The Ship Mortgage in the United States

The History of the Ship Mortgage in the United States

Although the general maritime law included bottomry (the pledging of the ship– literally the vessel’s “bottom” — as security for a loan) and respondentia (pledging the cargo as security for a loan), both bottomry and respondentia became impractical with the advent of steel ships in the nineteenth century and the needs for large amounts of capital to operate merchant vessels and fleets. Improvements in ship-to-shore communication (e.g. wireless and later marine radio technology) and the growth of international banking facilities also made it less necessary for masters to enter into “bottomry bonds” in foreign ports to procure funds needed to purchase supplies or repairs required to complete the voyage. Instead, advances could be obtained more quickly and easily by contacting the shipowner and arranging credit through banks or ships’ agents in virtually any part of the world. Moreover, creditors became less and less willing to risk large sums on bottomry, because bottomry claims literally sank with the ship.

The common law filled the gap nicely with the ship mortgage, an adaptation of the common law land mortgage to shipping. The ship mortgage permitted the vessel to become security for a loan without the attendant risk of loss of the security should the vessel perish. England recognized the ship mortgage early in the nineteenth century (The Portsea (1827) 2 Hagg. 84, 166 E.R. 175; The Exmouth (1828) 2 Hagg. 88n, 166 E.R. 176; R. Temperley, The Merchant Shipping Acts, 7 Ed., 1976 at para. 59), and the Admiralty Court acquired concurrent jurisdiction over such mortgages with the common law courts by the Admiralty Court Acts of 1840 (3 & 4 Vict., c. 65, sect. 3) and 1861 (24 & 25 Vict., c. 10, sects. 11 and 35).

The civil law, for its part, could not conceive of the hypothecation of a movable such as a ship (see French Code de Commerce of 1807, art. 190, whereby ships were categorized as movables), because hypothecation was traditionally restricted to immovables (i.e., lands and buildings) . The civil law hypothèque also differed considerably from the common law mortgage, particularly in that it conferred on the hypothecary creditor no immediate right to possession of the property, but only a right against the proceeds of sale of the property after enforcement of the right in judicial proceedings.

The common law mortgage, on the other hand, gives an immediate right of property, if not ownership, to the mortgagee, who can take possession of the property by a simple notice, without the necessity of taking suit, as well as a right of foreclosure at law.

The ship mortgage (or “maritime hypothec”) was finally accepted by civilian countries in the latter half of the nineteenth century, when Portugal in 1833, followed by Prussia in 1861, France in 1874 and Spain in 1893, introduced the maritime hypothec into their respective commercial codes (W. Tetley, Maritime Liens and Claims, 2 Ed., 1998 at p. 474; see also the modern French maritime hypothec, provided for in Law no. 67-5 of January 3, 1967 at arts. 43-57 and Decree no. 67-967 of October 27, 1967 at arts. 13-25). The ship mortgage and maritime hypothec were both recognized and assigned a definite ranking among maritime claims in the Mortgages and Liens Convention 1926 (arts. 2 and 3), and in the Mortgages and Liens Conventions 1967 and 1993 (arts. 1, 2 and 5).

In the United States, ship mortgages (as in England prior to 1840) were originally held not to fall within Admiralty jurisdiction (Bogart v. The John Jay 58 U.S. (17 How.) 399 (1854)), and the mortgagee’s claim ranked after all maritime claims in the distribution of judicial sale proceeds, making the ship mortgage less than viable as a form of maritime security (The Hendrik Hudson 11 Fed. Cas. 1087 (No. 6385) (N.D. N.Y. 1855); The Lottawanna 88 U.S. (21 Wall.) 558 (1874); The J.E. Rumbell 148 U.S. 1 (1893)).

The ship mortgage was, however, transformed by the Ship Mortgage Act of 1920 (Act of June 5, 1920, known as the Merchant Marine Act, c. 250, 41 Stat. 1000, 46 U.S. Code Appx, former chapter 25, former sect. 911-984), which codified the formalities, recognition and ranking of “preferred mortgages” in American maritime law. The Act was extended in 1954 to apply to foreign ship mortgages validly executed and recorded under applicable foreign laws. (Act of June 29, 1954, c. 419, 68 Stat. 323, 46 U.S. Code Appx., former sect. 951, second para.).

Today, preferred ship mortgages, domestic and foreign, are regulated by the Commercial Instruments and Maritime Liens Act of 1988, 46 U.S. Code, especially at sects. 31321-31330). As in other jurisdictions, the ship mortgagee enjoys a relatively high ranking, his “preferred mortgage lien” (codified by 46 U.S. Code sect. 31325) taking priority over all claims against the vessel, except for expenses and fees allowed by the court, court costs and “preferred maritime liens” (46 US. Code sect. 31326(b)(1)).

Modern U.S. ship mortgage law thus helps make America a major centre of international ship finance.

By William Tetley, Q.C.