by Stephen C. Hanemann

Increasingly common in coastal Louisiana – and even more so during a depressed, offshore, oilfield-services market – is the strained relationship between a marine lender and a vessel owner secondary to the lender asserting creditor’s rights against the vessel through a pre-existing security instrument. In one such dispute, lender, South Lafourche Bank & Trust Co. filed an action to enforce a Promissory Note secured by a Preferred Ship Mortgage against Guilbeau Boat Rentals, owner of the marine vessel NOONIE G.[1]

Conforming to the vessel finance protocol, Gilbeau’s authorized representative executed a Preferred Ship Mortgage encumbering the NOONIE G, pledging the vessel as collateral for the loan made by the Bank. A note, also executed by Gilbeau, was issued with and further secured by the Preferred Ship Mortgage. After several months of alleged non-payment on the note, the Bank instituted legal action to collect the debt owed. The Bank filed a Motion for Summary Judgment seeking a declaration that its mortgage was valid under the Ship Mortgage Act. Guilbeau filed a Motion to Dismiss the Bank’s action, alleging that the mortgage was invalid under Louisiana law and therefore not valid under the Act. Guilbeau claimed that the Act did not provide a valid basis for the Court to exercise subject matter jurisdiction over Guilbeau because the Bank’s financing documents were structured in the form of a Louisiana collateral chattel mortgage, and that such instrument was no longer valid for mortgaging immovable property under Louisiana law.

In its analysis, the Court examined the origin of the Ship Mortgage Act and determined that it was passed by Congress so that vessel-mortgage liens could be enforced in federal courts under admiralty jurisdiction. The Court examined the historically-ineffective nature of state court enforcement of ship mortgages. The Court found that state courts were not permitted to affect maritime liens and ship mortgages executed before the Act, and found that those instruments executed before the Act provided unsatisfactory protection of a ship mortgagee’s security interest.

Thus, the Act was designed to stimulate private investment in U.S. shipping and to protect the United States as the principal source of credit for shipping activities. Further, the Act aimed to induce private-investment capital in shipping projects and to create certainty in financing U.S. vessels. In passing the Act, Congress recognized the need for exclusive admiralty court jurisdiction in vessel foreclosure proceedings. And while state law may serve to supplement maritime law, it must yield when it interferes with a determination made under the Act.

In the matter of the NOONIE G, the Court considered the vessel owner’s argument that a mortgage held to be invalid under state law disqualifies the instrument as valid under the Act. The Court found that the Act itself included no requirement that a mortgage on a U.S. vessel be valid under the laws of the particular state to be an enforceable Preferred Ship Mortgage. The Act actually contains six (6) principal requirements, which are conditions precedent for a valid Preferred Ship Mortgage.[2] The Guilbeau Court found that the Bank’s mortgage met each of the six (6) requirements of the Act and was, therefore, a valid ship mortgage. The Court decided that it need not determine whether the mortgage would have been a valid collateral chattel mortgage under Louisiana law. But the Court did recognize the maxim that state law may otherwise be instructive to resolve mortgage disputes when the Act does not provide sufficient guidance.[3]

In conclusion, notwithstanding the validity of a Preferred Ship Mortgage under the laws of a particular state, if a vessel mortgage meets the six (6) basic requirements under the Act, it shall be a valid Preferred Ship Mortgage. Accordingly, a federal court determining the question of enforcement of a valid Preferred Ship Mortgage shall enjoy federal question admiralty jurisdiction over the subject dispute.[4] The Court, consequently, denied Guilbeau’s motion to dismiss for lack of subject-matter jurisdiction, and granted the Bank’s motion seeking a declaration of its mortgage validity.

******************************************

[1] S. Lafourche Bank & Trust Co. v. M/V NOONIE G, No. 16-2880, 2017 WL 2634204 (E.D. La. June 19, 2017).

[2] 46 U.S.C. § 31301 (2017).

[3] The Court determined that it need not address the validity of the collateral mortgages on movable property under state law secondary to Louisiana’s adoption of the Uniform Commercial Code Art. 9. But this commentator feels strongly that the concept of the collateral mortgage, as it pertains to vessels, is alive and well in Louisiana, provided that such document meets the requirements of a UCC Art. 9 security instrument.

[4] 46 U.S.C. § 31325(c) (2017).