ml

By Zoe Vermeulen

The U.S. Fifth Circuit recently held that a vessel management company did not have a valid maritime lien on the vessels it managed despite its attempt to create such a lien by the language in its management agreement. Comar Marine, Corp. v. Raider Marine Logistics, L.L.C., 2015 WL 4079541 (5th Cir. 2015) should serve as a helpful reminder to vessel management companies (and their lawyers) that just because the parties try to create a maritime lien by contract does not mean that a court will recognize such attempt as valid under law.

Comar Marine, LLC (“Comar”) sold four vessels to various vessel specific LLC’s ultimately owned by two members. The LLCs entered into a management agreement for each vessel with Comar whereby Comar would market, manage, and operate the vessels and the owners would pay Comar a monthly management fee equal to the greater of $3,000 or 10% of the gross income from each vessel that month. JP Morgan financed the purchase of three of the vessels and Allegiance financed the purchase of the fourth vessel. The banks secured their loans with preferred ship mortgages. When the Gulf of Mexico charter market deteriorated, the owners of the vessels notified Comar that they were terminating the management agreement with Comar and had executed a management agreement with another company. Soon thereafter, Comar filed an in personam action against the individual members, and the various LLCs, and in rem actions against the four vessels asserting breach of contract. Comar secured arrests of the four vessels on the grounds that its claims for necessaries and termination fees under the management agreements gave rise to maritime liens. The owners filed counterclaims against Comar asserting wrongful arrest of the vessels, and the banks intervened to defend their rights as preferred mortgagees.

Although the District Court, and ultimately the 5th Circuit, resolved all the issues before it including the penal nature of the termination fee imposed by the management agreement and the wrongful arrest of the vessels, the Circuit Court’s treatment of Comar’s arguments regarding the creation of a maritime lien through the management agreement is particularly informative and interesting.

Comar argued that the management agreements were the type of maritime contracts that gave rise to a maritime lien. Analogizing the management agreements as the functional equivalent of a bareboat charter, which is sufficient to confer a maritime lien, Comar argued that the management agreements should also confer a maritime lien. However, the Court was not persuaded by this analogy argument and declined Comar’s invitation to expand maritime liens to vessel management contracts similar to those at issue. The Court highlighted differences between the management agreement and a bareboat charter. For example, under the management agreement Comar did not pay for the vessels expenses (including insurance), and Comar did not owe the owners a periodic payment independent of whether the vessels were used. Although the Court highlighted the 9th Circuit’s holdings and this Circuit Court’s intimation “that a contract may give rise to a maritime lien if it imposes practically identical rights and responsibilities as historically recognized contracts, such as a subcharter”, the Court explained that the management agreements in the present case do not impose practically identical responsibilities as charters.

Further quashing Comar’s arguments, the Court addressed as irrelevant the parties attempt to create a maritime lien by contract. The management agreement between Comar and the owners stated that Comar “is relying on the credit of the Vessel[s] to secure payment of [the management fees and advanced sums for expenses] and shall have a maritime lien on the Vessel[s].” Despite this language and the parties to the management agreements’ intent, the Court reminded the parties and the creation of maritime liens is not so easy. The Court quoted the Supreme Court in Newell v Norton, 70 U.S. 257, 262 (1865), which stated:

[m]aritime liens are not established by the agreement of the parties, except in hypothecations of vessels, but they result from the nature and object of the contract. They are consequences attached by law to certain contracts, and are independent of any agreement between the parties that such liens shall exist. They, too, are stricti juris.”

 Despite Comar’s attempts to expand the definition of maritime liens to management contracts, the 5th Circuit found, at least under the instant facts, that such a contract does not impose practically identical rights and responsibilities as historically recognized contracts that give rise to maritime liens.