Chase Manhattan Financial Services, Inc. v. McMillian, 88-1832

• Citation: 896 F.2d 452
• Decision Date: 14 February 1990
• Docket Number: No. 88-1832,88-1832
• Parties: , 12 UCC Rep.Serv.2d 97 CHASE MANHATTAN FINANCIAL SERVICES, INC., doing business as Chase Manhattan of Oklahoma, a Delaware Corporation, Plaintiffs-Appellees, v. David J. McMILLIAN, in personam; Ruby Walters; Wagoner Lumber Company Inc., an Oklahoma corporation; Leroy Smith, doing business as Circle L. Cabinet Shop; Patriot, Her Engines, Tackle, Apparel, etc., in rem, Defendants-Appellants, Virgil WALTERS, Defendant-Third-Party-Plaintiff-Appellant, v. OKLAHOMA HOUSEBOAT MANUFACTURERS, INC., Third-Party-Defendant, Appeal of P & H SUPPLY; Muskogee Metal Fabricators Inc., Claimants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 452

896 F.2d 452

1990 A.M.C. 1702, 12 UCC Rep.Serv.2d 97

CHASE MANHATTAN FINANCIAL SERVICES, INC., doing business as

Chase Manhattan of Oklahoma, a Delaware

Corporation, Plaintiffs-Appellees, v. David J. McMILLIAN, in personam; Ruby Walters; Wagoner

Lumber Company Inc., an Oklahoma corporation; Leroy Smith,

doing business as Circle L. Cabinet Shop; Patriot, Her

Engines, Tackle, Apparel, etc., in rem, Defendants-Appellants, Virgil WALTERS, Defendant-Third-Party-Plaintiff-Appellant, v. OKLAHOMA HOUSEBOAT MANUFACTURERS, INC., Third-Party-Defendant,

Appeal of P & H SUPPLY; Muskogee Metal Fabricators Inc.,

Claimants-Appellants.

No. 88-1832.

United States Court of Appeals, Tenth Circuit.

Feb. 14, 1990.

Rehearing Denied Dec. 5, 1990.

R. Dow Bonnell and David K. Hoel, Hoel, Bonnell, Edmison & Deuschle, P.A., Tulsa, Okl., on the brief, for plaintiffs-appellees.

Jon Tom Staton, Muskogee, Okl., on the briefs, for defendants-appellants.

Before HOLLOWAY, Chief Judge, and GARTH ^* and TACHA, Circuit Judges.

TACHA, Circuit Judge.

This appeal is from an order of the district court granting priority to the claim of Chase Manhattan Financial Services, Inc. (Chase), as the holder of a preferred ship mortgage in the vessel Patriot. The appellants and competing claimants to the proceeds from the sale of the Patriot are the landlord of the boatyard and the suppliers of the raw materials and labor used to construct the Patriot. The appellants attack on various grounds the validity of Chase's preferred ship mortgage, and contend that, even if Chase has a valid preferred ship mortgage, their state statutory labor and materials liens have priority because these liens were created before the completion of construction and the launching of the Patriot. We affirm. ¹

I. History of the Case

This case arose out of the original construction of the vessel Patriot by Oklahoma Houseboats Manufacturing, Inc. (OHM). On October 30, 1986, David McMillian (McMillian), the buyer and mortgagor; Chase, the mortgagee; and Russell Bickers (Bickers), the sales agent and secretary/treasurer of the seller OHM met to complete the documentation for the sale and financing transactions for the Patriot. At this meeting the parties completed and Bickers signed a manufacturer's statement of origin for the Patriot. Bickers signed a sales agreement form in blank, and the terms of the agreement were later filled in.

At the meeting Chase loaned $50,000 to McMillian to purchase the Patriot, which at that time was 90 percent complete, and McMillian executed a promissory note and security agreement in favor of Chase. The note and security agreement provided that the Patriot must be kept at Sequoyah Bay Marina, Muskogee, Oklahoma, unless Chase gave McMillian written consent to keep the Patriot elsewhere. Additionally, the note and security agreement provided that if McMillian failed to keep the terms of the agreement Chase could declare a default and demand immediate payment in full. McMillian also executed a power of attorney in favor of Carol Matthews of Carol Matthews Vessel Documentation, Inc. (Matthews), a professional vessel documentation service located in Houston, Texas. Matthews' services were necessary to facilitate Chase's application for a preferred ship mortgage with the United States Coast Guard (Coast Guard).

Chase issued a check at the meeting in the amount of $50,000 jointly to the borrower McMillian and the seller OHM in accordance with the routine practice in the consumer lending field. McMillian immediately endorsed the check over to OHM at the meeting.

On April 7, 1987, the Coast Guard issued the Patriot's certificate of documentation and its official number. On April 13, 1987, Matthews completed the detailed application process and executed a first preferred ship mortgage on behalf of McMillian, the mortgagor, and in favor of Chase as mortgagee. The mortgage application was accompanied by the requisite affidavit of good faith executed by Matthews for McMillian. Matthews was not aware of and had no knowledge of any existing liens on the Patriot at the time she executed the affidavit. On July 27, 1987, the Patriot's first preferred ship mortgage was recorded by the Coast Guard and the particulars of the mortgage were endorsed on the certificate of documentation.

Meanwhile, in June 1987 Chase was first notified that McMillian was in default under the terms of the note and security agreement because the Patriot was no longer being kept at the Sequoyah Bay Marina. Chase declared McMillian to be in default and filed this action based on the district court's admiralty jurisdiction, 28 U.S.C. Sec. 1333 and 46 U.S.C. Sec. 951, to enforce its preferred ship mortgage pursuant to the Ship Mortgage Act of 1920, ch. 250, Sec. 30, 41 Stat. 1000 (codified as amended at 46 U.S.C. Secs. 911-984) ("SMA"). ² Chase named as defendants the appellants in this case. The appellants and their respective state law lien claims are as follows: Virgil and Ruby Walters, the owners of the construction site, claim a lien on the Patriot for back rent; Leroy Smith, the cabinet maker and interior contractor for the Patriot, claims a labor and material lien; Wagoner Lumber Company claims a lien for materials furnished for the construction of the Patriot; Muskogee Metal Fabricators claims a labor and material lien for furnishing and bending steel for the Patriot's hull; and P & H Supply, Inc. claims a lien for plumbing and fixtures provided to the Patriot. Defendant Virgil Walters also filed a counterclaim against Chase and a cross claim against McMillian alleging fraud and conspiracy in obtaining the preferred ship mortgage.

After a bench trial, the district court ruled that Chase had a valid preferred ship mortgage under SMA section 922. The court specifically found that Chase did not know of the existence of any bad faith on the part of McMillian that would defeat the SMA section 922(a)(3) requirement that the mortgage be made in good faith and without any design to defraud any lienor or creditor of the mortgaged vessel. Additionally, the court found that Virgil Walters had failed to establish fraud in connection with McMillian's and Chase's actions in obtaining the preferred ship mortgage on the Patriot. The court thus declined to award damages on Walters' counter and crossclaims. Finally, the district court held that Chase's preferred ship mortgage took priority over the appellants' claims under SMA section 953 because those claims were not preferred maritime liens.

Appellants claim that the district court erred in: (1) finding that Chase had satisfied the documentation and title requirements for obtaining a preferred ship mortgage under SMA section 922; (2) finding that there was no fraud in the documentation and execution of the mortgage and that Chase was unaware of the alleged fraudulent documentation; and (3) finding that the preferred ship mortgage had priority over their material and labor liens which were created prior to the completion of construction and launching of the Patriot.

II. "Maritime" Liens

Before addressing appellants' arguments, we first must characterize the nature of appellants' claims as "maritime" or nonmaritime "dry land" liens. See G. Gilmore & C. Black, The Law of Admiralty 586-89 (2d ed. 1975) (outlining the significant differences between common law or state law statutory liens and "maritime" liens) [hereinafter Gilmore]. This characterization is fundamental to our subsequent analysis, because preferred maritime liens take priority over a preferred ship mortgage, see SMA Sec. 953(b), whereas a nonmaritime lien is subordinate, see id. and discussion infra pp. 461-462.

A maritime lien arises for contract or tort claims against a maritime res for goods and services supplied to it or injury caused by it. See Gilmore at 587-89; 2 S. Friedell, J. Geraghty, S. Bellman & J. Loo, Benedict on Admiralty Sec. 31, at 3-1 to 3-2 (7th ed. 1988) [hereinafter 2 Benedict ]. Maritime liens generally are "secret" in that neither possession nor notice through filing is required to establish their validity. See Gilmore at 588; Comment, The Federal Maritime Lien Act: A Review and a Prospectus, 20 Hous.L.Rev. 861, 864 n. 17 (1983) [hereinafter Comment, 20 Hous.L.Rev.]; Comment, Developments in the Law of Maritime Liens, 45 Tul.L.Rev. 574, 575 (1971) [hereinafter Comment, 45 Tul.L.Rev.]. Only an admiralty court acting in rem can foreclose a maritime lien, because admiralty law engages in the fiction that the ship itself is the "person" who committed the offense and is legally responsible for the consequences. See Gilmore at 588-94; Hebert, The Origin and Nature of Maritime Liens, 4 Tul.L.Rev. 381, 382-92 (1930) [hereinafter Hebert, 4 Tul.L.Rev.]; Note, Priorities of Maritime Liens, 69 Harv.L.Rev. 525, 525-27 (1956) [hereinafter Note, 69 Harv.L.Rev.]; Comment, 20 Hous.L.Rev. at 864 & nn. 20-21.

In American admiralty law the existence of a maritime lien is synonymous with the scope of admiralty jurisdiction. See Gilmore at 622; H. Baer, Admiralty Law of the Supreme Court 464-65 (3d ed. 1979) [hereinafter Baer]; Robinson, "Contract" Jurisdiction in Admiralty, 10 Tul.L.Rev. 359, 360-62 (1936) [hereinafter Robinson, 10 Tul.L.Rev.]; Note, 69 Harv.L.Rev. at 526. It is an established principle of American admiralty law that contracts for building a ship, or supplying materials for the original construction of a ship, are not "maritime" contracts within the province of admiralty jurisdiction. See Gilmore at 16; Baer at 464-65; 1 S. Friedell, Benedict on Admiralty Sec. 186, at 12-30 to 12-31 (7th ed. 1988) [hereinafter 1 Benedict ]; Black, Admiralty Jurisdiction: Critique and Suggestions, 50 Colum.L.Rev. 259, 264 (1950); Robinson, 10 Tul.L.Rev. at 361. "The Supreme Court so held in 1857 in People's Ferry Co. v. Beers, [61 U.S. (20 How.) 393, 15 L.Ed. 961 (1857) ], and has followed that ruling both in dicta and decision in every subsequent case in which the...