2. Execution

The second step is the filing of the arrest papers and the execution of the arrest warrant once issued by the court. This includes several intermediate steps that need to be taken very fast to avoid the vessel leaving the port before being arrested: filing the complaint and case-initiating documents, filing the motion for issuance of an arrest warrant (and, if necessary, for appointment of a substitute custodian), scheduling and appearing at a pre-arrest court conference, and getting the admiralty warrant executed as soon as it is issued by the court.⁵

These steps can and should be taken without notifying the ship owner,⁶ to avoid any attempts to remove the vessel from the jurisdiction before the arrest is executed. Although the arrest itself consists only of affixing court papers on the vessel, the mortgagee need no longer be concerned about the risk of evasion once this has been done: the sanctions for violations of U.S. federal court orders can be significant, and are not taken lightly by ship owners.

3. Notices

The third step is the publication of a notice of arrest in a local newspaper⁷ and, when the arrester is the mortgagee, the mailing of a notice to all lienholders of record.⁸ The ship owner has two weeks from notice to file a claim of interest in the vessel, and then three weeks from that filing to answer the complaint.⁹ If the ship owner fails to complete both steps, the mortgagee should seek first a default certificate and then a default judgment.¹⁰ In addition to filing responsive pleadings, the ship owner may seek a post-arrest court hearing, at which the mortgagee will need to convince the court that the sale should not be vacated.¹¹

Anyone with a claim against the vessel may also seek to intervene in the proceedings.¹² Although the original plaintiff will have done the hard work of seizing the ship, the vessel stands arrested by all intervenors, and cannot be released without their consent or the court’s permission.¹³ The intervenors share the benefits and costs of the arrest. The cost is allocated in proportion to the amount of the plaintiff’s and intervenors’ respective claims, and subsequently reimbursed out of the proceeds of the sale of the vessel or the security posted by its owner, as explained in section 4 below.¹⁴ The order in which the plaintiffs’ claims are paid (if found valid) is addressed in section 5 below, and is not affected by the order in which they intervened in the action.

4. Release

The fourth step is the early litigation up to the release of the vessel. The vessel is released upon either the posting of security by its owner,¹⁵ or its judicial sale at an auction.¹⁶ If the owner does not promptly offer to post security, the mortgagee should move the court for an order directing the sale of the vessel on an interlocutory basis, that is, before the court considers the merits of the claims. This minimizes the arrest costs, and maximizes the chances of full recovery. The interlocutory sale motion must show that at least one of the following conditions is satisfied: the vessel is subject to deterioration, the arrest costs are excessive or disproportionate, or the owner’s delay in bonding the vessel is unreasonable.¹⁷ Even if the first sale motion is not successful, it is worth repeating: U.S. courts usually grant sale motions once four months have passed since the arrest.¹⁸ Longer arrests are considered unreasonable.

When moving for an interlocutory sale order, the mortgagee should seek permission to credit bid at the auction of the vessel.¹⁹ This avoids the need to transfer to the court a large sum that will probably be, for the most part, returned to the mortgagee at the end of the proceedings, since a preferred ship mortgage has priority over most other liens, and the claims that may rank higher tend to be much smaller. Whether the mortgagee is permitted to bid on credit or required to bid cash, it should bid an amount that accounts for a number of factors, including the estimated value of the vessel, the amount of the outstanding debt, the number of other ship mortgages securing the same debt (if any), and the amount needed to obtain a return on the loan secured by the mortgage. The mortgagee’s final bid amount will, of course, also depend on the bids made by others. The sale is announced in a local newspaper and open to all bidders that complete the registration formalities to the satisfaction of the U.S. Marshal or court-appointed broker.

5. Recovery

The fifth step is the post-release litigation up to obtaining a final judgment allocating to the mortgagee all or part of the security or sale proceeds – or releasing the mortgagee of liability to pay senior claims, if the mortgagee purchased the vessel on credit. The distribution of the funds requires the filing of motions, and may also require some discovery on the merits and priority ranking of each party’s claims. The post-arrest proceedings are unlikely to go up to trial and appeals, but that is possible. The extent of litigation depends on whether the other plaintiffs and the ship owner dispute the mortgagee’s entitlement to the funds.

The only claims that have priority over a preferred mortgage claim are claims for arrest, sale and custodial expenses, maritime tort claims, claims for stevedore and crew wages, general average and salvage claims, and certain claims for necessaries.²⁰ The latter category is the most complex and most likely to be litigated. The basic rule is that U.S. preferred ship mortgages have priority unless the necessaries were provided in the United States prior to their being recorded, and foreign preferred ship mortgages have priority unless the necessaries were provided in the United States. Necessaries include the provision of bunkers, supplies, towage, stevedoring, and pilotage services, but the exact boundaries are not clear under U.S. law.²¹ The mortgagee should consider settling these claims if the mortgage’s priority status is disputable.

6. Deficiency

If the amount of security or sale proceeds is not sufficient to satisfy the mortgagee’s judgment, then the mortgagee may seek a deficiency judgment against the ship owner.²² Unlike the arrest proceedings, which are conducted against the vessel, this requires personal jurisdiction over the ship owner. For this reason, it is a good idea – albeit not a guarantee of success – to include in the mortgage a clause pursuant to which the owner submits to the jurisdiction of any court where the vessel may be arrested, and to name the owner as a defendant in personam, in addition to the in rem defendant vessel, in the arrest action.²³

Obtaining a deficiency judgment is a helpful step if the vessel owner has assets against which it may be enforced. In some cases, the deficiency judgment may also be enforced against the ship owner’s affiliates, directors and officers under an alter ego or veil-piercing theory, especially if the owner is a shell one-ship company.

1. See 46 U.S.C. section 31321 et seq.
2. Supp. R. Certain Adm. & Mar. Cl. C, Notes of Advisory Committee on 1985 Amendments.
3. Fed. R. Civ. Pro. 15.
4. Supp. R. Certain Adm. & Mar. Cl. C(2)(c).
5. See Supp. R. Certain Adm. & Mar. Cl. C(3).
6. See Supp. R. Certain Adm. & Mar. Cl. C(4).
7. Supp. R. Certain Adm. & Mar. Cl. C(5).
8. 46 U.S.C. section 31325(d).
9. Supp. R. Certain Adm. & Mar. Cl. C(6)(a).
10. See Fed. R. Civ. Pro. 55(a)-(b).
11. See Supp. R. Certain Adm. & Mar. Cl. E(4)(f) & C(3)(a)(ii).
12. Supp. R. Certain Adm. & Mar. Cl. C, Notes of Advisory Committee on 2000 Amendments; Fed. R. Civ. Pro 24.
13. See, e.g., S.D.N.Y. & E.D.N.Y. Local Rule E(4)(a).
14. See id.
15. See Supp. R. Certain Adm. & Mar. Cl. E(5).
16. See Supp. R. Certain Adm. & Mar. Cl. E(9).
17. See Supp. R. Certain Adm. & Mar. Cl. E(9)(a).
18. See TMF Tr. Ltd. v. M/T Megacore Philomena, 792 F. App'x 472, 474 (9th Cir. 2019).
19. See 3B Benedict on Admiralty section 42 (2020).
20. See 46 U.S.C. section 31326(b) and 46 U.S.C. section 31301(5).
21. See Martin Energy Servs., L.L.C. v. Bourbon Petrel M/V, 962 F.3d 827, 831 (5th Cir. 2020).
22. See Cent. Hudson Gas & Elec. Corp. v. Empresa Naviera Santa S.A., 56 F.3d 359, 366 (2d Cir. 1995).
23. See id.

Client Alert 2020-521