CIT Corp. v. M/V WINCHESTER
| Decision Date | 18 September 1986 |
| Docket Number | Civ. A. No. 85-270-N. |
| Citation | 643 F. Supp. 1059 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | C.I.T. CORPORATION v. M/V WINCHESTER, Official Number 236120, together with her engines, tackle, apparel and equipment, in rem; M/V AMELIA ISLE, Official Number 505745, together with her engines, tackle, apparel and equipment, in rem; M/V CALVIN AND DAVID, Official Number 539391, together with her engines, tackle, apparel and equipment, in rem. |
Geoffrey F. Birkhead, Crenshaw, Ware & Johnson, Norfolk, Va., Henry P. Bouffard, Jett, Berkley, Furr & Price, Norfolk, Va., for intervening plaintiffs.
Daniel R. Warman, Williams, Worrell, Kelly & Greer, Norfolk, Va., for Tim Daniels.
George L. Hudspeth, Jacksonville, Fla., for C.I.T. Corp.
Michael P. Cotter, Vandeventer, Black, Meredith & Martin, Norfolk, Va., for Leroy and Daniel Whorton.
The issue to be decided in this case is whether a preferred fleet mortgage, which incorporates prior mortgage debts held on the vessels as well as a substantial new indebtedness, constitutes a maritime lien superior to that of repairmen and suppliers servicing the vessels in the period of time between the recording of the mortgages on the individual vessels and the recording of the fleet mortgage. The parties have submitted a stipulation of facts, numerous briefs and discovery documents to the Court. They have waived their right to present evidence at trial.
This action was instituted by CIT Corporation to foreclose on a preferred fleet mortgage held by CIT on three vessels, the Amelia Isle, the Calvin and David, and the Winchester. The vessels were owned by Julius and Daniel Whorton. CIT began financing fishing vessels for the Whortons in the 1977. In each case, the Whortons would give CIT a promissory note for the debt and a mortgage on a vessel or vessels. In some cases, the note was paid and the mortgage released. In other cases, the debt due from the Whortons was refinanced.
A second-preferred ship mortgage was executed on the Amelia Isle and the Katherine J. in 1977 for $54,636.00. In 1978 the Whortons signed a new note in the amount of $343,446.40. The note was secured by a third-preferred ship mortgage on the Amelia Isle and the Katherine J. Further security for the note was provided by a first-preferred ship mortgage on the Calvin and David. First- and second-preferred fleet mortgages were executed against the Katherine J. and the Winchester in 1980 to secure notes of $307,326.72 and $99,337.80, respectively. A first-preferred ship mortgage on the Saint Patrick was also executed in 1980 in the amount of $625,233.60. Each of these mortgages was recorded and endorsed upon the records of the U.S. Coast Guard and upon the documents of the vessels in accordance with the requirements of the Ship Mortgage Act. 46 U.S.C. § 921, 922.
In 1981 the Whortons began to experience difficulties in making payments due CIT under these various notes and mortgages. Suit was brought against the Amelia Isle in 1980 for salvage services rendered to the vessel. CIT intervened in this action on the basis of its preferred ship mortgage. The salvage lien was paid by the insurance carrier for the Whortons. CIT obtained an in rem consent judgment against the Amelia Isle for $185,000.00. The judgment remains unsatisfied.
The Saint Patrick was severely damaged in a storm off the Alaska coast in December of 1984. The Saint Patrick was owned by Saint Patrick, Inc., the Whortons and John Doody being the shareholders and officers of the corporation. Mr. Doody was a one-half owner of the vessel. The Whortons each had a one-quarter interest. The promissory note and the preferred ship mortgage on the vessel were signed in the name of the corporation. The Whortons executed a separate guarantee on the debt.
CIT brought suit against Saint Patrick, Inc., the Whortons, Mr. Doody and the Home Insurance Company to recover the debt due on the vessel's mortgage. The insurance company was dismissed from the suit by stipulation after paying CIT $190,000.00. The remaining parties consented to a final judgment against them in the amount of $285,032.10.
In November 1984 the Katherine J. was lost at sea. CIT collected $65,000.00 from the insurer of the vessel which was to be applied to the mortgage debt on the vessel. This amount was paid under the breach of warranty provision of the policy. The balance of the policy coverage, $160,000.00, was recovered by the Whortons in a separate action.
After a series of negotiations, CIT and the Whortons agreed that a large portion of the Whorton's recovery from the Katherine J. would be used to discharge existing liens against the various vessels owned by the Whortons and financed by CIT. CIT maintains that in the course of these negotiations, it was represented to them that the claims paid were the only outstanding obligations on the vessels. The Whortons insist that CIT knew of the existence of additional claims that had not been discharged.
As a result of the negotiations between the parties, an agreement was entered into whereby the then existing notes and mortgages held by CIT on the Amelia Isle, the Calvin and David, and the Winchester would be consolidated into one note and a single preferred fleet mortgage. The mortgages were to be cross-pledged so that one vessel was covered by more than one mortgage. The resulting July 25, 1984 note and mortgage included an outstanding indebtedness of $3,292.90 on the Amelia Isle, $182,145.89 on the Calvin and David, and the Amelia Isle, and $113,642.43 on the Winchester. Also included was $176,957.38 representing the debt owed to CIT under the in personam judgment it obtained for the mortgage on the Saint Patrick. The principal sum of the July 1984 note and mortgage was $476,038.60. Added to this was a repossession expense of $3,961.40 and other charges of $10,000.00. When finance charges were added, the note and the mortgage totalled $796,265.28.
The mortgage was recorded and filed in the office of the U.S. Coast Guard and was endorsed upon the documents of the vessels in accordance with the requirements of Sections 921 and 922 of the Ship Mortgage Act. 46 U.S.C. § 921, 922. Prior mortgages held by CIT on the vessels were marked satisfied on the Coast Guard records.
After the Whortons defaulted in payments on the July note, CIT filed a complaint to have the vessels arrested and the mortgage foreclosed. The complaint was filed on December 22, 1984. Timely intervening complaints were filed by Tim Daniels, Alco Welding and Machine Co., Inc., F.D. Hunt Co., Inc., Commonwealth Foods, Inc. d/b/a Farm Fresh Supermarkets, Cold Spring Fish and Supply Co., Inc., L & L Seafood Co., Inc., Southern Engine Co., Inc., Donald M. Forsyth d/b/a Forsyth Seafood, and John Pruitt d/b/a J.P.'s Welding Service. The claim of Southern Engine has been dismissed with prejudice. CIT and Cold Spring have filed a stipulation agreeing that if CIT establishes that it has a valid and enforceable first-preferred mortgage against the Winchester, Cold Spring's claim will be inferior to that of CIT. The claims of the intervenors are for materials, supplies and services furnished to the vessels between 1979 and 1984.
The vessels were arrested and sold by the U.S. Marshal on April 5, 1985. The successful bidder for each of the vessels was CIT, bidding $100,000.00 on the Amelia Isle, $80,000.00 on the Calvin and David, and $40,000.00 on the Winchester. By agreement of all parties involved, CIT was not required to deposit the bid prices for the vessels with the Court. CIT has agreed to satisfy the claims of the intervenors if the Court so orders.
In June and July of 1985 Julius and Daniel Whorton filed voluntary petitions in bankruptcy. By order of the Bankruptcy Courts, CIT was permitted to proceed with this action subject to the proviso that no in personam judgment be entered against the Whortons. The Court dismissed the Whortons from the case by Order dated April 18, 1986.
CIT claims a superior lien on the three vessels by virtue of the July 1984 note and mortgage executed by the Whortons. CIT argues that this mortgage is merely a consolidation and refinancing of prior mortgages held by CIT on the same vessels. Consequently, according to CIT, the July 1984 note and mortgage relate back to the recording dates of the earlier mortgages and to the maritime lien arising from these earlier mortgages. Furthermore, CIT argues that some of the intervening claims are barred by laches or a lack of due diligence of the claimants in discovering the existence of mortgages on the vessels and in recording their claims against the vessels.
The intervenors argue that the July 1984 note and mortgage represent an entirely new debt and security and not merely a refinancing and renewal of earlier mortgages held by CIT on the vessels. This argument is based primarily upon the inclusion in the July 1984 note and mortgage of a substantial in personam judgment obtained by CIT against the Whortons on a mortgage debt due on a fourth vessel, the Saint Patrick. The intervenors also allege that CIT knew or should have known in July 1984 that there were outstanding claims against the vessels and that the Whortons did not willingly sign the July agreement.
Under the Ship Mortgage Act, a preferred mortgage lien has priority over all claims against the vessel except liens arising prior to the time of the recording and endorsement of the mortgage, liens for damages arising out of tort, wages of stevedores and crew members, general average and salvage claims, and expenses, fees and costs allowed by the court. 46 U.S.C. § 953. The claims of the intervenors do not fall within the specifically protected categories of 46 U.S.C. § 953. The question before this Court is whether CIT's mortgage lien arose at the time of the recording of the July 1984 mortgage, thereby rendering it inferior to the claims of intervenors, or whether CIT's lien is...
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