U.S. v. Pride of Texas

• Decision Date: 05 October 1994
• Docket Number: Civil Action No. 2:92cv211.
• Citation: 964 F.Supp. 986
• Court: U.S. District Court — Eastern District of Virginia
• Parties: UNITED STATES of America, Plaintiff, Fairway Terminal Corporation, for itself and on behalf of I.T.O. Corporation, and Tomen America, Inc., Intervenor-Plaintiffs, v. THE PRIDE OF TEXAS, her engines, tackle, appurtenances, etc., in rem, Seahawk Management, Inc., in personam, Hull 751-IRFC I Partnership, in personam, Defendants.

964 F.Supp. 986

UNITED STATES of America, Plaintiff Fairway Terminal Corporation, for itself and on behalf of I.T.O. Corporation, and Tomen America, Inc., Intervenor-Plaintiffs, v. THE PRIDE OF TEXAS, her engines, tackle, appurtenances, etc., in rem, Seahawk Management, Inc., in personam, Hull 751-IRFC I Partnership, in personam, Defendants.

Civil Action No. 2:92cv211.

United States District Court, E.D. Virginia, Norfolk Division.

October 5, 1994.

Samuel Johnson Webster, Daniel Reid Warman, Williams, Kelly & Greer, Norfolk, VA, for Fairway Terminal Corp., Tomen America, Inc.

JACKSON, District Judge.

MEMORANDUM OPINION AND ORDER INTRODUCTION

This is an admiralty case in which there are three motions before the court. First, the United States seeks an order compelling the intervenors to provide complete responses to its interrogatories. Second, the United States seeks a default judgment by the court against the Pride of Texas, and any party who has not already intervened in this case. The final motion before the court involves a determination of which party has a priority claim to the foreclosure proceeds from the sale of the Pride of Texas. The United States has moved for summary judgment, stating that since it has a preferred mortgage lien on the vessel, its claim is superior to all others. Fairway Terminal Corporation and Tomen America, Incorporated ("intervenors"), claim that despite the United States' preferred mortgage, their claims should take priority under the principle of equitable subordination.

Upon review of the record, and for the reasons that follow, the court grants the United States' motion for a default judgment against the Pride of Texas and any claimants not already a party in this case. In addition, the court grants the United States' motion for summary judgment. The court will not address the government's motion to compel discovery since granting the motion for summary judgment moots the discovery issue.

I. FACTS¹

The Pride of Texas was owned by Hull 751-IRFC I Partnership ("Hull-IRFC"). Hull-IRFC was part of a conglomerate called the Falcon Group ("Falcon"). Falcon owned 11 ships, some of whose financing was cross-guaranteed. The entire group shared a common board of directors and a chief operating officer.

In May of 1981, the United States, through the Maritime Administration ("MARAD"), insured the repayment of U.S. Government Guaranteed Ship Financing Bonds, totalling approximately $17 million, under its Title XI financing program. This was done in order to finance the construction of the Pride of Texas. Hull-IRFC entered into a mortgage agreement with MARAD which served as collateral and secured the right of the United States to foreclose on the vessel. The mortgage was promptly recorded in the proper Coast Guard office. Between December 19, 1986 and July 14, 1988 the shipowner executed five supplements to the mortgage, primarily in order to allow it to withdraw money from its Title XI Reserve Fund. MARAD requires that a shipowner who does not meet certain financial criteria to maintain a reserve fund for each Title XI agreement. When the shipowner realizes profits over a certain amount, part of those profits are deposited in the reserve fund. This fund ensures that money will be available to meet loan payments or other operating expenses when financial difficulties arise. These supplements were also promptly recorded with the proper Coast Guard office.

In May of 1992, Hull-IRFC was unable to make its payments and defaulted on the mortgage. The United States Secretary of Transportation, who represented the government in this matter, subsequently paid almost $15 million to satisfy the ship's construction bonds. As of July 31, 1992, Hull-IRFC owed the United States a total of $15,045,779.67, including insurance costs and interest. On September 25, 1992, the United States filed this action against the Pride of Texas, in rem, and Hull-IRFC, in personam, in order to foreclose on the mortgage and recover the money due the government. The vessel was arrested on October 8, 1992 and sold to MARAD on January 8, 1993, for two million dollars. The vessel is currently docked at Fort Eustis, Virginia. The proceeds of the sale are being held in an government account.²

Meanwhile, on November 12, 1992, Fairway Terminal Corporation of Houston, Texas, filed a motion to intervene. Fairway claims a lien against the Pride of Texas for loading and other services totalling approximately $180,000 rendered between September 23 and October 8, 1991. Tomen America, Incorporated, of New York City, filed an intervening complaint on January 14, 1993, claiming a lien against the Pride of Texas for fuel services totalling just under $50,000. These services were rendered on February 26, 1992. No other parties intervened in this case and on March 31, 1993 the court clerk entered a default against the vessel, its owners, and any additional claimants, following a motion by the United States. At the same time, the United States made a motion for summary judgment pursuant to Rule 56 against Fairway and Tomen claiming that its lien on the vessel took priority over their liens.³

II. DISCUSSION

A. The court will grant the United States' motion to enter a default judgment against the Pride of Texas and any claimants who are not a party to this case because the vessel was properly arrested, notice of the arrest was published, and no other parties filed a timely claim.

The clerk has already entered a default against the Pride of Texas and any persons not already a party to this action under Federal Rule of Civil Procedure 55(a). The United States now seeks a judgment of default by the court under Rule 55(b)(2). In seeking the default judgment against the Pride of Texas and any other potential parties, the government has complied with Supplemental Admiralty Rules C(3) (relating to judicial authorization for an arrest of a vessel) and C(4) (relating to notice of the arrest). The Pride of Texas has been arrested and, therefore, the court has jurisdiction over the vessel enabling it to enter a default judgment. See Wong Shing v. M/V Mardina Trader, 564 F.2d 1183, 1186 (5th Cir.1977) (stating that "arrest or seizure of ... property [in rem] gives the court jurisdiction"). Except for the intervenors, no other party has complied with the requirements of Supplemental Admiralty Rule C(6) to file a claim and answer to the arrest; therefore, the court can properly hold the vessel in default and bar any future claims to the vessel's proceeds. See, e.g., United States v. One 1978 BMW, 624 F.Supp. 491 (D.Mass.1985) (applying the principles of admiralty and holding that a failure to meet the deadlines of Rule C(6) entitled the government to a default judgment).

B. The court will grant the United States' motion for summary judgment because the plain language of the relevant statute clearly gives a preferred mortgage priority over all other liens, and because the United States did not engaged in inequitable conduct.

1. Under 46 U.S.C. § 31326, a preferred mortgage has priority over all other liens.

A motion for summary judgment should only be granted in cases where "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). When granting summary judgment, "it [should be] perfectly clear that no issue of fact is involved and inquiry into the facts is not desirable to clarify application of the law." Teamsters Joint Council No. 83 v. CenTra, Inc., 947 F.2d 115, 119 (4th Cir. 1991). Therefore, the logical starting point in determining the outcome of this motion is the relevant admiralty laws.

Under 46 U.S.C. § 31322 (1988) (a)(1), a preferred mortgage "is a mortgage, whenever made, that — (A) includes the whole of the vessel; (B) is filed in substantial compliance with section 31321 of this title [relating to filing and recording requirements]; covers a documented vessel; ... [and] (D) has as the mortgagee ... the United States ..." Id. It is clear to the parties involved that the United States has a preferred mortgage lien on the Pride of Texas. (See Stipulation at 3.) Section 31326 of Title 46 states that:

(a) When a vessel is sold by order of a district court in a civil action in rem brought to enforce a preferred mortgage lien or a maritime lien, any claim in the vessel existing on the date of sale is terminated ... and the vessel is sold free of all those claims.

(b) Each of the claims terminated under subsection (a) of this section attaches, in the same amount and in accordance with their priorities to the proceeds of the sale, except that —

(1) the preferred mortgage lien ... has priority over all claims against the vessel (except for expenses and fees allowed by the court, costs imposed by the court, and preferred maritime liens) ...

Id. (emphasis added).

The language taken from § 31326 is directly applicable to the instant case. The Pride of Texas was sold by order of this court in a civil action in rem to enforce MARAD's preferred mortgage lien. Both intervenors had claims against the vessel when it was sold on January 8, 1993. The sale of the Pride of Texas extinguished all liens against the vessel and reassigned them to the proceeds according to their original ranking, but the preferred mortgage lien now has priority over all other claims.⁴

The intervenors would have the court disregard the language of § 31326. They state that they "do not dispute that summary judgment may be appropriate if this were a simple case of determining statutory priorities." (April 9, 1993, Brief in Opposition to Motion for Summary Judgment at 3.) Intervenors, however, claim that this is not a case where the statute should be applied.

To follow intervenors' rationale would make the language of § 31326 meaningless. While this is...