Vessel Arrests

A maritime lien is a lien on a vessel that is given to secure the claim of a creditor who has provided goods and services to the vessel or who has suffered an injury caused by the vessel's operation. Maritime liens, like other liens, are important tools for both vessel owners and their creditors. For vessel owners, a lien can provide valuable cash, supplies, and repairs. For creditors, the relatively easy applicability of maritime liens provides a measure of protection in a trade that is, by its very nature, in a constant state of flux. 

Non-judicial foreclosure, i.e., a Uniform Commercial Code (UCC) foreclosure sale, is the basic method under Article 9 of the UCC for a secured creditor to realize on personal property collateral securing its loans. A UCC foreclosure sale involves the secured creditor disposing of the collateral in a public sale (i.e., an auction), without judicial process. A key requirement of Article 9-610 in this context is that every aspect of the disposition, including the method, manner, time, place, and other terms, must be commercially reasonable.

The scope of a marine lender’s duty of reasonable care in the preservation of a vessel is not clearly defined. Borrowers may challenge a lender’s performance of this statutory duty if the price obtained at the sale of a repossessed vessel does not meet their expectations, which are often high. And there are creative ways to argue that the lender violated its statutory duty.

Lenders should take precautionary measures and, importantly, ensure that adequate records are maintained for a minimum of two years following the sale of collateral. A wise lender will ensure that it carefully selects the third-party vendors that will store and maintain their repossessed vessels. Some courts consider regular maintenance and replacement of essential components as important factors supporting reasonable care. Surveys can also provide a valuable tool for demonstrating a lender’s reasonable care in preservation.

While courts have held that the duty of care of collateral does not place a burden on the secured party to perform repairs to the collateral in order to obtain the best price possible at a foreclosure sale or auction, a lender should take measures that one would reasonably expect to preserve the collateral in its status quo and prevent deterioration which could affect a subsequent sales price. For items other than vessels, some courts have held that the collateral need not be preserved entirely, provided proper efforts were made to ensure preservation.

Uniform Commercial Code (“UCC”) is a Uniform Act (proposed state law) approved by the Uniform Law Commission which attempts to harmonize the laws of commercial transactions through its adoption by the states. Adoption of the UCC by the states is not entirely uniform, however, and is subject to revisions and different statutory interpretations in each state.

In states that have adopted Uniform Commercial Code (“UCC”) Section 9-207, marine lenders who resort to repossession following a default have a duty to preserve the collateral. In the words of the model code, the lender must “use reasonable care in the custody and preservation” of the vessel while it is “in the secured party's possession.”

The authors of the model code have offered some guidance: “[t]he fact that a greater amount could have been obtained…at a different time or in a different method… is not of itself sufficient to preclude the secured party from establishing that the… disposition… was made in a commercially reasonable manner.” (UCC §9-627). In other words, a borrower’s allegation that the vessel could have been sold for more is insufficient, standing alone, to support a finding that a sale was not commercially reasonable under Section 9-610. Official Comment to 62A.9A-610, Section 10.

The primary focus of commercial reasonableness, therefore, is not the proceeds received from the sale but rather the procedures employed in the sale. If the procedures were commercially reasonable, the size of the deficiency should be irrelevant, and courts have echoed a concern that deficiency judgment suits should not be turned into valuation cases. In practice, however, this proscription is often ignored and marine lenders find themselves defending the commercial reasonableness of their sale procedures simply because a sale price appears low.

The question of commercial reasonableness can extend to the analysis of the fair market listing price of the vessel, methods of marketing the vessel, negotiations in the sale price, capabilities of surveyors, brokers and other third parties and beyond.

The authors put teeth into these commercial reasonableness provisions by providing certain remedies for the lender’s failure to be commercially reasonable in the preservation or sale of a vessel. These potential damages include the borrower’s direct losses as a result of the violation, in addition to an amount “not less than the credit service charge plus 10 percent of the principal amount of the obligation….” The “credit service charge” here is left to the interpretation of the courts in the various jurisdictions. But many have found that it equals the amount of the finance charge in the Truth In Lending Disclosure Statement. It is easy to see how, in the right circumstances, these penalties could add up to an amount much greater than the deficiency a lender is pursuing, or perhaps even more than the loan obligation itself.