Best Practices: Vessel Collateral

A vessel is defined by Merriam Webster as “a watercraft bigger than a rowboat.”   There are many small businesses whose main assets consist of vessels, such as local fishermen, small cruise companies, boat rental companies, and parasail companies to name a few.  When such a company comes to a lender for financing, the lender will want to make sure to take a lien on these vessels to secure its loan.  Following please find key information on steps lenders should take when dealing with such collateral.

The first thing to figure out is if the vessel is required to be registered with the U.S. Coast Guard.  Vessels of five net tons or more used in fishing activities on navigable waters of the U.S. or in the Exclusive Economic Zone (the “EEZ”), or used in coastwise trade must be documented with the U.S. Coast Guard Documentation Center unless the vessel is exempt from documentation.  Coastwise trade is generally defined as the transportation of merchandise or passengers between points in the U.S. or the EEZ.  In addition, towboats operating between points in the U.S. or the EEZ or between the EEZ and points in the U.S. and dredges operating in the U.S. or the EEZ must be documented. Coastwise qualified, non-self-propelled vessels used in coastwise trade within a harbor, on the rivers or lakes (except the Great Lakes) of the U.S., or the internal waters or canal of any state would be considered exempt from the registration requirement.

If the vessel is registered with the U.S. Coast Guard, then the Coast Guard’s records will contain the original registration, any changes of ownership of the vessel since the original registration, any mortgages that have been recorded with the U.S. Coast Guard, and any Notices of Claims of Liens against the vessel.  A lender can obtain an Abstract of Title from the U.S. Coast Guard Documentation Center for a minimal fee, which Abstract will disclose all items recorded with it in relation to the vessel involved.  If any preferred mortgages or claims of liens are of record, lender should ensure that they are released/resolved prior to or at closing, so the lender may have the sole lien on the vessel post-closing.

There  is  NO  government  form  for  a  preferred  mortgage;  however,  there  is  an  Optional Application  for  Filing  form, CG-5542.  If the CG-5542 is properly completed, the instrument to which  it  is  attached  will  be  filed  and  recorded  WITH  NO  FURTHER  REVIEW.   The mortgage or related instrument must include the following:  (i) signature by or on behalf of the vessel owner(s) and acknowledged by a notary public; (ii) addresses of both the mortgagor and mortgagee; (iii) it must cover the “whole” of the vessel, cite a definite amount, and identify the vessel by name, official number and/or hull number, and (iv) must be accompanied by a filing and recording fee.  A mortgage cannot be accepted for filing unless the vessel has a valid Certificate of Documentation or an Application for Initial Issue, Exchange or Replacement, CG-1258, on file with the U.S. Coast Guard Documentation Center.

If a vessel is not required to register with the U.S. Coast Guard, federal law requires that if the vessel is equipped with propulsion machinery, it must be issued a number by the state in which the vessel is principally operated (46 U.S.C. §12301).  The state titling laws vary with respect to the size and type of vessels covered, the location or use of the vessel subject to the law, and many other details, so a lender should make itself aware of the titling and liening requirements of the State where the business is located.  In certain states, a lien can be placed on the title of the vessel, similar to a placing a lien on a vehicle title.  In others, there may just be a form to be filed with the relevant State authority.

Lenders should also remember that the Uniform Commercial Codes provisions of each State governs the creation, attachment, and perfection of security interests in property not secured by a preferred mortgage or lien on a vessel title.  Since there may be items located on a vessel that may not be covered by a preferred mortgage or lien on a vessel title, it is suggested that lenders also obtain a security interest in the rest of the assets of the vessel owner, to cover any such items.

For more information on vessel collateral, contact the attorneys at Starfield & Smith, PC at 215.542.7070.