The Preferred Ship Mortgage Exception

• Author: Ernesto Sanchez
• Pages: 199-201

199

THE P REFE RR E D SH IP MOR TG AG E EX C EP T I ON

§ 16.1 INTRODUCTION

Ship mortgages became commonplace as a major source of nance for shipowners during the

nineteenth century.1 Just like other mortgages, a ship mortgage involves a lender/mortgagee

lending money to a shipowner/mortgagor in exchange for an interest in a vessel as security for

the loan. If the shipowner/mortgagor stops making payments on the loan, the lender/mortgagee

can seek to recover the loan balance by forcing the sale of the ship used as collateral via foreclo-

sure proceedings.2 e FSIA denies immunity to foreign sovereign shipowners with respect to

the foreclosure of specic ship mortgages.

§ 16.2 PERTINENT STATUTORY TEXT

28 U.S.C. § 1605(d) states:

A foreign state shall not be immune from the jurisdiction of the courts of the United

States in any action brought to foreclose a preferred mortgage, as dened in section 31301

of title 46 [i.e., denition in statutory admiralty law governing commercial instruments

and maritime liens for purposes of maritime liability]. Such action shall be brought, heard,

and determined in accordance with the provisions of chapter 313 of title 46 [i.e., section

encompassing pertinent statutory admiralty law] and in accordance with the principles

of law and rules of practice of suits in rem, whenever it appears that had the vessel been

privately owned and possessed a suit in rem might have been maintained.3

§ 16.3 WHAT IS A PREFERRED SHIP MORTGAGE?

Amending the 1920 Ship Mortgage Act, Chapter 313 of Title 46 of the U.S. Code, encompass-

ing admiralty (or maritime) law with respect to commercial instruments and maritime liens for

purposes of maritime liability, sets forth prerequisites for a vessel mortgage to attain perfected

status: validity as against third persons with no actual notice of the mortgage (e.g., a liquidator

charged with collecting the assets of and settling all claims against the shipowner or shipown-

ing entity before dissolution) and preferred status—priority over specied competing maritime

liens. In general, then, preferred ship mortgages protect mortgagees from such events as the

vessel’s forfeiture under unrelated circumstances.4

1. See generally -VI B  A § .

2. See 46 U.S.C. § 31301(3) (dening a “mortgagee” as a legal person to whom property is mortgaged or, when a

vessel mortgage involves a trust, the trustee that is designated in the trust agreement).

3. 28 U.S.C. § 1605(d).

4. See 46 U.S.C. §§ 31325-26.

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