Introduction
In 1996 Congress directed the agency regulating commercial fishing to set up a registry system to facilitate lending to fishermen on the security of fishing permits.
Specifically, the National Marine Fisheries Service (“NMFS” or as it is increasingly calling itself, “NOAA Fisheries”) issues “limited access” fishing permits which are licenses to fish inside the 200 mile limit. The Magnuson-Stevens Fishery Conservation and Management Act, 16 U.S.C. §§ 1801-83 (the “Magnuson-Stevens Act”) provided in § 1855(h) that NMFS set up a central registry system to record title to these permits and lien claims against them. However, NMFS has been unable since the statute’s passage in 1996 to implement such a registry system, making financing of permits problematic.
Adding to the problem, recent case law holds that maritime liens attach to fishing permits and intangible fishing histories -- at least sometimes. Doctrinally, this is bad law and ignores § 1855(h)’s legislative history which clearly shows Congress intended that security interests in fishing permits be governed by the Uniform Commercial Code rather than maritime law.
Serious money is at stake here. Because U.S. limited access fisheries are essentially closed to new entrants, permit values have skyrocketed in the last decade. While a New Bedford scallop vessel’s hull might be worth $250,000, scallop permits are now worth $1,000,000. In some fisheries in Alaska a transferable permit can be worth more than ten times the value of the vessel. For obvious business reasons, permit holders need to be able to obtain loans using permits as collateral and lenders need to be confident they can perfect their security interests in the permits. Unfortunately, this is most difficult given the current state of the law.
The Fisheries Committee and the Marine Financing Committee of the Maritime Law Association of the United States (“MLA”) jointly sponsored two resolutions which were adopted at the MLA General Meeting in New Orleans on November 13, 2004. The first seeks an amendment of 16 U.S.C. § 1855(h). The second seeks a housekeeping amendment of 46 U.S.C. § 12102(c)(5)(A) to preclude the unintended loss of a large fishing vessel’s fishery endorsement.
Instrumental in formulating these proposals are MLA Attorneys Stephen B. Johnson of Seattle, Vice Chair of the Fisheries Committee; Bruce A. King of Seattle, Chair of the Marine Financing Committee; Edward J. Powers of Norfolk, Chair of the Joint Subcommittee on Maritime Liens & Mortgages; and Pamela A. Palmer of New York City, member of the Young Lawyers Committee.
We have discussed the proposed amendments with and received input from fishing vessel owners, lenders, Congressional staffers, NMFS personnel, and regional fishery management council leaders across the country. We anticipate presenting these proposals to Congress during 2005 when it considers several fishery management bills.
Fishing Privileges – The TraditionaI View
The Magnuson-Stevens Act provides a fishery management system whereby each of seven regional fishery management councils sets annual catch limits for individual species of fish in its region. Allocating the annual catch limits among the industry’s participants is often complicated biologically and politically, with allocations to participants based on a variety of factors: stock abundance, ecosystem concerns, historical participation in the fishery, catch history, and socio-economic clout.
NMFS oversees the seven regional councils. Supported by statutory[1] and regulatory[2] provisions, NMFS takes the position that fishery participation is a harvesting “privilege” rather than a property “right” -- in an effort to avoid Fifth Amendment takings claims. NMFS does not want to run the risk that a closure or other change in the fishery management regime would leave it open to a claim from a fishing permit holder that the regulatory change eliminated or diminished the value of the fishing “rights.” Several recent cases have in fact confirmed NMFS’ position, dismissing unconstitutional takings claims brought by disgruntled fishers whose permits have been effectively revoked. American Pelagic Fishing Co. v. U.S., 2004 AMC 2289 (Fed. Cir. 2004); Conti v. U.S., 291 F.3d 1334, 2003 AMC 2294 (Fed. Cir. 2002).
Traditionally, the consensus view of maritime lawyers was that fishing permits and fishing histories were general intangibles under the Uniform Commercial Code and that the proper method of taking security in them was to have the borrower grant a security interest and file a UCC Article 9 financing statement. This worked quite smoothly for more than a decade or so.
NMFS’ Delay and Judicial Confusion
NMFS’ inability since 1996 to implement § 1855(h)’s central registry system for fishing permit titles and liens is perhaps understandable: NMFS would in essence need to reinvent UCC Article 9, which has taken decades to evolve. Nevertheless, into that regulatory void entered several novel court cases from Washington, Maine, and New Jersey. The result is unsettled law that unduly complicates fishing industry financing and transactions involving permits as well as in rem and limitation of liability litigation involving fishing vessels.
The F/V TENACITY Case
An unpublished decision, Western Pioneer v. F/V TENACITY, No. C97-09585 (W.D. Wash. 1998), held that a preferred ship mortgage on the fishing vessel TENACITY which specifically included fishing rights in the collateral description could attach to and create a preferred mortgage lien on a vessel’s fishing rights. It also held that if a preferred mortgage did not mention fishing rights specifically, the mortgage did not attach to them.
The court ruled that the first preferred mortgage, which did not mention fishing rights, had a first priority position in the vessel, but was not perfected against the fishing rights, and the second preferred mortgage, which did mention fishing rights, had first priority in the fishing rights.
The TENACITY case was not appealed. But at about the same time, in another Seattle case that was appealed to the Ninth Circuit, the issue of whether fishing rights were subject to a maritime lien and could therefore be sold with a vessel at a Marshal’s sale was assumed, but not contested. Bank of America v. F/V PENGWIN, 175 F.3d 1109, 1999 AMC 1905 (9th Cir.), cert. denied 528 U.S. 872 (1999).
Who perfected what, when, and how was up in the air after these cases.
The F/V QUALITY ONE Case
Gowen, Inc. v. F/V QUALITY ONE, 244 F.3d 64, 2001 AMC 1478 (1st Cir.), cert. denied, 534 U.S. 886 (2001), discussed in a case of first impression whether fishing permits and intangible fishing histories could be arrested in rem.
Factually, Gowen asserted a necessaries lien for wharfage and repairs against the F/V QUALITY ONE. The vessel was arrested pursuant to a warrant commanding the seizure of “her equipment, engines and appurtenances.” After a default judgment, the District of Maine’s sale order included “any valid fishing permits and history to the extent permitted by law.”
The First Circuit held that fishing permits and intangible fishing histories are “essential to the vessel’s navigation, operation, or mission” and therefore constitute appurtenances of a fishing vessel to which maritime liens attach.[3] Five reasons were discussed, which on close inspection lack merit.
First, the First Circuit relied by analogy on United States v. Freights of THE MOUNT SHASTA, 274 U.S. 466 (1927), which held “freight charges due on account of a vessel’s carriage of cargo” are “subject to maritime liens against the vessel.” But that case did not hold that freight charges constitute appurtenances. Moreover, freight charges are prospective, identifiable to a voyage. In contrast, because permits can be transferred and because fishing histories are retrospective, they are accumulated based on fish caught in the past, often by different owners on different vessels.
Second, the First Circuit reasoned that the creditworthiness of a fishing vessel is largely due to its permits, which have a market value. However, if a creditor looks at a fishing vessel as a going concern based on its fishing history, that seems to constitute reliance on the personal credit of the fishing enterprise, sufficient to defeat the presumption that goods and services were furnished in reliance on the credit of the vessel under 46 U.S.C. § 31342(a)(3). In fact, the First Circuit seemed to blur the distinction between creditworthiness of the vessel and personal credit of the owner when it stated “Maritime liens underpin the extension of credit to fishermen….” 244 F.3d at 68, 2001 AMC at 1483 (emphasis added).
Third, the First Circuit assumed that permits can “be severed from the vessel upon her sale and retained by her old owner” and concluded that there are “no obvious arguments against treating the permits as subject to lien.” Id. at 69, 2001 AMC at 1484. However, as will be discussed below, severing permits from fishing vessels presents a financing debacle when maritime liens are held to attach to those permits.
Fourth, the First Circuit considered its F/V QUALITY ONE holding would not “upset settled expectations.” Id. However, vessel arrest strategy and logistics are significantly altered by its holding that fishing permits and histories are appurtenances. Now it would seem a maritime lienor could tie up a fishing vessel by merely attaching its fishing history on file ashore at the appropriate NMFS regional office without arresting the vessel. See generally The MLA Report, No. 756 at 12503-04 (May 4, 2001) (G. William Birkhead comments). Also, a Supplemental Rule F(1)(a) limitation of liability fund would now seem to include the value of the fishing permits but a hull underwriter would be unwilling to post security for a $1 million scallop permit when the $250,000 agreed value hull sank in the casualty, even though hull policies typically cover appurtenances. Instead, the permit holder would have to post the value of the permit – most assuredly upsetting settled expectations.
Fifth, the First Circuit ignored the argument that 16 U.S.C. § 1855(h) created a registry system that would “preempt any use of maritime liens against fishing permits.” 244 F.3d at 69, 2001 AMC at 1482. Instead, the First Circuit’s discussion obfuscated the obvious: § 1855(h)’s direction to create a title and lien registry system managed by NMFS takes permits outside of the preferred ship mortgage/maritime lien regime managed by the USCG National Vessel Documentation Center in Falling Waters, WV. The priority scheme in § 1855(h) also demonstrates that Congress did not contemplate maritime liens would attach to permits. Under the statute, “[t]he priority of security interests shall be determined in order of filing, the first filed having the highest priority.” § 1855(h)(4). That of course is opposite non-preferred ship mortgage maritime lien law where the priority rule is “last in time is first in right” and there is no filing requirement since maritime liens are “’secret.’” Gilmore & Black, The Law of Admiralty § 9-1 at 588 (2d ed. 1975). That Congress did not intend permits to be subject to maritime liens is finally demonstrated by the Senate Committee on Commerce, Science, and Transportation which reported it “intends” NMFS “rely on…the Uniform Commercial Code…in creating the registry system.” LEXSEE 104 S. Rpt. 276 at 16 (May 23, 1996).
The F/V MISS LAURA Case
In PNC Bank Delaware v. F/V MISS LAURA, 381 F.3d 183, 2004 AMC 2314 (3d Cir. 2004), the court faced this situation: when fishing vessel A sank and was a total loss, the owner transferred that vessel’s fishing history and permits to new vessel B. The purchase of vessel B was financed by means of a preferred mortgage. When the mortgagee foreclosed on vessel B, a shipyard creditor with a maritime lien on vessel A intervened. It claimed that by virtue of the First Circuit’s F/V QUALITY ONE case, its maritime lien on vessel A attached to the vessel’s fishing history and permits, and therefore, when the history and permits were transferred to vessel B, the maritime lien went with them, on the theory that a maritime lien on a vessel attaches to “the last plank” of the vessel.
In F/V MISS LAURA, the Third Circuit declined to follow the First Circuit’s holding and instead ruled that if F/V QUALITY ONE is good law, the lien did not survive the transfer of the fishing history and permits to vessel B because, when a vessel is a total loss, the maritime liens on any surviving parts of it that are incorporated into another vessel do not survive that transfer. F/V MISS LAURA essentially held that when “the last plank” is incorporated into another vessel, the liens on it are extinguished.
The F/V MISS LAURA holding makes it very difficult for a lender to finance a vessel and its permits when the permit is the primary asset. The reason is that the lender’s security will be effectively destroyed when the vessel is a total loss.
A. The MLA Proposed Amendment to 16 U.S.C. § 1855(h)
It follows that financing of NMFS permits needs to be shifted outside of the preferred ship mortgage/maritime lien regime, and into UCC Article 9, so that security interests in permits will be unaffected by the travails of the fishing vessels that use them from time to time.
The MLA proposal repeals the current version of 16 U.S.C. § 1855(h) in its entirety, replacing it with the version below. It makes clear that preferred ship mortgages and maritime liens do not attach to permits and that security interests in permits are governed by state law (i.e. UCC Article 9), consistent with Congress’ original intent. The proposal is also consistent with 46 U.S.C. § 31329 which does not require that a mortgagee be eligible to own a U.S. documented vessel.
For litigators, enactment of the MLA proposal would clarify that (1) when a fishing vessel is arrested, its fishing permits are not arrested in rem and (2) in a limitation of liability proceeding the value of the permits need not be posted by the fishing vessel owner or hull insurer.
In sum, the purpose of the MLA proposal is to eliminate uncertainty and facilitate the financing of enterprises engaged in limited access fisheries, on the principle that their permits are non-vessel assets best governed by state law, as originally intended by Congress.
Text - the MLA proposed amendment to 16 U.S.C. § 1855(h)
Section 305(h) of the Magnuson-Stevens Fishery Conservation and Management Act, 16 U.S.C. 1855(h), is amended by striking the entire text thereof and substituting the following:
“(h) Security interests in limited access permits
(1)(A) A security interest in a license, permit, quota or privilege allocated or assigned under a limited access system established pursuant to this chapter may be granted, perfected and enforced in the manner provided under applicable state law for the granting, perfecting and enforcing of a security interest in general intangibles, subject to the regulations adopted pursuant to this Chapter, applicable to such limited access system, as such regulations may be amended from time to time, consistent with this subsection.
(B) The interest of a secured party in a license, permit, quota or privilege allocated or assigned under a limited access system established pursuant to this chapter may be terminated by forfeiture, revocation or permit sanction imposed with respect thereto for a violation of a law of the United States only if the secured party authorized, consented, or conspired to do the act, failure, or omission that is the basis of the violation.
(2) No maritime lien shall attach to a license, permit, quota or privilege allocated or assigned under a limited access system established pursuant to this chapter, and the filing of a mortgage under chapter 313, Title 46 of the United States Code, shall be ineffective to perfect or establish the validity of the mortgagee’s interest in such license, permit, quota or privilege against any person.
(3) No fish may be harvested under the authority of a license, permit, quota or privilege allocated or assigned under a limited access system established pursuant to this chapter unless the holder thereof is eligible to own a vessel with a fishery endorsement under Title 46, United States Code, or other applicable law, and is otherwise in compliance with the regulations establishing such limited access system. Subject to the preceding sentence, a person that is not eligible to own a vessel with a fishery endorsement may (a) take a security interest in such license, permit, quota or privilege and acquire and hold such license, permit, quota or privilege in its own name for the purpose of realizing on its security interest through subsequent transfer to a person eligible to own a vessel with a fishery endorsement; and (b) acquire such license, permit, quota or privilege pursuant to court order, by operation of law, by inheritance or by involuntary transfer in any manner in which an interest in intangible personal property may be involuntarily transferred under applicable state or federal law.
(4) For purposes of this subsection 1855(h):
(A) The term “limited access system” has the same meaning as in sections 1851(a)(4) and 1853(b)(6) of this title and includes any system of individual fishing quotas, quota shares, license limitation or limited access permits or other system by which fishing privileges are allocated or assigned among a limited number of persons; provided, however, that “a license, permit, quota or privilege allocated or assigned under a limited access system established pursuant to this chapter” also includes any processing license, processing permit, individual processing quota, processing quota share or other device by which fish processing privileges are allocated or assigned among a limited number of fish processors as part of a limited access system.
(B) The term “fish processor” means any person, vessel or facility that receives unprocessed fish, except the vessel that harvested that fish.
(5) Within 6 months after the enactment of this Act, the Secretary shall adopt such regulations as may be necessary to implement the requirements of this subsection.
B. The MLA Proposed Amendment to 46 U.S.C. § 12102(c)(5)(A)
The MLA also proposes a housekeeping amendment to 46 U.S.C. § 12102(c)(5)(A):
(1) in sub paragraph (5)(A)(i) by adding the word “and” after the semicolon;
(2) in subparagraph (5)(A)(ii) by striking the word “and” after the semicolon and inserting in lieu thereof the word “or”;
(3) by striking subparagraph (5)(A)(iii) in its entirety.
Explanation
The MLA’s proposed housekeeping amendment would delete existing 46 U.S.C. § 12102(c)(5)(A)(iii), which currently provides that a vessel greater than 165 feet in registered length, of more than 750 gross registered tons (as measured under 46 U.S.C. ch. 145) or 1,900 gross registered tons (as measured under 46 U.S.C. ch. 143), or that has an engine or engines capable of producing a total of more than 3,000 shaft horsepower is not eligible for a fishery endorsement under 46 U.S.C. § 12108 if its fishery endorsement is invalidated and application is not made for a new fishery endorsement within fifteen (15) business days from such invalidation.
The existing provision was adopted to ensure that large vessels that had been removed from the U.S. fisheries prior to enactment of the American Fisheries Act in 1998 would not be able to return to the fisheries. However, limited access systems in place for most large-boat fisheries have substantially eliminated this concern.
Permanently barring a vessel from the U.S. fisheries as a result of the vessel owner’s failure to re-apply for a fishery endorsement within 15 days of invalidation could produce draconian results entirely unrelated to the purpose of the existing provision. For example, a vessel’s Certificate of Documentation, together with its endorsements, “becomes invalid immediately” as a result of any of the following events, among others: change in the vessel’s ownership in whole or in part; change in the general partners of a vessel-owning partnership; change in a corporate owner’s state of incorporation; change in the legal name of the vessel owner; change in the vessel’s hailing port, change in the vessel’s name; placement of the vessel under the command of a person who is not a citizen of the United States; change in the legal name of any vessel owner; or change in the gross or net tonnage of the vessel. See 46 C.F.R. § 67.167(b) and (c). In some cases, a vessel’s fishery endorsement can become invalid without the vessel owner even being aware of the event that causes invalidation, such as an inadvertent change in the vessel’s tonnage during shipyard work.
The existing provision constitutes a trap for unwary vessel owners and threatens the owners of large fishing vessels with a draconian sanction that has no relationship to the provision’s original intent. Similarly, the security of lenders holding mortgages on large fishing vessels could be rendered worthless as a result of a vessel owner’s failure to re-apply for a fishery endorsement within 15 days of its invalidation.
In sum, the MLA proposal seeks to preclude this sort of drastic and entirely unintended forfeiture to the detriment of owners, lenders, and others in the fishing industry.
David J. Farrell, Jr. practices on Cape Cod and Chairs the Fisheries Committee of the Maritime Law Association of the United States. He specializes in marine casualty litigation. For more info visit www.sealaw.org
[2] 50 C.F.R. § 635.4(a)(3).
[3] In unreported decisions, the District of Massachusetts ruled similarly and the First Circuit followed its decision in F/V QUALITY ONE and then the U.S. Supreme Court denied a petition for a writ of certiorari in Daniels v. Patenaude, 534 U.S. 1039 (2001).
