68 F.2d 946 (2nd Cir. 1934), 175, The Thomas Barlum

Docket Nº:175, 176.
Citation:68 F.2d 946
Case Date:February 05, 1934
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 946

68 F.2d 946 (2nd Cir. 1934)



Nos. 175, 176.

United States Court of Appeals, Second Circuit.

February 5, 1934

AUGUSTUS N. HAND, Circuit Judge, dissenting.

Page 947

George E. Brand, of Detroit, Mich., and Burke & Desmond, of Buffalo, N.Y., for appellants.

Miller, Canfield, Paddock & Stone, of Detroit, Mich., and Stanley & Gidley, of Buffalo, N.Y., for appellees.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

These suits in admiralty, tried together, were instituted to foreclose two ship preferred mortgages on appellant's vessels, the Thomas Barlum and John J. Barlum, each for $200,000. Each was a preferred mortgage, executed in the form required and filed pursuant to the Ship Mortgage Act (46 USCA 911-984). The foreclosure of the mortgage lien was taken pursuant to section 30, subsec. K (46 USCA 951).

The Barlum Steamship Company is a West Virginia corporation and owned these steamers plying the Great Lakes. There were fourteen stockholders of the corporation. Of a total of 3,200 shares, 2,561 were held by John J. Barlum. This shareholder was interested in real estate holdings which were held in separate corporations. The steamship company had no stock interest or assets in any of these real estate corporations.

In February, 1929, the appellee, through its vice president, negotiated and consummated a loan of $200,000 secured by the mortgage on the Thomas Barlum now in suit, guaranteed by John J. Barlum. A document setting forth the agreement between the parties showed that $50,000 of the loan secured by this mortgage was to pay a note then outstanding, secured by a previous mortgage on the ship, $1,225 to pay interest, attorney's fees, fees due the trustee, cost of printing the bonds, and $100,000 to take up a debt of that amount owed by John J. Barlum and Thomas Barlum & Sons. The balance of about $42,775 was to be used for repairs and refitting the steamers Thomas Barlum and John J. Barlum for the seasons of 1929. The $100,000 debt of Barlum and Thomas Barlum & Sons had no relation to the appellant or its vessels. The officer of appellee was fully informed of the details of the debt and that it was contemplated that it should be paid as stated. The mortgage was executed and delivered March 22, 1929, when the vessel was laid up. The appellant's home office was in Detroit, Mich., and an application, prepared by the appellee, was filed with the Securities Commission of that state stating that refinancing was the purpose of this issue. The sum of $42,896.44 given to the Barlum Steamship Company was placed in the bank account 'Steamer John J. Barlum' at the National Bank of Commerce. There was paid out of it about $22,000 of the accounts relating to the John J. Barlum and $20,000 of the balance was transferred to the bank account 'Steamer Thomas Barlum' at another bank, out of which were paid accounts allocated to the Thomas J. Barlum on account of its previous season's operations. A written authorization was given by the appellant to appellee to dispose in this manner of the proceeds of the bonds thus sold.

The mortgage on the John J. Barlum was executed January 5, 1928, after being prepared by the appellee's attorneys. It was understood that $82,281.25 was to be withheld by the appellee to pay $50,000 principal and $32,281.25 interest on a $1,250,000 bond issue and mortgage executed by John J. Barlum and his wife to the appellee trust company on individual real estate and leaseholds held by them and also $10,000 was to be retained by the trust company and applied to the payment of an individual note executed by Barlum for a personal loan from appellee. The appellant had no connection with these items of expense, and allowances to the trustee and the attorney, which were withheld according to the agreement. From the remainder there was paid to the engineer of the Thomas Barlum $500; $500 was paid to the captain of the John J. Barlum; $2,000 was transferred to the account 'Steamer John J. Barlum'; and the balance was used to pay off loans made to Barlum and his companies other than appellant. Thus, out of the entire proceeds of the issue, but $2,500 was transferred to the account of the John J. Barlum or used in connection with it.

It is admitted that there was a default in each of the mortgages, which contained provisions for foreclosure by seizure and sale without legal process.

Appellant contends that subsection K of the Ship Mortgage Act (section 30, subsec. K, Merchant Marine Act of 1920, 46 USCA 951) allowing foreclosure of the vessels' preferred mortgages in admiralty, does not apply. And if subsection K does apply, it is contended that it is unconstitutional and not

Page 948

within Art. 3, Sec. 2, of the Constitution, providing that the judicial power shall extend to all cases of admiralty and maritime jurisdiction. Congress, by section 9 of the Judiciary Act of 1789, conferred such jurisdiction on the District Courts saving to suitors in all cases the right to a common-law remedy where the common law is competent to give it (28 USCA 41, subd. 3).

The Merchant Marine Act of June 5, 1920, section 30 of which is called the Ship Mortgage Act, had as its purpose, expressed in section 1 of the act (46 USCA 861), the development of a merchant marine and the disposal of the vessels and shipping property held by the United States Shipping Board. In furtherance of that purpose, section 30 of the act (46 USCA 911 et seq.) provided generally for the recordation of ship mortgages and especially for the creation and enforcement of a class of preferred mortgages in order that the rights of both mortgagees and others dealing with United States vessels might be clearly defined. It was hoped that regulation of ship mortgages would attract capital to shipping. Senate Reports, vol. 1, 66th Congress, 2d Session. These preferred mortgages were utilized as the security taken by the Board in the form of purchase-money mortgages in cases of sales of vessels by the Board. Morse Drydock & Repair Co. v. Northern Star, 271 U.S. 552, 46 S.Ct. 589, 70 L.Ed. 1082; The Oconee (D.C.) 280 F. 927.

Subsection D of section 30 (46 USCA 922) provides how a valid mortgage may obtain a preferred status. Subsection K (46 USCA 951) provides for enforcing the mortgage by a suit in rem in admiralty.

Appellant argues that these mortgages, as the record establishes, were so devoid of connection with maritime purposes and subjects, that the statute should not be construed to confer and cannot confer original jurisdiction of foreclosure in admiralty. It is not disputed that Congress may legislate to confer such jurisdiction as to true maritime liens (Morse Drydock & Repair Co. v. Northern Star, supra; Crowell v. Benson, 285 U.S. 22, 52 S.Ct. 285, 76 L.Ed. 598; The Nanking (D.C.) 292 F. 642), but Congress has no power to confer jurisdiction in admiralty to litigate a nonmaritime contract. The J. E. Rumbell, 148 U.S. 1, 13 S.Ct. 498, 37 L.Ed. 345; The Lottawanna, 21 Wall. (88 U.S.) 558, 22 L.Ed. 654; Schuchardt v. The Angelique, 19 How. (60 U.S.) 239, 15 L.Ed. 625; People's Ferry Co. v. Beers, 20 How. (61 U.S.) 393, 15 L.Ed. 961; Bogart v. The Steamboat John Jay, 17 How. (58 U.S.) 399, 15 L.Ed. 95; The Genesee Chief, 12 How. (53 U.S.) 443, 13 L.Ed. 1058; Pillsbury Flour Mills Co. v. Interlake S.S. Co., 40 F.2d 439 (C.C.A. 2). And Congress did not intend to conflict with the rights of the state tribunals to enforce contracts governed by their own laws and not strictly of a maritime nature.

If it were established that these mortgages were given to support an issue of bonds 'to develop and encourage the maintenance of such a merchant marine' and therefore in accord with the objects of the Ship Mortgage Act, the admiralty jurisdiction to foreclose would be unquestionable. We need not decide whether or not a loan made for maritime purposes secured by a mortgage on a ship will become nonmaritime if the borrower, contrary to the agreement of the mortgage, diverts the money to nonmaritime purposes, nor need we consider what effect any estoppel in such a case would have. We are not called upon to say whether or not Congress could in any event extend the admiralty jurisdiction to a matter so closely related to transportation by navigable waters as to provide for the exclusive enforcement in admiralty of a mortgage on a ship actually engaged in such transportation. It is sufficient to point out here that the mortgagor and mortgagee both knew in advance of making these mortgages that the moneys advanced were not to be used for such purposes, but were intended for and actually were used for nonmaritime purposes. This was fully disclosed at the trial. In the absence of an express provision, the Ship Mortgage Act will not be construed to extend to such a case.

It has been recognized that the determination of what is a maritime contract depends upon the nature of the contract which means its substance. North Pac. S.S. Co. v. Hall Bros. Machine Ry. & Shipbuilding Co., 249 U.S. 119, 39 S.Ct. 221, 63 L.Ed. 510. Contracts of a mixed nature are not cognizable in the admiralty courts, and, where the principal subject-matter of the controversy belongs to the jurisdiction of a court of common law or of equity, the incidental matters must always be relegated to the appropriate jurisdiction, although of themselves they may be...

To continue reading