In re Levy-Mellon Marine
| Decision Date | 21 March 1986 |
| Docket Number | Bankruptcy No. 485-00246. |
| Citation | 61 BR 331,1987 AMC 472 |
| Parties | In re LEVY-MELLON MARINE, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Louisiana |
J. Christopher Kohn, Tracy J. Whitaker, and James F. Wallack, Washington, D.C., for Maritime Administration.
Philip K. Jones, Don K. Haycraft, Liskow & Lewis, New Orleans, La., for debtor in possession.
This matter comes before the court on motion of the United States on behalf of the Maritime Administration of the Department of Transportation MARAD. MARAD seeks a determination that it has a security interest in the accounts receivable generated by several of the debtor's vessels. MARAD bases its claim on a preferred fleet mortgage which it holds on those vessels. The parties stipulate that if such a security interest does exist, the debtor will be obliged to provide MARAD with adequate protection. Upon the agreement of the parties, no hearing was held in this matter, and it will be decided on the basis of stipulations and written briefs.
The Ship Mortgage Act, 46 U.S.C. 911 et seq. itself does not provide that a preferred mortgage encompasses the vessel's freights. That Act provides only for a preferred mortgage — outranking most subsequent maritime liens — on "the whole of any vessel". 46 U.S.C. § 922. Therefore, this court must determine whether Congress intended a preferred ship mortgage on a "vessel" to encompass that vessel's "freights", or whether a preferred ship mortgage was intended to have the same status as a maritime lien, which in some circumstances does encompass freights.
As stated above, the Ship Mortgage Act does not specifically provide for a preferred ship mortgage to encompass freights. The Act was passed in 1920 in order to encourage vessel financing by giving a mortgage-holder who met certain requirements priority over subsequent maritime lien holders. Rush v. Delaware & Chesapeake Steamship Co., 10 F.Supp. 497 (E.D.Pa.1935). The Act also provided that such mortgages could be enforced through admiralty jurisdiction. Under common law, a mortgage was not within admiralty/maritime jurisdiction. Since the Ship Mortgage Act is in derogation of the common law, and creates a remedy that did not previously exist, the Act must be strictly construed according to its own terms. Netherlands Ship Mortgage Corp. v. Madias, 554 F.Supp. 375, 379 (S.D.N.Y.1983). There is no specific provision in the Act defining "the whole of any vessel" to include "freights". Nor does the jurisprudence in this area of the law shed a great deal of light on this particular subject. The parties have not cited, nor has the court been able to find, any cases clearly deciding the issue at hand.
For example, both parties cite Rush, supra, favorably. In that case, the mortgage did contain a specific pledge of freights. On the other hand, the court stated that "freight earnings are a part of the vessel as much as the ship's tackle." Id. at 501. However, the real issue in Rush was whether the mortgage met the requirements of the Act to have preferred status, so the quoted statement is, at best, dicta. Further, when read in context, the Rush court seems to have meant that a pledge of earned freights could be made in a ship mortgage, not that such a pledge was unnecessary. Thus, this court is not enlightened by the Rush case, and finds it unpersuasive on either side of the issue at bar.
There is case authority suggesting that in the absence of an express agreement, a foreclosing mortgagee is not entitled to earned freights, and that those freights may be pledged by the vessel's owner to another. U.S. v. Sterling, 22 F.2d 323 (S.D.N.Y.1927). See also In re Atlantic Gulf & Pacific Steamship Co., 289 F. 145 (D.Md.1923), aff'd 3 F.2d 438 (4th Cir.1925). MARAD asserts that these cases are not apropos to this inquiry because there was no assignment of freights to a third party. That contention does not take into account section 544 of the Bankruptcy Code, which provides that a trustee, or a debtor-in-possession as provided by section 1107 of the Code, has the status of a perfect lien creditor as of the date of the petition. Thus, the Code itself provides a kind of "assignment" of all the debtor's assets to and for the benefit of the unsecured creditors. Therefore, this court considers the Sterling and Atlantic Gulf cases persuasive, though not binding, authority for the proposition that freights are not impliedly included in a preferred ship mortgage as part of a "vessel", but must be explicitly assigned.
Further, in Layne & Bowler Corp. v. U.S. Shipping Board Emergency Fleet Corp., 27 F.2d 39 (9th Cir.1928), the mortgage, by its own terms, applied to the ship, her appurtenances, "and all the earnings, income, revenue, issues and profits of said vessel". Id. at 41. The court held that such language did not include freights, because the word "freights" was not used. The court reasoned that given the importance of the freights, failure to include them specifically indicated that the parties did not intend to include them, but contemplated only the inclusion of "net income". Id. The Layne & Bowler court goes on to say that freights are an incidental right to a vessel, which no one save the owner can assign. The court concluded that the mortgagee had acquired no interest in the freights.
Although these cases are somewhat muddled, they do seem to indicate a judicial recognition that freights are not necessarily an inherent part of "the whole of any vessel", but are a separate and distinct asset, and must be specifically pledged.
Most of the authority cited by MARAD in its memoranda dealt with maritime liens rather than ship mortgages, and are thus not pertinent to this inquiry. MARAD does, however, cite Gulf Oil Trading Co. v. Creole Supply, 596 F.2d 515 (2d Cir.1979). In that case, the court stated that freights "generally belong to the mortgagee as a result of foreclosure, for freights may be the subject of an in rem proceeding in admiralty." Id. at 521. Although that statement seems pertinent when taken out of context, there are several problems with the Gulf Oil case. First the...
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