Reedsburg Bank v. Apollo, 73-1921

• Decision Date: 07 January 1975
• Docket Number: No. 73-1921,73-1921
• Citation: 508 F.2d 995
• Parties: The REEDSBURG BANK, Plaintiff-Appellee, v. APOLLO, Defendant-Appellee, v. Herbert R. NICHOLLS and Joan S. Nicholls, Proposed Intervenors-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 995

508 F.2d 995

The REEDSBURG BANK, Plaintiff-Appellee, v. APOLLO, Defendant-Appellee, v. Herbert R. NICHOLLS and Joan

S. Nicholls, Proposed Intervenors-Appellants.

No. 73-1921.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 17, 1974.

Decided Jan. 7, 1975.

Daniel W. Hildebrand, Madison, Wis., for proposed intervenors-appellants.

James R. Clark, Milwaukee, Wis., for appellee.

Before SPRECHEF and TONE, Circuit Judges, and PERRY, Senior District Judge. ^*

TONE, Circuit Judge.

This is an appeal from an order denying a motion to intervene in an in rem foreclosure proceeding under the Ship Mortgage Act, 46 U.S.C. 911, et seq.

Between July 1970 and December 1972, plaintiff Reedsburg Bank made loans to Western River Steamboat Co., Ltd., to finance the construction of the Apollo, a stern-wheel vessel being built for use in the Wisconsin Dells as a sightseeing vessel, and to provide operating capital for Western River's tourist operations in the Dells. The loans were in part secured by personal guarantees of Herbert R. Nicholls and Joan S. Nicholls, stockholders of Western River, who seek to intervene in this action.

In August 1972 Western River and the bank entered into a term loan agreement covering advances that had been made up to that time, and Western River gave the bank new promissory notes in the principal amounts of $75,000, $45,000, and $20,000, secured by a first preferred mortgage on the Apollo. An earlier note for $30,000, which intervenors had guaranteed, was incorporated into the $75,000 note. Whether intervenors guaranteed the full amount of the $75,000 note is in dispute.

When Western River defaulted, the bank commenced this action in admiralty against the vessel to foreclose the mortgage. Neither Western River nor the Nicholls were named as defendants. The bank exercised the option afforded by the Ship Mortgage Act to proceed in rem solely against the vessel. Western River did not appear. The Nicholls filed a motion to intervene, seeking a declaratory judgment that their guarantees were void or, in the alternative, an adjudication that the proceeds of the foreclosure be allocated to the amounts they had guaranteed and that the bank be precluded from later obtaining a deficiency judgment against them. The Nicholls, who, like the bank, were residents of Wisconsin, had no property interest in the vessel and were not parties to the ship mortgage.

Gerald Matthews, an officer of Western River and also a guarantor of its indebtedness to the bank, filed a claim in the amount of $20,625.58 against the vessel for labor and services rendered to Western River. Pursuant to a stipulation between the parties and the proposed intervenors, the vessel was sold by the marshal at a public sale, the bank bidding it in at $70,000. The proceeds were deposited with the clerk to await resolution of the competing claims of the bank and Matthews.

After hearing, the District Court denied the motion for intervention and confirmed the sale of the vessel. The only issues still pending before the District Court concern the validity and priority of Matthews' maritime lien. After the denial of intervention in this case the bank commenced an action in the Wisconsin state court against Western River, the Nicholls, and other guarantors to obtain a deficiency judgment and enforce the guarantees.

The District Court did not hold, and the appellee bank does not argue, that the Ship Mortgage Act precludes intervention. The right to intervene depends upon Rule 24, Fed.R.Civ.P.

The Nicholls sought alternatively to intervene as of right under clause (2) of paragraph (a) of Rule 24 and by permission of the court under clause (2) of paragraph (b) of that rule. The District Court held that the Nicholls did not satisfy the requirements for intervention of right and that they failed to establish the existence of an independent ground of federal jurisdiction for their claims, which the court held to be required for permissive intervention.

Appealability

Although appellee has not challenged the appealability of the order denying intervention, it is appropriate to observe that we find the order appealable. Under the traditional rule, an order denying intervention of right is unconditionally appealable, but an order denying permissive intervention is appealable only if the district court has abused its discretion. 3B J. Moore, Federal Practice P24.15 (2d ed. 1974). This distinction, which means that the court of appeals must consider the merits of the discretionary intervention to determine whether the order is appealable, has no practical significance. Its only effect is to require that, if we agree with the district court on the merits, we dismiss the appeal instead of affirming. The Second Circuit, in reviewing a denial of intervention of right, has taken the position that the distinction should be eliminated:

'Commentators seem to agree that requiring appealability of an order to turn on the merits serves no useful purpose. They would prefer to consider all denials of intervention final orders and therefore appealable, but would reverse only when a party is entitled to intervention as of right or the trial court abused its discretion in denying permissive intervention. See Shapiro, Some Thoughts on Intervention Before Courts, Agencies, and Arbitrators, 81 Harv.L.Rev. 720, 740-51 (1968); 3B J. W. Moore, Federal Practice P24.15 at 24-565 (1969).

. . . .l P

'Given the aim of the 1966 amendments to the Federal Rules which substituted 'a practical rather than a conceptual emphasis in questions of intervention,' (C. Wright, Handbook of the Law of Federal Courts 328 (2d ed. 1970)) the proper and sensible course is to assume that an order denying intervention is final for the purposes of appeal, and to go directly to the merits.' Ionian Shipping Co. v. British Law Insurance Co., 426 F.2d 186, 189 (2d Cir. 1970).

We agree with this analysis and proceed to consider the appeal from the order denying intervention on the assumption that we have jurisdiction to consider both the questions of intervention of right and permissive intervention. The standard of review of an order denying permissive intervention remains, of course, whether the district court abused its discretion.

Intervention of Right

To intervene of right under Rule 24(a)(2), the Nicholls were required to satisfy three conditions:

(1) claim 'an interest relating to the property or transaction which is the subject of the action,' i.e., 'a significantly protectable interest,' Donaldson v. United States, 400 U.S. 517, 531 (91 S.Ct. 534, 27 L.Ed.2d 580) (1971);

(2) be 'so situated that the disposition of the action may as a practical matter impair or impede (their) ability to protect that interest'; and

(3) show that their interest is not 'adequately represented by existing parties.'

The District Court held that the first two conditions were not satisfied. We agree.

The 'property or transaction which is the subject of the action' is the vessel Apollo and the preferred ship mortgage. The section of the act under which the action was brought, 46 U.S.C. 951, provides as follows:

'A preferred mortgage shall constitute a lien upon the mortgaged vessel in the amount of the outstanding mortgage indebtedness secured by such vessel. Upon the default of any term or condition of the mortgage, such lien may be enforced by the mortgagee by suit in rem in admiralty. Original jurisdiction of all such suits is granted to the district courts of the United States exclusively.'

Notice by publication is required, but 'actual notice of the commencement of any such suit' need be given only to the master, other ranking officer, or caretaker of the vessel and any person who has a recorded undischarged lien under 46 U.S.C. 925. Failure to give notice is not a jurisdictional defect but merely subjects the libelant to damages in the amount of his interest in the vessel terminated by the suit. The Ship Mortgage Act also permits an action in personam against the mortgagor, 46 U.S.C. 954(a), but the bank did not elect to proceed in that manner.

The sole function of the in rem proceeding is to foreclose the mortgage, effect the sale of the vessel, and establish the priority of all claims directly against the vessel. Upon proof that the mortgage qualifies as a 'preferred mortgage lien,' 'all pre-existing claims in the vessel are to be held terminated and thereafter are to attach to the proceeds,' which are to be districuted among the lienors. Detroit Trust Co. v. The Thomas Barlum, 293 U.S. 21, 35, 55 S.Ct. 31, 35, 79 L.Ed. 176 (1934). Since the Nicholls do not contend that the mortgage fails to qualify as a preferred ship mortgage under the definition in 46 U.S.C. 922, or that they qualify as lienors, the narrow scope of the in rem foreclosure proceeding does not actually touch upon their interest, as the District Court properly concluded.

The Nicholls do not claim a proprietary interest in the vessel or a maritime lien against it; nor do they claim to be parties to the ship mortgage. Their claims relate solely to potential exposure to personal liability created, not by the ship mortgage or the foreclosure of the ship mortgage, but by personal guarantees given by them. Since the bank has not sued on the guarantees in this action, there is no possibility that the judgment would have an adverse effect on their liability under the guarantees. Similarly, the Nicholls' claimed interest in requiring the proceeds of the mortgage sale to be applied to amounts guaranteed by them relates to the contract of guarantee and not to the foreclosure of the mortgage or the determination of the relative priority of liens.

The only arguable interest the Nicholls would have had in the subject of this action was in insuring that the price at which the vessel was sold at judicial sale was not unreasonably low. This possible interest, however, they...