Vedder Thinking | Articles Reregistering Vessels After Foreclosure Sale
Foreclosure against a vessel differs from foreclosure against other personal property for good reason. The U.S. Constitution confers admiralty jurisdiction on U.S. district courts, which have the power to order that vessels be arrested within their territorial jurisdiction and be sold free and clear of any liens or encumbrances whatsoever. A sale accomplished in this manner by federal court order generally is recognized by other nations as conveying title to the purchaser free and clear of liens while necessarily extinguishing all claims against the vessel. The U.S. recognizes this same power in equivalent courts in foreign countries. No other remedy available to the mortgagee, self-help or otherwise, can achieve the same result.1 Jurisdiction of the U.S. district court over a vessel arrested within its territorial bounds is in rem over the vessel itself as a separate person and does not depend on the presence of its owner or any basis of jurisdiction over its owner. Based on this in rem jurisdiction, U.S. courts often order sales of foreign-flag vessels arrested in U.S. waters, which vessels then are purchased at auction by new owners who reflag them in other foreign registries.
Most commercial vessels and larger pleasure vessels are registered under the laws and flag of a nation. The common effects of registration are that the vessel falls under the protection of, and regulation by, the flag state, and the flag state assumes a responsibility to regulate the vessel’s conduct and condition. These are long-standing concepts of customary international law and are reflected in the 1986 United Nations Convention on Conditions for Registration of Ships.
In the United States, vessel registration is defined in terms of “documentation” and is accomplished by complying with requirements set forth in 46 U.S.C. Chapter 121 and its implementing U.S. Coast Guard Regulations found in 46 C.F.R. Part 67. A vessel may be documented as a U.S.-flag vessel only if it is “wholly owned” by a United States citizen. Generally, an owner must establish title to the vessel by proving chain of title from the prior owner or manufacturer to itself. Nonetheless, U.S. law specifically states that a certificate of documentation is “conclusive proof of nationality for international purposes” but is not conclusive evidence of ownership in any title dispute.2
In the case of a foreclosure sale, U.S. law requires certified copies of the relevant court orders, whether domestic or foreign, authorizing the sale.3 If the auctioned vessel was registered in a foreign country, U.S. law requires evidence of the vessel’s removal from that registry before the vessel may be registered in the United States.4 This is normally satisfied by an official certificate of deletion issued by the registry of the foreclosed vessel. This is consistent with customary international law that a vessel may only be registered under, and fly the flag of, one nation at a time.
In some countries, the registration statutes permit a new owner to provisionally register a vessel, pending later delivery of a deletion certificate, at which point the permanent registry can be effected. Most often, a buyer provisionally registers its vessel by obtaining a “permission to sell” from the seller’s registry. The permission to sell is a comfort letter for the buyer, as well as a stated requirement of the new flag register, ensuring that the deletion certificate will be forthcoming upon return and cancellation of the seller’s registry document for the vessel. In a typical commercial sale of a vessel, a buyer requires such a permission, if not a full deletion, and also requires an abstract or similar official document confirming that, at the moment of sale, there are no liens or encumbrances (such as a mortgage) on the vessel, other than an encumbrance which will be directly paid out of sale proceeds.
Involuntary or “forced” sales are another matter, as the soon-to-be-divested owner generally is not motivated to cooperate in the title transfer. U.S. law provides a full palette of remedies to mortgagees and other maritime lien holders against vessels registered both in and outside the U.S., as long as the vessels are arrested in U.S. waters. U.S. law grants the U.S. district courts jurisdiction to order the sale of a vessel to satisfy unpaid claims on the application of the mortgagee or lienor. Such a sale is conducted by the U.S. Marshal under federal court order and conveys title to the vessel, free and clear of any liens, claims or encumbrances existing as of the date of sale.5 The case of Goldfish Shipping, S.A. v. HSH Nordbank AG demonstrates that, while U.S. law provides that a court-ordered sale of the vessel transfers title free of any encumbrances in certain circumstances this may not be sufficient to put the vessel’s past behind it.6
In Goldfish, a major international shipping bank foreclosed on a Turkish-flag vessel in the Port of Philadelphia.7 The defaulting Turkish vessel owner was not before the court. At auction, an unrelated buyer purchased the vessel and received a bill of sale from the U.S. Marshal, by order of the U.S. district court.8 The new owner provisionally re-registered the vessel in Panama and sailed with a cargo to the Mediterranean.9 The prior Turkish owner arrested the vessel upon arrival in Spain.10 After delays, the Spanish courts lifted the arrest, and the vessel sailed to Italy, where the prior owner re-arrested the vessel.11 More delays, and the vessel was released.12
The Turkish owner claimed that the vessel was still his, as it had not been deleted from the Turkish registry, which could not happen under Turkish law unless and until the mortgagee first released the mortgage.13 The mortgagee refused to file papers to release the mortgage on the Turkish register, claiming that this would also release the mortgagee’s claim to a deficiency under Turkish law.14 The buyer sued the mortgagee claiming that the mortgagee had an obligation, as any other seller would in a sale “free and clear,” to do whatever was necessary to permit the buyer to receive its bargained-for enjoyment of the vessel.15 The mortgagee claimed that it had done all it could without surrendering its deficiency claim and that a buyer’s claim can exist only against the prior owner, noting that a foreclosure sale in admiralty divested any claim of the prior owner in the vessel.16 The mortgagee also pointed out that the U.S. Marshal, and not the mortgagee, was the “seller” of the vessel.17
Ultimately, the Third Circuit Court of Appeals agreed with the mortgagee.18 The court held that the judicial sale did, in fact, result in the buyer receiving title free and clear of encumbrances.19 The actions by the prior owner, while certainly harmful o the buyer, were not caused by any failure in title (and, in fact, were unlawful and thus no different from any other wrongful arrest of the vessel); thus, the foreclosing lender was not liable for the actions of the former owner, nor was the foreclosing lender obligated to deregister its Turkish mortgage to prevent the former owner from continuing to attempt to arrest the vessel.20 In essence, the buyer was left to seek its own remedies against the former owner.21
There are a number of legal fixes for this problem under discussion in international legal circles, including a proposed international convention to strengthen foreign recognition of judicial sales of vessels and to establish more clearly the prior registry’s obligation to cancel the registration and issue the appropriate certificate. No silver bullet is on the horizon as of yet. In the meantime, a buyer in a foreclosure sale needs to take additional steps to make sure that it is not acquiring a vessel with unresolvable issues on reregistration.
The devil is very much in the details. Few nations accept decisions by administrators or courts in other countries requiring the country of registration to delete vessels from its national registry. This may be due in part to a lack of confidence in the integrity of the foreclosing nation’s courts or government. It also may be due to registry-state restrictions on the sale of vessels out of registry, particularly without registry-state prior approval. Moreover, the admiralty court sale orders and bills of sale do not address any requirement as to the treatment of the prior registration, as court orders and bills of sale merely establish good title on a going-forward basis.
So what can the responsible bidder do to avoid or mitigate the risk evidenced in the Goldfish case? First and foremost, the bidder should take into consideration the registry of the vessel at auction and consult with counsel on the mechanics of deleting the vessel from the prior registry, a necessary step in registering the vessel in a new jurisdiction after foreclosure.22
While foreclosure itself is not called into question by the Goldfish case, the perceived value of the collateral sold at auction may well be affected in the future, particularly for vessels under flags that are deemed troublesome or unreliable in releasing vessels from their registries. Lenders, as well as bidders, should consider the mechanics not only of entering a registry, but also of departing one.
1 Self-help remedies are, however, useful to preferred mortgagees as preliminary steps to the exercise of the foreclosure remedy. For example, mortgagees can use self-help to take physical control or direct the vessel to a location where she can be arrested.
2 46 U.S.C. Section 12134.
3 46 C.F.R. Section 67.77.
4 46 C.F.R. Section 67.55.
5 46 U.S.C. Section 31326(a).
6 See Goldfish Shipping, S.A. v. HSH Nordbank AG, No. 07-3518, 2008 U.S. Dist. LEXIS 93135 (E.D. Pa. Nov. 3, 2008), motion to amend judgment denied by 623 F. Supp. 2d 635 (E.D. Pa. 2009), aff’d, 150 Fed. App’x (3d Cir. Apr. 21, 2010).
7 Id. at 1.
8 Id. at 2.
9 Id. at 5.
11 Id. at 7.
14 Id. at 3.
15 Id. at 8–9.
16 Id. at 10–1 and 18.
17 Id. at 24.
18 See supra note 19 at 155.
19 Id. at 153.
21 Although no decision, published or otherwise, is yet available, there is apparently a similar scenario playing out in the High Court of Ireland, where a South Korean-flag vessel was sold at auction following arrest by a GECC affiliate, as mortgagee. See Geoff Garfield London, Geneva Player Pursues GE Arm, TradeWinds, March 31, 2011, also available at http://www.tradewinds.no/weekly/w2011-04-01/article579165.ece, published April 1, 2011 (last visited June 15, 2011). According to reports published in TradeWinds, the mortgagee refuses to discharge its mortgage of record in South Korea on grounds that such an action would defeat the priority of its claim in a related bankruptcy proceeding of the shipowner. The buyer claims that the mortgagee has a duty to do what it can to assure that the buyer has acquired title free of encumbrances. No resolution in the Irish courts has been reported thus far.
22 Unofficially, certain open registries encourage those planning to bid on foreclosed vessels to discuss these issues with the intended new registry in advance to determine if there are ways to provide assurances that the residual mortgage filings will not hamper successful registration following foreclosure.
Click below to download the complete newsletter featuring this article.