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Replevin where first mortgage is not available

October 13, 2015

In an era of heightened loan defaults, litigious borrowers, and the unfettered mobility of assets – where oh where is a lender to go? No doubt, lenders have experienced the “tail of the stingray” – an often lethal combination of events that result in their security being judicially untouchable and their default rate is skyrocketing. Coupled with the borrower who plays fast and loose with the Courts, the undeniable increase in escalating recovery costs, and the borrower’s mad dash to bankruptcy court, often suffocate the lender’s efforts to recover their security.

While Courts are responding to borrower’s efforts to avoid foreclosure, sometimes it is imperative that lenders go back to the basics – the old and often overlooked – “writ of replevin.” Unlike real estate, the transitory nature of vessels and aircraft often allows owners to skirt responsibility by simply going to another state or district, or even worse, a foreign country, without ever looking back. In Florida, the Bankruptcy Courts have recognized that when a borrower “surrenders” its property, it should be prohibited from raising defenses to the foreclosure proceeding. In fact, on May 13, 2015, Judge Michael Williamson, Middle District of Florida, (In re Meltzer 8:12-bk-16792-MGW, and In re Patel 8:13-bk-09736-MGW) held “at a minimum, ‘surrender’ under the Bankruptcy Code §§ 521 and 1325, means a debtor cannot take an overt act that impedes a secured creditor from foreclosing its interest in a secured property.” On December 19, 2014, Judge Paul G. Hyman, Jr., Chief Judge of the Bankruptcy Court for the Southern District of Florida in In re Failla, Case No. 11-34224-PGH, ordered the borrowers to stop defending or contesting a pending state court foreclosure action where the borrowers had filed a statement of intention to surrender their property, finding that by contesting the foreclosure action, the borrowers were the resisting surrender of their property and refusal on the borrowers’ part to refrain from defending against the foreclosure action could result in revocation of discharge, reasoning that the borrowers may have committed fraud on the court by stating under oath that they intended to surrender the property and then continuing to fight the foreclosure.

But when it comes to transitory collateral, the difficulty of recovery escalates. The 2011 case of Home Savings & Loan Co. of Youngstown, Ohio v. Super Boats & Yachts, LLC 2011 WL 2447641 (S.D. Fla. 2011) illustrates this difficulty. The Bank obtained a purchase-money security interest in the vessel perfected by notation on the vessel’s certificate of title. By its terms, the Note granted Home Savings a lien and security interest in the Vessel. The provisions of the Note allowed Home Savings to take immediate possession of the Vessel in the event of a default. While Home Savings initiated a replevin action for the seizure of the Vessel and the Ohio Court of Common Pleas issued an Order of Possession without a hearing against the Vessel based upon the unverified belief that the vessel was in Ohio. But, in a replevin action, the property’s location determines the existence of jurisdiction. Schaffer v. Heitner 433 U.S. 186 (1977) Hence, as the vessel had been removed from the State of Ohio and Defendant Super Boats and Yachts, LLC acquired ownership interest and possession of the Vessel and a Certificate of Title had been issued in Florida, Home Savings filed a complaint in the Southern District Court against the Vessel, in rem, and against Super Boats, in personam, in which it sought a warrant for the arrest of the Vessel, an order authorizing its sale, a judgment providing immediate possession and a decree in favor of Home Savings for damages.

Home Savings contended that “[b]ased on the Ohio Order, it is entitled to the “immediate right of possession in the [Vessel]” and argued that it possesses a lien over the Vessel that is “of a maritime nature. The District Court observed that Home Savings financed the purchase of the Vessel and, therefore, holds an ordinary mortgage. As the Supreme Court explained long ago, “[a]n ordinary mortgage of a vessel, whether made to secure the purchase money upon the sale thereof or to raise money for general purposes, is not a maritime contract. A court of admiralty, therefore, has no jurisdiction of a libel to foreclose it, or to assert either title or right of possession under it.” The J.E. Rumbell, 148 U.S. 1, 15 (1893); see also J.G. Jackson v. Inland Oil & Transp. Co., 318 F.2d 802, 804 (5th Cir. 1963). The Complaint does not allege that Home Savings provided necessaries to the Vessel. Therefore, the District Court held that Home Savings did not hold a maritime lien sufficient to for subject matter jurisdiction.

A plaintiff must possess a maritime lien or a preferred mortgage in order to invoke this Court’s admiralty jurisdiction and as Home Savings neither a valid maritime lien nor a “preferred mortgage” under the Commercial Instruments and Maritime Liens Act (“CIMLA”), 46 U.S.C. § 31301 et seq. Home Savings.” The District Court observed that a “preferred mortgage” is a mortgage that includes the whole vessel, is filed in accordance with 46 U.S.C. § 31321, and covers a documented vessel. See 46 U.S.C. § 31322(a). “[I]f a mortgage is within [CIMLA], admiralty jurisdiction is exclusive; if the mortgage is not within [CIMLA], admiralty has no jurisdiction.” Richard Bertram & Co. v. Yacht Wanda, 447 F.2d 966, 967 (5th Cir. 1971) (citing The Thomas Barlum, 293 U.S. 21 (1934)). Further, Home Savings did not file its mortgage with the Secretary of Homeland Security, which is an express requirement under 46 U.S.C. § 31321. Further, the boat is not a documented vessel or one for which an application of documentation has been submitted (46 U.S.C. § 12105) and in the absence of a preferred mortgage, the Court lacked admiralty jurisdiction over Home Saving’s claim.

So, where does this leave the lender? First, the lender must possess the proper qualifications for initiating a replevin action. It must bring the action in a court of competent jurisdiction and at the correct location. F.S. §78.055 sets forth the allegations which must be contained in a complaint for a lender to move for a writ of replevin prior to a final judgment. To obtain an order authorizing the issuance of a writ of replevin prior to judgment, the plaintiff must file with the clerk a complaint reciting; 1) a description of the claimed property; 2) a statement that the plaintiff is the owner of the claimed property or is entitled to possession of it; 3) a statement that the property is wrongfully detained by the defendant; 4) a statement that the claimed property has not been taken for a tax, assessment, or fine pursuant to law; and 5) a statement that the property has not been taken under an execution or attachment against the property of the plaintiff or, if taken, that it is exempt. Probably the greatest hurdle for the lender is the due process requirements. Florida’s statutory procedure for obtaining a writ of replevin prior to entry of a final judgment on an ex-parte basis was amended to comply with the due process requirements set forth by the U.S. Supreme Court in Mitchell v. W.T. Grant Co., 416 U.S. 600 (1974). Section 78.068 was drafted to meet the due process requirements. It requires a statement in a verified petition or separate affidavit of the nature and amount of claim along with the grounds relied upon for issuance of the writ and provides that the writ will issue if the court finds that the property is in danger of destruction, concealment, waste, removal, or transfer, or if the defendant has failed to make payment as agreed. Some Florida cases have affirmed orders directing the issuance of a prejudgment writ of replevin under §78.068 without mentioning the requirement of pleading exigent circumstances such as destruction, concealment, or waste, suggesting holding that nonpayment is sufficient as so held by the Supreme Court in Mitchell. See Landmark First National Bank of Fort Lauderdale v. Beach Bait and Tackle Shop, Inc., 449 So. 2d 1287 (Fla. 4th DCA 1984) (upon plaintiff’s proof of nonpayment issuance of a prejudgment writ of replevin should be upheld).

So, when vessel owners default, particularly a first preferred ship’s mortgage is lacking, Lenders must consider the benefit to be gained by seeking a prejudgment writ of possession.

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Author :Rober L. Gardana

Robert L. Gardana, P.A. is author of the book Florida Maritime Law and Practice.

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