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MIDLANTIC NAT. BANK v. SHELDON

August 27, 1990

MIDLANTIC NATIONAL BANK, PLAINTIFF,
v.
HARLAN SHELDON ET ALIA, DEFENDANTS.



The opinion of the court was delivered by: Sifton, District Judge.

On June 21, 1990, plaintiff, Midlantic National Bank (the "Bank"), filed a complaint in admiralty based on a preferred mortgage lien held against a boat purchased by defendant Harlan Sheldon. According to the original complaint, defendant Hanse Point Marina holds a maritime lien against the same vessel for repairs and storage charges, is now in possession of the vessel, and had given notice of its intent to auction the boat on July 2, 1990. The marina subsequently agreed not to hold this auction, pending resolution of plaintiff's application to enjoin this auction. On July 12, both parties appeared before the Court on plaintiff's order to show cause why the auction should not be enjoined, but the matter was adjourned to give plaintiff an opportunity to respond to the marina's opposition papers.

The matter is now before the Court on plaintiff's application for an order foreclosing its ship mortgage and directing Hanse Point Marina to turn over the vessel for sale by the plaintiff and, pending final determination of this matter, for an injunction against the sale or transfer of the vessel on the part of defendants. The defendant marina has opposed this motion and counterclaimed in rem to enforce its own maritime lien against the boat in question. Both parties agree that their claims may be determined on the basis of the documentary evidence submitted to the Court without the need for testimony.

The facts in this case pertinent to this matter are, in any event, not in dispute. On August 18, 1986, Harlan Sheldon entered into a purchase money ship mortgage with the plaintiff's assignor, First Commercial Corp., in connection with the purchase of a 42 foot, 1984 model, Sundance Seadancer, serial number SDH00860584. The mortgage agreement states that the vessel is a 22 ton houseboat which is not self-propelled. The financing arrangement is reflected by a "New York — Marine" Promissory Note and Security Agreement dated Sept. 18, 1986, pursuant to which Sheldon agrees to repayment of the total sum of $38,891.49 over a period of 120 months, at 11 percent interest. The promissory note explicitly provides that the contract would be assigned to the plaintiff, Midlantic National Bank.

The promissory note also provides that "if the Boat is registered with the Coast Guard, [the mortgagor, Sheldon] must sign and deliver a Preferred Ship Mortgage giving [the Bank] first lien on the Boat." On December 30, 1986, Sheldon also signed a "Mortgage of Vessel Agreement," by which he mortgaged his boat as collateral to plaintiff Bank. The mortgage of vessel was filed of record with the United States Coast Guard on March 26, 1987, in New York City.

On August 28, 1989, defendant Sheldon filed for Chapter 7 relief in the United States Bankruptcy Court for the Eastern District of New York. Plaintiff was notified of this filing and apparently did not file an objection. Sheldon was granted a discharge of his obligations by order dated December 7, 1989.

At some time prior to the filing of the bankruptcy proceeding, Sheldon delivered his boat to the custody of the defendant marina. A copy of a bill from the marina indicates that Sheldon had incurred approximately $12,600 in storage fees (for storage between January and May 31, 1990) and approximately $15,800 in repairs, for a total of $28,480. Plaintiff recently received a notice of lien and sale in which the marina announced its intention, pursuant to sections 184 and 201 of the New York State Lien Law, to auction Sheldon's vessel on July 2. That sale has, as noted, been postponed. The notice asserted a lien of $28,480, which was demanded and due on May 31, 1990, and estimated the value of the boat at $15,000. If a sale by the marina is permitted, the Bank's remaining security interest will be extinguished.

DISCUSSION

Plaintiff argues that the marina's threatened sale of the boat would violate federal law and the supremacy clause of the United States Constitution because this Court has exclusive jurisdiction over this federal admiralty claim and because plaintiff's preferred ship mortgage has priority over any other lien.

New York Lien Law § 184 specifically provides that a person who stores, maintains, keeps or repairs a motor boat, or furnishes gasoline or other supplies at the request or with the consent of the owner, whether or not the vessel is subject to a security interest, may detain the boat until such sum is paid. Section 200 of the New York Lien Law provides that a lien against personal property may be satisfied by the public sale of such property, while section 201 specifies the notice required for such sale.

It is well established that under the New York Lien Law, an unrecorded possessory lien under section 184 ordinarily has priority over a perfected security interest, such as that held by the defendant Bank. See Industrial National Bank of Rhode Island v. Butler Aviation Int'l, Inc., 370 F. Supp. 1012, 1018 (E.D.N.Y. 1974); Willys-Overland, Inc. v. Prudman Automobile Co., 196 N.Y.S. 487. Thus, N.Y. UCC § 9-310 expressly provides:

    "When a person in the ordinary course of his
  business furnishes services or materials with
  respect to goods subject to a security interest, a
  lien upon goods in the possession of such person
  given by statute or rule of law for such materials
  or services takes priority over a perfected
  security interest unless the lien is statutory and
  the statute expressly provides otherwise."

N Y UCC § 9-310 (McKinney's 1990).

However, N.Y. UCC § 9-104(a) states that Article 9 is not applicable to "any security interest subject to any statute of the United States to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property." Here, it is clear that this Court's admiralty jurisdiction and the provisions of 46 U.S.C. § 31301 et seq. preempt the New York Lien Law.

A creditor obtains a "preferred mortgage" under federal maritime law, 42 U.S.C. ยง 31322, if the mortgage (1) includes the whole of the vessel, (2) covers a documented vessel, (3) has as the mortgagee a federally insured depository institution, and (4) is filed in substantial compliance with section 31321. It is not disputed that ...


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