Bank One Louisiana N.A. v. M/V MR. DEAN
United States Court of Appeals for the Fifth
Circuit: Judges Garwood, Wiener and Fallon: June 10, 2002.
Priority of maritime lien for breach of charter:
inchoate lien: perfected lien.
The vessel was delivered under a
time charter. It was subsequently made subject to a preferred ship mortgage
under the U.S. Ship Mortgage Act (as amended and recodified). Thereafter, the
shipowner breached the charter. The Court held that the charterer’s lien on
the vessel for breach of the charter arose at the time of commencement of the
charter and was, therefore, senior in priority to the ship mortgage lien,
rejecting the mortgagee’s argument that the charterer’s lien arose at the
time of the breach of charter.
Case Note contributed by Glen Oxton, attorney
with the firm Healy
& Baillie LLP, New York, International Contributors to the website.
DMC Category Rating: Developed
The essential facts are set out in the Summary
The issue considered by the Court of Appeals for
the Fifth Circuit was when does a lien for breach of a time charter arise for
purposes of establishing the priority of maritime lien claims under the U.S.
Ship Mortgage Act. In a thorough analysis, and relying on 19th century Supreme
Court decisions, the Court held that the lien for breach of a time charter
arises at the point at which the charter is no longer an executory contract,
that is when performance has been commenced. The lien remains inchoate until a
breach of the charter occurs, when the lien becomes perfected. Regardless of the
time elapsing between the commencement of the charter and its breach, the
perfected lien is deemed to arise at the time of commencement of the charter.
Thus, the Court held that the charterer’s lien was senior to the lien of the
mortgagee, notwithstanding that the breach of charter occurred after the
mortgage was recorded.
This decision clears up ambiguity and conflict
among lower court decisions as to when a lien for a breach of charter arises.
The purpose of the Ship Mortgage Act was to encourage financing of ships by
providing a reliable and high priority maritime lien as security for vessel
loans. The decision shows that Congress probably used the wrong word in
establishing the priority of liens. The Act provides that ship mortgages are
subordinate to maritime liens "arising" before the mortgage is filed.
46 U.S.C. § 31301(5). It is likely that Congress meant to subordinate
mortgages only to those maritime liens which become "perfected" before
a mortgage is filed.
The decision illustrates a potential trap for
shipping lenders and their lawyers that exists not only for U.S. flag vessels
but also those registered in Liberia and Vanuatu. The lien provisions of the
maritime laws of both jurisdictions are substantially identical to the U.S. Ship
Mortgage Act, both use "arise" with respect to priority, and they
incorporate by reference the general maritime law of the United States. Although
the Maritime Act of the Marshall Islands also incorporates the general maritime
law of the U.S., it avoids this problem by providing that ship mortgages are
senior to all maritime liens based on contracts, except contract salvage.