court. If the action is successful, the ship can be sold and the proceeds can be used to pay the mortgage The disadvantage of this method becomes apparent when the proceeds of the sale are insufficient to pay off the mortgage.
Take action against the shipowner in state or federal court. An action against the shipowner allows you to secure a deficiency judgment that the owner will be ordered to pay if the proceeds from the sale of the ship turn out to be insufficient to cover the mortgage.
Take the First Step Today
If you anticipate litigation over a ship mortgage or if you simply need transactional advice so that you can more intelligently explore your options, call CKB Vienna LLP today at 909-980-1040, or fill out our online contact form to learn how we can help you. We serve clients from Rancho Cucamonga and surrounding areas, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.