Facts
The case involved a motor yacht named at one time the "LADY B." Upon the owner’s divorce, it was renamed "LADY B GONE." The buyer renamed it "CENT’ANNI," but as events transpired, the yacht lived up to its former name. The yacht was a "documented" vessel, meaning that it was registered under U.S. flag with the National Vessel Documentation Center (the "NVDC"), administered by the U.S. Coast Guard under the Secretary of Transportation.

The buyer of the yacht received a bill of sale from the seller, but neglected to file it with the NVDC for a period of sixty days. Before the bill of sale was filed, a creditor of the seller caused the county Sheriff to seize the yacht to enforce a state court judgment against the seller. The owner-buyer then invoked the Rule D¹ of the Supplemental Admiralty Rules of the Federal Rules of Civil Procedure in a maritime action seeking to regain title to and possession of the yacht. The issue in the case was simply whether the seller’s judgment creditor or the owner-buyer was entitled to the yacht.

At first instance, the District Court, recognizing that vessel sales contracts are outside admiralty jurisdiction, purported to apply state law Uniform Commercial Code ("UCC") principles. UCC § 2-402, entitled "Rights of Seller’s Creditors Against Sold Goods," provides essentially that the buyer shall prevail under the facts of this case, except in cases of fraudulent conveyance. The court held accordingly that the buyer was a bona fide purchaser for value and was entitled to the yacht. The court also awarded punitive damages of US$100,000 against the judgment creditor for intentionally interfering with the buyer-owner’s property rights in the yacht.

Judgment
On appeal, the Circuit Court reversed, holding that the federal vessel recording statute was applicable because the yacht was a documented vessel, and the recording statute rendered an unrecorded bill of sale invalid against a seller’s judgment creditors who levy on the vessel without notice of the sale. The recording statute was originally adopted in 1850. It was re-enacted in the Ship Mortgage Act of 1920 and again in the 1988 recodification of the Ship Mortgage Act in 46 U.S.C. § 31321(a)(1) (the "Recording Statute").

Implicit in the Court’s holding is that the Recording Statute preempts state law. The Recording Statute provides that a bill of sale for a U.S. flag vessel must be filed with the Secretary of Transportation (the NVDC) "to be valid … against any person" except the grantor and his successors and persons having actual notice of the sale.

A majority of state court decisions considering the Recording Statute were consistent with the appellate court’s holding. Two minority state court decisions holding that the Recording Statute was intended to protect only subsequent purchasers and mortgagees, based on the common law rule that a creditor’s rights are limited to the debtor’s actual title in the property, were considered and rejected by the Circuit Court on the ground that the common law rule is abrogated by the Recording Statute.

The Circuit Court remanded the case for further findings as to whether the sale of the yacht was a fraudulent conveyance under state law and whether the creditor had actual knowledge of the sale. The punitive damage award was reversed. The Court indicated that if the original sale was not fraudulent and the creditor did not have actual knowledge of the sale, the creditor would prevail.

Comment
The relegation of vessel sale and construction contracts to state law and their exclusion from admiralty jurisdiction has been often criticized as anomalous (see, e.g. Flota Maritima Browning de Cuba S.A. v. The CIUDAD DE LA HABANA, 363 F.2d 733 (4th Cir. 1966), cert. denied 385 U.S. 837 (1966)). This anomaly probably caused the difficulties experienced by the parties and the District Court. While the contract rights of a buyer and seller of a documented vessel are governed by state law, some aspects of the validity of the bill of sale obtained by the buyer and all aspects of maritime liens on the vessel are governed by federal law.

The case presents a cautionary tale for participants in transactions under several flags. The laws of Liberia, the Marshall Islands and Vanuatu all contain the provisions of the Recording Statute, and each incorporates the general maritime law of the U.S. by reference. Thus, in transactions involving vessels of these flags and U.S. flag, the delay between the time of payment for a vessel and the recording of the Bill of Sale should be minimized.

The case confirms an existing rule.