Vedder Thinking | Articles Recent U.S. Supreme Court Opinion Could Have Major Implications For Maritime-Related Industries
On Tuesday, January 15, 2013, the U.S. Supreme Court in Lozman v. City of Riviera Beach, Florida, 568 U.S.—(2013), held that a homemade plywood floating structure was not a “vessel” for purposes of Title 1, Section 3 of the U.S. Code. Section 3 provides that the term “vessel . . . includes every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.” This is the default provision that defines the term vessel wherever it occurs in the U.S. Code, except for those relatively few provisions that define the term differently for limited application. Section 3 does define the word vessel for a multitude of important provisions of maritime law, including the Jones Act, the Longshore and Harbor Worker Compensation Act, the Vessel Documentation Act of 1980 and the Ship Mortgage Act of 1920.
Justice Stephen Breyer, writing for a seven-member majority, announced that the Court had taken the case in response to “uncertainty in the Circuits” about application of the term “capable of being used.”
The Court’s majority opinion and a dissenting opinion authored by Justice Sonia Sotomayor, joined by Justice Anthony Kennedy, agreed that not everything that floats is a vessel and that the subjective intent of a vessel owner is irrelevant to the vessel status analysis. Citing its opinion in Stewart v. Dutra, 543 U.S. 481 (2005), the Court went on to say that “capable” in the definition must be applied in a “practical” and not a “theoretical” way. Then the majority announced a new test by stating that a structure would not be viewed as “capable of use” in transportation on water “unless a reasonable observer, looking to the home’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.” This passage is the first announcement of the “reasonable observer” who, thus far, is not otherwise described in terms of expertise or experience.
The Court also referred to its analysis of Lozman’s craft as a look at the “physical attributes and behavior of the structure.” It is unclear whether “activity” or “behavior” is a necessary observation if the physical characteristics are plainly what the reasonable observer might expect to find in a “vessel” or whether recent or current behavior is necessarily relevant. If, for example, a tanker operates in service for five years and is thereafter placed in “cold layup” in accord with Classification Society Rules, is “behavior” relevant for the layup period? Is capability affected because recommissioning may require three to six weeks before reentering service? What is the status of tank vessels devoted exclusively to long term offshore storage of product?
It also appears that a standard that requires evidence of a structure’s “activities” or “behavior” necessarily goes beyond a capacity analysis and defeats the purpose of the definition, which, by its terms, sets out two independent bases for a finding of “vessel” status—actual use and capacity. Indeed, Justice Breyer’s majority opinion also made important rulings on the “actual use” branch of the definition, by curtailing what the Court viewed as overly broad interpretations of “means of transportation” in some cases and by limiting the validity of arguments based on “actual usage” of a craft that the Court viewed as infrequent or inconsequential.
The Court agreed with the position taken by The Maritime Law Association of the United States (MLA) and other amici “to eliminate all consideration of evidence of subjective intent [of the structure’s owner]” but added that this view does not require “abandonment of all criteria based on ‘purpose’ [of the structure].”
The Court discussed at modest length examples of how its analysis might be applied in a variety of situations. The Court also acknowledged that a structure might lose its status as a “vessel” if it should become permanently attached to land or change its “characteristics” by conversion to a hotel, for example.
The MLA had also asked the Court to reaffirm the distinction between “vessel in navigation” and the concept of the “existential vessel,” but the Court in Lozman did not reach or address these points. Both of these issues, as well as the introduction of “activities” and “behavior” into the “capability” standard, leave serious concerns in the world of vessel finance.
Under U.S. law, a lender may only acquire a preferred mortgage on a “documented vessel.” A documented vessel must, of course, first be a “vessel” in the eyes of the “reasonable observer,” since the definition construed by the Lozman Court is the very same one which governs the Vessel Documentation Act and the Ship Mortgage Act.
The Court’s opinion acknowledges that the status of the structure can change as its physical attributes or activities change, invoking, again, the services of the reasonable observer. Although urged to do so by the MLA amicus brief, the Lozman Court did not address the effect of laying up vessels or what constitutes “permanent mooring” even though the word permanent is used freely through the opinion. If the reasonable observer finds that the structure is no longer a “vessel” under the Lozman test, the structure is no longer eligible for documentation, and the validity of the mortgage is more than questionable. The fact that the Coast Guard has not yet gotten around to removing such equipment from documentation is unlikely to create a safe haven for mortgagees.
The dissent in Lozman hit this nail on the head:
For example, without knowing whether a particular ship is a §3 vessel, it is impossible for lenders to know how properly to characterize it as collateral for a financing agreement because they do not know what remedies they will have recourse to in the event of a default. . . . The possibility that a shipowner like Lozman can depart so easily over water and go beyond the reach of a provider of necessaries like the marina in response to a legal dispute is exactly the kind of problem that the Federal Maritime Lien Act, 46 U. S. C. §31342, was intended to address.
The premier remedy under a preferred mortgage is in rem enforcement against a “vessel.” This remedy would, presumably, no longer be available if the status of a craft changes to “nonvessel” by divesting itself of “capacity” as a “means of transportation,” either by mooring itself permanently to land or by configuring itself for movement over water without carrying (or “transporting”) people or cargo. The same would be true of any maritime lien claimant, even though, for example, a supplier had provided bunkers or stevedoring services to the structure when it was a vessel, but at the time of attempted arrest it is not. Moreover, the exalted position of a preferred mortgage in foreclosure on a vessel might be lost, and no security interest under the Uniform Commercial Code can compensate for that.
As the MLA amicus brief pointed out, this situation is not merely a theoretical possibility, as a number of floating casinos are documented as “vessels” and encumbered by marine preferred mortgage debt, yet their on-board employees are not regarded as “seamen” entitled to maritime remedies for personal injuries or wrongful death. The MLA position was clear that “seamen” status properly depends on whether they are employed on a vessel and whether that vessel is in navigation. Shoreside floating casinos, which seldom or never leave the pier, are clearly not in navigation, regardless of whether they are “permanently moored” structures. Unfortunately, Lozman never addressed this or the elements of what constitutes “permanently moored.” Instead we are left with a relatively small and underdeveloped body of case law as well as a shallow Coast Guard guideline that any connection to shore which requires more than eight hours to separate means a structure is “permanently moored.” The MLA brief had urged a stiffer test such that permanent mooring would have to be akin to the attachment of the vessel to land as a fixture.
It is true that the issues of “in navigation” and “permanently moored” were not directly implicated in the Court’s decision in Lozman. However, these issues are of one piece with the problems arising from adding “activities” and “behavior” to the determination of “capability.” By not providing clarity on the connected issues of what it takes to lose vessel status and failing to separate the “existential vessel” from the “vessel in navigation,” the Supreme Court has probably only resolved the comparatively small questions of Mr. Lozman’s particular situation while further complicating the larger questions facing mortgagees, lienors and many others. Consequently, it is hard to differ with the dissenting opinion of Justice Sonia Sotomayor, which took issue with the majority’s new “reasonable observer” test for vessel status, likening it to the largely discredited “I know it when I see it” test for obscenity espoused nearly fifty years ago by Justice Potter Stewart. Justice Sotomayor’s very able opinion, and its treatment of venerable maritime doctrines, is presumably drawn from her experience presiding over maritime cases at the trial and appellate level in New York and will undoubtedly be consulted by future litigants and courts as an interpretive guide to the Lozman majority opinion and the actual state of the law in its aftermath.
Francis X. Nolan, III, of Vedder Price’s Global Transportation Finance practice, and John C. Cleary, of the firm’s Litigation practice, are resident shareholders in the Vedder Price New York office. They authored the amicus curiae brief in the Lozman case on behalf of The Maritime Law Association of the United States, accessible under “Library” on the website of The Maritime Law Association (www.mlaus.org). All views expressed are the authors’ alone and not for attribution to Vedder Price P.C., any client of Vedder Price P.C. or The Maritime Law Association of the United States.