Baylaw Boat Closing and Settlement Services

Boat closing and settlement servicesBoat Closing and Settlement Services

You can save thousands of dollars over what a broker will charge with complete confidence that your purchase and sale documents and funds will be handled professionally and honestly.  Baylaw will close the deal for 2.5% of the purchase price ($1000 minimum).  Funds will be held in our attorney trust account; purchase documents will be reviewed by a lawyer; and no money will be released until all parties are fully satisfied that the deal is ready to close.

Baylaw, LLC will finalize your boat purchase or sale.  We:

1. Collect purchase funds in an attorney trust account in preparation for closing.

2. Obtain and review ownership documents for completeness and accuracy.

3. Verify ownership status and publicly filed liens on the boat, yacht or ship.

4. Obtain lien pay-off information.

5. Prepare a settlement statement showing who is to be paid what funds from closing.

6. Pay off all known liens and mortgages.

7. Deliver closing funds to seller and lienholders.

8. Delivering good title to purchasers
In addition, we can also provide the following.

Documentation and registration services for all boats, yachts and ships.

Set up and transfer LLC and corporations and/or conduct asset sales for vessels held in LLCs or corporations.

Provide tax advice related to sales and use tax in any state in the United States.

Provide advice on related legal issues such as recommendations for where and how to title the boat; corporate ownership; chartering; maintaining anonymity, etc.

 

Vessel Purchase – Closing and Settlement

Vessel Purchase Closing and SettlementOnce the contract is signed, the most exciting and harrowing part of the purchase of a yacht or ship is the final magic moment when money and ownership change hands — that is the moment we call closing or settlement. It is truly one of the magic moments in the law: in an instant money is transformed into a living ship and a living ship is transformed into money. There is a great deal of work that must be done, however, before that moment can safely occur.

For a lawyer, representing the buyer is the most complicated transaction because everything must be verified — the identity of the ship, the identify of the owner, the authority of the owner to possess and sell the ship, the title documents offered in the sale. In addition, attention must be paid to the buyer/client — if they are buying through a company, is that company established and in good standing; are the funds going to be available to close; can the use the ship for the purpose that they expect; can it be registered in the location of their choice; is insurance in place? The worries are endless, and inevitably they all come to a last minute peak 24 hours before the scheduled close.
When closing finally occurs, it is the lawyer’s job to be sure that the title documents are legally sufficient to transfer title, that funds are properly allocated, and that possession is given to the new owner.

For small domestic boats, Baylaw, LLC will conduct settlement for a flat rate of $800, to include verifying and holding the documents necessary to transfer title; holding the purchase funds in trust; and ensuring that buyer receives title and seller receives ready funds. This resolves the problems giving a boat or a check to a thief.

Every closing is different, but here are some of the questions that we try to answer before any closing becomes final.

1. Can the owner deliver title to the boat free and clear of any liens or mortgages? Answering this requires checking with the registry of the flag nation and in some circumstances doing investigation to be sure that there are no hidden liens. Verifying the identify of the owner is also recommended.

2. Is the boat eligible for sale in the United States? A ship or yacht that has not been properly imported (and paid import duty) cannot be sold in the United States to a US Citizen without paying import duty. The consequences of violating customs law can be significant.

3. What documents will be required by the vessel registry in which the vessel will be placed? All registries will require that the boat be deleted from any prior registry and that properly executed Bill of Sale be executed. Different jurisdictions have many different and specific requirements as well, including the United States, which requires that vessels be primarily owned by US citizens. .

4. Are there factors that require that the closing be conducted in international waters or a different state of the United States than where the boat presently lies? Usually the reasons to conduct an international settlement involve state sales and use tax or the application of duty.

Closing and settlement can feel overwhelming — that’s pretty normal. There are a lot of moving parts and there are always surprises. With good representation, however, the important issues will be resolved: you will either get your boat or your money and be ready to move on to your next projects.

Dirk Schwenk is a maritime attorney in Annapolis, Maryland. He is a member of the Yacht Broker’s Association of America, the Maryland Marine Trades Association and the bar of Maryland. He has been practicing in admiralty and maritime since 1997.

Vessel Documentation, Registration and Flagging

Vessel documentation (also known as Flagging) is a national form of registration, which essentially registers the ownership of your vessel with the shipping agency of the country of choice. In the United States, this is a Coast Guard responsibility, and it is that agency that accepts applications for documentation and also files liens against federally documented vessels. The “Certificate of Documentation” essentially replaces a title and registration that you would receive from state authorities. All maritime countries have similar agencies, with large yachts often flying the flag of the Cayman Islands, British Virgin Islands, Jamaica, as well the flags of the home countries of the owners.

Baylaw, LLC can provide documentation and flagging services for your vessel at a very competitive fixed rate, assuring that you have a lawyer that is looking out for your interests in the closing process.

Documentation or flagging provides conclusive evidence of nationality for international purposes, provides for unhindered commerce between the states, and admits vessels to certain restricted trades, such as coastwise trade and the fisheries.  Vessel documentation also allows for greater flexibility in obtaining financing. Certain types of mortgages, specifically a “Preferred Ships Mortgage”, are only available to documented vessels and are only available from FDIC approved banks or other lending institutions that have received federal approval.

Baylaw, LLC provides documentation and flagging services including, as needed, setting up corporations in the United States or abroad, submitting applications for documentation or registration, perfecting liens and generally problem solving to assure the best experience possible for the vessel owner. We differ from most documentation companies in two ways. First, in addition to getting the proper papers filed, our attorneys are available to consult on complex issues such as avoidance of unnecessary tax, dealing with customs bonds and import duties, as well as review of purchase contracts, crew contracts and charter arrangements. Second, we bill for what needs to be done, instead of setting a price in advance. For simple transactions this will almost always result in savings for the vessel owner. For transactions that become complex, any additional money will go to assuring that you have the best possible maritime advice to solve the problem.

We look forward to working with you.

Legal Considerations for Buying Charter Boats

This article is aimed at people who are considering buying a yacht to be used for charters, or converting their existing yacht for charters.  There are, of course, lots of other things to consider – like how to properly employ a captain and crew; where the boat is going to be located, etc., etc.  But if you are considering charters in the US, this is a good place to start.   Originally published in the Yacht Brokers Association of America Spring, 2015 Newsletter.

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Eventually, many people that love the water and love their boats will entertain the idea of chartering their boat.  Perhaps if they can make a little money with chartering, they can write off their expenses and enjoy more time on the water.  This is a great idea, but one that should be approached with solid planning and much caution.  Here are some of the most important issues to consider:

  1. Income Tax Issues.  In my practice, I leave income tax questions to qualified professionals (and if you are going to consider writing off boat-related expenses, so should you).  Here is a rule of thumb, however — you’d better have income related to the boat if you are going to write off losses related to the boat.  Beyond that, lawyers like me are happy to consult with your qualified tax professional.
  2. Insurance Issues.  Almost all personal yacht insurance policies either ban chartering altogether or limit it to a very small number per year.  Carefully read the yacht policy to determine what limitations are currently in place.  About the worst possible result is that you decide to charter the boat, there is a serious injury or death, and then you find out that you have violated the conditions of your insurance policy.  That mistake could be catastrophic.  If the boat is to be chartered, the policy should reflect the scale and duration of the charters.
  3. Banking Limitations.  Many boat loans forbid the use of the boat for any purpose other than as a private yacht, and provide the bank the option to call the note if that prohibition is breached.  I personally have never seen this become a serious issue in a case, and I struggle to imagine a situation in which it would become a serious issue — but no one wants to be the guinea pig tasked with finding the worst case scenario.
  4. Limitations on Crewed Charters.  Only US flagged boats with a coastwise endorsement can be used to carry passengers in US waters (except for American Somoa, the Northern Marianas, and the Virgin Islands)
    1. To be coastwise, a boat must be built (or completely rebuilt) in the United States, or else it must obtain a waiver.  (The waiver application is here: http://www.marad.dot.gov/ships_shipping_landing_page/domestic_shipping/small_vessel_waiver/small_vessel_waiver_request/small_vessel_waiver_request.htm).  Generally waivers are available if a boat is more than 3 years old, cannot carry more than 12 passengers, and will only be used for passengers, not cargo or commercial fishing (sportfishing is allowed, assuming no commercial sale of the catch).
    2.  Tip for Brokers and Buyers: if the owner hopes to provide crewed charters (especially meaning that the owner selects and employs the Captain), then it is imperative that the boat be qualified for coastwise endorsement.  The safest option for this is a US built vessel or a boat with a previously granted waiver.  Less safe, but possible, is a boat that is more than three years old and to be certified for no more than 12 passengers.
  5. Issues with Bareboat Charters.  Most yachts are not built in the US, and therefore are not eligible for a coastwise endorsement (see above, Limitations on Crewed Charters).  The only chartering option for such yachts is to make them available for bareboat chartering.  Some considerations for bareboat chartering:
    1. A bareboat charter is considered to be equivalent of a lease of property — for all intents and purposes the ownership and control of the boat transfers from the title owner to the charter for the period of time of the charter.  The documents and the actions of the parties should reflect this.
    2. A boat under bareboat charter cannot have paying passengers (ie the Captain can’t charter the boat and then have the passengers pay him) as this is a violation of the coastwise protections.
    3. The title owner of the boat is responsible for providing a seaworthy vessel, and may be liable if issues arise.
    4. Although the charterer is responsible for operations, the title owner may be left holding the bag if the charterer engages in illegal activity (like smuggling) and gets caught.
    5. It is strongly recommended that any boat that is made available for charter comply with the inspection requirements for a similar passenger vessel with USCG certification — anything less may be considered unseaworthy or negligent preparation.
    6. While the boat must be fully in the control of the charterer, the owner can place some restrictions such as requiring certain certifications for the Captain and crew; placing navigational limits on region or running at night.
  6. Placing the Boat in a Charter Fleet.  Many boats in the US (and other destinations) place boat in a charter fleet so it is managed by a charter company.  The benefits of taking this path are that typically the charter company handles the contracting, scheduling, maintenance, etc.  On the downside, there may be significant limitations on the owner’s use and customization of the boat.  For an owner looking for a newer stock boat, and who is willing to accept some limitations in exchange for cost savings, this can be a great option.  Brokers may be advised to consider what boats the charter companies are looking for in order to best advise their buyers.
  7. Corporate Ownership.  A boat that is going to be placed in charter for a significant percentage of its use should consider ownership through a corporate entity like a limited liability corporation.  Such an entity provides some protection against liability (although insurance should be the first consideration), some anonymity for the true owner, and also provides an organizing vehicle for income tax considerations.

A buyer (or a buyer’s broker) that is considering purchase of a boat to be used in charter should do some homework before buying.  Considerations such as the location of future charters, the origins of the boat, the size and capabilities of the boat and its marketability should all be evaluated before purchase.  An existing boat can be converted into a charter opportunity, but it is much easier if attention is paid to purchasing the right boat for the job.

J. Dirk Schwenk is a Maryland real estate and maritime law lawyer.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice ever since.  He has worked on hundreds of matters involving boat purchase, tax, ownership and sale.

 

Contract Law 101 – Maryland Contracts

Back to Basics – Contracts 101.

(Originally published in the Mid Atlantic Mariners Club Newsletter, 2010).

The first rule of contract: capture the intent of the parties.

In every profession, not just the law, we are faced with making, interpreting and abiding by contacts.  Sometimes these contracts are long and impossible to understand (mortgage refinancings, consumer warranties) sometimes they are so fleeting that one hardly notices (“I’ll pick up lunch”).  In law school, we learn that a contract consists of an enforceable promise.  It’s a promise that one can take to court, and the court can make the other comply or award damages for their failure to do so.  All contracts, though, include a major element of hope and trust and if that trust is broken, bad things happen, and the threat of a court’s intervention may not be enough to save the deal.

When a client comes to me about a contract, it is usually one of three things — reviewing a contract that someone else has prepared; papering an understanding where the framework is already in place; or protecting a client from the risks of a particular kind of deal.  The most frequent contracts for me are boat and ship purchase contracts — these often involve a significant outlay of funds before the product is near completion, and therefore require both trust and legal protections.  With all projects, I generally start with the same three questions.  What are you trying to accomplish?  What has already been agreed to?  How much do you know and trust the other party?

 When it comes to reviewing a contract that someone else has prepared for my clients’ signature, I focus on two things.  First, does it capture the items that my client thinks are being agreed to?  Many times I am given a form contract such as a boat brokerage agreement, and the parts of the deal that are most important to my client (the time of delivery and the promises that the boat will be fully commissioned to spec) are nowhere to be found.  Usually this can be handled with an addendum that sets out the specifics (Boat to be delivered to Maryland on date certain at the seller’s risk and expense), but sometimes the brokerage contracts simply will not do the trick.  Lawyers often joke about the boat brokerage and real estate contracts — they do a great job protecting the brokers or agents, but beyond that, its usually a lot of words that don’t say too much.

 My favorite project is when a client comes to me and says … “I agreed to _____ with ______ – can you write a contract for that?”  I like this kind of project (not just for the irony of the fact that there may already be an oral contract) because it usually allows me to work from the ground up, as opposed to slogging through pages of 8 point font prepared by someone else.  I get to start with “what exactly has been agreed to?”  Typically a clients’ answer to that question feels like the tip of the iceberg … “we agreed that I would sell his product for a 10% commission.”  This leaves open all sorts of lawyer-fun — how much do you have to sell; can you sell competitor’s products, too; can they hire other brokers or salespeople; where will suit take place; what happens upon termination?  And what happens if there is no agreement on all of the side issues?  I love that question.

 The Second Rule of Contract: be reasonable.

Assuming that there is enough of a contract to be a contract (generally that it is known what is being agreed to, including when it is to be done and how much it is going to cost) everything else may be an open term.  In some areas of the law, like partnerships, employment and state insurance contracts, there is a whole body of statutes that fills in the blanks.  In those areas people may “agree” to many things that they never even thought of.  If there are not default terms, then the agreement reverts to the rules of reasonableness.  These rules are essentially human instincts — most people will agree most of the time about certain things even if they have never considered them before.  If the contract is to buy a certain thing (say a house), then it is only for that particular thing, not something else.  If it is for something that is largely interchangeable (like a Blackberry), then it may not mean a specific thing, just a thing like it.  You can usually do well in contracts by staying polite and acting reasonably, but sometimes that is mighty hard.

 The rest of contracts is just simple interpretation — if the words on the paper say to do X, and X isn’t illegal or completely unreasonable, then that is what you do.  Words are notoriously tricky things, though, so one must write with care and make sure that everyone abides by at least the most important terms over time.  There are a few contracts (marine insurance, for example) where certain words and phrases have such a history behind them that their meaning is known with some certainty.  But for most contracts, even ones that have been used many times, no court has ever interpreted the key language, and everyone is operating on   hope that the words mean what they think they mean.  This is the real difficulty with “form” contracts — people trust it because its The Form, but who knows whether it captures the agreement that was really intended.

 What can you take away from all of this?  First and foremost, be sure that the contracts you enter into actually capture what is being agreed to — this can be trickier than you think.  Second, sometimes the simplest contracts are the best ones — agree to the key items, and otherwise act reasonably.  Third, there are times when a very thorough papering is necessary — like when a major asset like a house or a business is on the line.  In those cases, have clear goals and good representation that is looking out for your specific interests.

J. Dirk Schwenk is a Maryland real estate and civil litigation lawyer.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice ever since.

Maryland Boat Lien Sales and Marina Collections

Maryland marinas and marine businesses have a number of options to collect on unpaid bills.  Baylaw, LLC offers competitive rates to conduct lien sales and additionally has the legal expertise to assure that you select the right method to ensure the greatest return with the least likelihood of ending up worse a write off.

Maryland Lien Sales: 

Three reasons to use Baylaw, LLC to conduct lien sales: 

Baylaw LLC Lien Sales

Baylaw Marina Collections

1. We know when the best option is to hold an auction, use the abandoned boat process, arrest a vessel under federal maritime law or simply sue for the amount due.  We also know when to tell you that your best option is to walk away and not pursue the debt. 

2. The Marina or Marine Business can always negotiate with its customers.  We never stand in the way of a negotiation, and we never tell owners that they have to pay our fees to get their boat.  Your customer is your customer.  

3. We will not put you at risk for claims of unfair debt collection or consumer protection act violations, and if litigation ever does arise, we will know what to do.  

If, despite your good efforts, a boat owner will not pay, there are four basic options: 1) conduct a lien sale; 2) seek title as an abandoned boat; 3) arrest the boat under federal maritime law; or 4) file suit against the owner in state or federal court.   Each of these options has its pros and cons, and Baylaw, LLC can help you decide which is appropriate for your situation.

1) Maryland lien sale: The most important facts for a lien sale are that you have possession of the boat and the owner’s bill is unpaid at least 30 days.  If those facts are present, and the boat is not a federally documented boat, then a lien sale is a good option.  Notice of the sale must be sent to the owner and secured lienholders and the sale must be conducted in a public place.  Baylaw, LLC does that work at a competitive flat rate.

2) Abandoned boats: This is a good option if the owner is unknown or will not respond.  If the owner will respond and challenge, it is better to conduct a lien sale.

3) Maritime arrest: this is a good option for a higher value claim or where the marina or maritime business does not have possession of the boat.  If a bill is unpaid, an arrest can be done in any jurisdiction where the boat can be found.

4. Sue for damages: This is another option if the boat is no longer in the hands of the marine business and is especially effective if the owner of the vessel is known and has assets.

If you need assistance with collecting a debt concerning a boat, please contact Dirk Schwenk at 410 775 6805 or dschwenk@baylawllc.com.

 

Lien Sales – The Times Just Changed.

In October, 2014, the Maryland Court of Special Appeals issued a decision concerning Maryland’s lien and recovery business.  Lien and recovery companies are hired by mechanics and marinas to collect overdue charges for repairs and storage on vehicles and boats. At least as long as I have been practicing, lien companies have added a “processing fee” to the amount owed, and required that the boat or vehicle owner pay the processing fee in addition to the overdue charges in order to get their boat or vehicle back.  If the owner didn’t pay up, then the vehicles were put up for auction.  In Allstate Lien and Recovery Corp. v. Stansbury, however, the vehicle owner fought back.  Mr. Stansbury asserted that including a $1000 processing fee in the amount required to redeem the vehicle was an unfair and deceptive practice, and violated Maryland’s laws against unfair debt collection.  The trial court, and now the Court of Special Appeals, agreed that the inclusion of the processing fee was a violation of the Consumer Protection Act and the Consumer Debt Collection Act.

Violations of the Consumer Protection Act and Consumer Debt Collection Act both have significant consequences.  Consumer Protection Act violations are grounds for shifting attorneys’ fees from the consumer to the business — which means that Allstate Lien and Recovery in this case is likely to be responsible for tens of thousands of dollars (even hundreds of thousands) of fees for Mr. Stansbury’s lawyers.  A violation of Consumer Debt Collection allows for “damages of emotional distress and mental anguish suffered with or without accompanying injury.”  This means that a jury is free to award money for distress and upset, even without any kind of physical symptoms, if the debt collector has acted badly.  Since the lien and recovery company is the agent of the mechanic or marina — those businesses may also be on the hook if the lien and recovery company acts badly.

You are warned.  The unlawful $1000 processing fee may be costing Allstate Lien and Recovery (or hopefully their insurer) hundreds of thousands of dollars beyond what they paid their own attorneys to defend the case.

With those warnings, when does a garageman’s lien attach?  Here is the statute:

 

(a)(1) Any person who, with the consent of the owner, has custody of an aircraft and who, at the request of the owner, provides a service to or materials for the aircraft, has a lien on the aircraft for any charge incurred for any:

(i) Inspection, maintenance, repair, servicing, or rebuilding;

(ii) Storage, parking, handling, or tiedown; or

(iii) Parts, accessories, materials, or supplies.

(2) The operator of any airport on which an aircraft lands or which is otherwise used by an aircraft has a lien on the aircraft for any landing fee, flight fee, or other charge so incurred.

(3) A lien is created under this subsection when any charges giving rise to the lien are incurred.

(b)(1) Any person who, with the consent of the owner, has custody of a boat and who, at the request of the owner, provides a service to or materials for the boat, has a lien on the boat for any charge incurred for any:

(i) Repair, rebuilding, maintenance, servicing, or wet or dry wharfage;

(ii) Storage; or

(iii) Parts or accessories.

(2) A lien is created under this subsection when any charges giving rise to the lien are incurred.

(c)(1) Any person who, with the consent of the owner, has custody of a motor vehicle and who, at the request of the owner, provides a service to or materials for the motor vehicle, has a lien on the motor vehicle for any charge incurred for any:

(i) Repair or rebuilding;

(ii) Storage; or

(iii) Tires or other parts or accessories.

(2) A lien is created under this subsection when any charges set out under paragraph (1) of this subsection giving rise to the lien are incurred.

(d)(1) A park owner has a lien against a resident’s mobile home, if the park owner obtains a judgment against the resident under Title 8A, Subtitle 17 of the Real Property Article, and the resident fails to yield and render possession of the premises as ordered by the court.

(2) A lien under this subtitle shall be:

(i) Stayed if the resident files an appeal in accordance with Title 8A, Subtitle 17 of the Real Property Article; and

(ii) Extinguished if the resident redeems the premises in accordance with Title 8A, Subtitle 17 of the Real Property Article.

(3) A lien is created under this subsection when the resident fails to yield and render possession of the premises as ordered by the court.

Md. Code Ann., Com. Law § 16-202 (2014).

If you are owed money for repairs, storage or maintenance, here are the steps you should follow:

  1. retain possession unless and until paid in full;
  2. act promptly to hire a competent lawyer or lien sale company to prepare the statutory notices of lien.
  3. Accept payment in full — don’t add in charges that cannot be substantiated.

Baylaw, LLC can prepare statutory notices for a reasonable flat fee and walk you through the process of getting paid or obtaining title.  Please email Dirk Schwenk dschwenk@baylawllc.com, or Jeff Toppe jtoppe@baylawllc.com for details.

 

The End is Near — Settlement and Dispute Resolution

As a lawyer it sometimes feels as though you work and work but nothing is ever fully resolved.  This month has been different for me – I have actually put the final signatures on settlements of four different kinds of cases — all central to the kind of work that I do.  The cases included:

1. a dispute on the location of a boundary as it pertained to riparian rights and a pier location;

2. a dispute on insurance coverage on damages to a boat;

3. a dispute between a purchaser and broker on a boat purchase; and

4. a dispute over erosion control efforts on community property.

Resolution of a case is always a team effort that includes dedicated clients that are willing to do the hard work of obtaining facts and facing the risk that a case does not go their way.  Patience and appropriate strategy a must.  If the opportunity presents itself to obtain results through negotiation and settlement, the entire team must have a clear idea of the achievable goals and be ready to compromise as needed.

Dispute on Boundaries, Riparian Rights and Pier Location

In Calvert County, Maryland, our client owned a property with a house at the end of a street in an incorporated town.  When the town was designed, his lots did not reach the water and the town owned a strip of land which included the entire waterfront.  Over time, however, erosion ate through the land between his property in the water, so that some lots in the subdivision were entirely submerged, and my client had a small cove that provided access to the bay.  The town took ownership of the submerged lots and a small remaining parcel that was still above water, leading my clients to worry that the town intended to put a walkway around his property which would isolate his property from the bay and decrease his privacy.

We filed a declaratory judgment action stating that he had obtained riparian rights when the water reached his property and asserting adverse possession over the land next to his lot.  After discussions with the Town stemming from the suit, it came to light that the town was willing to forego putting in a walkway if it could get an easement along the water to install a flood control berm.  Although the negotiations were difficult, we eventually reached an agreement that allowed for my client to have a location that allowed him to install a pier for access to the Chesapeake Bay; maintained my client’s privacy; and met the town’s needs for installation of flood control.

Dispute on Insurance Coverage on Boat Insurance

In Anne Arundel County, Maryland, we had a client whose boat had water enter into the core of his boat hull and eventually cause rot and damage.  When the boat was on jackstands at the marina, the hull partially crushed and required significant fiberglass and core repairs.  The client filed a claim under his hull insurance policy but surveys were inconclusive as to how the water entered the hull.  We filed suit asserting coverage under the all-risks policy of marine insurance, arguing that if the source of the water was not known, then none of the exclusions to the policy supported the denial of coverage.  We were unable to resolve the dispute through discussions with the adjuster, so we filed suit seeking a declaration of coverage.  Resolution was difficult and lengthy, but the client obtained money for repairs that he would not have had if he accepted the denial of coverage.

Dispute on failed erosion control project

Controlling erosion is a major issue for waterfront owners and waterfront communities, and the quality of contractors and erosion control projects is highly variable.  With new requirements preventing bulkheads and restricting hard shorelines, poor work can increase erosion or worse, leave large loose stones that can injure or even kill unsuspecting community members.  We recently obtained an insurance settlement to allow for reconstruction of a failed erosion control project on community land — the project was so bad that it required installation of “keep off” signs on the community’s main beach area as well as environmental citations against the contractor and a community board member.  Resolution required changing the way that the community’s erosion control funds were managed and contracts awarded, as well identifying appropriate experts to testify on the deficits with the project.  The Court’s intervention was required to determine significant related issues about the nature of the community’s land and covenants as well.  Perseverance was required — luckily it was a community that had leaders and community members that were willing to carry through with a difficult job to the end.

Dispute with Buyer and Broker in Boat Purchase Contract

One of the most interesting aspects of boat purchase/boat broker and boat tax cases is that they often involve many different states.  This case was no different.  The contract called for arbitration in New Jersey, where my client was located.  The boat was located and seat rialed in Tennessee.  The listing broker broker was in Alabama and the buyer was located (and the boat was delivered to) Illinois.  The buyer alleged that there were undisclosed problems with the boat and filed suit in Illinois (where he signed the contract).  Right away, the case involved the tension between arbitration and litigation; maritime and State common law; and the substantive law of multiple states — and all of that before getting to the question of whether the purchase contract’s terms protected my broker-client.  My client’s first questions to me concerned whether I was comfortable working across so many jurisdictional lines and areas of law.  Luckily those issues come up in most significant boat purchase disputes, and I had an idea of how to mitigate the issues of the Plaintiff having filed in Illinois.

This was a rare case in which there was an intense week of work preparing motions to dismiss or stay the action in Illinois.  We argued that the contract called for Arbitration in New Jersey, and that therefore the suit in Illinois could not go forward there.  Since there was some question about whether the arbitration clause would be enforced, we also argued that since boat was delivered to the purchaser in Tennessee, that was the appropriate State if the case was not going to be in New Jersey.  Ultimately we were able to reach a rapid resolution prior to the Court ruling on the motions.

Latent Defects v. Manufacturer’s Defects in Marine Insurance

There are lots of potentially hidden issues in a boat.  I have seen engines destroyed by the use of aluminium and iron together.  I have seen stringers with saturated, rotten plywood cores; hulls full of soaked balsa coring and massive delamination caused by improper foam cores or improper installation of foam cores.   These sorts of issues lead to severe losses and sleepless nights.  For new boats under warranty, these losses will first be the responsibility of the builder.  For the rest, the main question will be whether there is any coverage from the marine insurance.

When a boat owner reports a loss that is not obviously due to a collision, the adjuster and surveyor will certainly be looking for evidence of an uncovered manufacturer’s defect.  In the case of core problems, the insurer is very likely to deny coverage on that basis unless there is clear evidence of a collision that punctured the outer hull.

Most marine insurance covers all losses unless there is a specific exclusion that applies (this is known as an “all risks” policy), so losses are considered covered absent an exclusion.  Most policies exclude all losses that are caused by manufacturer’s defects by excluding coverage for damages caused by “manufacturer’s defect(s) or manufacturer’s defect(s) in design. “  At the same time, most policies exclude latent defects, but cover damage that result from a latent defect with language that excludes “the cost of replacing or repairing any item having a latent defect that causes damage to your insured property, however, resulting damage would be covered.”  A latent defect is usually defined to mean a hidden defect that existed from the time of manufacture.

In many cases, a hidden defect can be viewed as both a manufacturer’s defect, in the sense that it was due to a mistake of the manufacturer, and a latent defect, in that it was hidden and existed from the time of manufacture.  Insurance adjusters may deny coverage if it is a close call or if the cause is actually unknown, but seems like a manufacturer’s defect.  The courts that have reviewed such cases have reached very different decisions.

For example, in French Cuff v. Markel, a case out of Florida, the court considered 64 foot catamaran in which the bulkheads failed because the coring was “too thin or friable.”  The court concluded that this was both a manufacturer’s defect and a latent defect.  Under Florida law, an insurance policy is read to favor the insured, and therefore coverage existed for the loss.  However, the case Carrier v. RLI (applying New York law) considered the loss of a large catamaran due to a bad safety hatch.  In that instance, the Court again considered the problem to be both a manufacturer’s defect and a latent defect.  Under New York law, however, exclusions are applied in the order that they are listed in the policy.  The manufacturer’s defect exclusion was listed first, and therefore there was no coverage.

Since the cases, facts and policy language are all inconsistent, here are some things to keep in mind if the issue arises:

1. Choice of Law: Generally the state’s law that applies to an insurance contract is the state where the policy was issued or the state where the policy was delivered.  These may be different, and state chosen may lead to a completely different result.  Analyze this issue early and choose carefully.

2. Policy Details: The specific language of the policy will be very important.  The surveyor for the insurance company will know how to look for facts that will cause an exclusion of coverage.  A boat owner seeking coverage should be aware of the specific language of the policy and be sure to advocate for a determination that the cause is covered.

3. No Known Cause:  Sometimes when there is no readily ascertainable cause, it will be termed a manufacturer’s defect in order to exclude coverage.  In that instance, the all risks nature of marine insurance should force coverage, but it may take additional advocacy to make sure that it happens.

Good luck and let me know if I can be of assistance.

Dirk Schwenk

Surveys and Boat Purchase

For most previously owned boats sold through a broker, it is routine to recommend that the boat be surveyed with the professional surveyor prior to committing to the purchase.  In the vast majority of cases, those surveys turn up issues that are either cleaned up prior to closing; negotiated as a reduction to the purchase price; or they stop the contract altogether.  The parties complete the deal and go their separate ways.  In some cases though, issues arise after closing that lead to disputes.  In my experience, disputes fall into one of four categories: 1) hull or stringer core problems (usually rot); 2) discrepancies between the listed inventory and the delivered inventory; or 3) non-hull survey items that were missed; 4) mechanical problems that were not covered by the survey contract.  Any of these can cause significant post-closing issues.

If there are post-purchase problems, the buyer will be holding the bag.

In the event that there are significant post-survey, post-closing issues, a purchaser can pretty much assume that everyone else involved will step back and deny liability (previously owned boats are different than new boats insofar as they are not warrantied).  Brokers and Sellers will (probably correctly) say that they did not know about the problems, or if they did, that it was the Buyer’s responsibility to find them with a survey.  The surveyor, in all likelihood, will have a contract signed by the Buyer that specifically releases him from all negligence or failure to detect problems, and states outright that the survey cannot be relied on.  The crucial lesson for the purchaser — pick a very high quality surveyor and you would be well advised to personally test every item on the boat as well.  Be absolutely, positively sure that any item listed in the inventory that matters to your purchase is on the boat at the time of inspection, and on the boat at the time of closing.  Buyers should also be aware that if they execute a “conditional acceptance of vessel” that notes certain problems, absent fraud or intentional concealment, the list of items is all that they will be able to enforce if bad things happen.  Sellers, surveyors and brokers — the best course of action is probably to rely on the contract protections written into the deal, and obtain good counsel in the event of a significant claim.

Hull and Core Problems

Hull, core and stringer problems — especially wet, rotten core issues — are usually the worst cases because a bad hull or bad stringers may be so expensive to fix that they make the boat a total loss.  Stringers are notoriously difficult to fix without taking the whole boat apart.  For this reason, a buyer should be certain that proper soundings are performed, a moisture meter is utilized, and if there are any remaining questions, should either walk away or seek further help, such as thermal imaging.  A buyer will have real difficulty recovering any money from insurance or a seller for wet hull issues unless it can be shown that the seller knew about the problem but concealed that in the sale.

Listed inventory versus delivered inventory.

Most boat listings include an inventory of electronics and other features that will transfer with the vessel.  These are usually assembled by the broker and reviewed by the seller prior to the listing — they also usually come with the reminder that the inventory is believed to be accurate but cannot be relied on.  Some items on the inventory will be of limited value, but significant sails, outboard engines, navigational equipment, etc., can be very expensive.  Buyers should confirm that anything that matters is with the vessel, and confirm that it is in acceptable working condition.

Items that should have been picked up in the survey, but were missed.

Generally, a buyer’s recourse for missed items would be against his own surveyor, but that recourse may be limited by the survey contract.  It is a good idea to attend the survey and test everything in the same way that a surveyor would — if it is broken you want to know that before the purchase, not after.

Mechanical Surveys

Most hull surveys do not include any mechanical testing beyond running the boat and noting any discrepancies in the readouts or the boat’s ability to operate properly.  Items such as leaking oil may be noted, but compression problems, worn parts, or other issues that a fully trained mechanic testing the engine would pick up may not be in the survey.  Surveyors will typically recommend that a buyer get a mechanical survey.  As with other issues, if the buyer completes the contract, and it cannot be shown that the seller knew of the mechanical problems, in all likelihood the buyer will have to pay for any engine repairs without recourse against any other party.

Conclusions

Buyers should be diligent in obtaining a survey from a qualified surveyor and taking the effort to be sure that the survey is thorough; no items are missed; and the inventory is accurate.  Sellers, Brokers and Surveyors should be sure that there is contract language to protect them from any claims of problems with the boat that were discovered (or arose) post-closing.  If a dispute does arise, quality representation and investigation will be absolutely imperative.