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May 19, 1993

THE VESSEL MADAM CHAPEL, OFFICIAL NO. 924662, etc. Defendant. MIKE L. and SUZANNE SPARKMAN, Cross-claimant, v. MATTHEW O. JONES, Cross-Defendant.

The opinion of the court was delivered by: EARL B. GILLIAM

 On April 19, 1993, claimant Matthew O. Jones' motion for summary judgment came on for hearing before this court, the Honorable Earl B. Gilliam presiding. R. Jeffrey Kelleher appeared for claimant Jones; Thomas A. Russell appeared for plaintiff Maryland National Bank.

 At the conclusion of the hearing, the court took claimant's motion under submission. After considering all of the pleadings, memoranda of points and authorities and other documents on file herein, and after having heard and considered oral argument, the court now grants claimant's motion for summary judgment. Due to its negligent conduct in failing to either retain control of the vessel's title origination documents or endorse its lien on the state certificate of title, the bank's interest in the vessel shall be equitably subordinated to claimants' interests.


 Factual background.

 On March 31, 1987, John A. Chapel became the original purchaser of the pleasure vessel which is the subject of this lawsuit. *fn1" A Loan and Security Agreement was executed the same day, extending credit to Chapel and creating a security interest in the vessel in the amount of $ 210,000. *fn2" The bank's mortgage was not recorded until March 10, 1988. Shortly after the sale, Chapel applied for official United States Coast Guard documentation on the vessel. Owing to an administrative backlog, however, the Coast Guard did not finally issue an official number to the vessel until November 19, 1987. On that date, the Coast Guard issued a certificate of documentation, and the vessel was given official number 924662. Upon issuance of the certificate of documentation, the boat became a "vessel of the United States." 46 U.S.C. § 808; 46 C.F.R. § 67.01-1.

 Meanwhile, in July 1987 *fn3" Chapel acquired a certificate of title from the New York State Department of Motor Vehicles. State titling was required by the terms of Chapel's Loan and Security Agreement with the bank, and was possibly required by New York law as well. Significantly, New York issued a "clean" certificate of title, which did not show the bank's lien against the boat. At this point, two chains of title to the boat were in existence: one federal, by the Coast Guard; the other state, through the New York certificate of title. Such dual titling is not in itself unusual. The important fact is that the second, state document of title did not evidence on its face an already existing mortgage.

 On May 1, 1988, Chapel sold the boat to a Jose Santiago. On October 4, 1988, Chapel assisted Santiago in obtaining from the Coast Guard a second official number, No. 942142, based upon the New York certificate of title which showed no lienholders. Later in October 1988, the boat was subsequently resold, in the New York line of title, to Matthew Jones, the claimant in this action. In September 1991, Jones sold the boat to Mike and Suzanne Sparkman of San Diego, extending a loan and taking back a preferred ship mortgage in return.

 Since Chapel had been in default on his original promissory note since September 1989, the plaintiff bank filed an in rem action against the vessel to foreclose the mortgage. The boat has been under arrest since October 16, 1992. At an April 5, 1993, hearing, this court denied plaintiff's summary judgment request, ruling that there was no constructive notice of plaintiff's mortgage in the federal title chain and that claimants could thus not have had constructive knowledge of plaintiff's interest in the vessel.

 The maritime recordation and titling system.

 When a boat is manufactured, two different origination documents are issued. The first is called the "manufacturer's statement of origin" ("MSO"), and is used to originate a state chain of title. That chain is established by producing bills of sale linking each subsequent purchaser to his predecessor, ultimately back to the manufacturer. This was the chain of title under which Jones and the Sparkmans bought the vessel. The second origination document is the "builder's certificate," which is used to establish the first owner's title for boats that are not issued state certificates of title. It is placed on file with the Coast Guard. The bank's mortgage appears in this alternate chain of title tracing back to the vessel's builder's certificate. Two types of origination documents are necessary because vessels can be (but need not be) registered under two different registries, one state and one federal. Both registries require original proof of ownership, hence the two types of origination documents.

 Both the MSO and the builder's certificate are potentially documents of title, "live" documents from which a chain of title can emanate. These basic facts are well known to those who regularly deal in marine sales and financing. The core problem animating this litigation is not that there exist two chains of title to the boat. Rather, it is that the two chains of title do not both evidence the bank's lien. Jones and the Sparkmans were bona fide purchasers for value of the boat in the New York title chain, the one which did not show the bank's mortgage. They therefore purchased the vessel without notice of the bank's interest. One reason they did not have notice is the fact that the original official number issued to the boat (No. 924662) was not conspicuously and indelibly marked in large block letters on a structural member of the boat, as required 46 C.F.R. § 67.15-1.

 The federal registry and the Ship Mortgage Act of 1920. *fn4"

 The basic idea underlying the system is provision of notice to the world of a mortgage's existence. In re Alberto, 823 F.2d 712, 720 (3rd Cir. 1985). In principle, a purchaser can search the federal registry and determine whether a preferred mortgage exists. A mortgage cannot enjoy preferred status unless it is duly recorded under this system. There is, however, no compulsion to record. Pleasure vessels can be, and often are, federally undocumented.

 The security afforded to subsequent purchasers and lienors rests on two basic features of the federal system. First, the coast guard assigns an official number to each federally-documented boat. By law each boat may have only one federal number. The number "must be marked by any permanent method which cannot be obliterated or obscured, in block-type Arabic numerals not less than three (3) inches in height on some clearly visible interior structural part of the hull." 46 C.F.R. § 67.15-1. Before the number may be issued, the owner must swear in a "certificate of marking" that this regulation has been complied with. This physical security is at the heart of the system: It ensures against the creation ...

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