"Lady B Gone"
DMC Category Rating: Confirmed
Case note contributed by Glen T. Oxton, a partner in the firm of Healy & Baillie, LLP, New York. Healy & Baillie are the International Contributors to the website for the United States of America
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.
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.
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.
1This case was brought under Rule D, a seldom used provision of the federal rules. Rule D provides, in essence, that claims for possession, petitory actions (i.e. actions claiming title) and partition actions that are otherwise within admiralty jurisdiction shall be commenced by an in rem seizure of the vessel, cargo or other property in dispute. The most frequently asserted claims to acquire title to a vessel are based on a sales contract or vessel construction contract. Such claims are held not to be maritime in nature because the rights of the parties arise from a non-maritime contract. However, once a party holds title to a vessel, the title holder’s claim to the vessel is deemed to be a maritime matter even though the challenger’s claims are non-maritime (such as the state court judgment in Mullane), the source of the title holder’s rights is a non-maritime sale contract, and the vessel is not federally documented. If the jurisdictional anomaly as to sales contracts were to be eliminated, Rule D would undoubtedly find wider use.
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