Barnouw v. SS OZARK

• Decision Date: 26 July 1962
• Docket Number: No. 19347.,19347.
• Citation: 304 F.2d 717
• Parties: In the Matter of Willem C. BARNOUW and Nanette E. L. Murnan, Trustees for Bondholders and Mortgagees, and Wall Street Traders, Inc., Bondholders, et al., Libelants, v. The S.S. OZARK, Her Engines, Boilers, Machinery, Tackle, Apparel, Furniture, etc., Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

304 F.2d 717 (1962)

In the Matter of Willem C. BARNOUW and Nanette E. L. Murnan, Trustees for Bondholders and Mortgagees, and Wall Street Traders, Inc., Bondholders, et al., Libelants, v. The S.S. OZARK, Her Engines, Boilers, Machinery, Tackle, Apparel, Furniture, etc., Respondent.

No. 19347.

United States Court of Appeals Fifth Circuit.

June 28, 1962.

Rehearing Denied July 26, 1962.

COPYRIGHT MATERIAL OMITTED

Newton B. Schwartz, T. G. Schirmeyer, L. G. Kratochvil, Houston, Tex., Richard Gyory, New York City, for appellants.

Robert Eikel, Houston, Tex., Theodore Goller, Jr., Houston, Tex., of counsel, for Socony Mobil Oil Co.

George W. Renaudin, Houston, Tex., Royston, Rayzor & Cook, Houston, Tex., of counsel, for Societe Algerienne Des Petroles Mory.

L. J. Benckenstein, Beaumont, Tex., Benckenstein & Benckenstein, Beaumont, Tex., of counsel, for Texaco, Inc.

Stein, Bennett & Shepley, Houston, Tex., Cooper, Ostrin, DeVarco & Ackerman, Richard Gyory, New York City, of counsel, for Willem C. Barnouw, Nanette E. L. Murnan and Wall Street Traders, Inc.

Before TUTTLE, Chief Judge, and RIVES and BROWN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

We deal again with the race for priority between a preferred maritime mortgage and a traditional maritime lien. This turns finally on whether an earlier mortgage was extinguished so that the subsequent mortgage must be deemed an entirely new and unrelated security subsequent in point of time to existing maritime liens. Two additional issues are presented concerning supremacy of a preferred maritime mortgage over a lien created by foreign law, and the status of claims for vacation, welfare and pension contributions as seamen's wages giving rise to a superior maritime lien. Each issue is controlled by recent decisions of this Court having immediate, specific application.

The claim of Augusta Oil Bunkering, S.P.A., for bunkers supplied to the S.S. OZARK involves the relative superiority of the maritime lien under Italian law and the lien of the preferred maritime mortgagee under the American Ship Mortgage Act, 1920, 46 U.S.C.A. § 911 et seq. In a detailed opinion, this was determined adversely to the maritime lienor in Brandon, Trustee, et al. v. S.S. Denton, 5 Cir., 1962, 302 F.2d 404. We adhere to that decision and the disallowance of the claim by the District Court must be affirmed.

As to the claim for contributions due by the Vessel and her owners to various union welfare trust funds, the Commissioner (as did the District Judge affirming his report) followed a sort of middle course. While determining, as did the other Commissioners and other Courts in the related cases of the S.S. DENTON and the S.S. KINGSTON, that contributions to pension and welfare trust funds were not seamen's wages giving rise to a preferred maritime lien,¹ the Commissioner and the Judge below held that vacation plan contributions were. Consequently, as to this feature of the case, the mortgagee-trustee and the various trust funds each appeal and cross-appeal. Again, for the reasons spelled out in Brandon v. S.S. Denton, 5 Cir., 1962, 302 F.2d 404, we conclude that these do not qualify as "wages of the crew of the vessel" under 46 U.S. C.A. § 953(a) (2). The allowance of a superior lien for vacation fund contributions is therefore reversed while disallowance of the pension and welfare plan funds is affirmed.

The remaining problem not covered by the S.S. Denton decision ranges all of the maritime lienors in a concerted dispute with the mortgagee-trustee of the preferred maritime mortgage. The particular preferred maritime mortgage ostensibly sought to be foreclosed was that executed June 25, 1959. Each of the competing maritime liens was for supplies furnished to the S.S. OZARK in the three preceding months. The Commissioner, confirmed by the District Court, held that while this was subsequent in point of time to the maritime liens, the mortgage would be superior because it was in effect a continuation (renewal) of a preferred maritime mortgage of July 1958 (or perhaps August 1957).

As one of the difficulties encountered in the briefs and arguments is the identification of these various security instruments, we think it advisable to refer to them in terms other than the first preferred mortgage, the first second preferred mortgage, the assignment of the first second preferred mortgage by the first supplemental agreement to the second preferred mortgage, the third first preferred mortgage, or the like. So far as we are concerned, only three mortgages are involved:

                  The 1957
                  Mortgage:        Between the Shipowner and Empire Commercial Corporation
                                   securing a single promissory note $500,000 at 18%
                                   interest; maturity July 5, 1958
                  The 1958
                  Mortgage
                  and Assignment:  Empire Commercial Corporation assigned note and 1957
                                   mortgage to Wall Street Traders, Inc., July 8, 1958, for
                                   $500,000 cash, the amount of unpaid mortgage debt; the
                                   separate but simultaneous First Supplemental Agreement
                                   amended 1957 Mortgage to cover renewal note
                                   $500,000 at 16% interest, maturity July 8, 1959, and
                                   names Wall Street Traders, Inc. as mortgagee
                  The 1959
                  Mortgage:        Between Shipowner and Barnouw and Murnan, Trustees
                                   as mortgagees; dated June 25, 1959, to secure 7 negotiable
                                   bonds shown to be issued to Wall Street Traders
                                   Inc., or order, maturity December 31, 1959, aggregating
                                   $410,000, interest 6%.
                

Except for the subsidiary dispute which we later discuss concerning the sufficiency of the proof of the mortgagee's citizenship to qualify the 1957 Mortgagee under § 922(a) (5), there is no doubt that the 1958 Mortgage accorded to Wall Street Traders, Inc. the status of a mortgagee of a preferred maritime mortgage having an effective date not later than July 8, 1958. Nothing about the circumstances of the assignment of the 1957 Mortgage on July 8, 1958, creates any problem. The amount then in arrears under the 1957 Mortgage was $500,000. That amount was paid in cash by Wall Street Traders, Inc. to Empire Commercial Corporation. In "extension of repayment" of the 1957 note, the shipowner issued a new note in like amount payable to Wall Street Traders, Inc. due July 8, 1959. Interest was reduced from 18% to 16%.

Of this $500,000 debt, only $140,000 was paid by the Shipowner to Wall Street Traders, Inc. at least in the sense of the receipt of cash or its equivalent. With a balance of $360,000 of that debt remaining unpaid the action was taken leading to the 1959 Mortgage and which precipitates the present controversy.

The Shipowner owed money on the S.S. OZARK and another vessel. It desired that the indebtedness be aggregated and then be divided equally for the two vessel mortgages. Additionally, the Shipowner — presumably from an operating point of view to bolster credit — desired that the interest nominally payable be reduced from 16% to 6%. To achieve this, the difference (10%) in the interest (approximately $35,000) was added to the principal ($360,000), and with the debt transferred from the other vessel's account, the amount secured by the 1959 Mortgage was $410,000.

Save for this possible rearrangement of interest as principal and the transfer of the small amount of the other vessel's indebtedness, Wall Street Traders, Inc. was in the same position it had been in under the 1958 Mortgage. The maritime lienors urged that five things extinguished the former security, thus creating, at best, new security which, under § 953(a), would be outranked by maritime liens incurred prior in time.

Two of the things are emphasized most strongly. First, unlike the rearrangement of the indebtedness by the 1958 Mortgage when Wall Street Traders, Inc. took an assignment of a pre-existing mortgage which was expressly kept alive by the Supplemental Agreement, on this occasion the 1959 Mortgage — an entirely new preferred mortgage — was executed on June 24, 1959. It made no reference to the 1958 Mortgage or the earlier 1957 Mortgage, or the Supplemental Agreement. Second, and more important, in connection with the required filing of it in the Customs House, there was also filed a formal "Satisfaction of Mortgage" on Customs Form 1363.² After referring to the 1957 and 1958 Mortgages, this paper, executed by Wall Street Traders, Inc. under oath, recited that the 1957 preferred Mortgage "is paid, and the mortgagee does consent that the same be discharged of record." The other differences urged include, as third, the change in interest rate, as the fourth, the change in principal, and fifth, the change in parties. This latter (fifth) difference arose from the mandatory use of trustees as mortgagees since the debt was represented by negotiable bonds.³

The argument of the lienors has a beguiling appeal. It is premised on what the Customs House records reflect to one making inquiry of the state of the vessel's title. Thus, the argument runs, there can be no stability to, nor reliance on, the vessel ownership records if a new instrument between different parties created at a fixed time is deemed to be merely the continuation of a pre-existing security which is formally extinguished on the record. But this is to argue backwards. For with the supplies giving rise to the maritime lien furnished prior in time to the last recorded mortgage complained of, the public record could not have misled anyone because there could be no reliance on a mortgage not yet executed or recorded. Whatever merit this basic contention has is not really related to the apparent state of the vessel's record title. Rather, as to maritime liens coming into being prior to the time of the recorded document in dispute, it is a question whether the security formerly existing has been legally extinguished. If it has, then...