THE R. LENAHAN

• Decision Date: 18 April 1935
• Docket Number: 83,87,No. 79,85,81,89.,79
• Parties: THE R. LENAHAN. THE ALBANY. RUSH v. DELAWARE & CHESAPEAKE S. S. CO.
• Court: U.S. District Court — Western District of Pennsylvania

10 F. Supp. 497

THE R. LENAHAN.

THE ALBANY.

RUSH v. DELAWARE & CHESAPEAKE S. S. CO.

Nos. 79, 81, 83, 85, 87, 89.

District Court, E. D. Pennsylvania.

March 27, 1935.

Reargument Denied April 18, 1935.

Hunt, Hill & Betts, of New York City (John W. Crandall and Frank J. Zito, both of New York City, of counsel), and Rawle & Henderson, of Philadelphia, Pa. (Joseph W. Henderson and Thomas F. Mount, both of Philadelphia, Pa., of counsel), for libelants Stemmler & Co.

Howard M. Long, of Philadelphia, Pa., for Atlantic Refining Co.

Charles B. Downs, of Philadelphia, Pa., for Kensington Shipyard & Drydock Corporation.

DICKINSON, District Judge.

Leave was given to file briefs, and subsequently supplemental, and again reply, briefs. These have now been submitted and the cause ripe for a ruling.

The Fact Situation and General Findings.

The questions here raised are in some respects novel and call for a somewhat extended discussion. The genius of the law maritime makes of a vessel a sentient being having the needs of its existence and support and endowed with capacity to pledge itself, its tackle, earned freight, and, on occasion, even its cargo, by way of general average. It may borrow money on bottomry bonds to pay for its conditioning and repair in order to resume its voyaging and activities. It is thus a source of credit to itself, which may be necessary to its very preservation and existence. Creditors to whom such a pledge is given have claims prior in payment to those who have investments in the vessel venture. These claims such creditors could enforce.

The Ship Mortgage Act of June 5, 1920 (46 USCA § 911 et seq.) made a profound change in the law maritime. The capital of any one engaged in any business may consist of capital ventures by those who thus become owners and also by those whose investments take the form of bonds or other debt obligations, secured by a mortgage of some or all of the property of the mortgagor.

The former type of capital is subordinated to the claims of creditors of the owner, but the latter is often given a preferred claim upon the pledged property. The supply of this type of capital to a marine venture is not founded upon a maritime contract within the meaning of the Admiralty Law. One of the things which the Ship Mortgage Act was meant to do was to make these maritime contracts. Its very laudable purpose was declared to be to benefit our merchant marine. It sought to do this by encouraging the investment of this form of capital by giving to the mortgagees of ships a preferred lien (with a few exceptions) upon the mortgaged ships. The credit extended to ships is likewise a source and form of capital. It is to be hoped that the effect of the Ship Mortgage Act will not be to deprive shipping ventures of the greater capital which the ship's credit supplied. It would be expected that a mortgaged ship would lose the credit which would otherwise be extended to her, and this lost credit might exceed the capital derived from the preferred mortgage contributions. The preferred mortgage plan is undoubtedly an extension, or at least a change, of the law maritime. It provides for the enforcement of such mortgages through a foreclosure proceeding. The question at once arose whether such foreclosure proceedings could be brought within the jurisdiction of Courts of Admiralty, inasmuch as such mortgages were not before known to the law maritime. This question has been set at rest by the case of Detroit v. The Thomas Barlum, 293 U. S. 21, 55 S. Ct. 31.

This type of mortgage has, by the Act of Congress, been incorporated into our maritime law. A regrettable effect is to subject shipping activities to the danger of a scheme which has resulted in untold evil in other business activities. The evil has reached colossal proportions in hotel, apartment house and office building and many other operations. Efforts are now being made to find a remedy as the scheme has become a national scandal and has called for a congressional investigation. The scheme is simplicity itself. It is for the promoters to plan an extensive construction which may be subjected to a mortgage. It is planned to create the mortgage for a sum for which the property is good security and yet so large that in case of a sale the property can be bought in under it. Such a mortgage is executed to the promoters for all they invest plus a very generous margin for their profits. The gullible are then plied by every art to invest in the venture. They are given bonds supposed to be secured by a second mortgage or are given beautifully embossed certificates of preferred stock. The bait is a large promised profit. There is usually a lavish issue of common stock to investors in the second mortgage bonds and preferred stock, but the promoters retain control of the management through holding the major part of the common or voting stock. The promoters have risked nothing. Their entire investment, if any, and high profits, are secured by the first mortgage. When the time comes to spring the trap, the first mortgage is foreclosed, taking everything, and all others get nothing. This is no fancy picture but what is happening every day and every where. This is the scheme charged to be behind these preferred mortgages.

The facts of this case can be best presented through a series of findings, which we make:

1. Stemmler & Co. were investment bankers. Some changes were made in the course of the transactions, but we treat them as alone concerned from the beginning. They became interested in the marine venture of cargo carrying by water from the port of Philadelphia to Kinsale, Va. They were to supply the needed capital and were willing to invest $30,000.

2. A corporation, given the name of the Delaware & Chesapeake Steamship Company, was chartered under the laws of the state of Delaware. Its entire capital stock was represented by an issue of 3,000 shares of the type known as "no par value" stock. The charter date is August 21, 1934.

3. About the same time the two barges, known to this record as the Albany and R. Lenahan, were purchased, the one for $9,000, and the other for $10,000, or $19,000 in all. Checks for the payment were the checks of Stemmler & Co. direct to the vendors, but the bills of sale of the boats were made to the corporation.

4. On August 23, 1934, a formal meeting of the incorporators was held, Stemmler presiding as chairman, at which a formal offer was made by Stemmler that in consideration of the issue to Stemmler & Co. of 3,000 shares of the stock of the company (the entire stock issue), and the execution of two notes for $15,000 each payable in six months, secured by "two preferred mortgages" of $30,000 each on the boats Lenahan and Albany respectively. Stemmler & Co. would transfer title to the boats and give the company $11,000. The offer was formally accepted by the company. It may be noted for whatever this truth is worth that the offer was made by Stemmler to himself and accepted by him. It will be further noted that the entire capital of the corporation became borrowed capital and the company without any means of payment agreed to repay the $30,000 in six months.

5. The mortgages for $30,000 each on the Albany and Lenahan were dated August 24 and August 27, 1934, respectively, and the two notes for $15,000 each were given about the same time. When these were given Stemmler & Co. had paid out something above $21,000 or $22,000. It is not denied that they afterwards advanced the full $30,000 or more.

6. Each mortgage was not only for $30,000 or for $60,000 in all, but they pledged not only the vessel, but all freight earnings as well. Opposing counsel attach importance to this latter feature.

7. We have assumed, without inquiring into it, that there has been compliance with the formalities of foreclosure.

8. In making the following fact finding, we have had in mind that the mortgagees are bankers with a banker's idea of his rights and the measure of consideration he owes to others.

The Ship Mortgage Act attempts to afford some measure of protection to those dealing with mortgaged ships by giving them notice of the existence of the mortgage. This purpose was thwarted by the acts of the mortgagees in this case. The act, for instance, requires that the mortgage be recorded so as to give at least constructive notice of its existence. The plain intent of the act is to have this record easily accessible to prospective creditors. The record must be in the home port of the vessel. The owner here is a Delaware corporation. The port from which the vessels were to sail was Philadelphia. The credit asked for would be expected to be from Philadelphia merchants. What may be called the natural home port of the vessels would hence be Wilmington or Philadelphia. Had the mortgages been recorded in Philadelphia, their existence would likely have become known. Instead of this being made the home port, that of New York was selected. It is impossible to escape the at least suspicion, in view of the whole conduct of the mortgagees, that the home port was made New York purposely in the hope that actual knowledge of the existence of the mortgage would thereby be concealed. In their eagerness to have a distant port made the home port of the vessels, the mortgagees recorded the mortgage before the formalities of designating a home port had been complied with. The required approval of the Commissioner of Navigation of the Department of Commerce had not been made when the mortgages were recorded. It was, however, afterwards given. As a further assurance that the existence of the mortgage would be disclosed, a copy of the mortgage is required to be kept among the ship's papers, and, although we cannot find this to be expressly required by the act, notices of the mortgage are expected to be posted on the ship. In this case all such information was purposefully withheld and the existence of the mortgages concealed. Notices were prepared for...