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In re Alberto

argued: February 9, 1987.

IN RE PASQUALE ALBERTO, DEBTOR
v.
MARYLAND NATIONAL BANK, APPELLANT



On Appeal from the United States District Court for the District of New Jersey, Camden, C.A. No. 86-0012.

Author: Stapleton

Opinion OF THE COURT

BEFORE: HIGGINBOTHAM and STAPLETON, Circuit Judges, and CONABOY, District Judge*fn*

STAPLETON, Circuit Judge

In this case, we must decide whether the lien of a ship mortgage properly filed with the United States Coast Guard more than 90 days before the ship mortgagor filed a bankruptcy petition may be defeated by the bankruptcy trustee because the Coast Guard did not record the ship mortgage until after the bankruptcy petition was filed. We conclude that, under the Ship Mortgage Act of 1920 ("SMA"),*fn1 a ship mortgage is valid against third parties when it has been properly filed for recordation with the Coast Guard and retained by the Coast Guard in a manner that permits prospective creditors to learn of pre-existing liens with reasonable effort.

I.

Pasquale Alberto ("Debtor") purchased a motor yacht ("the vessel") from Jackson Marine Sales pursuant to an Installment Sale Agreement-Security Agreement, which the seller assigned to Maryland National Bank ("Bank"). The Security Agreement required the Debtor to "complete and execute any documents deemed necessary by [the Bank] to enroll the vessel as a vessel of the United States and to place the [Bank] in the position of a preferred ship's mortgagee." App. at 258.

On August 12, 1983, the Bank, through an agent, applied for federal documentation of the vessel at the United States Coast Guard Office of Vessel Documentation in Philadelphia and the Coast Guard thereafter issued notice of an award of an official number to the vessel. On January 6, 1984, the Debtor executed a "First Preferred Mortgage of Vessel" in favor of the Bank and the Bank later filed a financing statement covering the vessel with the New Jersey Secretary of State. On April 5, 1984, the Coast Guard issued a Certificate of Documentation for the vessel.

On April 9, 1984, the Bank's agent sent the mortgage and appropriate accompanying documents to the Coast Guard for recordation. The Coast Guard marked these documents as received on April 13, 1984. It was not until October 30, 1984, six and a half months later, however, that the Coast Guard recorded and indexed the Bank's mortgage and endorsed it upon the vessel's abstract of title.*fn2 In the interim, on August 28, 1984, the Debtor filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code.*fn3

On May 23, 1985, the Bank moved the bankruptcy court to lift the automatic stay imposed by 11 U.S.C. § 362 and to permit the Bank to reclaim the vessel. The bankruptcy court denied the Bank's motion, holding instead that the bankruptcy trustee could avoid the Bank's interest in the vessel pursuant to his powers under 11 U.S.C. § 544. The bankruptcy court found: that the validity of a mortgage on a federally documented vessel is determined exclusively by federal law; that the Bank's mortgage was not valid under the SMA until recorded by the Coast Guard on October 30, 1984; that the automatic stay barred recordation of the Bank's mortgage after the filing of the petition; and that subsequent recordation was not permitted pursuant to 11 U.S.C. §§ 362(b)(3) and 546(b) because the SMA did not provide that recordation would "relate back" to a time before the bankruptcy petition. The district court affirmed the decision of the bankruptcy court, adding that, even if subsequent recordation were permissible under the automatic stay, the Bank's preferred ship mortgage would not prevail over previously perfected non-maritime liens.

The Bank makes three arguments supporting the validity of its security interest in the vessel. First, the Bank argues that state law governs a security interest in a federally documented vessel until a mortgage on such vessel is recorded by the Coast Guard. Second, the Bank insists that a mortgage on a federally documented vessel is valid under the SMA when received by the Coast Guard. Third, the Bank asserts that a mortgage on a federally documented vessel may be recorded after a filing for bankruptcy pursuant to 11 U.S.C. §§ 362(b)(3) and 546(b), and that a preferred ship mortgage prevails over previously perfected non-maritime liens.

II.

Upon the issuance of a Certificate of Documentation for the vessel at issue on April 5, 1984, the vessel was a "vessel of the United States."*fn4 Section 1012 of Title 46, U.S.C., provides that:

No bill of sale, conveyance, mortgage, assignment of mortgage, or hypothecation (except bottomry), which includes a vessel of the United States or any portion thereof shall be valid in respect to such vessel against any person other than the grantor or mortgagor, his heirs or devisees, and any person having actual notice thereof, until such bill of sale, conveyance, mortgage, assignment of mortgage, or hypothecation is recorded in the office of the collector of customs at the home port of such vessel.

To permit state law to govern security interests in federally documented vessels would undermine the congressional intent reflected in § 1012 that a federal registry be established to which a diligent prospective creditor may resort to determine the status of a vessel's title. See White's Bank v. Smith, 74 U.S. 646, 19 L. Ed. 211 (1868). Accordingly, we conclude that § 1012 "has usurped the entire field and leaves no room for interference by state statutes." Velikopoljski v. Florida National Bank (In re Velikopoljski), 54 Bankr. 534, 537 (S.D. Fla. 1985); accord McCorkle v. First Pennsylvania Banking & Trust Co., 459 F.2d 243, 246 n.2 (4th Cir. 1972). Upon the vessel's documentation as a vessel of the United States, the validity of the Bank's security interest was determined exclusively by federal law.*fn5

III.

Congress first established a federal recording system for mortgages on vessels of the United States by the Act of July 29, 1850, ch. 27, § 1, 9 Stat. 440.*fn6 As noted by the Supreme Court, "the system of recording these instruments in the collector's office, at the home port of the vessel, furnishes a much readier opportunity to persons dealing in this species of property, to obtain a knowledge of the condition of the title, than by the former mode under the State law." White's Bank v. Smith, 74 U.S. 646, 651, 19 L. Ed. 211 (1868). Nonetheless, because a ship mortgagee could not foreclose on a properly recorded mortgage in admiralty and the mortgage lien was held to be inferior to all maritime liens, e.g., The J.E. Rumbell, 148 U.S. 1, 15-16, 37 L. Ed. 345, 13 S. Ct. 498 (1893), "mortgage security on ships [was] practically worthless "before the enactment of the SMA. S. Rep. No. 573, 66th Cong., 2d Sess. 1, 9 (1920). See generally G. Gilmore & C. Black, The Law of Admiralty 688-90 (2d ed. 1975).

To encourage private American investment in United States shipping, Congress passed the Ship Mortgage Act of 1920, ch. 250, § 30, 41 Stat. 1000. See, e.g., Detroit Trust Co. v. The Thomas Barlum, 293 U.S. 21, 79 L. Ed. 176, 55 S. Ct. 31 (1934); Seattle-First National Bank v. Bluewater Partnership, 772 F.2d 565, 569 (9th Cir. 1985); Merchants National Bank of Mobile v. Ward Rig No. 7, 634 F.2d 952, 955 (5th Cir. 1981); Mastan Co. v. Steinberg, 418 F.2d 177, 179 (3d Cir. 1969), cert. denied, 397 U.S. 1009 , 90 S. Ct. 1238, 25 L. Ed. 2d 422 (1970). Legislative history indicates that Congress sought to make ship mortgage security "good except as to certain demands that should be superior to everything else, such as wages. We want our people and capital interest in shipping and shipping securities." S. Rep. No. 573, 66th Cong., 2d Sess. 1, 9 (1920).

To encourage investment in shipping, Congress, through the SMA, (1) provided for notice of pre-existing liens on vessels to prospective creditors by reenacting the recording provisions of the earlier Act, see 46 U.S.C. § 921, and (2) granted ship mortgagees a lien against the mortgaged vessel superior to most other liens upon compliance with the conditions necessary to obtain a "preferred mortgage." See id. §§ 922, 953; see generally G. Gilmore, supra, at 688-717; Gyory, Security at Sea: A Review of the Preferred Ship Mortgage, 31 Fordham L. Rev. 231 (1962).

The SMA envisions a two-step process for a ship mortgagee to perfect its security interest in a federally documented vessel. First, recordation of a ship mortgage is required for the mortgage to be valid against persons other than the mortgagor, his heirs or devisees, and persons with actual notice of the mortgage. See 46 U.S.C. §§ 921, 1012. Prospective non-maritime creditors are put on notice of the mortgage by its recordation with the Coast Guard at the vessel's home port. Upon recordation, the ship mortgage is valid and has priority over all subsequent non-maritime liens. See Morse Drydock & Repair ...


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