Reed Smith Client Alerts

A preferred ship mortgagee can typically foreclose in any jurisdiction where the vessel can be arrested. In some cases, the vessel trades within a limited area, offering little opportunity for forum shopping. In other cases, the vessel trades globally and the mortgagee has multiple options.

When deciding where to arrest, the mortgagee should consider not only the ease of the arrest procedure, but also the strength and reliability of the local court system. By arresting in a given port, the mortgagee submits to local jurisdiction. If the ship owner does not pay the mortgage debt, the mortgagee may be constrained to continue to litigate in that jurisdiction. The need for post-arrest proceedings is more widespread in the current COVID-19 crisis, due to ship owners’ limited access to financing. This makes the choice of the arrest jurisdiction even more critical – and the choice of a sophisticated jurisdiction even more sensible.

The United States and its many active ports offer frequent arrest opportunities. Mortgagees often arrest there, either by choice or by necessity. U.S. federal courts handle arrest cases efficiently, especially in states like New York, Texas, Louisiana, and California, where arrests are common. The procedure is fair and well delineated, but slightly complex. We summarize below the key steps, to give mortgagees an idea of what to expect when they arrest in the United States. We also provide some tips on how to successfully complete each step, up to (hopefully) full recovery of the debt.

Logistics and transportation of Container Cargo ship and Cargo plane with working crane bridge in shipyard at sunrise

1. Preparation

The first step is not the arrest. Rather, it is preparation for the arrest. Aside from deciding whether and where to arrest, the mortgagee should make sure, before arresting, that it satisfies all conditions to prevail on the merits. The conditions include, without limitation, the proper wording and recording of the mortgage and any amendment and assignment, and the service of a notice of default and acceleration to the mortgagor, if required by the mortgage.1 The mortgagee only needs to make a prima facie showing that it has a valid lien to obtain an arrest warrant,2 but the mortgagee’s right to amend the complaint is limited after filing.3 The complaint should therefore be drafted carefully, and accompanied by all relevant loan, mortgage, and recordation documents as exhibits.

While preparing the documentation, the mortgagee should, of course, track the vessel. The vessel must be within the jurisdiction of the U.S. federal court where the action is filed at the time when it is filed.4 The mortgagee should also – through its counsel – contact the local U.S. Marshal office to coordinate the arrest (and, if necessary, retain a substitute custodian).