The essential value of these liens lies in the right they give to have the ship arrested and sold by a court of admiralty for their satisfaction, and in the speed and security with which the remedy can be applied. The vessel is arrested immediately upon the filing of the libel, before the liability is proven or the case tried, and may not leave port without giving bond to secure the claim (see Chapter XVII, Admiralty Remedies).
They do not depend upon notice or recording or possession and do not in any way resemble a mortgage. They are, in fact, an actual property in the ship, created as soon as the service is rendered or the wrong suffered (Yankee Blade, 19 How. 82).
As these liens do not depend upon notice or record, they are essentially secret in their nature and even purchase of the ship, in good faith and for value, will not be protected against them (The Marjorie, 151 Fed. 183).
On the other hand the law requires the lienor to be diligent in enforcing his lien so that third parties may not be unduly prejudiced thereby. If he is not diligent, the court will hold him guilty of laches and the lien may become stale as against all parties other than the owner.
There are no hard and fast rules defining diligence or the limit after which a lien becomes stale. Under the general maritime law, the voyage was the test; liens which accrued on one voyage were required to be enforced before another voyage was made or they became stale as to those of the latter. In deep-sea navigation, where the voyages are prolonged, this rule still obtains. On the Great Lakes, where the trips or voyages are comparatively short, and navigation is closed by the winters, the season of navigation is the rule. Liens not enforced during the season or the following winter will be postponed to those of the later season. In New York harbor, the local conditions have resulted in a forty-day rule; in Virginia, under somewhat different conditions, a one-year rule has appeared. The safe method is to be prompt and diligent in collecting liens against a ship; delay is always dangerous and there may be no other financial responsibility. This course is also for the best interests of the shipowner; interest and costs accumulate rapidly where the liens are enforced by the courts.
In the case of the Marjorie, 151 Fed. 183, above cited, a private yacht was libeled in Baltimore on account of coal furnished her in Norfolk nearly a year previously. She spent that time voyaging up and down the coast, putting in at various ports and when libeled had been laid up for the winter. She had not been in Norfolk subsequent to the occasion on which the coal was furnished. About six months after the coal was furnished she was sold to a new owner, who, finding no lien on record against her, paid the full purchase price. The Court held:
As commercial enterprise would be vexatiously incommoded and the free circulation and disposal of vessels prevented if such liens, which are not required by law to be made manifest by public registration, were allowed to lie dormant for an indefinite period, the courts have uniformly held, where the rights of bona fide purchasers will be injuriously affected if it is allowed to prevail, that the lien is lost if there has been long delay, and there has been reasonable opportunity to enforce it. The diligence required is usually measured by the opportunity of enforcement. In nearly all of the cases where the courts have held the lien to be lost and where there has been change of possession, there has been unreasonable delay on the part of the creditor in availing himself of the opportunities of enforcing his lien.
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In the case under consideration the libel was filed within less than a year. The yacht had been sailing from port to port, and never came within the jurisdiction of the port where the supplies were furnished. The claim was a small one and hardly justified the employment of a detective to follow her wanderings. The lien was asserted as soon as the yacht was found.... The law is well settled that liens of this nature must be sustained if there has been reasonable diligence in asserting them. A long line of decisions shows that a delay of a year in circumstances such as are disclosed by the testimony is not unreasonable, and to lay down any other rule would tend to unsettle the law and to disturb the credit which in the interest of commerce must be extended to ships for supplies when away from their home ports to enable them to continue their voyages, a credit only given upon the faith that they have a lien upon the ship.
The Merchant Marine Act of 1920 (Sec. 30, Subsection G. See Appendix), provides that any one claiming a lien on an American ship which is subject to a "preferred mortgage" as defined in that Act (see Chapter X, infra) may record a notice of his lien with the Collector of Customs at the port of documentation, and upon the discharge of the indebtedness, shall file a certificate to that effect. A lienor who has recorded his lien is entitled to notice of any proceeding for the foreclosure of a preferred mortgage. This provision is intended to enable the lienor to come in and protect his interest.
These liens arise only upon movable things engaged in commerce and navigation. They cannot exist in anything which is fixed and immovable and not the subject of maritime commerce or navigation. Thus they will subsist in vessels, rafts and cargoes but not upon a bridge or a ship totally out of commission (Rock Island Bridge, 6 Wall. 213; Pulaski, 33 Fed. 383). The lien has been sustained against a dredge. (Atlantic, 53 Fed. 607).
Important priorities exist among maritime liens and these are adjusted when the ship is sold in admiralty to satisfy her debts. The purchaser at an admiralty sale, as elsewhere stated, takes the ship free of all existing liens; the proceeds of the sale are distributed among the lienors according to their priorities, after deducting costs and expenses.
Liens for torts take precedence over all prior liens, and the later lien for tort will be preferred to an earlier if there has been an absence of diligence in enforcing it. The John G. Stevens, 170 U. S. 113, is the leading case on the priority of liens against the offending vessel for torts committed by her. Mr. Justice Gray held:
But the question we have to deal with is whether the lien for damages by the collision is to be preferred to the lien for supplies furnished before the collision.
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The collision, as soon as it takes place, creates, as security for the damages, a maritime lien or privilege, jus in re, a proprietary interest in the offending ship, and which, when enforced by admiralty process in rem, relates back to the time of the collision. The offending ship is considered as herself the wrongdoer, and is herself bound to make compensation for the wrong done. The owner of the injured vessel is entitled to proceed in rem against the offender, without regard to the question who may be her owners, or to the division, the nature, or the extent of their interests in her. With the relations of the owners of those interests, as among themselves, the owner of the injured vessel has no concern. All the interests existing at the time of the collision in the offending vessel, whether by way of part ownership, of mortgage, of bottomry bond, or of other maritime liens for repairs or supplies, arising out of contract with the owners or agents of the vessel, are parts of the vessel herself, and as such are bound by and responsible for her wrongful acts. Any one who had furnished necessary supplies to the vessel before the collision, and had thereby acquired, under our law, a maritime lien or privilege in the vessel herself, was, as was said in The Bold Buccleugh [7 Moore P. C. 267] before cited, of the holder of an earlier bottomry bond, under the law of England, "so to speak, a part owner in interest at the date of the collision and the ship in which he and others were interested was liable to its value at that date for the injury done without reference to his claim [7 Moore P. C. 285]."
Liens arising out of matters of contract will be paid in substantially the following order:—
Salvage.
Sailors' wages and wages of a stevedore when employed by master or owner.
"Preferred mortgages" (see below).
Pilotage and Towage.
Supplies and Repairs.
Advances of Money.
Insurance premiums (where a lien).
Mortgages not preferred.
It may be regarded as the grand rule of priority among maritime liens, that they are to be paid in the inverse order of the dates at which they accrued. Liens arising on a later voyage have priority over liens of an earlier voyage, and the later in point of time which have been for the preservation or improvement of the vessel, are to be paid in the inverse order of the dates at which they accrued, the later debt being paid in full before anything is allowed to the lien of an inferior grade. The reason for this is because the loan, or service, or whatever created the later lien has tended to preserve or improve the first lien-holder in security for his lien. He is to be preferred who contributed most immediately to the preservation of the thing.
An important qualification of the rule heretofore governing the priority of maritime liens on American vessels, is made by the Ship Mortgage Act of 1920 (Merchant Marine Act, see Appendix). By this act certain mortgages which conform to its provisions are called "preferred mortgages" and are made maritime liens enforceable in admiralty. In the order of priority, a preferred mortgage lien comes next after liens arising out of tort, for wages of a stevedore when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of the crew, for general average and for salvage. Liens for repairs, pilotage, towage, freight and charter hire come in subsequent to "preferred mortgages."
The subjects of liens for salvage, wages, pilotage and towage, advances, mortgages, freight and charter hire are discussed under the appropriate titles in this book.
By act of Congress approved June 23, 1910, provisions were made which substantially changed the law as it existed theretofore. This act was repealed and reënacted with amendments by the Merchant Marine Act of 1920 (see Appendix). The latter act (Sec. 30), representing the present state of the law, provides:
Subsection P. Any person furnishing repairs, supplies, towage, use of drydock or marine railway, or other necessaries, to any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall not be necessary to allege or prove that credit was given to the vessel.
Subsection Q. The following persons shall be presumed to have authority from the owner to procure repairs, supplies, towage, use of drydock or marine railway, and other necessaries for the vessel: The managing owner, ship's husband, master, or any person to whom the management of the vessel at the port of supply is intrusted. No person tortiously or unlawfully in possession or charge of a vessel shall have authority to bind the vessel.
A person furnishing supplies or repairs to a vessel in the absence of her owners or temporary owners, and elsewhere than in her home port, and upon the order of the master, should inquire into the necessity for the supplies or repairs. If, upon reasonable inquiry, he finds that they are necessary, he may safely furnish them, relying on the credit of the vessel and upon his right to a maritime lien upon her. If reasonable inquiry fails to show any necessity, the supplier or repairer will not be entitled to a lien, even though the master gave the order.
In the case of the Valencia, 165 U. S. 264, the home port of the ship was Wilmington, North Carolina. She was plying between New York and Maine. Coal was ordered for her in New York, not by the master, but by a steamship company doing business in New York whose relations to the vessel were not inquired into by the suppliers of the coal. If they had inquired, they would readily have learned that the steamship company was a charterer of the vessel and was bound by the charter party to "provide and pay for all coals." The coal was not paid for and the suppliers libeled the ship. In directing the libel to be dismissed the Supreme Court said:
Although the libellants were not aware of the existence of the charter party under which the Valencia was employed, it must be assumed upon the facts certified that by reasonable diligence they could have ascertained that the New York Steamship Company did not own the vessel, but used it under a charter party providing that the charterer should pay for all needed coal. The libellants knew that the steamship company had an office in the city of New York. They did business with them at that office, and could easily have ascertained the ownership of the vessel and the relation of the steamship company to the owners. They were put upon inquiry, but they chose to shut their eyes and make no inquiry touching these matters or in reference to the solvency or credit of that company. It is true that libellants delivered the coal in the belief that the vessel, whether a foreign or a domestic one, or by whomsoever owned, would be responsible for the value of such coal. But such a belief is not sufficient in itself to give a maritime lien. If that belief was founded upon the supposition that the steamship company owned the vessel, no lien would exist, because in the absence of an agreement, express or implied, for a lien, a contract for supplies made directly with the owner in person is to be taken as made "on his ordinary responsibility, without a view to the vessel as the fund from which compensation is to be derived." The St. Jago de Cuba, 9 Wheat. 409. And if the belief that the vessel would be responsible for the supplies was founded on the supposition that it was run under a charter party, then the libellants are to be taken as having furnished the coal at the request of the owner pro hac vice, without any express agreement for a lien, and in the absence of any circumstances justifying the inference that the supplies were furnished with an understanding that the vessel itself would be responsible for the debt incurred. In the present case, we are informed by the record that there was no express agreement for a lien, and that nothing occurred to warrant the inference that either the master or the charterer agreed to pledge the credit of the vessel for the coal.
*****
We mean only to decide, at this time, that one furnishing supplies or making repairs on the order simply of a person or corporation acquiring the control and possession of a vessel under such a charter party cannot acquire a maritime lien if the circumstances attending the transaction put him on inquiry as to the existence and terms of such charter party, but he failed to make inquiry, and chose to act on a mere belief that the vessel would be liable for his claim.
The law is even more succinctly stated in the case of the Kate, 164 U. S. 458, as follows:
The principle would seem to be firmly established that when it is sought to create a lien upon a vessel for supplies furnished upon the order of the master, the libel will be dismissed if it satisfactorily appears that the libellant knew, or ought reasonably to be charged with knowledge, that there was no necessity for obtaining the supplies, or, if they were ordered on the credit of the vessel, that the master had, at the time, in his hands, funds, which his duty required that he should apply in the purchase of needed supplies. Courts of admiralty will not recognize and enforce a lien upon a vessel when the transaction upon which the claims rests originated in the fraud of the master upon the owner, or in some breach of the master's duty to the owner, of which the libellant had knowledge, or in respect of which he closed his eyes, without inquiry as to the facts.
If no lien exists under the maritime law when supplies are furnished to a vessel upon the order of the master, under circumstances charging the party furnishing them with knowledge that the master cannot rightfully as against the owner, pledge the credit of the vessel for such supplies, much less one is recognized under that law where the supplies are furnished, not upon the order of the master, but upon that of the charterer who did not represent the owner in the business of the vessel, but who, as the claimant knew, or by reasonable diligence could have ascertained, had agreed himself to provide and pay for such supplies, and could not, therefore, rightfully pledge the credit of the vessel for them.
Where a charterer becomes the owner pro hac vice, as usually occurs in the case of a "bare-boat" charter, necessary supplies ordered by the master will entitle the supplier to a maritime lien under the statute, unless the charter party contains stipulations that were known to the supplier or which he could have readily ascertained, excluding such liens. Thus in the latest decision of the Supreme Court in which the act of June 23, 1910, was construed (South Coast S. S. Co. v. Rudnbach, decided March 1, 1920) a bare vessel was chartered to one Levick, the contract stipulating that Levick was to pay all charges and save the owners harmless from all liens. There was also a provision that the owner might retake the vessel in case Levick failed to discharge any liens within thirty days, and a provision for the surrender of the vessel free of all liens, if Levick failed to make certain payments. The master of the ship had been appointed by the owner, but was under Levick's orders. When the supplies were ordered representatives of the owners warned the supplier that the steamer was under charter and that he must not furnish supplies on the credit of the vessel. He disregarded the warning and furnished the supplies and libeled the vessel for his lien. The Court upheld his right to the lien, holding that the warning of the owner was ineffectual because the charterer had become the owner pro hac vice, the master being his agent and not that of the owner, and that:
Unless the charter excluded the master's power the owner could not forbid its use. The charter-party recognizes that liens may be imposed by the charterer and allow to stand for less than a month, and there seems to be no sufficient reason for supposing the words not to refer to all the ordinary maritime liens recognized by the law. The statute had given a lien for supplies in a domestic port, and therefore had made that one of these ordinary liens. Therefore the charterer was assumed to have power to authorize the master to impose a lien in a domestic port, and if the assumption expressed in words was not equivalent to a grant of power, at least it cannot be taken to have excluded it. There was nothing from which the furnisher could have ascertained that the master did not have power to bind the ship.
The reader will not be misled into supposing that the absence of a right to a maritime lien means that the debt is uncollectible by legal process. While the admiralty court is closed to the creditor if there be no right to a maritime lien, he has the same remedy as any other creditor by a suit at law to recover the debt or damage from the debtor, or person liable, i.e., the owner, the temporary owner, or the person who ordered the goods or did the damage as the case may be. Such a remedy lacks the peculiar advantages of the maritime lien (§ 2 supra, this chapter). There may also be special remedies open to him under state statutes (but see § 13, this chapter).
Maritime items are only completely divested by payment or by an admiralty sale. Laches—that is to say delay or sloth—on the part of the lienor may prevent their enforcement against the rights of subsequent lienors or purchasers for value in good faith, but the ship is really only absolutely free from them when she has passed through a sale in proceedings in rem—that is, a suit against the ship. This transfers all claims to the proceeds in the registry of the court and passes a clear title to the purchaser. The Garland, 16 Fed. 283, is illustrative; she had sunk a yacht in the Detroit River with great loss of life; her business was that of a ferry between Detroit, Michigan, and Windsor, Ontario, and her value was about $20,000; libels were filed against her in Detroit on account of the collision and she was then arrested in Windsor, by process from the Maritime Court of Ontario, for a coal bill of $36.30; that court sold her in accordance with the usual admiralty practice. She then resumed her business and was arrested under the Detroit libels. These were dismissed by the United States court because all liens had been divested by the admiralty sale in Ontario and such sales are good throughout the world. No other sales, judicial or otherwise, have this effect since they convey only the title of the owner in the thing and not the thing itself. Maritime liens, therefore, are not divested or affected by the foreclosure of a mortgage, or a sheriff's sale on execution, or a receiver's sale, or any other form of conveyance of an owner's title. Nor are they divested by a writ of execution issued out of a court of common law, nor postponed to such execution. This has been held, even where the execution was in favor of the government.
For many years there was an open question in the maritime law of the United States as to the status of liens which arose in the home port of the vessel and numerous conflicting decisions were made by the courts. The effect was that in all cases of liens arising out of contract, like supplies and repairs, the question of upon whose credit the work was done and the supplies furnished became very important; where the transaction was in the home port, there was a presumption that it was on the personal credit of the owner and no lien was allowed; and the theory of home port became extended to include the entire State in which the owner resided. Thereupon all of the states interested in maritime affairs enacted statutes providing for liens upon vessels, both maritime and nonmaritime in their nature, and a sort of admiralty proceeding against the ship to enforce them; the procedure portions of these statutes were generally held void as interfering with the exclusive jurisdiction in rem of the Federal courts, but the liens which they created, if maritime in their nature, were usually enforced. By the act of Congress of June 23, 1910 (as amended and reënacted by the Merchant Marine Act of 1920, see Appendix), relating to liens on vessel for repairs, towage supplies or other necessaries, it was declared unnecessary to allege or prove that credit had been given the vessel and also provided that the Act shall supersede the provisions of all state statutes conferring liens on vessels so far as they purport to create rights in rem, that is to say, rights against the vessel herself. It is yet unsettled whether those of a nonmaritime class survive, as in the case of the lien for shipbuilding which, not being regarded by the admiralty as maritime, has been enforceable under the state statutes.
These may arise upon a ship under the provision of local statutes and be entirely enforceable so long as they do not come into conflict with maritime liens and the exclusive jurisdiction of the admiralty. So, also, a lienor may assert his common-law right to retain possession of the ship until payment is made. This depends entirely on possession and cannot be enforced by judicial proceedings, although it may be recognized by the court when it arrests the vessel on other accounts.
Maritime liens often depend on the law of the place in which the obligation is incurred and also upon the law of the ship's flag. In other words, inquiry must frequently be made whether the local law gives a lien, whether the law under which the ship sails gives the master power to create the lien, and whether the country in which the suit is commenced has the legal machinery to enforce the lien. There is no doubt about our own admiralty courts having adequate jurisdiction and equipment to enforce any maritime lien which exists by the law of a foreign country. Its enforcement is a matter of comity and not of right when the parties are foreigners. Thus the maritime lien for collision will generally be enforced wherever the offending ship may be seized, irrespective of the place where the collision occurred. That lien exists by virtue of the general maritime law. On the other hand, there may be a closer question in regard to the lien for supplies. They may be furnished in a port of a country whose laws do not provide such a maritime lien but only give a remedy by attachment of the ship. The tendency of the weight of authority is to enforce such liens in the courts of this country whenever they exist by virtue of the general maritime law, even if they could not be enforced in the courts of the country where they arose. Possibly this gives a foreigner an advantage here over what he would have at home, but this is not really material.
This is discussed in Chapter XVII, Admiralty Remedies.
Admiralty, Hughes, Chapter XVII.
Admiralty Liens of Material Men, IX American Law Review, 654.
Features of Admiralty Liens, XVI American Law Review, 193.
Maritime Liens, 4 Law Quarterly Review, 379.
Priorities among Maritime Liens, II University Law Review, 122.
The DeSmet, 10 Fed. 483 (excellent annotation).
Lottawanna, 21 Wall. 558.
John G. Stevens, 170 U. S. 113.
A vessel mortgage is a conveyance of the ship as security. A bottomry bond is a contract in the nature of a mortgage by which the ship is pledged as security for the repayment of money borrowed and the lender assumes the risk of loss if the ship does not survive in consideration of maritime interest, usually at a high rate. Respondentia is a loan on the cargo, to be repaid if the goods arrive, but, if lost, the borrower is exonerated. Like bottomry, it is essentially a loan without personal liability beyond the value of the property mortgaged. Vessel bonds are a modern form of security in the form of debentures of the owner, carrying interest coupons and secured by a trust deed or mortgage of the ship.
The name of this class of security on the ship arose from the fact that the bottom or keel of the ship was figuratively used to express the whole and to indicate that the entire vessel secured the loan. The repayment of money borrowed on bottomry depends on the safe arrival of the ship; if she is lost the loan is lost with her. The money is at the risk of the lender. Under an ordinary mortgage, the borrower must pay at all events and his personal liability survives the loss of his vessel. Under bottomry, the risk is shifted. In consideration of this risk, the lender is permitted to charge a high rate of interest without violating the law of usury. Rates of interest as high as 25 per cent. and higher have been upheld, and while in some cases the courts have ordered a reduction in the rate when it was regarded as clearly extortionate, the strong inclination of the courts is to carry out the bargain as made by the parties. The bond must be in writing. No particular form is essential but it must rest on the assumption of maritime risks by the lender or it will be no bottomry. It may be expressed after the precedent of a common-law bond, with a recital of the circumstances, provisions showing that the usual risks are on account of the obligee; and stipulations providing that the condition of performance or discharge is the safe arrival of the ship at her designated haven. The lender may secure himself against loss by taking out insurance. Such bonds may be made by the owner, in the home port, although this is not usual. He may, of course, make them anywhere. The master, however, can only do so as in cases of great necessity and the absence of the owner. His power, in this respect, is like his power to sell. His first duty is to obtain funds on the personal credit of the owner. The duty of the master to communicate with the owner, if possible, before giving a bottomry bond is the same as his duty to communicate before selling the vessel (Chapters II, § 14; IV, § 9). For this reason and in view of modern facilities for communication the giving or making of bottomry bonds by masters has, like the sale of a vessel by her master, become rare in modern times.
A good illustration of a bottomry bond is found in the case of the Grapeshot, 9 Wall. 129. There the libel recited that the Grapeshot was at Rio de Janeiro in April, 1858, was in great need of reparation, provisions and other necessaries to render her fit and capable of proceeding to New Orleans, the master having no funds or credit in Rio de Janeiro, and the owner not residing there and having no funds or credit there, the libellants at the request of the master loaned him $9,767.40, on the bottomry and hypothecation of the bark at the rate of 19½ cents, maritime interest; that the master did expend the sum borrowed for repairing, victualing and manning the bark to enable her to proceed to New Orleans and that she could not possibly have proceeded with safety without such repairs and other necessary expenses attending the refitting of her. Chief Justice Chase described the general characteristics of a bottomry bond as follows:
A bottomry bond is an obligation, executed generally, in a foreign port, by the master of a vessel for repayment of advances to supply the necessities of the ship, together with such interest as may be agreed on; which bond creates a lien on the ship, which may be enforced in admiralty in case of her safe arrival at the port of destination; but becomes absolutely void and of no effect in case of her loss before arrival.
Such a bond carries usually a very high rate of interest, to cover the risk of loss of the ship as well as a liberal indemnity for other risks and for the use of the money, and will bind the ship only where the necessity for supplies and repairs, in order to the performance of a contemplated voyage, is a real necessity, and neither the master nor the owners have funds or credit available to meet the wants of the vessel.
The Court also quoted with approval the decision in the old case of the Aurora, 1 Wheat. 96, in which it was said:
To make a bottomry bond, executed by the master, a valid hypothecation, it must be shown by the creditor that the master acted within the scope of his authority; or, in other words, that the advances were made for repairs or supplies necessary for effecting the objects of the voyage, or the safety and security of the ship. And no presumption should arise in the case that such repairs or supplies could be procured on reasonable terms with the credit of the owner, independent of such hypothecation.
And in summarizing the conclusion reached in the case it was said:
To support hypothecation by bottomry, evidence of actual necessity for repairs and supplies is required and, if the fact of necessity be left unproved, evidence is also required, of due inquiry and of reasonable grounds of belief that the necessity was real and exigent.
These bonds are not required to be placed on record but great diligence should be employed in enforcing them so that the rights of innocent purchasers or subsequent lienors may not be impaired.
This is security for a loan on marine interest created on the cargo. It may be created by the cargo-owner, at home, if he sees fit, but ordinarily, only arises out of necessity during the course of the voyage. The master has the same authority to borrow on the security of the cargo as he has in cases of bottomry. The proceeding must be sanctioned by great necessity and liability to communicate with, or obtain relief from, the owner of the goods. The duty of communication is the same as in the case of bottomry bonds (see preceding sections). The rule with respect to interest is the same as that governing bottomry bonds. The instrument may be in any form which expresses the facts and conditions; an ordinary bill of sale may be used or the form of a bottomry bond. The instrument is not required to be recorded.
The case of Ins. Co. v. Gossler, 6 Otto 645, contains an example of a bond, which was both bottomry and respondentia. The bark Frances en route from Java to Boston with a cargo of sugar encountered a hurricane which compelled the master to cut away her mast to save the vessel and put into Singapore for repairs. Destitute of funds and without credit, the master executed a bond with maritime interest at 27½ per cent., secured upon the boat, cargo and freight. When nearing the completion of her voyage the bark was cast away on the shore of Cape Cod. She could not be salved as an intact vessel, but was sold as a wreck and subsequently broken up by the purchaser in order to make use of the parts of her. Some of her cargo was saved. The Court held that the salvaged portion of the cargo and the wreck as she lay on the beach must respond to the obligation of the bond, saying that nothing but an utter annihilation of the thing hypothecated would discharge the borrower on bottomry, the rule being that the property saved, whatever it may be in amount, continues subject to hypothecation.
Unless the ship be actually destroyed and the loss to the owners absolute, it is not an utter loss within the meaning of such a contract. If the ship still exists, although in such a state of damage as to be constructively totally lost, within the meaning of a policy of insurance; ... she is not utterly lost within the meaning of that phrase in the contract of hypothecation.
Thus, the doctrine of "constructive total loss," which is important in the law of marine insurance, has no application to bottomry. It is customary in bottomry and respondentia bonds to insert a clause reserving to the lender, in case of utter loss, any average that may be secured upon all salvage recoverable.
The lender of money on a bottomry bond is under obligation to satisfy himself that the supplies or refitment for which the money is borrowed are necessarily required by the vessel. The act of June 23, 1910 (discussed in § 9 of preceding chapter), apparently has no application to money advanced on bottomry bonds and certainly has no application to respondentia bonds. If the actual need for the advance sought to be secured by the bottomry or respondential bond does not exist, the bond will not constitute a lien upon the vessel or cargo.
These are species of chattel mortgages. The ship is a chattel or personal property, for many purposes. Prior to June 5, 1920, these mortgages were not recognized as maritime transactions. The Merchant Marine Act of that date makes radical changes in the law governing ship mortgages. The new provisions are to be found in Section 30, which is to be cited, independently of the rest of the statute, as the "Ship Mortgage Act, 1920," and is printed in full with the rest of the Merchant Marine Act in the Appendix.
An ordinary mortgage upon a vessel, whether made to secure the purchase money or to obtain funds for general purposes, is not a maritime contract. This is the rule in this country, as announced by the Supreme Court in the J. E. Rumbell, 148 U. S. 1, although it is different under the general maritime law in other countries. Accordingly, courts of admiralty in the United States, have no jurisdiction of a libel to foreclose a mortgage or to enforce title or right to possession under it. If, however, the ship has been sold under admiralty process, and there are proceeds in the registry after satisfying maritime liens, the court will pay over the surplus, to a mortgagee in preference to the owner or general creditors.
The Ship Mortgage Act (supra) makes a sweeping exception to the foregoing rule in cases of American vessels where the mortgagee is an American citizen and where the parties fulfill certain formalities required by the Act and discussed in the next section. The Act provides that these mortgages shall be known as "preferred mortgages" and confers upon the courts of admiralty exclusive jurisdiction to foreclose them. There has yet been no judicial interpretation of this Act. Some doubt may be entertained whether it is within the power of Congress to convert ship mortgages into maritime contracts; that is to say, can Congress take a transaction, which has always been regarded as wholly foreign to the admiralty and confer upon it a maritime quality? The decision of this point is of the utmost importance and will be awaited with the greatest concern by every one interested in ships and shipping.
An ordinary vessel mortgage is a very inferior grade of security because it is subordinate to all maritime liens and has only a qualified and dubious standing in the only courts which enforce them. One who advances money to a ship or her owner on mortgage is bound to know that the ship navigates on credit, and must continue to accumulate liens in order to earn freight, and that she may be pledged for bottomry or incur liability for torts. He is therefore postponed to sailors' wages, salvage, towage, advances, bottomry, general average, repairs, supplies, collision, personal injury, damage to cargo, breach of contract, penalties, and liens created by local law which the admiralty will enforce.
Here again the Ship Mortgage Act, 1920, makes a radical change in the case of "preferred mortgages" given upon American vessels to secure American investors. The Act makes the lien of a "preferred mortgage" inferior to liens of prior date and liens for damages arising out of tort, for wages of stevedores when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of crew, general average and salvage, including contract salvage; but superior to all other liens, such for example as repairs, supplies, towage, pilotage, etc.
No particular form is essential to a vessel mortgage except that the requisites of the Federal Statutes in regard to recording and conveyance must be observed if it is to be placed on record in the office of a collector of customs. They require that every instrument in the nature of a bill of sale or other conveyance or incumbrance of any ship or vessel, shall be duly acknowledged before a notary public or other officer authorized to take acknowledgments of deeds (7 U. S. Comp. St. §§ 7778, 7779). It should contain a copy of the last certificate of registration or enrollment. Government blank mortgages can usually be obtained at the custom house and are preferred, although any instrument following their general form will be sufficient. A bill of sale may be used, although absolute in its terms, and the fact that it is only security can be shown by parole.
Trust-deeds or mortgages securing issues of bonds are in general use where large amounts are involved. These forms are very elaborate and resemble railroad mortgages in their elaborate details. In all vessel mortgages, important provisions are those in regard to the insurance, the amount of liens which the ship may incur, the waters which she may navigate, and the rights of the mortgagee on default. It is desirable to provide for contingencies, as far as possible, by clear and definite agreements in the instruments.
To entitle a mortgage of an American vessel to an American mortgagee to the status of a "preferred mortgage" under the Ship Mortgage Act, 1920, giving its lien the superiority described in the preceding section, it is necessary that it should be recorded; that an affidavit be filed at the time of recordation to the effect that the mortgage is made in good faith and without design to hinder, delay or defraud any existing or future creditor of the mortgagor or any lienor; and that there be endorsed upon the ship's documents the names of the mortgagor and mortgagee, the time and date of the endorsement; the amount and date of the maturity of the mortgage. The formalities to be observed in the creation of "preferred mortgages" are described in detail in the Act which is printed in full in the Appendix and should be observed with scrupulous exactness.
No mortgage of any vessel of the United States is valid against third parties unless it is duly recorded in the office of the collector of customs where such vessel is registered or enrolled. She must be registered or enrolled by the collector of that collection district which includes the port to which such vessel shall belong at the time of her registry; which port shall be deemed to be that at or nearest to which the owner, if there be but one, or, if more than one, the husband or acting and managing owner of such vessel usually resides. Unless a mortgage is properly recordable in the custom house, the mere fact that it is recorded there is insufficient to give it validity against others than the mortgagor. Record in the wrong office and premature record in the right office are equally invalid. Thus a mortgage was held bad against general creditors in the case of the Empire Shipbuilding Company, 221 Fed. 223, where it was made before the ship was completed and recorded on the same day she was enrolled. The proper course would have been to first enroll the ship as a vessel of the United States and then execute and record the mortgage. As we have observed in Chapter II, § 16, supra, where a vessel at sea is mortgaged it is wise, in order to be safe until she returns, to record the mortgage at the home port, as shown by her outstanding document, as well as at the new home port if there is to be a change of home port.