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Prudential Insurance Co. v. S.S. American Lancer

decided: March 21, 1989.

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, PLAINTIFF-APPELLEE,
v.
S.S. AMERICAN LANCER, S.S. AMERICAN AQUARIUS, S.S. AMERICAN APOLLO, S.S. AMERICAN LYNX AND S.S. AMERICAN ASTRONAUT, THEIR ENGINES, TACKLE, APPAREL, FURNISHINGS, EQUIPMENT AND APPURTENANCES, IN REM, DEFENDANTS, AND ALL RELATED CLAIMS TO VESSELS AND COMPLAINTS-IN-INTERVENTION, GENERAL ELECTRIC CAPITAL CORPORATION, CLAIMANT-INTERVENOR-APPELLANT, UNITED STATES LINES, INC., DEBTOR AND DEBTOR IN POSSESSION, CLAIMANT-APPELLEE



Appeal from an order entered in the United States District Court for the Southern District of New York (Richard Owen, Judge) denying appellant's motion for summary judgment and granting appellee's cross-motion for summary judgment upholding the preferred status of appellee's ship mortgage notwithstanding a $92 million typographical error. Affirmed.

Kearse, Cardamone and Winter, Circuit Judges.

Author: Winter

WINTER, Circuit Judge

This case involves a $92 million typographical error. Appellant General Electric Capital Corporation ("GECC"), appeals from Judge Owen's order, reported below at 686 F. Supp. 469 (S.D.N.Y. 1988), that granted appellee Prudential Insurance Company of America's ("Prudential") cross-motion for summary judgment regarding the extent of Prudential's first preferred ship mortgage on eight vessels. GECC, a beneficiary of a second mortgage on the same vessels, sought to limit Prudential's first preferred mortgage to $92,885.00 based on a typographical error in an amendment to that mortgage. All parties agree that Prudential and United States Lines, Inc. ("U.S. Lines"), the mortgagor, intended that the mortgage amendment state the amount as $92,885,000.00 and that GECC's second mortgage was specifically intended to be subordinate to the Prudential mortgage. Nevertheless, GECC argues that the relevant provisions of the Ship Mortgage Act of 1920 ("SMA"), 46 U.S.C. ยงยง 911 et seq. (1982 and Supp. IV 1986), mandate that the amount reflected by the typographical error, $92,885.00, be determinative of the extent of Prudential's first preferred ship mortgage. We affirm.

BACKGROUND

The facts are undisputed. On April 12, 1978, Prudential loaned approximately $150,000,000.00 to U.S. Lines. This loan was made pursuant to: (i) a note agreement dated April 10, 1978 (the "original note agreement"); (ii) a financing and security agreement dated April 10, 1978 (the "original Prudential financing agreement"); and (iii) the documents, including various ship mortgages (the "1978 mortgages") required by the original Prudential financing agreement to secure the Prudential debt. Among the ships mortgaged were eight Lancer class vessels (the "Lancers").

In 1983, U.S. Lines sought to finance the construction and acquisition of twelve jumbo container vessels (the "econships") at a cost of approximately $570,000,000.00. Because of the original Prudential financing agreement, U.S. Lines could not finance the econships without Prudential's approval and therefore invited Prudential to participate. At that time, the remaining principal on Prudential's earlier loan to U.S. Lines was $126,859,753.54.

Prudential thereafter became GECC's partner in extending to U.S. Lines $114,000,000.00 pursuant to a trust indenture (the "Trust Indenture"), dated April 12, 1983, under which the United States Trust Company ("U.S. Trust") was the trustee. The $114,000,000.00 served as the downpayment or junior tier of the econship financing (the "equity financing"). Although the equity financing was secured by the econships, the ship mortgages providing this security were subordinate to ship mortgages securing $460,000,000.00 in senior debt (the "senior econship financing"). In order to provide additional collateral for the equity financing, U.S. Lines granted U.S. Trust a second mortgage on the aforementioned Lancers (the "U.S. Trust mortgages").

Prudential insisted, of course, that these mortgages be subordinated to the 1978 mortgages held by Prudential. Each of the U.S. Trust mortgages thus states that such mortgages are "[subject and subordinate] to the First Preferred Ship Mortgage . . . between The Prudential Insurance Company of America . . . and the Shipowner. . . . " In addition, Article V of each of the U.S. Trust mortgages includes a subordination provision that declares:

Notwithstanding any other provision of this Mortgage, the rights of the Mortgagee hereunder are expressly made subject and subordinate in all respects to the First Mortgage and the right, title and interest in and to the Vessel and the liens created thereby in favor of the respective prior mortgagee.

Moreover, U.S. Trust closed the econship financing by delivering to Prudential a letter in which U.S. Trust pledged to continue the subordination of its mortgages to the mortgages held by Prudential and limited the remedies available to U.S. Trust under its mortgages.

As a result of the econship financing, each of the agreements concluded between Prudential and U.S. Lines in 1978 was altered as follows: (i) the original note agreement was restated as the 1983 note agreement, dated April 21, 1983, and the notes issued pursuant to the original note agreement were cancelled in favor of notes issued pursuant to the 1983 note agreement; (ii) the original Prudential financing agreement was amended (the "Prudential financing agreement"); and (iii) the 1978 mortgages were replaced by a fleet mortgage titled the First Preferred Ship Mortgage, dated April 21, 1983 (the "Prudential mortgage"). These agreements were executed concurrently with the Trust Indenture and the U.S. Trust mortgages. Subsequently, the Prudential mortgage was filed and recorded with the Coast Guard and endorsed on the Lancers' appropriate documents. Only after that process was completed were the U.S. Trust mortgages filed, recorded and endorsed in the same manner.

By 1986, U.S. Lines had reduced the outstanding principal balance of the Prudential debt to $92,885,000.00. At that time, however, U.S. Lines informed Prudential and other creditors that U.S. Lines anticipated difficulty in meeting its future payment obligations. Consequently, Prudential, GECC and the holders of the econships' senior mortgages (collectively the "key lenders") agreed to a restructuring of U.S. Lines' debt conditioned on the consent of each key lender to the form of the restructuring. Pursuant to this agreement, amended drafts of the financing agreements governing the econships' senior debt, the Trust Indenture and the Prudential debt (the "key moratorium documents") were circulated to each of the key lenders. Along with these drafts, U.S. Lines circulated a joint consent form (the "Master Consent") which was to be executed by each key lender in order to fulfill the condition of universal consent. Both Prudential and GECC executed the Master Consent.

The key moratorium document relevant to the Prudential debt was the amendment to the Prudential financing agreement. That document expressly states on its first page that as of January 1, 1986, the outstanding principal balance of the Prudential debt was $92,885,000.00. In addition to amending the Prudential financing agreement, however, Prudential and U.S. Lines also amended the Prudential mortgage (the "corollary ship mortgage amendment"). The two parties intended the amendment to effect the following two substantive changes to the Prudential mortgage: (i) all references in the Prudential mortgage to the Prudential financing agreement were to be amended to refer to the Prudential financing agreement as amended in 1986; and (ii) section 31 of the Prudential mortgage was to be amended to record the reduction in the outstanding balance of the Prudential debt to $92,885,000.00.

The first purpose was successfully achieved. The second was not and that failure spawned this litigation. The amendment inadvertently amended section 33 instead of section 31 of the Prudential mortgage and, more importantly, stated that the outstanding balance of the Prudential debt was $92,885.00 instead of $92,885,000.00. Section 3 of the amendment to the Prudential mortgage stated, however, that: "Except as amended by this Amendment, the Original Mortgage shall continue in full force and effect." Consequently, according to the combined terms of the Prudential mortgage and the corollary ship mortgage amendment, the outstanding balance of the Prudential debt was both $126,859,753.54 (paragraph 31 of the Prudential mortgage) and $92,885.00 (section 2 of the corollary ship mortgage amendment).

In addition, paragraph six of the corollary ship mortgage amendment stated that the purpose of that amendment was to "reflect the changes in the [Prudential financing agreement] effected by [the 1986 amendment to that agreement]." Consequently, a copy of the amendment to the Prudential financing agreement, which, as noted above, correctly stated the outstanding balance of the Prudential debt to be $92,885,000.00, was attached to the corollary ship mortgage amendment (which gave $92,885.00 as the amount) as Exhibit A. The corollary ship mortgage amendment, with the ...


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