When friendly arrangements turn sour

Posted: May 25, 2014  |  By: David Weil, Esq.

 I bought a 41 foot power boat two years ago with the help of a friend who loaned me the money for 80 percent of the purchase price. He funded the transaction by taking out a home equity loan, and our arrangement called for me to make the payments on his loan. Unfortunately he never showed me his loan paperwork and I recently discovered that the amount of his home equity loan was substantially more than the amount that he gave to me for the boat purchase. This entire deal was done on a handshake and at this point I have no idea how much I owe him. He refused to give me a detailed accounting of my payments or of his home equity loan, so I stopped making my payments to him. He responded by putting a lien on my boat through the Coast Guard. What are my legal rights at this point?
This case covers a lot of ground, but we need to start by asking why our reader would enter into a deal like this on a “handshake” with no written contract.  Maritime finance is complicated.  Hire a professional to draft the proper paperwork.  This is fundamental for the protection of both the lender and the boat owner.             

We have discussed maritime liens quite a few times in this column (starting with “A Lesson on Liens,” The Log, August 24, 2006), but it may be helpful to review a few fundamental concepts.  The most fundamental of those concepts is that maritime liens have very little in common with other liens, such as a lien claimed against a house.             

A lien claimant does not actually record a "lien" with the Coast Guard.  The instrument is described as a "Notice of Claim of Lien" (or "NCL"), and that description accurately conveys the legal effect of the document.  A person who files a NCL is giving notice to the world that he or she claims to have a lien.  Period.   It has no other legal effect.  A claimant does not “lien a vessel” or “put a lien on a vessel.”  It is simply a notice of a claim.              

A maritime lien may be valid and enforced without recording anything with the Coast Guard, and the  Coast Guard will allow practically anything to be recorded against the title of a vessel.  The Coast Guard's National Vessel Documentation Center warns that "neither the filing of a notice of claim of lien nor the acceptance by the Coast Guard of such a notice is a guarantee that the claim is valid or enforceable."             

A vessel mortgage is the one exception to this rule, and we will focus on this difference in our reader’s case since the claim against his boat arose from a loan for the boat purchase.  A mortgage must be recorded to be a valid claim against the vessel, and the document must include all of the information set forth in the Coast Guard’s recording regulations.             

The reason for the different treatment is that a mortgage is not technically a maritime lien.  Generally speaking, any service that is actually provided to a boat will automatically give rise to a maritime lien when the work is completed, so long as the work did something to benefit the vessel and it was done with the consent of the person in charge of the vessel.  A mortgage or a purchase money loan provides assistance to the buyer of a boat, but it does not provide any benefit to the boat itself.  A mortgage therefore will not give rise to a maritime lien, and it is not a valid claim against the vessel unless it includes the boat owner’s notarized signature and it is recorded with the Coast Guard.             

This leads us back to our reader’s case.  The NCL recorded by his lender relates to a purchase money loan and as such it is not supported by a valid maritime lien.  The lender must, upon demand, file a satisfaction of the claim, and if he refuses to do so our reader may file suit against him.  This is unfortunately complicated by the fact that our reader does owe some amount of money to the lender.  And that obligation is complicated further by the lack of a written agreement, which may in some circumstances render the obligation unenforceable.  

The bottom line here is that the transaction is a mess and it is unlikely to be cleared up without the assistance of experienced attorneys on both sides.  Next time, contact an attorney before the documents are signed!   

David Weil is licensed to practice law in the state of California and, as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.   

David Weil is the managing attorney at Weil & Associates (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at dweil@weilmaritime.com.   Ask your question online at thelog.com.

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