This is part two of the ramifications of the Lozman vs. City of Riviera Beach case just recently decided by the Supreme Court of the United States. In the last blog we discussed the impact that the decision would have on marinas. In this blog, we will briefly discuss the impact that the decision will have on the lending institutions.
Vessels can be secured in two different ways:
1) Smaller vessels are typically secured with a traditional collateral security agreement and note. Not too dissimilar from an automobile loan. If the boat owner fails to meet his obligations, the lender has the right to repossess the vessel and sell it. The problem with this type of lending vehicle is that vendors providing necessaries to the vessel, dockage or other lean-worthy items may have a superior position to that of the bank and will have to be paid prior to the bank realizing any monies back from the resale of the vessel. Since vessels lose a high amount of fair market value once they get wet, if the vessel accrues enough debt against it, then the secured instrument holder may be stuck in a position where they repossess the vessel, sell it and got nothing out of it.
2) The other lending vehicle is by way of a Preferred Ship's Mortgage. A mortgage is typically used for larger vessels with greater value. These vessels are documented with the United States Coast Guard. Liens are typically filed with the Coast Guard, so they are known to the lender at the time of repossession or arrest. Many of these liens are inferior to the mortgage and will be erased upon the sale of the vessel after an arrest by the United States Marshal’s office, as opposed to a titled vessel with a note and security agreement. Therefore, a preferred ship's mortgage is the better way to secure vessel than the other discussed above.
The Lozman case, since it redefines what a vessel is, will place banks in a tenuous situation as to whether or not to lend money on vessels that may not qualify as a boat under the new definition. Banks are typically conservative and will err on the side of caution. Therefore, someone interested in buying a houseboat may not be able to obtain traditional marine financing. It is unclear whether any other lender would be willing to loan money on an asset that does not have a clear definition. Manufacturers of these types of vessels may be placed in economic straits due to the fact that their potential buyers may not be able to obtain financing. I believe banks will become very leery of lending money on any vessel that could be redefined as something other than a boat per the Lozman case.
Just as the Lozman case has influenced the way marinas will do business, it will influence the way lenders do business as well.