Admiralty
Maritime Law
Liens
Loans (Admiralty)
Preferred Naval Mortgage
Bareboat Charters
Standstill Agreements
London Maritime Arbitration Association Dispute Resolution Clause
State-Created Liens
Attachment of the Vessels under Texas State Law
Appeal from the United States District Court for the Southern District of Texas, USDC No. 4:19-CV-1963
In 2008, Intervenors-Appellees Caterpillar Financial Services Asia Pte Ltd (“Caterpillar”) and Eksportfinans ASA (“Eksportfinans”) provided a loan to Marfield Limited Incorporated (“Marfield”) for the construction of an offshore construction vessel named the M/V CABALLO MAYA (“MAYA”). To secure payment of this loan, Marfield executed and delivered a First Preferred Naval Mortgage to Eksportfinans and a Second Preferred Naval Mortgage to Caterpillar on December 19, 2008. As further security for outstanding sums owed to Caterpillar, Marfield executed a Third Preferred Naval Mortgage on April 17, 2014, encumbering the whole of the MAYA. The MAYA was flagged in Panama, so all three of those mortgages were submitted to the Panama Maritime Authority Directorate General of Public Registry of Property of Vessels (“PMA”), which is the central office for the recordation of Panamanian ship mortgages. The PMA reviewed all three mortgages twice and accepted them for recordation.
In 2012, Caterpillar and Intervenor-Appellee the Norwegian Government (“Norway”) provided a loan to Shanara Maritime International S.A. (“Shanara”) for construction of another offshore construction vessel named the M/V CABALLO MARANGO (“MARANGO”). To secure this loan, Shanara executed and delivered a First Preferred Naval Mortgage to Caterpillar and Norway on February 9, 2012. The following year, KFW IPEX-Bank GmbH (“KFW”) provided a loan to Shanara to finance the acquisition of cranes for installation aboard the MARANGO. To secure payment of this loan, Shanara executed and delivered a Second Preferred Naval Mortgage to KFW on January 24, 2013. The MAYA was also flagged in Panama, so both mortgages were submitted to the PMA, which reviewed the mortgages twice and accepted them for recordation.
Once construction of the MAYA and MARANGO was completed, Marfield and Shanara chartered the vessels to Oceanografia S.A. de C.V. (“Oceanografia”) for use in Mexico. The MAYA and the MARANGO were chartered there until early 2014, when the Mexican government seized the vessels in conjunction with its criminal investigation of Oceanografia. On February 28, 2014, Marfield and Shanara terminated their bareboat charters of the vessels with Oceanografia, and the vessels remained in the Mexican government’s custody. Shanara and Marfield could not generate revenue on the vessels and began to fall behind on their loan payments to Intervenors-Appellees Caterpillar, Norway, KFW, and Eksportfinans (collectively, the “Lenders”). Shortly after that, bankruptcy proceedings were commenced against Oceanografia in Mexico, and, on April 10, 2014, the Mexican government separately seized the MAYA and MARANGO in connection with the bankruptcy.
In early 2014, Grupo R, a Mexican conglomerate in the oil, gas, and energy sector, initiated discussions with Marfield and Shanara to purchase the MAYA and MARANGO. On March 21, 2014, the parties entered into purchase agreements for the vessels. Shanara and Marfield were subsequently unable to obtain the release of the vessels from the Mexican government, which violated the deadlines set forth in the purchase agreements. Since the agreements are governed by English Law and contain a London Maritime Arbitration Association dispute resolution clause, Grupo R initiated a London arbitration against Shanara and Marfield. Grupo R prevailed, and on May 30, 2019, a London Arbitration Panel entered awards of $5,000,000 against Marfield and $5,000,000 against Shanara.
From the initial arrest of the vessels until December 2017, the Lenders executed a number of amendments to the original loan agreements to reaffirm Marfield’s and Shanara’s payment obligations, which remained unfulfilled. On July 10, 2015, the Lenders, Marfield, and Shanara executed two Standstill Agreements in which Shanara and Marfield admitted that their cancellation of the Oceanografia charters constituted “materially adverse” events of default under their respective loan agreements. To avoid the imposition of liens over the MAYA and MARANGO, Caterpillar provided additional financing to Marfield and Shanara in the form of four “protective advances,” or loans. In return, Marfield and Shanara executed four Preferred Naval Mortgages in favor of Caterpillar to secure the outstanding amounts due, then registered those mortgages with the PMA. The PMA reviewed each of the mortgages twice, then accepted them for recordation. Since 2014, Shanara and Marfield have made no loan payments to the Lenders on any of the nine mortgages issued.
On May 30, 2019, Grupo R filed suit in the U.S. District Court for the Southern District of Texas seeking to attach the MAYA and MARANGO under the Texas Civil Practice and Remedies Code Section 61.001, et seq. Grupo R requested that the court attach the vessels so they could be sold at judicial auction to satisfy Grupo R’s arbitration awards. Grupo R attached a Certificate of Ownership and Encumbrance to its Complaint, identifying the First, Second, and Third Preferred mortgages over the MAYA and the MARANGO. At the time, the MAYA and MARANGO had been released from Mexican seizure and were located in Galveston, Texas.
On June 7, 2022, the court issued its findings of fact and conclusions of law, holding, in relevant part, that (1) Marfield and Shanara are in default under the loan agreements; and (2) the Lenders’ preferred ship mortgages related to said default outrank Grupo R’s state-created liens arising from Grupo R’s attachment of the MAYA and MARANGO under Texas state law. Grupo R timely appealed.
A. Relative priority of the Lenders’ mortgages as to Grupo R’s state-created liens
On appeal, the parties dispute whether the Lenders’ liens created by the nine ship mortgages take priority over Grupo R’s liens that arose from the attachment of the MAYA and MARANGO under Texas state law. The relative priorities of the Lenders’ and Grupo R’s rights determine how the proceeds from the judicial sale of the MAYA and MARANGO should have been allocated. The law of the forum provides the relative rankings of the liens, while Panamanian law governs the substance of the liens. The ranking of liens in the United States, from highest priority to lowest priority, is as follows:
1. Custodia legis expenses;
2. Seamen’s liens for wages;
3. Salvage and general average liens;
4. Tort liens;
5. Preferred ship mortgage liens;
6. Liens for necessaries under CIMLA;
7. State-created liens that are maritime in nature;
8. Maritime liens for penalty/forfeiture for violation of federal statutes;
9. Perfected non-maritime liens;
10. Attachment liens;
11. Maritime liens in bankruptcy.
Under this ranking regime, Grupo R’s rights are classified as “state-created liens that are maritime in nature,” while the Lenders’ liens are classified as “preferred ship mortgages.” Grupo R’s liens arose when it caused the MAYA and MARANGO to be attached under Texas state law. The Lenders’ mortgage liens, on the other hand, arose when Shanara and Marfield failed to pay the mortgages over the MAYA and MARANGO, which had been executed in Panama and registered with the PMA. The Commercial Instruments and Maritime Liens Act (“CIMLA”), 46 U.S.C. § 31301 et seq., defines a preferred ship mortgage as a: mortgage . . . established as a security on a foreign vessel if the mortgage . . . was executed under the laws of the foreign country under whose laws the ownership of the vessel is documented and has been registered under those laws in a public register at the port of registry of the vessel or at a central office.
The parties do not dispute that the Lenders’ preferred ship mortgage liens outrank Grupo R’s state-created maritime attachment liens, and the district court confirmed those rankings in its findings of fact and conclusions of law. The threshold issue on appeal is whether the Lenders’ mortgages are valid and enforceable against third parties like Grupo R, allowing Lenders to exercise their priority over the proceeds of the judicial sale of the MAYA and MARANGO.
B. Validity and enforceability of the preferred ship mortgages under CIMLA and Panamanian law
Grupo R and the Lenders agree that CIMLA and Panamanian law are implicated in the resolution of this lawsuit. At trial, it was undisputed that (1) the Vessels are registered under Panama’s flag; (2) the PMA is the public register or central office charged with recording vessel mortgages in Panama; and (3) all nine of the Lenders’ mortgages were recorded with the PMA, reviewed and accepted by the PMA before their recordation, and reviewed again by the PMA when it issued certificates confirming the mortgages’ compliance with Panamanian law. Under CIMLA, “a mortgage on a foreign vessel is preferred so long as it was properly (1) executed and (2) recorded under the laws of the nation in which the foreign vessel is registered.” For a preferred ship mortgage, CIMLA provides a cause of action in federal court “on default of any term of the preferred mortgage.” The mortgagee may bring a civil action or an admiralty action in personam against the mortgagor or guarantors to recover a deficiency. The mortgagee may also “enforce the preferred mortgage lien in a civil action in rem for . . . a foreign vessel.” As noted above, the parties agree that each of the Lender’s mortgages was executed in Panama and registered with the PMA. Accordingly, the Lenders’ mortgages are properly classified as “preferred ship mortgages” under CIMLA.
(…) Courts frequently accept affidavits from foreign-law experts to guide their analyses of foreign law.” When there are conflicting opinions offered by experts on foreign law, “it is not the credibility of the experts that is at issue, it is the persuasive force of the opinions they expressed.
The district court directed the allocation of proceeds of the MAYA and the MARANGO pursuant to its conclusions regarding the liens’ relative priorities. The proceeds from judicial sale of the MAYA were to be allocated as follows: (1) $63,243.90 to Grupo R and $663,745.12 to Caterpillar for their custodia legis lien claims; and (2) any remaining proceeds to Eksportfinans for its First Preferred Vessel Mortgage over the MAYA. The proceeds from the credit sale of the MARANGO were to be allocated to Grupo R in the amount of $63,243.90 for its custodia legis lien claims, and the remainder of the Amended Security Bond released to Norway, KFW, and Caterpillar.
(…) We are also not convinced that compliance with Article 260’s highly technical requirements is dispositive in this case. We previously held that it is “well established that the validity of a mortgage is dependent only on the existence of a debt actually secured by the mortgage and not on the description of the debt contained in the instrument.”
Further, other circuits have explained that foreign law plays a more limited role in determining the validity and enforceability of foreign mortgages under CIMLA. In M/V Prodromos, the Third Circuit explained that “the stringent procedural requirements for perfecting domestic ship mortgages are not imposed on foreign ship mortgages . . . to provide a simplified procedure for enforcing mortgages without destroying substantive rights.”
Oil Shipping (Bunkering) B.V. v. Sonmez Denizcilik Ve Ticaret A.S., 10 F.3d 1015, 1023 (3d Cir. 1993) (holding that the Ship Mortgage Act—CIMLA’s precursor—“specifically speaks to a limited role for foreign law by making the preferred status of foreign mortgages dependent only on their compliance with the execution and registration requirements of the applicable foreign law”).
We conclude that the district court correctly held that the nine preferred ship mortgages at issue are enforceable under CIMLA and Panamanian law, and that the Lenders’ preferred ship mortgage liens enjoy priority over Grupo R’s state-created maritime attachment liens.
For the reasons detailed above, we AFFIRM the district court’s findings of fact and conclusions of law with regard to (1) the validity, enforceability, and relative priority of the parties’ liens following the judicial sale of the MAYA and MARANGO, and (2) the status of Caterpillar’s and KFW’s lien positions following the credit sale of the MARANGO.
Secondary Sources: Varian, Rank and Priority of Maritime Liens, 47 Tul. L. Rev. 751 (1973); G. GILMORE AND C. BLACK, THE LAW OF ADMIRALTY, 596 (2d ed. 1975); SCHOENBAUM, ADMIRALTY & MAR. LAW §9:5 (6th ed. 2020); CHRISTIAN BREITZKE, JONATHAN S. LUX, MARITIME LAW DESK HANDBOOK, Part II. Flag and Registration of Vessels and Mortgages of Vessels (Wolters Kluwer 2019, 2021). This text was not introduced into the record as an exhibit, but the district court was authorized to consider it under Rule 44.1 of the Federal Rules of Civil Procedure. FED. R. CIV. P. 44.1.
(U.S. Court of Appeals for the Fifth Circuit, March 24, 2023, Corporativo Grupo R SA DE C.V. v. Marfield Limited Inc., Docket No. 22-20345)
