Chemical Bank New York Trust Co. v. Steamship Westhampton, 4451.

• Decision Date: 11 June 1964
• Docket Number: No. 4451.,4451.
• Citation: Chemical Bank New York Trust Co. v. Steamship Westhampton, 231 F.Supp. 284 (D. Md. 1964)
• Parties: CHEMICAL BANK NEW YORK TRUST COMPANY, Trustee, Mortgagee, v. STEAMSHIP WESTHAMPTON (formerly Steamship Montauk Point), her engines, boilers, etc.
• Court: U.S. District Court — District of Maryland

231 F. Supp. 284

CHEMICAL BANK NEW YORK TRUST COMPANY, Trustee, Mortgagee, v.STEAMSHIP WESTHAMPTON (formerly Steamship Montauk Point), her engines, boilers, etc.

No. 4451.

United States District Court D. Maryland.

June 11, 1964.

Ober, Williams, Grimes & Stinson, Baltimore, Md., Thacher, Proffitt, Prizer, Crawley & Wood, New York City(William A. Grimes, Baltimore, Md., and Edward C. Kalaidjian, New York City, advocates), proctors for libelant Chemical Bank New York Trust Co., Trustee.

Sol C. Berenholtz, Baltimore, Md. (Solomon Kaplan, advocate), Baltimore, Md., proctor for Trustees of Seafarers Vacation Plan, objecting intervening libelant.

Semmes, Bowen & Semmes, Baltimore, Md. (David R. Owen and William R. Dorsey, III, advocates), Baltimore, Md., proctor for Caltex (Overseas) Limited, Texaco, Inc.(Boal, McQuade & Fitzpatrick, New York City, of counsel), and Fertex Steamship Corporation(Foley & Grainger, New York City, of counsel), objecting intervening libelants.

Thomas B. Eastman, Baltimore, Md., proctor for International Maritime Supplies Co., Ltd., objecting intervening libelant.

John H. Skeen, Jr., Baltimore, Md., proctor for The Marine Midland Trust Co. of New York, intervening libelant.

Thomas J. Kenney, U. S. Atty., Baltimore, Md. (Leavenworth Colby, Anthony W. Gross, attorneys, Dept. of Justice, and John R. Tankard, Asst. Gen. Counsel, Maritime Administration, of Washington, D. C., of counsel), amicus curiae by invitation of the court.

THOMSEN, Chief Judge.

This libel in rem against the Steamship Westhampton, her engines, boilers, etc., was filed on January 14, 1963, by Chemical Bank New York Trust Company, Trustee(Chemical), to foreclose what purports to be a first preferred mortgage on the vessel.The validity of the mortgage was questioned initially by the owner, Seatrade Corporation(Seatrade), but its objections were withdrawn before the entry of the order of sale.The vessel was sold on March 28, 1963, for $2,602,000, the sale was confirmed, and the Marshal has paid the net proceeds of sale, amounting to $2,551,104.14 into the Registry of the Court.

Pursuant to orders permitting interested parties other than the owner to contest the validity of the mortgage, several intervening libelants who assert liens on the vessel have challenged its validity.¹

The issue is whether the so-called "First Preferred Mortgage and Indenture"(the mortgage) dated August 6, 1962, from Seatrade to Chemical, as Trustee, meets all the tests of a "preferred mortgage" set out in the Ship Mortgage Act, 46 U.S.C.A. § 911 et seq., particularly the requirement of sec. 922 (a)(5) that the mortgagee be a citizen of the United States.Chemical is a citizen of the United States.Hamburgische Landesbank Girozentrale(Landesbank), a corporation of Hamburg, Germany, the holder of the only bond issued under the deed of trust, is not a citizen of the United States.

Contentions of the Parties

Chemical relies on sec. 911(5), which provides: "The term `mortgagee', in the case of a mortgage involving a trust deed and a bond issue thereunder, means the trustee designated in such deed."Chemical's principal argument is that the mortgage involves a trust deed and a bond issue thereunder, that Chemical is the trustee designated in the deed and is therefore the mortgagee, and that the citizenship of Landesbank is immaterial.

Objectors contend that the term "bond issue", as used in sec. 911(5), means a public issue of bonds, and not a private issue or placement, where there is only one lender and bondholder; they argue that this construction of the Act is supported by the legislative history of the relevant statutes and by the early administrative rulings; and that it would thwart the purpose of the Act to permit a single alien lender, who could not qualify as a mortgagee, to use the device of a trust indenture and a single bond to circumvent sec. 922(a)(5), especially where the indenture gives the lender so great a measure of potential control as is given by the indenture in this case.²

Facts

Most of the facts have been stipulated, many exhibits have been filed, testimony has been taken, and the questions involved have been fully briefed and argued.

The SS Westhampton, a T-2 tanker, was converted to an ore carrier at the Stuelcken Shipyard in Hamburg, Germany, under a contract dated August 21, 1961, between the predecessor in interest of Stuelcken and Manuel E. Kulukundis, to whom Seatrade is successor in interest.The work was completed about August 1, 1962, but some months before that date Seatrade, which had become the owner of the vessel, indicated a desire to pay Stuelcken only 30% of the contract price in cash, the balance to be secured by a mortgage on the vessel.Stuelcken was a customer of Landesbank, a West German corporation with no place of business in the United States, and Landesbank agreed to finance the credit.

In May or June, 1962, Landesbank, which was a correspondent of Chemical, requested Chemical to act as "mortgagee-trustee" under a proposed preferred ship mortgage on the vessel.The reason for this request was that Landesbank was not a United States citizen and therefore could not qualify as a mortgagee under the Ship Mortgage Act, whereas Chemical could.46 U.S.C.A. § 922(a)(5).Chemical agreed, and the original draft of the mortgage was prepared by New York attorneys for Landesbank.The Court finds as a fact that no economic or business reason affected the decision to use the form of transaction which was adopted in this case.The closing was held in New York on August 6, after Albrecht Roscher, a German attorney in the employ of Landesbank, had come to New York with a power of attorney from Landesbank to sign documents on its behalf.

Upon execution of the mortgage on August 6, Landesbank set up a deposit in favor of Stuelcken in the amount of 70% of the shipyard's bill.Seatrade acknowledged receipt of the consideration for the mortgage by letter to both Landesbank and Stuelcken.It is stipulated that so far as Chemical knows, Landesbank dispensed the proceeds of the loan to Stuelcken in part payment of the latter's charges to Seatrade for the conversion of the Westhampton.Stuelcken confirmed to Seatrade that the deposit had been set up in Landesbank at Seatrade's request.The proceeds of the loan did not pass through Chemical's hands and never left Germany.

A single bond in the full amount of the indenture, DM 3,836,000 (equivalent to approximately $960,000, but payable in German funds) was executed by Seatrade, authenticated by Chemical, redelivered to Seatrade and then delivered to Landesbank by Seatrade.At the same time, Kulukundis, president of Seatrade, gave Landesbank his personal written guarantee of payment of the bond.Seatrade also gave Landesbank ten promissory notes, each in the amount of an instalment of principal and interest, guaranteed by Kulukundis.There was a written agreement protecting Seatrade and Kulukundis against having to pay both the bond and the notes.

Landesbank has at all times been the owner of the bond.At the closing on August 6, Landesbank gave Chemical a written warranty that it was purchasing the bond for its own account as an investment, with the intention of holding the same until maturity, and agreed that it would not dispose of the bond or any portion thereof without Chemical's consent.Such consent has never been requested or given.The bond was registered in the name of Landesbank as to both principal and interest.The indenture permitted multiple bonds not exceeding DM 3,836,000, but that is the usual practice even when it is intended that only a single bond will be issued initially.Landesbank never contemplated that its bond would be split into lesser denominations.

The bond was not registered under the Securities Act of 1933, because it was clearly exempt from registration as not "involving any public offering" within the meaning of sec. 4(1) of that Act.

The Westhampton is a vessel of the United States, as that term is used in the Ship Mortgage Act, 46 U.S.C.A. § 911 et seq.The mortgage was duly endorsed upon the vessel's document on August 6, 1962, as required by sec. 922 (a)(1), and was recorded on the same day in the manner provided in sec. 921, as required by sec. 922(a)(2).

The mortgage indenture contains a number of clauses, customarily included in such documents, which give a considerable measure of control to Landesbank as the sole bondholder.Sec. 4.1 provides that in case any one or more of the specified "events of default" shall occur and be continuing, "then and in each and every such case the trustee may, and upon written request of the majority in principal amount of the bonds shall", inter alia: 4.1(4), take and enter into possession of the vessel at anytime wherever the same may be, without legal process, and lease, charter, operate or otherwise use the vessel, accounting only for the net profits, if any, arising from such use; and 4.1(5), if it seems desirable, sell the vessel at any place and in such manner as the trustee may deem advisable, after specified notice, without a court proceeding.Most importantly, sec. 4.2 provides: "* * * At any such sale, any holder of any Bonds may bid for and purchase such property and upon compliance with the terms of sale may hold, retain and dispose of such property without further accountability therefor."Sec. 4.9 provides that after an event of default, the ship owner can cure the events of default only if the bondholders consent.Under sec. 5.5the trustee may be removed at any time by the bondholder, but under sec. 5.4 any successor trustee must be a citizen of the United States within the meaning of the Act.

On January 2, 1963, Chemical cabled Landesbank that Seatrade had defaulted in sinking fund and interest payments due December 31, 1962.On January 11 Landesbank instructed Chemical to declare the loan due.Chemical did so by letter to Seatrade dated January 14....