LEGAL GUIDE
Written by attorney Michael Edward Vaughn | May 20, 2010

Maritime Vessel Arrest- Seizure of vessel for collection of debts

IN REM JURISDICTION

Arrest of a vessel is part of the process by which an Admiralty Court gains jurisdiction over the subject matter of a law suit. These lawsuits are known as "in rem" actions meaning that the action is against the ship rather than a person. The ship itself is a party to the litigation.

Generally, the vessel, itself, is responsible for payment of liens, mortgages or any other maritime lien that may arise. When the owner encumbers a vessel with a First Preferred Ship's Mortgage, it is the ship that guarantees payment as well as the owner. The owner may separately agree by a personal promise to pay or other type of guarantee to be personally liable.

LITIGATION IS INITIATEd BY THE ARREST OF THE SHIP

An arrest of a vessel is the prerequisite for the court to establish jurisdiction. If the vessel cannot be seized, the court may have no right over the vessel. Arrest is the physical process by which, in case of the United States, a U.S. Marshal goes aboard the vessel and physically takes charge of it. A similar process is used in all maritime nations.

The Notice of Arrest must be posted on the vessel, a copy given to the master or person in charge, as well as to the owner. Also, notice must be published in a newspaper authorized to publish legal notices. Actual notice must be given to all other lien holders who claim an interest in the vessel.

CUSTODY OF THE VESSEL

Once seized, the court, through the marshal's service or substitute custodian, maintains possession of the vessel and the owner loses all control the end of the litigation. To avoid this situation and its effect on commerce, the court will allow the owner to post a bond or other suitable security. Once the security is accepted, the vessel is returned to the owner and the litigation continues with the security as the subject of execution of judgment. Letters of undertaking, are stipulations by the owner or his insurance company to appear and defend any claim that is made, just as if the vessel had been arrested. If a judgment is entered, the owner or the insurer must pay the judgment. This amounts to stipulated jurisdiction for the admiralty court and prevents the disruption of the owner's business during the litigation.

Once the marshal has seized a vessel, he is obligated to preserve the vessel and its equipment. Generally, the custodian of a seized vessel should not interfere with the conduct of cargo and other operations normal to a vessel in berth unless directed so by court order. In the United States, the "Manual for United States Marshals" sets forth the obligations and duties for the marshal and how he should perform them. It is important to realize that the Marshal does not place hull insurance on a seized vessel. It is necessary for the owner or the Plaintiff to place adequate Port Risk Insurance on the vessel to protect their interest against loss.

SALE OF THE VESSEL

If a vessel is not released by the posting of security, the court may order an interlocutory sale. An interlocutory sale means a sale prior to the completion of the litigation and the entering of a judgment. As a general rule the sale will not be allowed for four months. The rules provide for sale if the arrested property is perishable, liable to deterioration, of if the cost of keeping it is excessive or disproportionate to the value of the claim against the ship.

RIGHTS OF PURCHASER AT AUCTION

Regardless as whether the sale is interlocutory or a judgment sale, the purchaser at the auction does not have any right in the vessel, until the sale is confirmed by the court. If a higher bid is received within three days by the court, the court has the option of voiding the auction and ordering a new sale. Once confirmation is received, the buyer receives title which extinguishes all other liens and provided him with a clear title.

An "in rem" action resolves claims of all of the world against the vessel and no lien for past debts can be created or asserted. The proceeds of the sale are paid into the court and are used to satisfy any expenses incurred by the keeping of the vessel and fees to the marshal. The balance is paid to the claimants and any balance left over is paid to the owner.

If the sums received are not sufficient to pay all claims, the claimants pay proportionately to the shortfall. Unless the claimant/plaintiff who seized the vessel acts in bad faith, the owner of the vessel may not recover damages due to the arrest or for loss of profits.

A vessel sold at a marshal's sale to foreclose on a preferred ship's mortgage or maritime lien does not, as a result of the sale, become qualified as a "U.S. built" for the purpose of the Jones Act, requiring vessels trading between U.S. ports to be U.S. built. However, if the vessel is forfeited to the U.S. Government as a drug, customs or other "seizure", then when purchased from a marshal's sale, will become "U.S. built" for all purposes.

The costs to the party seizing a vessel may be substantial. These costs will include attorney fees, pre-paid marshal fees, storage and removal fees and moorage during the arrest. Most if not all all of these expenses will be recovered if the vessel is sold. It is important to be aware that not all sales produce enough revenue to pay all the expenses and pay all of the debts owed. Debts that will give rise to an arrest of a vessel must be maritime in nature and relate to that specific ship or boat.

Once a vessel is sold there is a very rigid schedule of priorities of payment of claims. Generally payments are made in the following order until no funds remain.

  1. Expenses of the court during the seizure.( Marshal fees, storage, maintenance, etc.)

  2. Crew wages

  3. Salvage and general average liens.

  4. Tort Liens

  5. Pre-mortgage liens for neceswsaries.

  6. Preferred Ship mortgages

  7. Liens for necessaries

  8. State created liens of a maritime nature

  9. Penalties and forfeitures for violation of federal statutes

Generally it will take from 90 days to 12 months for the litigation to be completed.

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