Freret v. Harris Trust

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DMC/SandT/04/14
Freret Marine Supply v. Harris Trust & Savings Bank: 73 Fed. Appx. 698 (5th Cir. 2003): Circuit Judges: Garza, Dennis and Head
Effjohn Int’l Cruise Holdings, Inv. v. A&L Sales, Inc.: 346 F.3d 552 (5th Cir. 2003): Circuit Judges: Smith, Barksdale and Duplantier
Maritime lien: necessaries: advances
Summary
In two related cases, Freret Marine Supply v. Harris Trust & Savings Bank and Effjohn Int’l Cruise Holdings, Inc. v. A&L Sales, Inc., the Fifth Circuit Court of Appeals held that neither a credit agreement between a cruise vessel operator ("Commodore") and a guarantee company ("Guarantor"), nor a surety bond which applied to Commodore’s vessels, gave rise to a maritime lien. The Court further held in Freret that a Guarantor was not entitled to a maritime lien because it did not provide "necessaries" for the vessels and did not provide an "advance" to the vessel for the purpose of purchasing necessaries.

DMC Category Rating: Developed

Case Note Submitted by Emilio G. Boehringer, an attorney with Healy & Baillie, LLP, New York. Healy & Baillie are the International Contributors to the website for the United States of America

Facts
In Freret, the dispute between Guarantor and Commodore arose when the latter became insolvent and Guarantor intervened in the proceedings in rem in order to assert a lien. Guarantor’s in rem claims against Commodore’s vessels were premised on a credit agreement between Commodore and Guarantor. According to the credit agreement, Guarantor was under an obligation to refund money to credit card companies when customers had their cruises cancelled but had already paid their deposits in advance. When Commodore declared bankruptcy, Guarantor returned prepaid deposits to the credit card companies and lost money in the process.

In Effjohn, Sureties issued a bond to Commodore to provide security for passengers who pre-paid for cruises on one of Commodore's vessels, but who, through no fault of their own, never sailed. Sureties were obligated to refund unearned passenger revenues if Commodore was unable to do so. The Sureties claimed a maritime lien for necessaries against Commodore’s vessels based on the bond.

Judgment
In Freret, the Fifth Circuit Court of Appeals held that the credit agreement was not maritime in nature such that it gave rise to a maritime lien. The Court reasoned that the credit agreement did not have "a direct and substantial link with the operation of Commodore’s vessels, their navigation, or their management afloat, taking into account the needs of the shipping industry." Additionally, the court agreed with the lower court that the credit arrangement had not been a provision of necessaries, most particularly because the credit appeared to have been provided to Commodore itself and not to any particular vessel. Finally, the court found that Guarantor had not shown that the money advanced to Commodore was supposed to be used for "necessaries" or that it had in fact been used to purchase necessaries. Thus, the court held, no lien existed.

In Effjohn, the court held that the bond at issue was not a maritime contract, reasoning that "not every contract that relates to maritime matters warrants the invocation of admiralty jurisdiction." Additionally, unlike maritime insurance contracts, surety bonds were not a well-established part of maritime law, and merely agreeing as a surety to pay damages for another's breach of a maritime charter is not a maritime contract. This, the court held, was particularly so given that the bond was only a measure taken to protect consumers and had no relation to operating vessels.

The court rejected Sureties’ subrogation argument, reasoning that whether a surety was subrogated to a maritime lien hinged on whether the passengers themselves had maritime liens. Since the passengers’ contracts were executory, because Commodore declared bankruptcy before they had embarked on the vessels, the court held the contracts did not give rise to a maritime lien.

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