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March 27, 1935


The opinion of the court was delivered by: DICKINSON

DICKINSON, District Judge.

Leave was given to file briefs, and subsequently supplemental, and again reply, briefs.These have now been submitted and the cause ripe for a ruling.

The Fact Situation and General Findings.

 The questions here raised are in some respects novel and call for a somewhat extended discussion. The genius of the law maritime makes of a vessel a sentient being having the needs of its existence and support and endowed with capacity to pledge itself, its tackle, earned freight, and, on occasion, even its cargo, by way of general average. It may borrow money on bottomry bonds to pay for its conditioning and repair in order to resume its voyaging and activities. It is thus a source of credit to itself, which may be necessary to its very preservation and existence. Creditors to whom such a pledge is given have claims prior in payment to those who have investments in the vessel venture. These claims such creditors could enforce.

 The Ship Mortgage Act of June 5, 1920 (46 USCA § 911 et seq.) made a profound change in the law maritime.The capital of any one engaged in any business may consist of capital ventures by those who thus become owners and also by those whose investments take the form of bonds or other debt obligations, secured by a mortgage of some or all of the property of the mortgagor.

 The former type of capital is subordinated to the claims of creditors of the owner, but the latter is often given a preferred claim upon the pledged property. The supply of this type of capital to a marine venture is not founded upon a maritime contract within the meaning of the Admiralty Law. One of the things which the Ship Mortgage Act was meant to do was to make these maritime contracts. Its very laudable purpose was declared to be to benefit our merchant marine. It sought to do this by encouraging the investment of this form of capital by giving to the mortgagees of ships a preferred lien (with a few exceptions) upon the mortgaged ships. The credit extended to ships is likewise a source and form of capital. It is to be hoped that the effect of the Ship Mortgage Act will not be to deprive shipping ventures of the greater capital which the ship's credit supplied. It would be expected that a mortgaged ship would lose the credit which would otherwise be extended to her, and this lost credit might exceed the capital derived from the preferred mortgage contributions. The preferred mortgage plan is undoubtedly an extension, or at least a change, of the law maritime. It provides for the enforcement of such mortgages through a foreclosure proceeding. The question at once arose whether such foreclosure proceedings could be brought within the jurisdiction of Courts of Admiralty, inasmuch as such mortgages were not before known to the law maritime. This question has been set at rest by the case of Detroit v. The Thomas Barlum, 293 U.S. 21, 55 S. Ct. 31.

 This type of mortgage has, by the Act of Congress, been incorporated into our maritime law. A regrettable effect is to subject shipping activities to the danger of a scheme which has resulted in untold evil in other business activities. The evil has reached colossal proportions in hotel, apartment house and office building and many other operations. Efforts are now being made to find a remedy as the scheme has become a national scandal and has called for a congressional investigation. The scheme is simplicity itself. It is for the promoters to plan an extensive construction which may be subjected to a mortgage. It is planned to create the mortgage for a sum for which the property is good security and yet so large that in case of a sale the property can be bought in under it. Such a mortgage is executed to the promoters for all they invest plus a very generous margin for their profits. The gullible are then plied by every art to invest in the venture. They are given bonds supposed to be secured by a second mortgage or are given beautifully embossed certificates of preferred stock. The bait is a large promised profit. There is usually a lavish issue of common stock to investors in the second mortgage bonds and preferred stock, but the promoters retain control of the management through holding the major part of the common or voting stock. The promoters have risked nothing. Their entire investment, if any, and high profits, are secured by the first mortgage. When the time comes to spring the trap, the first mortgage is foreclosed, taking everything, and all others get nothing. This is no fancy picture but what is happening every day and every where. This is the scheme charged to be behind these preferred mortgages.

 The facts of this case can be best presented through a series of findings, which we make:

 1. Stemmler & Co. were investment bankers. Some changes were made in the course of the transactions, but we treat them as alone concerned from the beginning. They became interested in the marine venture of cargo carrying by water from the port of Philadelphia to Kinsale, Va. They were to supply the needed capital and were willing to invest $30,000.

 2. A corporation, given the name of the Delaware & Chesapeake Steamship Company, was chartered under the laws of the state of Delaware. Its entire capital stock was represented by an issue of 3,000 shares of the type known as "no par value" stock. The charter date is August 21, 1934.

 3. About the same time the two barges, known to this record as the Albany and R. Lenahan, were purchased, the one for $9,000, and the other for $10,000, or $19,000 in all. Checks for the payment were the checks of Stemmler & Co. direct to the vendors, but the bills of sale of the boats were made to the corporation.

 4. On August 23, 1934, a formal meeting of the incorporators was held, Stemmler presiding as chirman, at which a formal offer was made by Stemmler that in consideration of the issue to Stemmler & Co. of 3,000 shares of the stock of the company (the entire stock issue), and the execution of two notes for $15,000 each payable in six months, secured by "two preferred mortgages" of $30,000 each on the boats Lenahan and Albany respectively. Stemmler & Co. would transfer title to the boats and give the company $11,000. The offer was formally accepted by the company. It may be noted for whatever this truth is worth that the offer was made by Stemmler to himself and accepted by him. It will be further noted that the entire capital of the corporation became borrowed capital and the company without any means of payment agreed to repay the $30,000 in six months.

 5. The mortgages for $30,000 each on the Albany and Lenahan were dated August 24 and August 27, 1934, respectively, and the two notes for $15,000 each were given about the same time. When these were given Stemmler & Co. had paid out something above $21,000 or $22,000. It is not denied that they afterwards advanced the full $30,000 or more.

 6. Each mortgage was not only for $30,000 or for $60,000 in all, but they pledged not only the vessel, but all freight earnings as well. Opposing counsel attach importance to this latter feature.

 7. We have assumed, without inquiring into it, that there has been compliance with the formalities of foreclosure.

 8. In making the following fact finding, we have had in mind that the mortgagees are bankers with a banker's idea of his rights and the measure of consideration he owes to others.

 The ship Mortgage Act attempts to afford some measure of protection to those dealing with mortgaged ships by giving them notice of the existence of the mortgage. This purpose was thwarted by the acts of the mortgagees in this case. The act, for instance, requires that the mortgage be recorded so as to give at least constructive notice of its existence. The plain intent of the act is to have this record easily accessible to prospective creditors. The record must be in the home port of the vessel.The owner here is a Delaware corporation. The port from which the vessels were to sail was Philadelphia. The credit asked for would be expected to be from Philadelphia merchants. What may be called the natural home port of the vessels would hence be Wilmington or Philadelphia. Had the mortgages been recorded in Philadelphia, their existence would likely have become known. Instead of this being made the home port, that of New York was selected. It is impossible to escape the at least suspicion, in view of the whole conduct of the mortgagees, that the home port was made New York purposely in the hope that actual knowledge of the existence of the mortgage would thereby be concealed. In their eagerness to have a distant port made the home port of the vessels, the mortgagees recorded the mortgage before the formalities of designating a home port had been complied with. The required approval of the Commissioner of Navigation of the Department of Commerce had not been made when the mortgages were recorded. It was, however, afterwards given. As a further assurance that the existence of the mortgage would be disclosed, a copy of the mortgage is required to be kept among the ship's papers, and, although we cannot find this to be expressly required by the act, notices of the mortgage are expected to be posted on the ship. In this case all such information was purposefully withheld and the existence of the mortgages concealed. Notices were prepared for posting, but were never displayed. It is true that the duty of giving this notice is not imposed upon the mortgagees, but upon the mortgagor, and in some measure upon the Collector of the Port. If the duty is not imposed upon a mortgagee to give this notice, he is not bound to give it, but he is bound not to make himself a party to the fraud of the mortgagor by aiding in its perpetration. One of whom inquiry is made of the credit of a prospective debtor is often placed in a delicate and sometimes embarrassing situation if it is to his interest to have the credit extended. It is always his duty to speak the truth in what he says. It is not always his duty to tell all he knows. Sometimes, however, it is his duty to speak, as his silence may be misleading and may be found to have been intentionally so. To say of a person asking for credit that he is the owner of a valuable property, but to withhold the fact that the person inquired of holds a mortgage against it for all it is worth, is a misleading statement. To withhold information both of the property and the mortgage may not be. As the corporation was a new one, inquiry into its financial standing was to be expected. Inquirers were referred to Stemmler. His answers were partly oral and in part in writing. The latter make painful reading. They are on their face a studied effort to avoid committing the writer to anything, and yet lead the inquirer to believe that the corporation had ample capital and financial resources. The fact is emphasized, as a source of credit, that the corporation owned two valuable vessels, yet not a word is said of the mortgages Stemmler held. It is true that he has testified that he told inquirers of the mortgages. The fact is, however, found to be otherwise. Evidently, in making his statement, he was testifying not to the fact, but to his then inference. When testifying, he appreciated that he should have mentioned the mortgages. He, because of this, infers that he did mention them. The inference is unjustified and the fact otherwise. He led inquirers to believe that the corporation had ample capital resources and sought credit merely "as a convenience," when he knew it had no free capital whatever.

 In adverting to this feature of the case, we have in mind that a mortgagee might subject himself to an action for deceit by false statements made without losing any of his rights as mortgagee. What the mortgagees did is of significance only in its bearing upon the question of whether the mortgages they hold are "preferred" mortgages within the meaning of the act making of them maritime contracts.

 As bearing upon this, we make these findings. One is that Stemmler & Co. agreed to make a capital contribution of $30,000 to this corporation for which there was issued to them 3,000 shares (the entire issue) of the capital stock of the company. As such capital contribution, the investment depended upon the success of the adventure. In the attempt to assure themselves against all possible business losses, they, acting for the corporation, gave to themselves these mortgages. The other is that, seeking to comply in form with the requirements of the act, as to giving notice of the existence of the mortgages, they successfully concealed all knowledge in fact of the mortgages from those dealing with the vessels on their credit.

 9.This takes us to the procedural features of the act.

 The mortgagees have filed two libels directed against each of these vessels to recover $30,000 for the claim based upon each mortgage. Viewed as simply a foreclosure proceeding to which the mortgagees and mortgagor were alone parties, the mortgages would undoubtedly be at least prima facie evidence of the mortgage debt which, if unanswered, would give the right to a decree in libelant's favor. Such was the case, as viewed by the libelants. They rested their case (in this feature of it) upon the offer of the mortgages in evidence. The proceeding, however, is much more than a mere foreclosure proceeding. Other parties had first filed libels and caused the vessels to be seized. All the libel proceedings were consolidated and the other libelants answered to the mortgage libels. The owner of the vessels has offered no defense to any of the libels and no defense has been interposed to any except the two mortgage libels. We thus have an issue as it would be between two claimants upon a fund, each of whom asserts a prior lien. What it comes to in practical effect it that, if these mortgagees are valid "preferred" mortgagees within the meaning of the Ship Mortgage Act, they take the whole fund. Otherwise the other libel claims must be paid thereout. This then presents the issue which is one not between the mortgagees and their mortgagor, but between the mortgagees and the other libelants.


 The mortgage libelants hold two mortgages, each of different vessels, but each for $30,000. On the face of the mortgages they have the right to awards aggregating $60,000. We are saved the decision of the question of whether these mortgages, while evidence of the mortgage debt against the mortgagor, would be evidence of the debt against other parties, or be as to them res inter alios acta, because opposing counsel has brought out that there is a debt for $30,000 which, as we understand it, is all the mortgagees are claiming. The question then becomes that, having a mortgage to secure a $30,000 claim of debt, is the mortgage a valid "preferred" mortgage, within the meaning of the act of Congress, against the other libelants? What is the kind of mortgage which is thus given priority?

 Before discussing the conditions imposed by the act of Congress in terms, we have a broad underlying question to answer. It is this: A man makes a capital contribution to a corporation of say $30,000, receiving therefor 3,000 shares, being all of its capital stock. He, then being practically the corporation, has it execute a mortgage to himself for $30,000 without other consideration. If the mortgaged property is brought into court charged with the lien of the mortgage and also with other liens to creditors, will the mortgagee be awareded a preferred lien upon the property? We are propounding this as a general question without the Act of Congress, although without it such a claim would not give a maritime lien. The question admits only of the answer that as against lien creditors of the corporation the mortgage would be without consideration and a nullity. How is it under the act? The act authorizes the mortgaging or vessel property, but provides that, although such mortgages are good as against the mortgagor "and a person having actual notice thereof," (43 USCA § 921) they are invalid as against "any person other than" the mortgagor and those having actual notice of the existence of the mortgage, unless the mortgage is recorded with the Collector of Customs in the home port of the vessel. The home port can be designated only with the approval of the Commissioner of Navigation of the Department of Commerce. These mortgages were not so recorded. It is true they were deposited with the Collector of Customs of the Port of New York, but that port had not at that time been designated as the home port of the vessels. It is likewise true that New York was afterwards designated as such home port.

 We do not think there was in this a compliance with the requirements of the act. What is sought to be done is to visit upon creditors constructive notice of the mortgages. A compliance with the act would be such constructive notice, but something else would not be. In re Empire Shipbuilding Co. (C.C.A.) 221 F. 223; The Underwriter (D.C.) 3 F.2d 483; The Jean L (D.C.) 286 F. 727; The Susana (C.C.A.) 2 F.2d 410.

 We pass without a specific ruling the effect of the requirement of the indorsement of the mortgage upon the ship's papers where the mortgagee has been a party to the hiding of this notice.

 The provision, in case other property than the vessel is included in the mortgage, is under the facts of this case somewhat difficult to construe. There was a pledge here, not only of the vessel, but of freight earned and to be earned. Obviously no freight had been earned, and just as obviously future earnings could not be apportioned. Freight earnings are a part of the vessel as much as the ship's tackle. This is true, however, only of freight earned. There is authority for the proposition that the value of mortgaged property suffered by the mortgagee to go to the mortgagor may, in favor of another lien creditor, be deducted from the mortgage debt. The Red Lion (D.C.) 22 F.2d 329.

 There is no evidence, however, that any earned freights were either applied to the mortgage or released to the mortgagor. The practical effect of mortgaging each vessel separately for the whole $30,000 mortgage debt was to make of each mortgage one of a pledge of both vessels for the $30,000 debt.

 We refuse to hold that there was here any property pledged "other than a vessel" within the meaning of clause "e" of § 30, subsec. D of the Act (46 USCA § 922 (e). We do hold, however, that the mortgages in suit are not "preferred" mortgages within the meaning of the act of Congress as against the other libelants. There remains only the other libels.

 The discussion has already been extended to a tiresome length. The claims of the other libelants are not disputed and have been decreed pro confesso, and may be allowed with a single comment. Libelants for supplies, etc., are now relieved from averring or proving that the supplies were furnished on the credit of the vessel. That, none the less, is still the basis for a libel in rem. If the debt was contracted on the personal credit of the one who contracted the debt, no lien can be successfully asserted. Here is its zeal to visit bad faith upon the mortgagee in the contraction of the debt, one of the libelants has come dangerously near to a waiving of its otherwise lien against the vessel. This is because one of the expressions used might be construed as a statement that the debt was contracted wholly upon the personal credit of the owner and in nowise upon the credit of the vessel.

 We construe this expression, however, as meaning that the libelant furnished supplies to the vessel on its credit, and, in consequence, acquired a lien. The enforcement of such a lien is, however, troublesome and expensive. They, because of this, inquired into the additional financial ability and credit of the owner without waiving their lien against the vessel.

 The claims are all allowed.

  There are a number of these libels.

 We accordingly grant leave to the proctors concerned to submit formal judgments disposing of the several claims and the cause in accordance with this opinion, retaining jurisdiction of the cause for the purpose of entering final judgments.


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