793 F.2d 598 (5th Cir. 1986), 83-3298, Equilease Corp. v. M/V Sampson

Docket Nº:83-3298.
Citation:793 F.2d 598
Party Name:EQUILEASE CORPORATION, Plaintiff-Appellant, Cross-Appellee, v. M/V SAMPSON, etc., et al., Defendants-Appellants, Cross-Appellees, v. FRED S. JAMES & CO., etc., Intervenor-Appellee, Cross-Appellant, FRED S. JAMES & CO., etc., Plaintiff-Appellee, Cross-Appellant, v. EQUILEASE CORP., et al., Defendants-Appellants, Cross-Appellees.
Case Date:April 25, 1986
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 598

793 F.2d 598 (5th Cir. 1986)

EQUILEASE CORPORATION, Plaintiff-Appellant, Cross-Appellee,


M/V SAMPSON, etc., et al., Defendants-Appellants, Cross-Appellees,


FRED S. JAMES & CO., etc., Intervenor-Appellee, Cross-Appellant,

FRED S. JAMES & CO., etc., Plaintiff-Appellee, Cross-Appellant,


EQUILEASE CORP., et al., Defendants-Appellants, Cross-Appellees.

No. 83-3298.

United States Court of Appeals, Fifth Circuit

April 25, 1986

Page 599

Philip A. Franco, Adams & Reese, Frank M. Adkins, New Orleans, La., for Equilease Corp.

James G. Burke, Jr., Burke & Mayer, Kimbley A. Kearney, New Orleans, La., for Fred S. James & Co.

Appeals from the United States District Court for the Eastern District of Louisiana.


E. GRADY JOLLY, Circuit Judge:

The facts of this case are reported in detail in the district court opinion Equilease Corp. v. M/V Sampson, 568 F.Supp. 1259 (E.D.La.1983), and in our panel opinion, Equilease Corp. v. M/V Sampson, 756 F.2d 357 (5th Cir.1985). We agreed to hear this case en banc to decide the issue whether insurance is a necessary under the Federal Maritime Lien Act, 46 U.S.C. Secs. 971-975 (1982) ("FMLA" or the "Act" ), so that an unpaid insurance company may claim a federal maritime lien on the insured vessel. 1

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1] We now expressly overrule Learned v. Brown, 94 F. 876 (5th Cir.1899), and hold that marine insurance is a necessary under the Federal Maritime Lien Act, and thus may be given the status of a federal maritime lien.


The essential facts are these. Equilease is a financing corporation that in 1974 provided interim construction financing for three vessels. In 1977 the vessels' owner defaulted on its loan and Equilease became the owner of the vessels. Equilease transferred title to each vessel to one of three separate, wholly-owned, nominally capitalized "shelf" corporations, taking a preferred first mortgage from each corporation in the amount of construction cost and other expenses.

Equilease then issued a bareboat charter on each vessel to a company wholly owned by James Denning. Denning transferred the charters to Dunnamis Offshore Touring, Inc., another corporation he owned. As required by the charters, Dunnamis purchased insurance for each vessel. The insurance was purchased from various insurance companies through the agent Fred S. James & Company of Texas, Inc. ( "James" ), at a cost of over $200,000. When $184,000 of the insurance premiums remained unpaid at the end of the first policy year, James, instead of suing Dunnamis for the balance, arranged financing of the premiums with Borg-Warner Insurance Finance Corporation ( "Borg-Warner" ). Borg-Warner paid Dunnamis' debt to James, and James' accountant credited Dunnamis' account in full. James guaranteed the debt by endorsing a note executed by Dunnamis to Borg-Warner. As a result of this guarantee, James, rather than Borg-Warner, bore the risk of Dunnamis' non-payment to Borg-Warner.

Dunnamis soon defaulted on the charter agreement with Equilease. Equilease located and seized the vessels, and instituted proceedings in federal district court to foreclose on its preferred mortgages.

By that time Dunnamis also had defaulted on its insurance note payments to Borg-Warner. James, who later satisfied the debt, intervened in the foreclosing proceedings, claiming a state privilege 2 and a maritime lien against the vessels for unpaid insurance premiums. James also filed a separate but substantially similar lawsuit against Equilease and Dunnamis in personam, and against the three vessels in rem. The district court consolidated the actions.

After hearing the evidence, the court held that James had a state privilege against the vessels for the amount of the unpaid insurance premiums, and that because Dunnamis acknowledged the debt within six months of the filing of the lawsuit, the applicable six-month limitations period had been interrupted and thus had not lapsed. It refused, however, to recognize a federal statutory maritime lien in favor of James, relying on this court's decision in Learned v. Brown, 94 F. 876 (5th Cir.1899). It then invalidated the preferred mortgages against the vessels on the basis that the three Unilease corporations were "shams" and "alter egos" of Equilease, and reduced Equilease to the status of a general creditor against the vessels. It further held that Dunnamis was not an agent of Equilease with the power to obligate Equilease to pay the premiums. The district court entered judgment in favor of James in rem against the vessels and in personam against Dunnamis.

Page 601

The panel reversed the district court, holding that the six-month period was one of peremption, not prescription, and thus could not have been interrupted by Dunnamis' acknowledgement of the debt. The state lien had therefore expired, so James had no state claim against the vessels. The panel then held that it could not overrule Learned v. Brown, 94 F. 876 (5th Cir.1899), and letting that decision stand, ruled that there was no federal maritime lien for unpaid insurance premiums.


The issue before the en banc court is whether we should overrule Learned and recognize a federal maritime lien in James' favor for the unpaid insurance premiums. In refusing to recognize such a lien, the district court and the panel both followed the precedent of Learned, which held that maritime insurance on a vessel is for the sole and exclusive benefit of the vessel owners, not inuring to the benefit of the vessel, and therefore that no lien arises for unpaid insurance premiums under general maritime law.

Learned was decided in 1899, eleven years before the passage of the Federal Maritime Lien Act, 46 U.S.C. Secs. 971-75. The decision was based on general maritime principles that denied a lien for materials and services rendered in the vessel's home state. Because the vessel in Learned was a Louisiana vessel operating solely within Louisiana, the Fifth Circuit held that no general maritime lien could attach under federal law. The Learned court then considered whether the insurers had a lien and privilege under the law of Louisiana. This lien too was denied because "the insurance written was for the sole and exclusive benefit of the owners of the steamboat, and in no wise inured to the benefit of the ship or maritime lienholders." Learned, 94 F. at 883.

Analysis of the question under the Federal Maritime Lien Act, James argues, leads to a different conclusion. James urges that in determining what constitutes a necessary under the Federal Maritime Lien Act, this court should apply the test that asks whether the furnished supplies or services are "reasonably needed in the ship's business." 3 James further suggests that Learned can be read narrowly as a decision of state law, not federal law, and therefore might not control the result in this case.

Equilease, on the other hand, argues on appeal that the federal maritime lien is a preferential one that should not be granted to those who advance premiums for marine insurance. In support of this position, Equilease first argues that because insurance is not physically delivered to the vessel, it is not "furnished" to the vessel within the meaning of 46 U.S.C. Sec. 971. 4 Second, Equilease argues that neither general admiralty law nor the Federal Maritime Lien Act provides a maritime lien for unpaid insurance premiums because insurance is not a necessary for the benefit of the vessel. In support of this proposition, Equilease cites Learned and Grow v. Steel Gas Screw Lorraine K, 310 F.2d 547 (6th Cir.1962), and the rationale that a contract of insurance in no way aids the ship. Equilease's third argument is that James did not rely on the credit of the vessels when it advanced the insurance premiums, and therefore James may not claim a federal maritime lien. Equilease's final argument is that even if a maritime lien did arise in James' favor, the lien expired when James received payment from Borg-Warner in the

Page 602

amount of the insurance premiums owed by Dunnamis. Equilease reasons that this payment in full to James extinguished any right that James had to assert a privilege.

To answer the question whether insurance is a necessary under the Federal Maritime Lien Act, we first examine briefly the history and nature of the federal maritime lien.


Under the FMLA, a maritime lien is established in favor of those who furnish "repairs, supplies, towage, use of drydock or marine railway, or other necessaries, to any vessel...." 46 U.S.C. Sec. 971 (emphasis added). 5 Although maritime liens are to be strictly construed, the provision of necessaries for a vessel has long been recognized as the basis for a lien. See Atlantic & Gulf Stevedores, Inc. v. M/V Grand Loyalty, 608 F.2d 197, 200 (5th Cir.1979).

One purpose of the Ship Mortgage Act, 46 U.S.C. Sec. 911, et seq. (1982), of which the Federal Maritime Lien Act is a part, was to establish sound security in favor of loans to ship owners. Merchants & Marine Bank v. The T.E. Welles, 289 F.2d 188 (5th Cir.1961); First Suffolk National Bank of Huntington v. The Air Brant, 125 F.Supp. 709, 710 (E.D.N.Y.1954). History shows that the merchant marine industry was faltering in 1910; Congress passed the Act in an attempt to spur incentive for the financing of shipowners by making private investment in shipping more attractive than it had been. The Act is essentially a compromise between two conflicting interests: that of the materialmen, who wanted an automatic and far-reaching lien, and that of the shipowners, who preferred never to have any lien attach. Gilmore and Black, The Law of Admiralty, at 653.

The federal maritime lien is a unique security device, serving the dual purpose of keeping ships moving...

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