The opinion of the court was delivered by: SWEET
The parties to this consolidated maritime action seek to establish the validity and priority of maritime liens asserted against certain Hellenic Lines Limited ("Hellenic") vessels and their freights. Between April 29, 1985 and May 2, 1985 a hearing was held on the first of several contested issues, the validity of certain preferred ship mortgages asserted by plaintiffs Morgan Guaranty Trust Company of New York ("Morgan"), Continental Illinois National Bank & Trust Company of Chicago ("Continental"), National Westminister Bank USA ("Natwest"), and Banque de la Societe Financiere Europeene ("BSFE") (collectively, "Plaintiff Banks"), and an additional mortgage asserted by Morgan and SFE Banking Corporation Limited ("SFE"), all under 46 U.S.C. § 951. On the following findings of fact and conclusions of law, the mortgages are held to be valid foreign preferred ship mortgages pursuant to 46 U.S.C. § 951.
Plaintiff Banks brought this action under 46 U.S.C. § 951 as alleged registered mortgagees of eleven Greek flag vessels, ten of which were owned by Hellenic and one of which was owned by Transpacific Carriers Corporation ("Transpacific"), a Panamanian corporation affiliated with Hellenic, seeking to foreclose their alleged mortgages against three vessels owned by Hellenic, the M.V. HELLENIC IDEAL ("IDEAL"), M.V. HELLENIC INNOVATOR ("INNOVATOR") and M.V. HELLENIC STAR ("STAR"). These mortgages had been given as partial security for an $80 million Revolving Credit Facility and Term Loan of March 31, 1983. The vessels were arrested in New York during November of 1983. In addition, Morgan and SFE brought an action against the M.V. HELLENIC SPIRIT ("SPIRIT") owned by Transpacific to enforce a separate mortgage given by Transpacific as security for a Guarantee and Foreign Exchange Facility Agreement given to secure the purchase of the vessel. The SPIRIT was arrested in New York on December 10, 1983. The ships were sold at auction pursuant to a court order of February 3, 1984, and the funds thus generated were held subject to further order of the court.
Pursuant to the claims of Greek creditors, Hellenic was declared a bankrupt in Greece on May 30, 1984 by judgment number 259/1984 of the multi-member Court of First Greece on May 30, 1984 by judgment number 259/1984 of the multi-member Court of First Instance of Piraeus, Greece. Hellenic and Transpacific filed for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq, on December 12, 1983 in the Southern District of New York. On January 20, 1984, Bankruptcy Judge Burton Lifland ordered that the automatic stay be lifted so that any party could proceed with actions in rem against the mortgaged vessels and their freights.
Various parties, including the Mobil Oil Corporation, two container financiers, Grindlays Bank p.l.c. (London) ("Grindlays"), and Banque de Paris et des Pays-Bas (Suisse) S.A. and Paribas (Bahamas) Limited (collectively "Paribas"), certain container leasing companies (collectively, the "Container Claimants"),
and certain others who collectively contested the validity of the mortgages at issue for the purpose of maritime lien priority determination, intervened in these foreclosure actions. The actions against the IDEAL, INNOVATOR, SPIRIT and STAR were consolidated by an order of this court dated August 24, 1983. In addition, because certain payments of freight were deposited in this court as a result of specified voyages of additional ships of Hellenic, mortgages on the following vessels are also challenged before the court: M.V. HELLENIC VALOR ("VALOR"), M.V. HELLENIC PRIDE ("PRIDE"), M.V. HELLENIC EXPLORER ("EXPLORER") and M.V. HELLENIC CHAMPION ("CHAMPION"). Maritime lien claims are asserted against those freights.
A Special Master, Eliot H. Lumbard, Esq. ("Special Master") was appointed by the court to assist in the pretrial preparation and preliminary ordering of the various maritime lien priorities for the numerous claims asserted against the vessel sale proceeds and freights held for distribution by this court in the exercise of its admirality jurisdiction. It was determined that the issues for trial would be separately ordered and presented.
The initial issue of the validity of the mortgages and thereby the eligibility of the mortgages to qualify as maritime liens for the distribution, rather than being left to bankruptcy claims only, was presented by skilled counsel at a bench trial between April 29, 1985 and May 2, 1985. A subsequent issue, the validity of the claims of container claimants asserting maritime liens was heard upon evidence and argument on August 12, 1985. Final submission of briefs and proposed findings and conclusions was set for October 4, 1985.
However, the container interests except for Paribas Suisse and Grindlays reached a settlement dated August 8, 1985 with the Plaintiff Banks after the initial trial, contingent upon the court's approval of the payment of the settlement amounts out of the funds held subject to the court's direction. Subsequent to the hearing on the container issue on August 12, 1985, the Plaintiff Banks, Paribas Suisse and Grindlays, also reached a settlement on September 30, 1985 on the container claims. On September 30, 1985 the court approved the payment of the settlement amounts out of the INNOVATOR funds, there remaining sufficient amounts to satisfy the remaining maritime claims against that ship.
Mobil and other claimants continue to challenge the validity of the mortgages. Because of these challenges, as well as the rights of claimants ranking behind the Plaintiff Banks, the issue of the validity of ship mortgages remains until today alive and well and is not mooted by the settlement.
The following facts were established by the evidence presented. Hellenic and its affiliated companies, Transpacific, Universal Cargo Carrier, Inc. ("Universal") and Hellenic-American Agencies, Inc. ("HAA") (collectively, "the Hellenic Group"), operated a regularly scheduled Greek flag liner service from ports on the East and Gulf coasts of the United States to ports in the Mediterranean and Middle East, as well as from Europe to the Mediterranean and Middle East. Hellenic was primarily a container operation carrying cargo in an east and west bound pattern in container boxes. In addition, it had some smaller vessels known as break bulk carriers. Hellenic owned and operated the Greek flag vessels IDEAL, INNOVATOR, STAR, CHAMPION, EXPLORER, PRIDE and VALOR. Transpacific was the registered owner of the SPIRIT which was operated and managed by Hellenic as part of its fleet.
Hellenic maintained a banking relationship and checking accounts with both Morgan and Continental. Prior to the execution and recording of the mortgages at issue in this case, there were unsecured lines of credit at both banks and there were loans outstanding to Hellenic from each bank in the sum of $24 million secured by mortgages on various vessels. In addition, each bank had other term loan agreements with Hellenic secured by marketable securities. By the fall of 1982 Morgan and Continental were Hellenic's primary banks.
The $80 Million Refinancing
In the fall of 1982, Hellenic Morgan to arrange a refinancing of approximately $69.80 million of fixed term debt held by Morgan and Continental.
Hellenic had been suffering from cash flow problems which were expected to increase and had failed to reduce the outstanding balances of its revolving unsecured lines of credit. It sought to increase its liquidity by refinancing in a manner that would provide additional credit for working capital and allow it to defer payments temporarily on the principal of its loans. These overtures for refinancing were made on behalf of Gregory Callimanopoulos ("Callimanopoulos"), the son of the founder of the company, Pericles Callimanopoulos ("Pericles") and owner of the majority of Hellenic stock. Morgan rejected Hellenic's initial proposal because it believed additional infusions of capital from the principal owner in particular were needed to give Hellenic sufficient relief.
No injection of capital from Hellenic shareholders was forthcoming. In early 1983, as Hellenic's condition worsened, Hellenic and the Banks agreed upon a major financial restructuring in the sum of $80 million which would provide $10 million of the new credit for operating expenses. In pursuit of this plan, officials of Hellenic contacted additional banks and obtained commitments from Natwest and BSFE for loans of $5 million each. Of the remaining $70 million sum, Morgan committed $40 million and Continental $30 million. Management of the refinancing was overseen by Morgan, which also became agent for the bank syndicate. The loan was to be secured by mortgages on 11 ships (the "syndicate vessels"), of which 7 had previously been mortgaged to Morgan and Continental and 4 were previously unencumbered vessels. In addition to the mortgages previously issued, Hellenic had pledged marketable securities to Morgan and Continental for its prior loan facilities. Under the $80 million revolving credit facility it was agreed that although these securities were to be pledged to the banks, they could be released to Hellenic by the banks depending on the value of the vessels. These values were to be redetermined periodically. The banks also agreed to give Hellenic a two year moratorium on repayment of both the refinanced debt and the additional loan amounts, after which the debt would be converted to a six-year term obligation with quarterly payments. In anticipation of this portion of the agreement, the banks allowed Hellenic to pass payments due in February and March of 1983.
Execution of the Mortgages Other Than the SPIRIT Mortgage
By late March, 1983, there was a commitment letter to provide the $80 million loan. This became formalized as a Revolving Credit and Term Loan Agreement, dated as of March 31, 1983 (the "March 31 Agreement"). Individual ship mortgages were to provide the underlying security for the loans. April 28, 1983 was selected as the date for execution of the term loan agreement, the mortgages on the Hellenic vessels selected for this purpose, and related documents, and May 3 was to be the date for funding the loan. The firm of Meyer, Brown & Platt, which regularly represented Continental and acted as counsel in this transaction for the Plaintiff Banks, initially drafted the mortgage instruments for execution in Greece and subsequently revised them for execution by all parties in New York on April 28, 1983 as preferred ship mortgages under Greek law. The mortgage documents contained notarial acknowledgments of the execution by the signatories and a notarial affidavit of good faith for the mortgage.
Under the original refinancing proposal, which assumed the mortgages would be executed in Greece, they would have been executed in so-called "notarial" form. Under Greek practice, this means the notary would have a role more extensive that in the United States, including participation in the preparation and execution of the mortgages. In addition, the notary would have become the official depository of the original of these documents, rather than a government office.
The execution ceremony was held in New York on April 28, 1983, at the office of Mayer Brown. Each of the syndicate banks signatories signed ten copies of the respective mortgages for each syndicate vessel. Ms. Randee Ammon ("Ms. Ammon"), a Vice President of Morgan, signed on its behalf and on behalf of BSFE, pursuant to a power of attorney. Charles Yao signed on behalf of Continental and Nicholas Gumprecht signed on behalf of Natwest.
On April 19, 1983, the Hellenic Board of Directors by resolution had authorized Mr. Tassos Pitenis ("Pitenis"), as its representative, to execute the necessary documents associated with this transaction. Mr. Theo Sioufas ("Sioufas"), a Greek attorney who was consulted by Mayer, Brown on issues of Greek law relating to the transaction, on the morning of April 28 advised Mr. R. Theodore Ammon ("Mr. Ammon"), the Mayer Brown partner in charge of the matter, that Mr. Pitenis should not sign the mortgages until Hellenic's Board also granted him a notarial power of attorney under Greek law. Sioufas was under the impression that the mortgage instruments would be notarial acts, in which event under Greek law Pitenis' authority would have to be in notaril form. This procedure would have been followed had the documents been executed in Greece. Sioufas recommended that the execution of the mortgages by Pitenis should be deferred until the Hellenic Board of Directors could meet and authorize one of its directors to issue such a notarial power of attorney to Pitenis. Mr. Ammon acceded to this proposal. Accordingly, at the signing on April 28, Pitenis was asked to sign only eight copies of each mortgage. Two copies of each mortgage, referred to in the testimony as the "control copies," were reserved for his signature on May 2 after the notarial power of attorney had been executed in Greece, as authorized by the Hellenic Board. Pitenis also signed eight copies of each affidavit of good faith accompanying the mortgages, two copies also having been reserved for signature on May 2, the anticipated mortgage registration and funding date.
At trial, Mr. Ammon testified that on August 28 as each signatory entered the area of Mayer, Brown's office where the documents had been lined up in preparation for execution, he introduced the signatory to the two notaries public who were present to witness the signing ceremony, Elizabeth Pantelis and Evelyn Dalmeda, both of who were otherwise employed as secretaries in his office. Mr. Ammon further testified that in his introduction, he informed the notaries as to the identity of each respective signatory and stated that he or she would be executing the document on behalf of a particular bank or on behalf of the borrower, Hellenic. The signatories were advised that the notaries would take their acknowledgments and in the case of Pitenis, would also subscribe his affidavit of good faith. No oaths were administered to the signatories. The notaries were instructed to execute the notarial jurats with the dates in bank.
Mr. Ammon assigned the task of attending to the dating of the mortgages and acknowledgments and the affidavits of good faith to a Mayer Brown associate attorney, Ian Coles ("Coles"), working with him on those transactions. Pursuant to Mr. Ammon's instruction, Coles dated each mortgage, on its first page, May 3, 1983, which was to be the date of closing (i.e., the date of registration of the mortgages in Greece and the funding of the loan in New York).
In Piraeus, Greece, on May 2, the Hellenic Board met and authorized the issuance of a power of attorney to Pitenis in notarial form. This was formalized, and the documents immediately were inspected by Sioufas in Greece who then telephoned Mr. Ammon to report that he was satisfied with the evidence of Pitenis' authority. In New York, on the morning of May 2, Pitenis returned to the offices of Mayer, Brown, and in the presence of the same two notaries to whom he had been introduced on April 28, executed the remaining two copies of each of the mortgages as well as the affidavits of good faith for each of those mortgages. The notaries then signed the acknowledgments and the jurats on the affidavits.
Upon examining the documents executed by Pitenis, Mr. Ammon discovered that his associate Coles had misunderstood his instructions and had dated the acknowledgments of Pitenis' signature and affidavits of good faith May 3. He instructed Coles to correct the date to May 2. This was done. Mr. Ammon was unaware at that time, however, that Coles had dated each of the acknowledgments for the bank signatories May 3 as well. Unknown to him, Coles then changed each of those acknowledgments to read May 2, which was, of course, the correct date for Pitenis but incorrect for each of the bank signatories, who in fact had signed on April 28. None of the alterations are initialed.
The fully executed mortgages with acknowledgments and affidavits of good faith were taken from Mayer, Brown's offices to the New York County Clerk's offices where certificates were attached attesting to the good standing of the notaries who signed the affidavits and acknowledgments, and from there the documents were taken to the Greek Consulate in New York which attested as to the standing of the County Clerk. After consularization, the two control copies of each mortgage were taken to Kennedy Airport and turned over to Pitenis who flew with them overnight to Athens.
Upon his arrival in Greece, Pitenis had the mortgages delivered to the offices of Sioufas in Piraeus on the morning of May 3. Later the same day, Sioufas completed the necessary forms for recording the mortgages, and they were registered at the appropriate ship registry, the public registry of the Department of Ship Registries and Naval Mortgages at the Central Port Authority of Piraeus, Greece. Sioufas then advised Mr. Ammon that registration was complete. Mr. Ammon in turn notified Morgan, and Morgan made the funds available to Hellenic. Hellenic immediately drew a substantial part of the $80 million and made subsequent withdrawals through the summer of 1983 until the entire $80 million was taken down.
The $80 million revolving credit facility refinanced Hellenic's existing debt of $69.80 million to Morgan and Continental. It enabled Morgan and Continental to eliminate approximately $7 million in unsecured debt. According to the Plaintiff Banks, Hellenic also obtained the release of some $7 million in securities which had been pledged previously to secure its debts prior to the refinancing and obtained a two-year moratorium on the repayment of principal of the refinanced debt, without which Hellenic would have been required to repay approximately $32 million during such two-year period. The Plaintiff Banks allege that the new structure was intended to provide sufficient working capital so that Hellenic could survive the recession and continue its business. The Intervening Plaintiffs contend that the refinancing was intended to allow the banks to extend their security interest into further assets of Hellenic and reduced Morgan's credit exposure by over $18 million. The Intervening Plaintiffs also contend that at the time the loan was made, hellenic had defaulted under the credit facility because its net worth was less than required in the loan agreement, and that the banks were aware of this default.
Authority of the Hellenic Board
Control of Hellenic and its Board of Directors was the subject of extensive litigation following the death of Pericles Callimanopoulos in September 1979. Pericles bequeathed roughly a 60% stock interest in Hellenic to his son, Gregory Callimanopoulos, and the 40% remainder interest to his widow and three daughters. The will was contested by his widow and daughters, and a dispute also arose concerning the election of the Hellenic board which took place in 1979 after Pericles death. Early in 1982 the Court of First Instance of Piraeus, Greece, by judgment No. 352 of 1982, clarified by judgment No. 871, invalidated the 1979 election and appointed a provisional Board of Directors for the purpose of convening a general assembly of the Hellenic shareholders to elect a new Board. The Court also appointed an administrator of the shares owned by all of Pericles' heirs and subsequently advised him how to vote the shares. In April of 1982 a new Board was elected at an extraordinary General Meeting of Hellenic's Shareholders in accordance with the Greek Court's order. Following a challenge to that board by dissident shareholders, the court reaffirmed the authority of its administrator. A Shareholder's Agreement was entered into on May 31, 1982 between Callimanopoulos heirs providing for the distribution of voting rights among the heirs. In accordance with that agreement, another board was elected on June 1, 1982. This Board was in office in 1983 when Pitenis was authorized to sign the mortgages. All family litigation relevant to the issues before this court have been resolved. There has been no legal challenge in Greece to the validity of the Board since May 31, 1982.
Subsequent to the transaction just described, Morgan entered into another mortgage involving the M/V HELLENIC SPIRIT, owned by Transpacific. In early 1982 representatives of Hellenic had asked Morgan if it would be a guarantor of a loan to be obtained from two French banks, Banque Louis Dreyfus and Morgan & Cie, in connection with the purchase of the SPIRIT, then owned by a French company. Morgan indicated a willingness to participate as guarantor of the loan amount and of the French franc exchange rate underlying the transaction. SFE, a subsidiary of BSFE, agreed to join Morgan as a guarantor. Morgan was to guarantee 60% and SFE 40% of the amount of the loan, which was $5.635 million. The purchase price of the SPIRIT was $8.05 million. It was the obligation of Morgan and SFE under a Guarantee and Foreign Exchange Facility dated July 29, 1983, to pay the two French banks in the event Transpacific failed to repay its loan when required, as well as to provide a foreign exchange facility, which in essence guaranteed a French franc exchange rate to Transpacific. Morgan and SFE did not provide any money for the purchase of the vessel.
On September 8, 1983, as security for the guarantees, a mortgage on the SPIRIT in favor of Morgan and SFE was executed in New York. This mortgage was prepared by Lord, Day & Lord, counsel to Morgan and SFE, in consultation with Greek counsel, Dimitri Astras ("Astras"). Ms. Ammon signed the mortgage on behalf of Morgan. Clayton Rose, also a Morgan officer, signed on behalf of SFE, by a power of attorney. William Mays, an attorney from the firm of Poles, Tublin, Patestides & Stratakis, signed on behalf of Transpacific, a Panamanian corporation, pursuant to authority granted by its Board of Directors and ratified by its shareholders. The signatories were introduced to the notary public, Irving Spielman. Mr. Spielman was told on whose behalf each signatory would sign the mortgage, and the signatories were told that Mr. Spielman would take their acknowledgments and, in the case of Mr. Mays, would also attest to his affidavit of good faith. Once again, no oaths were administered.
Following execution by all parties, the mortgage was sent to Astras for recording in Greece. On September 12, 1983 Morgan and SFE issued their guarantees to the French banks, Transpacific acquired title to the vessel with the credit thus made available, and Mr. Astras recorded the mortgage in Piraeus, Greece. The covenants in the guarantee and foreign exchange facility on the SPIRIT are exactly the same as those under the $80 million revolving credit facility including a "cross default provision" so that if any of the Hellenic group defaulted in the payment of any debt obligation to any party to which the group had debt obligations, it was a default under the security agreement. There was, however, no cross-collateralization provisions between the two transactions.
Hellenic's Financial Situation
In 1982, there was a general recession in international trade, particularly in the routes served by Hellenic. Oil prices had dropped, affecting the ability of a number of countries in the Middle East to continue importing goods from the West at their previous rate. Hellenic was particularly affected by these developments because it had been engaged in a program of converting much of its break-bulk cargo fleet to larger and more capital intensive container and roll on-roll off vessels. For these services Hellenic had entered into an expensive program of owning and leasing thousands of metal box containers for cargo shipments. These major business and financial developments were undertaken in anticipation of an increase in trade between the West and the OPEC countries. Hellenic's revenues declined during the summer of 1983 when freight rates dropped precipitously and competition increased for the reduced amount of cargo available. There was no forecast of change in these conditions.
Beginning in 1981, Hellenic reported, on a book basis, a negative net worth. While the entire Hellenic Group had a negative cash flow in 1983, the Group retained sufficient marketable assets to continue to pay its creditors on a regular, although consistently late, basis until November 1983. Most, if not all, of the Intervening Plaintiffs here continued to receive payments ...