By Lisa M. Goolik, J.D.
On July 6, the U.S. Court of Appeals for the Fifth Circuit held that a company that managed and operated vessels for owners under management contracts could not claim maritime liens in the vessels for unpaid management fees, even though the agreements specifically provided for the creation of maritime liens to secure payment. In Comar Marine Corporation v. Raider Marine Logistics, LLC, the court concluded that maritime liens cannot be created by agreement. In addition, the management agreements were not of the category of contracts that give rise to maritime liens. As a result, the company, Comar Marine Corporation, was not entitled to arrest and sell the vessels to collect its management fees.
Relevant facts. The underlying issue began as a contract dispute between Comar and four vessel-owning limited liability companies (LLCs). The LLCs contracted Comar to market, manage, and operate the vessels as charters in the Gulf of Mexico. The management agreements provided that the LLCs pay Comar a monthly management fee, and all expenses Comar incurred in connection with its provision of services were to be reimbursed by the owners. The contracts also provided that Comar “is relying on the credit of the Vessel[s] to secure payment of [the management fees and advanced sums for expenses] and shall have a maritime lien on the Vessel[s].”
When the charter business in the Gulf of Mexico began to dry up, the LLCs decided to terminate the agreements prematurely, and Comar sued for breach of contract. Comar alleged that it was owed approximately $1.1 million in fees and sought and secured arrests of the four vessels, on the grounds that it was entitled to maritime liens.
The district court held that although the LLCs materially breached the agreements, Comar did not have valid maritime liens on the vessels because the management agreements were not of the type to give rise to a maritime lien. As a result, the district court concluded that Comar wrongfully arrested the vessels. Comar appealed.
No lien by agreement. Although the contracts specifically provided that Comar held a maritime lien on the vessels to secure payment of its management fees, the Fifth Circuit held that maritime liens cannot be created by agreement. “The Supreme Court has stated, ‘[m]aritime liens are not established by the agreement of the parties, except in hypothecations of vessels, but they result from the nature and object of the contract. They are consequences attached by law to certain contracts, and are independent of any agreement between the parties that such liens shall exist.’”
Specific contracts. Moreover, according to the Fifth Circuit, the breach of only certain types of historically recognized contracts gives rise to maritime liens, and the management agreements in question were not one of the recognized types. Comar contended that the agreements were the functional equivalent to bareboat charters, contracts that have been recognized as giving rise to maritime liens.
However, a “charter” is an arrangement whereby one person becomes entitled to the use of the whole of a vessel belonging to another, wrote the court. The court had previously held that under such a charter, “the vessel is transferred without crew, provisions, fuel or supplies, i.e. ‘bareboat’; and when, and if, the charterer operates the vessel he must supply also such essential operating expenses.” In addition, the charterer is responsible for periodical payments to the vessel owners, “without regard to whether the charterer uses the vessel gainfully or not.”
Because the management agreements provided that the LLCs were to reimburse Comar for any expenses, the court concluded the agreements were not charters. In addition, Comar did not owe the LLCs a periodic payment independent of whether the vessels were used. Rather, the LLCs owed Comar a periodic payment for its services.
For more information about maritime liens, subscribe to the Banking and Finance Law Daily.
