Avondale Shipyards, Inc. v. Tank Barge ETS 2303

• Decision Date: 15 March 1985
• Docket Number: No. 84-3304,84-3304
• Citation: 754 F.2d 1300,1986 A.M.C. 2200
• Parties: AVONDALE SHIPYARDS, INC., Plaintiff, v. TANK BARGE ETS 2303, et al., Defendants, ITT INDUSTRIAL CREDIT CO., Intervenor-Appellant, v. The BELCHER COMPANY OF TEXAS, INC., Intervenor-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1300

754 F.2d 1300

1986 A.M.C. 2200

AVONDALE SHIPYARDS, INC., Plaintiff, v. TANK BARGE ETS 2303, et al., Defendants, ITT INDUSTRIAL CREDIT CO., Intervenor-Appellant, v. The BELCHER COMPANY OF TEXAS, INC., Intervenor-Appellee.

No. 84-3304.

United States Court of Appeals, Fifth Circuit.

March 15, 1985.

Adams & Reese, Clare E. Peragine, Frank M. Adkins, New Orleans, La., for intervenor-appellant.

W.E. Noel, Lemle, Kelleher, Kohlmeyer, & Matthews, New Orleans, La., for intervenor-appellee.

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

Before GEE, REAVLEY and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

Creditors caused the arrest of the M/V Precursor. A United States Marshal sold the vessel at an interlocutory sale on July 6, 1982. This appeal involves a priority fight over the sale proceeds between the holder of a ship mortgage on the vessel and a maritime lien claimant. The issue presented is whether a renewal mortgage may take priority over an intervening maritime lien if it is executed by a new mortgagor who has assumed the original mortgagor's indebtedness to the mortgagee. The district court granted summary judgment for the lien claimant. For the reasons that follow, the summary judgment is vacated, and the case is remanded for proceedings consistent with this opinion.

I. BACKGROUND ¹

In 1977, George Engine Company ("GECO") purchased the M/V Precursor and the M/V Presager from Energy Transport Services, Inc. ("Energy Transport"). GECO borrowed the purchase money from ITT Industrial Credit Company ("ITT" or "the mortgagee"). ITT agreed to finance the purchase for a two-year period ending with a large balloon payment. ITT also agreed to refinance the amount of the balloon payment upon maturity for an additional two-year period ending with a similar balloon payment. Moreover, ITT agreed, assuming that GECO did not default, to continue refinancing the indebtedness for successive two-year periods ending with similar balloon payments until the indebtedness was repaid in full. On October 18 On November 19, 1979, with only the balloon payment outstanding, ITT extended maturity of the note for thirty days. On December 19, 1979, ITT refinanced the amount of the balloon payment. GECO executed a new note, for the unpaid balance of the 1977 note, secured by new mortgages on the vessels (the "1979 mortgages"). ITT, in turn, recorded a satisfaction of the 1977 mortgages. The 1979 note again required relatively small monthly payments for twenty-four months, followed by a large balloon payment on January 10, 1982.

1977, GECO executed a promissory note to ITT for the first of these two-year periods. The note required twenty-four relatively small monthly payments, followed by a large balloon payment of approximately $3,000,000 on November 18, 1979. The note was secured by ship mortgages on both vessels (the "1977 mortgages").

In 1979, United States Coast Guard documentation listed GECO as the owner of both vessels. The 1977 and 1979 mortgages, moreover, describe GECO as the owner and mortgagor of the vessels. Nevertheless, GECO's books did not list ownership of the vessels as an asset or the indebtedness to ITT as a liability. Instead, these assets and liabilities were carried on the books of Ocean Capital and Leasing, Inc. ("Ocean Capital"), a wholly-owned subsidiary of GECO. In late 1979, however, GECO's auditors insisted that the indebtedness be reflected on the books of GECO, the corporation that actually owed the money and owned the vessels. Thereafter, GECO and Ocean Capital made an internal accounting change to accommodate the auditors' concerns.

For whatever reason, it was apparently important to GECO that ownership of the vessels not appear on its corporate books. Soon after the books were changed to reflect true ownership of the vessels, GECO sold the vessels to Ocean Capital. On February 20, 1981, a bill of sale for each vessel was recorded with the Coast Guard. ITT consented to the sale and Ocean Capital apparently caused the vessels to be redocumented in its own name. The parties did not, however, supplement or amend the 1979 note and mortgages. Although the record is not altogether clear on this point, GECO and Ocean Capital apparently agreed that, to purchase the vessels, Ocean Capital would simply assume GECO's indebtedness to ITT. Although ITT consented to the sale, it is not clear whether ITT also consented to an assumption of indebtedness. At any rate, because the companies are related, GECO and Ocean Capital determined that a formal assumption agreement was not necessary. The record does not reflect which corporation made the payments on the note following the sale.

GECO's 1979 note to ITT matured on January 10, 1982, when a large balloon payment was due. On February 11, 1982, ITT again refinanced the amount of the balloon payment. This time, however, Ocean Capital was formally substituted as debtor and owner-mortgagor on the documents evidencing the indebtedness. ITT recorded with the Coast Guard a satisfaction of the 1979 note and mortgages. Ocean Capital executed a new promissory note to ITT, for the unpaid balance of the 1979 note, secured by new mortgages on both vessels (the "1982 mortgages"). ITT recorded the new mortgages with the Coast Guard.

Prior to the February 1982 refinancing transaction between Ocean Capital and ITT, various parties furnished supplies and services to the M/V Precursor and the M/V Presager for which, as of the commencement of this action, they had not been paid. On April 5, 1982, Avondale Shipyards, Inc. ("Avondale"), a shipyard that performed repairs on the vessels, brought an in rem action against the vessels in the district court to foreclose maritime liens for necessaries. Warrants of arrest issued and a United States Marshal seized the vessels. ITT intervened in the action and claimed that Ocean Capital had defaulted on the 1982 note and that the 1982 mortgages ranked prior to all other liens and claims. Thereafter, several other Before resolving the priority issue, the district court ordered an interlocutory sale of both vessels at which, on July 6, 1982, ITT purchased the M/V Presager and the M/V Precursor. ITT purchased the vessels for an amount far below Ocean Capital's indebtedness on the 1982 note. ITT is not obligated to pay the purchase price for the vessels, therefore, unless the lien claims outrank ITT's ship mortgages. Accordingly, the district court confirmed the sale and allowed ITT to place a certificate of deposit in the registry of the court, in lieu of actually paying the purchase price for the vessels, in an amount exceeding the aggregate of the lien claims.

parties, including the Belcher Company of Texas, Inc. ("Belcher"), intervened to assert maritime liens of their own. Belcher claimed a maritime lien for fuel supplied to the M/V Precursor in November and December of 1981.

ITT purchased the certificate of deposit with funds borrowed from GECO. The loan agreement provides that, if ITT's mortgage liens outrank the maritime liens (and ITT therefore suffers no loss), ITT will repay the loan. The agreement also provides, however, that the loan will not be repaid to the extent of any lien claim that is found to prime the mortgages. Because, according to the agreement, Ocean Capital remains liable to ITT on the 1982 note for any loss incurred as a result of the loss of priority, the payment will simply be considered an advance by GECO to ITT on behalf of Ocean Capital. GECO also agreed to pay to ITT all other costs incurred by ITT, including attorney's fees, in protecting the priority of the mortgage liens. ITT thereafter sold the M/V Precursor and the M/V Presager to Ocean Capital, the preforeclosure owner, and received a new note from Ocean Capital for the unpaid balance of the 1982 note, secured by new mortgages on the vessels.

With the case in this posture, the district court resolved the issue of priority between ITT's mortgages and the maritime liens on cross-motions for summary judgment. The lien claimants, including Belcher, maintained that their liens arose prior to the date on which the 1982 mortgage from Ocean Capital to ITT was recorded. Pursuant to 46 U.S.C. Sec. 953(a), they argued, their liens are "preferred maritime liens" which rank ahead of subsequently recorded preferred ship mortgages. ITT conceded, as it must, that many of the maritime liens arose prior to the execution of the 1982 mortgages. It is undisputed, for example, that Belcher's lien arose in November and December of 1981. Relying exclusively on Barnouw v. S.S. Ozark, 304 F.2d 717 (5th Cir.), cert. denied, 371 U.S. 923, 83 S.Ct. 291, 9 L.Ed.2d 231 (1962), and Merchants & Marine Bank v. The T.E. Welles, 289 F.2d 188 (5th Cir.1961), ITT argued that the maritime liens are nonetheless subordinate to the 1982 ship mortgages.

In Barnouw and The T.E. Welles, ITT argued, we held that a subsequent mortgage intended simply to renew an earlier mortgage has priority, even if the earlier mortgage is formally satisfied of record, over intervening liens that arise during the life of the first mortgage. According to ITT, the February 1982 transaction simply refinanced the 1977 purchase money loan to GECO. Thus, under the renewal mortgage rule, the priority of the 1982 mortgages flows from the date of the 1977 mortgages which they replaced. The lien claimants responded that the rule of Barnouw and The T.E. Welles only preserves the priority of a mortgage lien if the subsequent mortgage secures the same indebtedness between the same parties as the mortgage that it replaces. Since the February 11, 1982, mortgages are between different parties than the 1977 mortgages, their priority does not relate back. Rather, in Belcher's view, the 1982 mortgages must stand on their own.

The district court granted the lien claimants' motions for summary judgment. The court found that the 1982 mortgages secured the same indebtedness as...