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MARYLAND NATL. BANK v. THE YACHT ESCAPE II

March 3, 1993

MARYLAND NATIONAL BANK, Plaintiff,
v.
THE YACHT ESCAPE II, her engines, masts, anchors, cables, etc., in rem and THEODORE L. PUTTICK and JERRY GAGLIANO d/b/a MARINE BASIN MARINA, in personam, Defendants.



The opinion of the court was delivered by: HURLEY

HURLEY, District Judge

 By Memorandum and Order dated December 28, 1992, *fn1" the Court ordered the parties to submit supplemental memoranda of law on certain issues implicated by the above-referenced case. Such briefing was required in order for the Court to determine the sole remaining issue in this action: whether, by virtue of a preferred mortgage lien pursuant to the Ship Mortgage Act, 46 U.S.C. § 31301 et seq. (the "SMA"), plaintiff has priority over the proceeds of the sale of the defendant vessel, or whether Jerry Gagliano ("defendant"), the only other claimant, is entitled to the funds. Both parties agree that if the Court determines that plaintiff has a preferred mortgage lien, plaintiff is the rightful recipient of the funds. However, defendant argues that because there is a deficiency in the acknowledgement of the mortgage, the mortgage does not comply with the mandate of the SMA.

 The Court ordered the parties to brief two issues: first, whether New York or federal law applies to the acknowledgement; and second, whether a deficiency in the acknowledgement necessarily precludes a finding that the mortgage is preferred. See 46 U.S.C. § 31322. The Court is in receipt of the parties' submissions and has reviewed them. For the reasons stated below, the Court holds that plaintiff is entitled to priority over the remaining funds from the sale of the defendant yacht.

 DISCUSSION

 I.

 A preferred mortgage is one that has been filed "in substantial compliance with section 31321" of the SMA. See 46 U.S.C. § 31322(a)(1)(B). Section 31321 provides, inter alia, that a preferred mortgage be "signed and acknowledged". Section 31301(1) defines "acknowledged" as "making (A) an acknowledgement or notarization before a notary public or other official authorized by the law of the United States or a State to take acknowledgements of deeds".

 As stated, one issue the Court must address is whether state or federal law applies to the acknowledgement in this case. Under New York Real Property Law ("NYRPL") § 309, an acknowledgement must be made by an officer or attorney in fact of the corporate mortgagor. In contrast, under federal law, the purpose of an acknowledgement is simply to authenticate the mortgage for the record. See Moore v. Simonds, 100 U.S. 145, 147, 25 L. Ed. 590 (1879). Thus, the propriety of the acknowledgement under federal law is not directly dependent on a particular individual making the acknowledgement.

 Defendant argues that New York law should apply, because section 31301(1) provides for notarizations before an official authorized by state law, and in this case, the mortgage indicated that the acknowledgement was to "conform to the requirements of the law of the locality where made." The mortgage at issue in this action was acknowledged by a "specially authorized agent" for the mortgagor. Because in defendant's view, the mortgage does not comply with NYRPL § 309, he maintains that it is not in substantial compliance with section 31321. Plaintiff counters that because the legislative intent of the SMA reflects a desire for national uniformity, the Court should look to federal law in determining whether the mortgage was properly acknowledged. *fn2" Plaintiff also argues that in any case, it has substantially complied with the mandate of the SMA.

 II.

 Because the SMA only came into effect on January 1, 1989, there is relatively little judicial interpretation of it. However, the SMA has its roots in the Ship Mortgage Act of 1920, 41 Stat. 1000 (the "Act"). Like the SMA, the Act provided that a lender under a "preferred ship mortgage" would have priority over certain "preferred maritime liens". 46 U.S.C. § 953 (1975). Moreover, the courts interpreted the Act's requirements under a "substantial compliance" standard. Thus, the Court looks to the judicial interpretation of the Act for guidance.

 The case law relating to the Act emphasizes the need for uniformity in the application of the Act and the resulting importance of applying federal law. For example, in J. Ray McDermott & Co. v. Vessel Morning Star, 457 F.2d 815 (5th Cir.), cert. denied, 409 U.S. 948, 34 L. Ed. 2d 218, 93 S. Ct. 292, 93 S. Ct. 271 (1972), the Fifth Circuit interpreted the legislative history of the Act and held that "it is clear that Congress intended that the ready availability of credit to support interstate commerce should not be impeded by parochial limitations and that the Act would wholly and completely supersede state law and practice in every respect." Id. at 818 (emphasis added).

 Similarly, in Mastan Co. v. Steinberg, 418 F.2d 177 (3d Cir. 1969), cert. denied, 397 U.S. 1009, 25 L. Ed. 2d 422, 90 S. Ct. 1238 (1970), the Third Circuit, facing a creditor's attempt to use New York state law to destroy the mortgagee's priority, held that "it seems clear that to engraft the various nuances of state law onto federal legislation would introduce an undesirable lack of uniformity in the interpretation of congressional enactments. In the present case, it would condition the validity of ship mortgages on the idiosyncracies of local law rather than their conformity to national interests." Id. at 179.

 Finally, the legislative history of the Act indicates that its "primary purpose" was "to induce private capital to invest in shipping", Custom Fuel Services v. Lombas Indus., 805 F.2d 561, 568 (5th Cir. 1986), by creating "'certainty in financing'" vessels in the United States. In re Alberto, 823 F.2d 712, 713 (3d Cir. 1987) (quoting H.R. Rep. No. 1116, 89th Cong., 1st Sess., reprinted in 1965 U.S. Code Cong. & Admin. News 4231, 4232). Such certainty could not be attained if vessel ...


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