Branch Banking & Trust Co. v. M/Y Beowulf
MEMORANDUM OPINION & FINAL JUDGMENT in favor of the claimant, SUNFISH MARINE VENTURES, LTD., against the plaintiff, BRANCH BANKING & TRUST CO. OF VIRGINIA. Signed by Judge Daniel T. K. Hurley on 6/7/12. (lr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 11-80692-CIV-HURLEY
BRANCH BANKING & TRUST CO.
M/Y “BEOWULF,” Official No. 1137719,
etc., in rem,
MEMORANDUM OPINION & FINAL JUDGMENT
This is an in rem admiralty action to foreclose a first preferred ship mortgage claimed by
plaintiff Branch Banking & Trust Co. of Virginia (“the Bank”) on the defendant vessel, the M/Y
Beowulf (“the Beowulf” or “the vessel”). The mortgage was given as security for a $1 million
personal loan funded by the Bank in favor of James C. Sculley (now deceased), past President of
Sculley Boatbuilders, Inc., the North Carolina corporation which built the vessel.
Shortly after Mr. Sculley executed the mortgage, Sculley Boatbuilders assigned a second
identification number to the vessel, secured a second, different official number from the United
States Coast Guard, documented the vessel under a different name and sold it to a third-party
purchaser for value, all without notice to the Bank. This fraud gives rise to the present controversy,
in which Sunfish Marine Ventures, Ltd. (“Sunfish”) claims a competing ownership interest in the
Beowulf as a subsequent innocent purchaser for value.
Sunfish contends that the Bank’s mortgage is not a valid preferred ship mortgage under the
Ship Mortgage Act, 46 U.S.C. § 31301 et seq., and that even if it is, grossly negligent and reckless
lending practices of the Bank permeating the Sculley loan should cause this court to rank the Bank’s
mortgage below the interest claimed by Sunfish under the doctrine of equitable subordination.
A bench trial was conducted on these claims on April 16, 2012 through April 18, 2012. After
consideration of the evidence, arguments of counsel, trial memoranda and the applicable law, the
court now makes the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P.
I. Findings of Fact
1. Sculley Boatbuilders, Inc. (“Sculley Boatbuilders”) is a North Carolina corporation with
headquarters in Wanchese, North Carolina. The company specializes in the production of custom
2. On December 1, 2002, at a joint meeting of its stockholders and directors, James C.
Sculley was elected President of Sculley Boatbuilders and Bonnie L. Hickie was elected Secretary
and Treasurer. At that time, the corporation also authorized Ms. Hickie to pursue a $1,000,000.00
loan through Coastal Financial Corporation, a mortgage brokerage company, using “Hull # 3" as
3. “Hull # 3” referred to a 60-foot sport-fishing vessel, the “Sculley 60',” which was then
4. Coastal Financial Corporation brought Mr. Sculley, as a new customer, to the Bank at its
Virginia Beach-Pembroke branch location. In late December, 2002, Mr. Sculley applied for a
$1,000,000.00 personal loan from the Bank to be secured by a vessel as collateral.
Minutes of the Annual Meeting of the Board of Directors and Stockholders of Sculley
Boatbuilders, Inc. held December 1, 2002 [Claimant Exhibit No. 1].
5. At the outset, Mr. Sculley completed a “Retail Loan Application” on a form supplied by
the Bank. This form described the proposed collateral as a “2003 Sculley Boatbuilders 60 Ft.”2
Although this form is dated December 22, 2002, Mr. Sculley did not sign the application until
January 17, 2003, the day on which the loan closed.
6. In further support of his application, Mr. Sculley submitted a “personal financial
statement to the Bank.”3 Like the loan application, this form had a typed date of December 20, 2002,
but it also included a handwritten date of January 17, 2003 next to Mr. Sculley’s signature.
7. After collecting this preliminary financial data from Mr. Sculley, the Bank’s loan
processor, Kathy Harrell, generated a “BB&T Retail Loan Presentation” (“Loan Presentation).4 This
report was signed by Ms. Harrell, who approved the loan on January 16, 2003, and by R. B.
Edwards, the bank’s Direct Retail Lending Risk Manager, who co-approved the loan at time of
The application listed Mr. Sculley’s monthly income as $26,435.75, and referenced
the first name of an illegible co-applicant (in type) earning an income of $24,632.09. It did
not supply any other identifying or historical data regarding the co-applicant, and was signed
only by Mr. Sculley. The application further listed $284,666.00 in cash assets and
$7,768,969.00 of stock held in closely held corporations. A single liability, $1,000,000 in
real estate loans, was reported. Mr. Sculley’s credit report, however, showed outstanding
real estate loans valued at over $2,000,000.00 (twice the amount shown on the application),
as well as $175,000 in outstanding debt (not shown on the application), a $17,000 credit card
dispute (not shown on the application) and a $160,000.00 credit line from Ibernia Bank (not
shown on the application).
On this form, Mr. Sculley reported $317,229.00 in salary, $29,339.04 in interest and
$266,306.04 in “other income,” bringing his aggregate income to $612,674.08 for calendar
This form reported Mr. Sculley’s monthly debt/income ratio, as of December 20,
2002, at $12,454.00/$36,437.50, significantly less income than the roughly $600,000.00 per
annum claimed on his financial statement .
8. By early January, 2003, Sculley Boatbuilders had completed construction of the Sculley
60' and assigned it Hull Identification Number (“HIN”) GIJ60001A303.
9. Around the same time, Mr. Sculley commissioned Harbour Marine Services, Inc.
(“Harbour Marine”) to perform a survey on the Sculley 60'. On January 8, 2003, Edward Harbour
of Harbour Marine provided the Bank with a survey of the “2003 Sculley Custom 60'
Sportfisherman” (the “Sculley 60'), HIN GIJ60001A303, reporting the value of the vessel at
Both parties agree that the vessel surveyed by Mr. Harbour is the vessel now known as the
10. Although Coast Guard regulations require vessel manufacturers to permanently affix a
Hull Identification Number (“HIN”) on all vessels which they build,6 Sculley Boatbuilders did not
Ms. Harrell is now deceased and there is no recorded testimony from this individual
before the court.
From the evidence presented at trial, the court infers that she began processing Mr.
Sculley’s loan application on December 20, 2002, the typed date on the application which
also corresponds to the date that the credit bureau report was generated.
Although the presentation shows a date of 1/7/03 next to the signature of Mr.
Edwards, there is no evidence that Mr. Edwards, as the Bank’s managing agent, signed off
on the loan before Ms. Harrell. It is more likely, and the court infers, that the 1/7/03 date
found next to Mr. Edwards signature is a scrivener error for “1/17/03.”
Federal regulations governing United States Coast Guard oversight of navigation and
navigable waters require boat manufacturers and importers to identify each boat produced or
imported with primary and secondary hull identification numbers, consisting of twelve identifying
characters, which are “permanently affixed” in accordance with 33 C.F.R. §181.29. See 33 C.F.R.
§181.23; 33 C.F.R. §181.25.
affix a HIN to the Sculley 60.' The Harbour survey placed the Bank on notice of this lapse, but the
Bank nonetheless funded the Sculley loan without requiring Mr. Sculley to comply with the federal
11. In addition to the failure to affix the HIN, the Harbour survey noted different engine
numbers from those referenced in the Bank’s Loan Presentation. It also referenced the owner’s intent
to place the vessel in the upcoming Miami Boat Show. Further, the survey noted the builder’s intent
to install a custom fishing tower on the boat at an estimated cost of $75,000.00, and to add an
electronic package at the option of the “buyer.”
12. Relying on the testimony of Dean McBrayer, the Bank’s designated Rule 30(b)(6)
corporate representative, the court finds that the above reference to the Miami Boat Show and
contemplated addition of electronics at the buyer’s option establish that Mr. Sculley was effectively
seeking a “floor plan loan” (a loan to finance the purchase or construction of inventory intended for
sale to other people) in January of 2003. In other words, Mr. Sculley appeared to be pursuing a
corporate objective of obtaining financing in anticipation of an eventual sale of the vessel.
13. Before the Bank would fund the loan, it required a corporate resolution from Sculley
Boatbuilders authorizing Mr. Sculley to pledge corporate property, and specifically the Sculley 60',
as collateral for Mr. Sculley’s personal indebtedness and obligations. An undated document found
33 C.F.R. §181.29(c) provides:
Each hull identification number must be carved, burned, stamped, embossed, molded,
bonded or otherwise permanently affixed to the boat so that alteration, removal or
replacement would be obvious. If the number is on a separate plate, the plate must
be fastened in such a manner that its removal would normally cause some scarring
or damage to the surrounding hull area. A hull identification number must not be
attached to parts of the boat that are removable.
in the Bank’s loan file, captioned “Certificate of Corporate Resolution and Authorization to Borrow”
[Bank Form No. 1477VA], purports to memorialize this event. This form was signed by Mr.
Sculley, claiming to act in capacity as both President and Secretary of Sculley Boatbuilders.7 By
affixing his signature to this document, Mr. Sculley clearly acknowledged the Sculley 60' as
14. The Bank closed the Sculley loan on January 17, 2003. The loan documentation
executed on that date consisted of: (1) a Retail Note and Security Agreement (“the promissory
note”); (2) a First Preferred Ship Mortgage (“the mortgage”); (3) a Retail Security Agreement (“the
security agreement”); (4) a Hypothecation Agreement (“the hypothecation agreement”), and (5) an
“Agreement to Provide Accidental Physical Damage Insurance” (“the insurance agreement”).
As detailed below, these documents contained glaring inconsistencies regarding ownership
of the collateral used to secure the Sculley loan. The note (in one place) and mortgage referred to
James C. Sculley, individually, as owner of the collateral, while the note (in another place), the
security agreement, and the hypothecation agreement all listed Scully Boatbuilders, Inc. as the owner
of the vessel.
Mr. Sculley was not the Secretary of Scully Boatbuilders, Inc. when he signed the
“Certificate of Corporate Resolution and Authorization to Borrow.” The Bank knew or
should have known that Mr. Sculley had falsely held himself out as such when he signed this
form, since it also had before it minutes from the December 1, 2002 Annual Meeting of the
Board of Directors and Stockholders of Sculley Boatbuilders, Inc. showing the election of
James Sculley and Bonnie Hickle as President and Secretary of the corporation, respectively,
on that date [Claimant Ex. No. 1]. Notably, the signature block on this form designates an
area for affixation of the corporation’s seal or imprint, but the document does not bear a
corporate seal or imprint.
(a). The promissory note
In one place, the note executed by Mr. Sculley at closing indicated that he was the owner of
the Sculley 60', the collateral used to secure the note. Specifically, on page 1, the note recited that
Mr. Sculley was giving the Bank a security interest in certain personal property, as described in a
separate agreement between the parties, to secure the note.
On page 2, however, under Mr. Sculley’s individual signature, there is a reference to Sculley
Boatbuilders as owner of the collateral. This language was added:
The following owners of the vessel are signing this Note only for the purpose of
granting a security interest there ans (sic) are not borrowers.
Grantor of Security Interest: Sculley Boatbuilders Inc.
Mr. Sculley separately signed the addendum, this time designating himself as “Member” on behalf
of Sculley Boatbuilders, Inc.8
The pagination on the note indicated that it was a four-page document. Further, on
page 2, just above the maker’s signature, the note recited, “This contract is signed and accepted
subject to the additional terms and provisions contained on pages 3 and 4 which are made part of this
contract by reference.” However, the Bank only introduced into evidence copies of pages 1 and 2
of the note at trial [Plaintiff Exhibit No. 1]. The Bank’s collections manager, Anna Marie
Potter, testified that she retrieved these copies from the bank’s computer system, but did not
find pages 3 and 4 of the note stored in that depository. She identified pages 3 and 4 of the
standard note form in effect at the time the Sculley loan was made (Form No. 1491VA
(0208)), and these pages were introduced as exemplars of the form in use by the Bank in this
general time period [Plaintiff Exhibit No. 2].
Ms. Potter further testified that while the Bank normally stores originals of
instruments such as promissory notes and other loan documentation in its vault, a physical
search of the vault conducted at her direction did not turn up the original Sculley note or any
other Sculley loan documents. She had no explanation for the disappearance of the original
Sculley note from the vault, and no explanation as to why pages 3 and 4 of the note were
missing from the Bank’s computer-stored images of the document.
As further noted by claimant’s lending expert James Meere, there is a blank space in
the designated area for buyer’s initials under the “optional credit insurance” block shown on
(b). The mortgage
The mortgage was made by James C. Sculley, designated in this instrument as “Sole
Owner(s) of the vessel” being mortgaged to secure a $1,000,050.00 promissory note made by James
C. Sculley on January 17, 2003. The specific vessel “mortgage[d] and convey[ed]” by this
instrument was described as the “Sculley 60',” a “2003 60' Sculley 60,” HIN GIJ60001A303. On
page three, the mortgage was signed solely by “James C. Sculley,” as designated “Owner.”
Underneath Mr. Sculley’s signature on the mortgage appears a partially complete notary
signature block, with the handwritten name of “Mark Delaney” shown as the notary public before
whom James C. Sculley allegedly appeared and took an oath.9 Although the notary block includes
a handwritten date of January 17, 2003 along with what purports to be the signature of Mr. Delaney,
the space for the “notary seal” is blank, and the notary acknowledgment on the form does not
indicate whether the notary knew Sculley, or the method of identification he used to verify the
identity of the signatory. 10
page two of the note introduced at trial [Plaintiff Ex. No. 1], while the copy of the note
attached to the Bank’s complaint [DE# 1-1] shows a script of the borrower’s initials in this
space, “JCS,” suggesting that original document may have been altered, at least in this
respect, at some time after closing.
The claimant’s marine lending expert, James Meere, testified, and the court accepts
his testimony as credible, that Mark Delaney is an officer or agent of Coastal Financial
Corporation, he mortgage brokerage company which was actively involved in procuring and
closing on the Sculley loan. The involvement of Coastal Financial in this transaction is
evident from Mr. Delaney’s participation in the closing, and the words “Coastal Financial”
found imprinted in fax transmission data running across the top of several documents in the
Bank’s loan file.
The parties stipulated that the mortgage contains all of the information recited above
[Joint Pretrial Stipulation, ¶¶ 11-16], and further that “the mortgage is signed and
acknowledged.”[Stipulation ¶17]. At trial, Sunfish sought to withdraw Stipulation ¶17,
(c). The security agreement
The security agreement identified “Sculley Boatbuilders Inc.” as “Owner(s)” of the “2003
Sculley 60' Sport Fisherman Vessel, HIN GLJ60001A303" serving as collateral for Mr. Sculley’s
loan. This instrument indicated that Sculley Boatbuilders, Inc., as “owner,” granted the Bank a
concerning acknowledgment of the mortgage, or alternatively to reserve its right to challenge
the validity of the notary acknowledgment as a matter outside the factual parameters of this
In the latter regard, Sunfish argued that the stipulation was intended to signify merely
its recognition that the document contained a signature and an acknowledgment, not its
assent to the validity of the acknowledgment or genuineness of the signature, which it wishes
to now contest due to the absence of a notary seal, and the notary’s failure to indicate the
method by which the signatory presented for identification.
Sunfish urged that the acknowledgment defect was essentially uncorrectable, since
a notary may not amend a certificate of acknowledgment without re-acknowledgment by the
parties. Thus, it argued there could therefore be no prejudice to the Bank by allowing
Sunfish to contest the validity of the acknowledgment, since Mr. Sculley is now dead, and
there are no other witnesses or other evidence available to the Bank through which it might
have attempted to correct the error.
The court denied Sunfish’s request to withdraw Stipulation ¶17 at trial, concluding
that the joint stipulation constituted a waiver of any objections Sunfish may have had to
validity of the signature or its acknowledgment. The court reaffirms this ruling here.
Further, the court alternatively holds that the acknowledgment substantially complies
with the requirements of Florida law, the stipulated controlling law, and hence is not fatally
defective for failure to include either the seal or a specified mode of signatory identification.
While re-acknowledgment of a defective acknowledgment is required in some cases, if the
intention of the parties to a mortgage is clear from the document when construed as whole,
clerical and technical errors should be disregarded. See In Re Henry 200 B.R. 59 (M.D. Fla.
1996) and cases cited infra.
Applying this precept here, the court finds omission of the mode of signatory
identification and failure to affix the notary seal are clerical errors which do not affect the
rights or obligation of parties to the mortgage or validity of the mortgage document itself.
Compare In re Sunnafrank, 456 B.R. 885 (S.D. Ohio 2011)(mortgage not defective and
ineligible for recording simply because seal of notary public who acknowledged it did not
appear on it); In re Robinson, 403 B.R. 497 (S.D. Ohio 2008)(acknowledgment of mortgage
not defective because of notary failure to inscribe name on seal or print or stamp name near
signature; even if defective).
security interest in the Sculley 60' to secure obligations assumed by James C. Sculley under the
January 17, 2003 promissory note.
James C. Sculley signed this document in two places, first as “owner,” on behalf of
Sculley Boatbuilders, Inc., and then again as “borrower owner.”
(d). The hypothecation agreement
Sculley Boatbuilders Inc. executed a hypothecation agreement by which it unconditionally
pledged all of its interest in the Sculley 60' and her engines, as “collateral security’ for the
$1,000,050.00 note made by James C. Sculley on January 17, 2003. This instrument was signed by
James C. Sculley, as “Member” on behalf of “Sculley Boatbuilders Inc.”
(e). The insurance agreement
The insurance agreement identified “James C. Sculley” as “Insured,” and required him to
“continuously insure against loss or damage to the collateral” at his own expense during the term of
the loan. This form contained a signature block for execution and seal by the “Borrower,” but was
not executed by Mr. Sculley or Sculley Boatbuilders. Instead, on the signature line for “borrower”
appear the typed words “SIGNATURE NOT REQUIRED” [Claimant Exhibit No. 9].
15. As part of the closing, the Bank loaned Mr. Sculley the sum of $1,000,050.00.
16. As a condition of the loan, the Bank required that Mr. Sculley apply for a “Certificate
of Documentation”11 from the Coast Guard and have the bank’s security interest noted on it.
Accordingly, on the day of closing, Mr. Sculley signed an “Application for Initial Issue, Exchange
“A Certificate of Documentation is required for the operation of a vessel in certain trades,
serves as evidence of vessel nationality, and permits a vessel to be subject to preferred mortgages.”
46 C.F.R. § 67.120, § 67.1.
or Repayment of Certification of Documentation; Re-documentation,” seeking United States Coast
Guard documentation for the Sculley 60' at the vessel’s hailing port in Wanchese, North Carolina.
He also supplied a “Builder’s Certificate” as proof of title.
17. In the application for initial issue of certificate of documentation, Mr. Sculley identified
the vessel for which documentation was sought as the “Sculley 60',” HIN GIJ60001A303, and listed
himself as “managing owner” of the vessel. He signed the application as “James C. Sculley,” the
“sole owner” of the vessel.
18. In the accompanying “builder’s certificate and first transfer of title,” completed on Coast
Guard form CG-1261, Mr. Sculley identified himself as the “party(ies) for whom built,” and
certified that he had personal knowledge of the facts recited in the form, “acting in [his] capacity as
President of Sculley Boat Builders.”
However, the “acknowledgment” block found at Section “X” of the builder’s certificate,
expressly designated for completion by a “notary public or other official authorized by a law of a
State or the United States to take oaths,” was left blank.
19. Mr. Sculley did not supply, and the Bank did not require, a “manufacturer’s statement
of origin,” or “MSO,” to corroborate Mr. Sculley’s claim of ownership of the vessel prior to
“A Manufacturer’s Certificate of Origin means a certificate issued under the law or
regulation of a State, evidencing transfer of a vessel from the manufacturer ...to another
person.” 46 C.F.R. §67.120, §67.3.
According to claimant’s marine lending expert, James Meere, lenders ordinarily insist
upon both a builder’s certificate and a manufacturer’s certificate before accepting a vessel
as collateral for a loan, and typically store the original MSO in a vault until the loan is paid
in full, a security measure designed to prevent the borrower from taking the MSO to another
20. Mr. Sculley did not supply, and the Bank did not require, a written sales agreement or
bill of sale memorializing a transfer of title from Scully Boatbuilders to Mr. Sculley.
21. Through Coastal Financial Corporation, on February 3, 2003, the Bank caused
submission of Mr. Sculley’s application for initial issue of certificate of documentation to the United
States Coast Guard National Vessel Documentation Center (NVDC), along with the builder’s
certificate as proof of title.
22. Through Coastal Financial Corporation, on February 3, 2003, the bank also caused its
mortgage to be recorded with the National Vessel Documentation Center (Book 03-28, page 229).13
As indicated above, the mortgage identified Mr. Sculley, individually, as sole maker of the
mortgage and sole owner of “100% of the interests in the vessel ....being mortgaged ... to secure a
promissory note made by James C. Sculley ... dated January 17, 2003, in the principal amount of
23 On March 27, 2003, the Coast Guard issued a Certificate of Documentation for
the Sculley 60', HIN GIJ6000A303, assigning it Official No. 1137719. This certificate identified
James C. Sculley as both “owner(s)” and “managing owner” of the vessel
24. A few months later, on June 12, 2003, Sculley Boatbuilders, Inc., prepared a “Builder’s
Certificate and First Transfer of Title” for a vessel to which it assigned the same HIN as that
lender to shop for a second loan collateralized by same vessel.
Documents subpoenaed from Coastal Financial Corporation show that these documents
were forwarded to the Coast Guard’s Naval Vessel Documentation Center under cover of an undated
letter from Coastal Financial Corporation signed by office manager Lori Watson, along with a $145
recording fee [Claimant Exhibit No. 55].
previously assigned to the Sculley 60', HIN GIJ60001A303. This certificate identified the vessel for
which documentation was sought as the “ECO,” and documented a “first sale or transfer of vessel”
to “Juanillo Corporation” in Sabana Seca, Puerto Rico.
Unlike the initial “Builder’s Certificate and First Transfer of Title,” prepared by Sculley
Boatbuilders in connection with its application for initial issue of certificate of documentation on
the Sculley 60', HIN GIJ60001A303, the Juanillo builder’s certificate identified “Sculley
Boatbuilders, Inc.” as the party for whom the vessel bearing this HIN was built. This certificate was
signed by James Polatty, the General Manager of Sculley Boatbuilders, Inc., and contained a fully
completed jurat and notary public acknowledgment block dated June 12, 2003, bearing the signature
and seal of notary public Christine Etheride Walker.
25. On June 18, 2003, Edgar Figueroa, as President and on behalf of Juanillo Corporation,
signed a corresponding application for initial issue of certificate of documentation for a vessel
identified as the “ECO,” bearing HIN GIJ60001A303. On June 22, 2003, Sculley Boatbuilders
submitted this application on behalf of Juanillo Corporation to the Coast Guard’s National Vessel
Documentation Center, together with a bill of sale and builder’s certificate as proof of ownership.
26. On September 23, 2003, Sculley Boatbuilders, through James Polatty, General Manager,
sent a letter to the Coast Guard claiming that the company had mistakenly duplicated the issuance
of HIN GIJ60001A303 on the ECO. Mr. Polatty asked the Coast Guard to correct the HIN listed
on Juanillo’s application for certificate of documentation to reflect a new HIN of “GIJ60003D303,”
and to issue a new official number for the ECO.
27. The Coast Guard complied with Polatty’s request without further inquiry, and inscribed
a handwritten “corrected” HIN of GIJ60001D303 [apparently a scrivener error for the
requested GIJ60003D303] on Juanillo’s application for initial issue of certificate of
documentation, and on October 6, 2003, issued a certificate of documentation for the ECO at its
hailing port in Puerto Rico, with assigned HIN GIJ60003D303 and Official No. 1148420.
28. On January 1, 2005, Juanillo Corporation transferred the ECO back to Sculley
Boatbuilders Inc. This was memorialized by a “Transfer of Interest” filed with the National Vessel
Documentation Center on February 3, 2006.
29. On January 30, 2006, Sculley Boatbuilders sold the ECO to Forest Stream Sportfishing
LLC, as evidenced by a Bill of Sale executed by James Polatty as General Manger for Sculley
Boatbuilders, Inc. on that date.
30. On February 3, 2006, Forest Stream Sportfishing LLC submitted an application for
initial issue, exchange or replacement of certificate of documentation for the ECO to the National
Vessel Documentation Center, supported by a notarized bill of sale as proof of title. This application
requested a name change on the vessel, from the “ECO” to the “EVANS B.” The National Vessel
Documentation Center granted this request and issued a certificate of documentation for the
“EVANS B,” identifying Forest Stream Sportfishing LLC as owner.
31. Approximately two years later, on January 21, 2008, Mr. Sculley defaulted on the
$863,378.90 balloon payment then due under the note. In February, 2008, he applied to the Bank
for a modification of the note and extension of the loan term. In support of his request, on February
14, 2008, he submitted a personal financial statement listing his net worth as of December 31, 2007
at $14,055,785.00, with mortgage liabilities reported at $3,066,272.00 [Claimant Exhibit No. 25].
He later submitted another personal financial statement on a Bank form which listed his net worth
as of February 20, 2008 at $435,500.00, with no mortgage liabilities reported [Claimant Exhibit No.
32. Despite Mr. Sculley’s default on the balloon payment, following a history of multiple
late payments under the original note and updated financial data showing that his reported net worth
had plummeted from $11,339.635.00 (in 2003) to $435,000.00 (in 2008); that he incurred
outstanding tax liens for $226,000.00 and $159,000.00; that his Beacon score dropped from 751 to
673; that his debt to income ratio had grown to 157% [meaning that for every $100,000.00 of
income generated he incurred $157,000.00 in debt], and that his accounts payable went from $0 in
2002 to $1,300,000,00 in 2008---the bank agreed to an extension of the loan.
33. Accordingly, on February 28, 2008, the Bank and Mr. Sculley entered into a retail note
modification agreement note extending the time for repayment for an additional five years with an
increased interest rate.14 Significantly, the modified note identified James S. Sculley, individually,
as the maker and “Borrower,” while it described Sculley Boatbuilders, Inc. and Sculley Boatbuilders
as “grantor(s)” and “owners ...of any property designed to secure performance of Borrower’s
obligations to the Bank.” This instrument was signed twice by James Sculley, first as individual
“borrower,” and second as “grantor” on behalf of Sculley Boatbuilders, Inc.
34. Before agreeing to the modification, the Bank was aware it did not have a current
valuation of the collateral. Nonetheless, it did not reevaluate the value of the vessel serving as
Under the modified note, Mr. Sculley was obligated to make 58 monthly payments
of $8,252,63, beginning March 28, 2008, with a balloon payment of $692,249.12 falling due
on January 28, 2013.
collateral, did not require proof of insurance on the collateral, and did not conduct a physical
inspection or otherwise take any steps to ensure that the vessel still existed and remained under
Sculley’s control at that time. Instead, the Bank assumed the same value for the collateral as that
fixed by the then five–year old Harbour survey, and, despite Mr. Sculley’s financial free-fall,
extended the term of the loan along with its security interest in the collateral for an additional five
35. The Bank also took a significant corrective action at the time of loan modification: It
corrected the name of the owner on its “collateral tab” to Sculley Boatbuilders, Inc., and drafted the
note modification agreement accordingly to identify Sculley Boatbuilders and Sculley Boatbuilders,
Inc. as “owner(s)” of the collateral designated to secure the borrower’s performance of the modified
36. The Bank, however, did not take any steps to make a corresponding correction to the
37. The Bank’s decision to modify the loan was the product of egregious, reckless lending
38. Relying on the expert testimony of James Meere, which the court accepts as credible,
the court finds that the Bank’s failure to declare a default in February 2008 resulted from
institutional pressures against allowing a loan of this magnitude to run into a sixty-day default stage,
thereby triggering reporting requirements and other accounting and regulatory fall-out detrimental
to the financial well being of the Bank.
The Bank’s attorney stipulated during trial that the Bank did not follow good
banking practices in making the Sculley loan.
39. The court further finds, based on the unrebutted expert testimony of Mr. Meere, that the
debt-to-income ratio of Mr. Sculley in February, 2008 alone justified an automatic rejection of Mr.
Sculley’s request for an extension of the loan, and that the Bank’s decision to extend the term of the
loan for five years, in the face of the debtor’s then rapidly tightening financial vice, reflects
irresponsible, grossly reckless, egregious lending practices undertaken for the sole purpose of
protecting the Bank’s own financial interests to the foreseeable detriment of future creditors of the
debtor and lienors and/or purchasers of the collateral.
40. Moreover, by failing to reevaluate the collateral, confirm its existence, or insist on proof
of insurance, and agreeing to extend the term of Mr. Sculley’s loan for an additional five years in lieu
of declaring a default – despite the fact that Mr. Sculley was by then clearly teetering on the edge of
bankruptcy – the Bank effectively allowed Mr. Sculley to bury the fraud which he had orchestrated
via assignment of two different HINs to the same vessel, all to the foreseeable detriment of future
purchasers and lienors of the collateral. At the same time, the Bank obtained an unjustified
extension of its rights in the vessel for an additional five years.
41. At or about this same time, in early 2008, William Hodges, the principal of Sunfish
Marine Ventures Ltd. (“Sunfish”) expressed an interest in the purchase of the “EVANS B” from
Forest Stream Sportfishing, LLC. To facilitate the sale, Mr. Hodges requested a survey on the vessel
from Florida Detroit Diesel-Allison, the Florida subsidiary for the engines’ manufacturer, and
retained the services of maritime attorney Steven Hibbes.
Florida Detroit Diesel-Allison issued its survey on March 20, 2008 showing an “Assembly
No” ( HIN) for the “EVANS B” of GIJ60001A303, matching the original HIN assigned to the
Sculley 60' by Sculley Boatbuilders in 2003.
42. On April 15, 2008, Forest Stream Sportfishing LLC sold the “EVANS B” to Sunfish,
evidenced by a Bill of Sale filed with the National Vessel Documentation Center on April 24, 2008.
Sunfish renamed the vessel the “Beowulf” and registered her in the British Virgin Islands.
43. Mr. Sculley died on June 1, 2009, and thereafter defaulted in his obligation to make
timely payments under the retail note modification agreement.
44. The Bank declared a default and filed this action on June 16, 2011, based on the court’s
admiralty jurisdiction, 28 U.S.C. §1333 and 46 U.S.C. §951 to enforce its claimed preferred ship
mortgage pursuant to the Ship Mortgage Act of 1920, 46 U.S.C. § 911 et seq. and to collect on the
outstanding debt owed by Mr. Sculley.
45. The principal amount due to the bank, under the modified note, is $832,573.98, plus
late fees of $975 and accrued interest.
II. Conclusions of Law
A. Requirements for a Preferred Ship Mortgage
The Ship Mortgage Act of 1920 (“the Act”) was intended to encourage investment in the
shipping industry by providing greater security to mortgagees. To achieve this goal, the Act grants
the holder of a preferred ship mortgage the right to proceed in admiralty with priority status over
most maritime liens arising after perfection of the mortgage. All Alaskan Seafoods, Inc. v. M/V Sea
Producer, 882 F.2d 425 (9th Cir. 1989); Merchants Nat’l Bank of Mobile v. Ward Rig No. 7, 634
F.2d 952 (5th Cir. 1981).
The statutory requirements for perfecting a preferred ship mortgage are set forth at 46 U.S.C.
§ 31322 (a), which defines a “preferred mortgage” as a mortgage that includes the whole vessel, is
filed in accordance with 46 U.S.C. §31321, and covers a documented vessel.16 In turn, under 46
U.S.C. § 31321, a ship mortgage must (1) identify the vessel; (2) state the name and address of each
party to the instrument; (3) state, if a mortgage, the amount of the direct or contingent obligations
that is or may become secured by the mortgage, excluding interest, expenses and fees; (4) state the
interest of the guarantor, mortgagor or assignor in the vessel; (5) state the interest sold, conveyed,
mortgaged or assigned; and (6) be signed and acknowledged. 46 U.S.C. §31321(b).
The parties in this case stipulated that the Sculley mortgage satisfied these requirements.
Sunfish, however, contends that the mortgage is not entitled to preferred status under the Act
because the underlying mortgage was itself invalid, and because the vessel was not properly
“documented” at the time of the mortgage recording.
B. Validity of the Sculley Mortgage
Merely following the correct recording procedures prescribed by the Ship Mortgage Act does
not automatically create a valid preferred mortgage entitled to priority. Custom Fuel Services, Inc.
v. Lombas Industries, Inc., 805 F.2d 561 (5th Cir. 1986). Instead, an admiralty court must turn to
other sources to determine the validity of the underlying mortgage, including state law, other federal
laws, and general principles of equity. Id., at 565, citing Bergren v. Davis, 287 F. Supp. 52 (D.
Conn. 1968), citing Gilmore & Black, The Law of Admiralty 590 (1957); J. Ray McDermott & Co.
v. Vessel Morning Star, 457 F.2d 815 (5th Cir. 1972); Florida Bahamas Lines, Ltd. v. The Steel
Barge ‘Star 800' of Nassau, 433 F.2d 1243, 1249-50 (5th Cir. 1970); Cantieri Navili Riuniti v. M/V
Skyptron, 621 F. Supp. 171, 187 (W.D. La. 1985), aff’d on other grounds, 802 F. 2d 160 (5th Cir.
A “documented vessel” means “a vessel which is the subject of a valid Certificate of
Documentation.” 46 C.F.R. §67.120, §67.3.
The validity of the underlying mortgage turns, in the first instance, on whether the mortgagor
held legal title to the vessel at the time of execution and recordation of the mortgage. C.I.T. Corp.
v. Oil Screw Peggy, 424 F.2d 767, 768 (5th Cir. 1970)(per curiam)(“[n]othing in nature of the ship
mortgage, nor in the terms of its statutory implementation, suggests that its lien should extend to
what the mortgagor did not own and had no right to acquire.”). This follows as a party has no power
to convey a security interest in property which does not belong to him. See generally Pennock v.
Coe, 64 U.S. 117, 23 How. 117, 1859 WL 10652, 16 L.Ed. 436 (1859); Roberts v. Hart, 573 So.2d
12 (Fla. 4th DCA 1990)(mortgage invalid where mortgagor did not own property at time he executed
mortgage); Wagner v. Roberts, 320 So.2d 408 (Fla. 2d DCA 1975)(same), cert. den., 330 So.2d 20
(1976); Gonzalez v. Chase Home Finance LLC, 37 So.3d 955 (Fla. 3d DCA 2010)(mortgagor can
convey no greater interest in property than he owns). See also United States v. One Parcel of Real
Estate at 3229 S.W. 23d St., etc., 768 F. Supp. 340 (S.D. Fla. 1991)(mere execution of mortgage is
not evidence of any ownership of mortgaged property under Florida law); Pasekoff v. Kaufman, 392
So.2d 971 (Fla.3d DCA 1981)(same).
The court recognizes that “the primary rule of construction of a mortgage is to ascertain the
intention of the parties,” Huntington Nat’l Bank v. Merrill Lynch Credit Corp., 779 So.2d 396, 398
(Fla. 2d DCA 2000). Further, where multiple documents are executed contemporaneously with a
mortgage and are part of the same transaction, all documents are read together to determine and give
effect to the intention of the parties. In re Alford, 403 B.R. 123, 21 Fla. L. Weekly Fed. B 665
(M.D. Fla. 2009), citing Boyette v Carden, 347 So.2d 759, 761 (Fla. 1st DCA 1977). At the same
time, as a rule of contract interpretation, parol evidence is generally not admissible to vary, contradict
or defeat the terms of a complete and unambiguous written instrument. Id. at 132. If a contract is
ambiguous or obscure in its terms, extrinsic evidence may be considered to aid the interpretation,
but, even here, under the “ambiguous transaction exception,” the parol evidence must still be
“consistent with, and not contrary to, such written instrument.” Id., citing Florida Moss Products
Co. v. City of Leesburg, 93 Fla. 656, 112 So. 572, 573 (1927).
In this case, the mortgage on which the Bank relies to establish a preferred ship mortgage
unambiguously identified James C. Sculley as “sole owner” of the collateral pledged to secure the
Sculley note, thus precluding resort to extrinsic evidence, including other documents comprising the
loan documentation, as a constructional aid in determining the parties’ intent.17
Thus, it is upon this document that the Bank must proceed to establish its claimed priority
status under the Act. Because the mortgage identified Mr. Sculley as sole maker and “sole owner”
of the collateral pledged in the mortgage,18 the Bank bears the burden of proving Mr. Sculley’s
ownership of the Sculley 60' as part of its burden of establishing the validity of the underlying
mortgage and its claimed preferred ship mortgage status under the Act. See C.I.T. Corp. v. Oil Screw
Peggy, 424 F.2d 767, 768 (5th Cir. 1970)(per curiam)(preferred ship mortgage did not attach to
It is undisputed that the Bank did not record the hypothecation agreement, which
identifies Sculley Boatbuilders as owner of the collateral and grantor of the security interest
in the Sculley 60' used to secure the note. Because a ship mortgage must be recorded to be
valid, 46 U. S. C. § 31321, and the hypothecation agreement clearly was not, the court need
not wrestle with the implications which a recorded hypothecation agreement might have
posed in determining the parties’ competing priority claims in this case.
The Bank did not seek a reformation, which generally will not be ordered against a bona
fide purchaser for value, although many states allow reformation against judgment and execution
creditors. See In re McLean Industries, Inc., 84 B.R. 340 (S.D.N.Y. 1988) and cases cited infra.
radar equipment leased by shipowner/mortgagor in which mortgagor did not have an ownership
interest); ITT Indus. Credit Co v. The M/V Richard C., 617 F. Supp. 761, 764 (E.D. La. 1985)(“It
is further obvious that a [preferred ship] mortgage cannot attach to property not owned by the
mortgagor”); Chase Manhattan Financial Services, Inc. v. McMillian, 896 F.2d 452 (10th Cir. 1990);
ITT Indus. Credit Co. v M/V Richard C., 617 F. Supp.761 (E.D. La. 1985).
The Bank agrees with this statement of law [Plaintiff’s Proposed Conclusions of Law, ¶
4][DE# 95], and contends that Mr. Sculley owned the Sculley 60' [n/k/a the Beowulf] as of January
17, 2003, the date he signed the mortgage [Plaintiff’s Proposed Findings of Fact, ¶ 22][DE# 95].
State law defines what constitutes legal title to a ship for purposes of establishing the validity
of a preferred ship mortgage, as contracts for the sale of ships are not “maritime” and thus admiralty
jurisdiction does not apply. See Chase Manhattan Financial Services v. McMillian, 869 F.2d 452
(10th Cir. 1990); SC Loveland, Inc. v. East West Towing, Inc., 608 F.2d 160, 164 (5th Cir. 1979),
cert. den., 446 U.S. 918 (1980).
The parties agreed during trial that Florida law, as the law of the forum, drives the title issue
in this case, where neither party has advanced the application of the law of any other jurisdiction.
See National Ass’n of Sporting Goods Wholesalers, Inc. v. F. T. L. Marketing Corp., 779 F.2d 1281
(7th Cir. 1985), citing Gonzalez v. Volvo of America Corp., 752 F.2d 295 (7th Cir. 1985)(where
parties fail to raise a possible conflict of substantive law, the substantive law of the forum controls).
In their pretrial stipulation, the parties similarly agreed that the laws of Florida apply in areas where
there is no applicable maritime law [Pretrial Stipulation, Section VII] [DE# 87]. In their trial briefs,
both advanced the application of Florida UCC law as determinative of the title issue.
The court accordingly turns to the substantive law of Florida, as stipulated by the parties, to
determine whether Mr. Sculley owned the Sculley 60' at the time he executed the mortgage. See
Windward Traders, Ltd. v. Fred S. James & Co. of New York, 855 F2d 814 (11th Cir. 1988)(applying
state law by stipulation); Casio, Inc. v. S. M. & R. Co., 755 F.2d 528 (7th Cir. 1985)(unless court’s
subject matter jurisdiction is affected, parties may generally stipulate to the substantive law to be
applied); Cates v. Morgan Portable Building Corp., 780 F.2d 683 (7th Cir. 1985)(parties may
impliedly stipulate to source of substantive law governing dispute).
In effort to prove that Mr. Sculley owned the vessel on the date of closing, the Bank points
to the builder’s certificate and first transfer of title dated January 17, 2003, which identified James
C. Sculley as the “person for whom [the vessel was] built”[Plaintiff Exhibit No. 4], the
corresponding application for initial issue of certificate of documentation, in which Mr. Sculley
again identified himself as owner of the Sculley 60' [Plaintiff Exhibit No. 5], and the Certificate of
Documentation which the Coast Guard issued in reliance upon those submissions which identified
“James C. Sculley” as “Owner” and “Managing Owner” of the Sculley 60' [Plaintiff Exhibit No. 6].
None of these documents, however, constitutes conclusive evidence of ownership. Saint Paul Fire
Marine Ins. Co. v. Vest Transportation Co., 666 F.2d 932, 938 (5th Cir. 1981)(true ownership of
a vessel not dependent upon its registry, as ownership question ordinarily governed by state law);
Hozie v. The Vessel Highland Light, 182 F.3d 925, 1999 WL 313650 * 1 (9th Cir.
1999)(unpub)(“Underwood did not become the legal owner of the ship when the Coast Guard issued
a certificate of documentation...”); Chase Manhattan Financial Services, Inc. v. McMillian, 896 F.
2d 452 (10th Cir. 1990)(builder’s certificate is prima facie, but not conclusive evidence of title
because it is part of the paperwork required by the Coast Guard for the certification of
documentation process); C & C Boat Works, LLC v. Skansi Marine, LLC, 2009 WL 361138 (E. D
La. 2009); ITT Indus. Credit Co v. M/V Richard C., 617 F. Supp. 761 (E.D. La. 1985).
Thomas Willis, former head of the National Vessel Documentation Center in Falling Waters,
West Virginia, gave unrebutted testimony (via videotaped deposition) that a “builder’s certificate”
is ordinarily accepted at “face value” by the Coast Guard as indicia of ownership, but does not
operate as conclusive evidence of title. Mr. Willis further testified that the Coast Guard ordinarily
will not accept a security agreement, promissory note, note modification agreement or hypothecation
agreement as proof of ownership (while noting that hypothecation agreements can be recorded if in
proper form). However, in an errata sheet, attached and incorporated into his deposition testimony
without objection, Mr. Willis clarified that if the National Vessel Documentation Center had been
aware in this case of the inconsistent representations of ownership concerning the Sculley 60' set
forth in the security agreement, promissory note, modification agreement and hypothecation
agreement, it would have questioned Mr. Sculley’s claim of ownership and would not have issued
a certificate of documentation until the issue was resolved.
The Bank knew about these contradictory statements regarding ownership in the loan
documents, but took no action to investigate them. In its trial briefing, the Bank acknowledged that
“references to Sculley Boatbuilders as the owner of the vessel in some of the banks (sic) documents
seem inconsistent,” but argued that these documents are not “relevant or material” to the issue of
ownership [Plaintiff’s Proposed Conclusions of Law, ¶ 13]. Instead, it urged the court to infer the
existence of a pre-closing sale of the vessel from Sculley Boatbuilders to Mr. Sculley based on Mr.
Sculley’s conduct pursuant to § 672.204(1), Florida Statutes, 19 apparently of the view that Mr.
Section 672.204(1), Fla. Stat. provides, “A contract for the sale of goods may be made in
any manner sufficient to show agreement, including conduct by both parties which recognizes the
Sculley recognized the existence of such an implied contract by affixing his signature to the
builder’s certificate and participating in the loan process on behalf of Sculley Boatbuilders
[Plaintiff’s Proposed Conclusions of Law, ¶¶ 17, 18]. 20
The court disagrees. Standing alone, without contradictory statements of ownership revealed
in other contemporaneously created documents, the builder’s certificate might well be relied upon
as adequate evidence of title. However, in this case, glaring inconsistencies about ownership found
throughout the loan documentation raise the opposite inference from that urged by the Bank.
Because the Sculley 60' constitutes “goods” within the meaning of Florida’s Uniform
Commercial Code (UCC), J.K Jones v. One Fifty-Foot Gulfstar Motor Sailing Yacht, Hull No. 01,
625 F.2d 44 (5th Cir. 1980); Northern Ins. Co. of New York v. 1996 Searay Model 370DA Yacht,
453 F. Supp. 2d 905 (D. S. C. 2006), the issue of legal title in this case is necessarily resolved by
determining whether a “sale” of the vessel from Sculley Boatbuilders to Mr. Sculley occurred prior
to the time of execution of the mortgage. See e.g. Equipment Leasing LLC v. Three Deuces, Inc.,
2011 WL 3268197 (E.D. La. 2011).
Article 2 of the UCC, as adopted in Chapter 672, Florida Statutes, applies to all transactions
in goods. § 672.102, Florida Statutes. Because the Sculley 60' meets the definition of “goods”
contained in § 672.105, the statute of frauds provided in Article 2 of the UCC, §672.201, requiring
“some writing sufficient to indicate that a contract for sale has been made” for contracts for the sale
existence of such a contract.”
The Bank acknowledged that “there is no written contract between Sculley Boatbuilders
and Mr. Sculley” [Proposed Conclusions of Law, ¶17].
of goods valued at $500 or more, applies.21 See generally H.P.B.C. , Inc. v. Nor-Tech Powerboats,
Inc., 946 So.2d 1108 (Fla. 2d DCA 2006); Ashland Oil, Inc. v. Pickard, 269 So.2d 714 (Fla. 3d DCA
In this case, there is no reliable evidence that Sculley Boatbuilders conveyed legal title of
the Sculley 60' to Mr. Sculley by sale and delivery of the vessel and a valid contract for sale meeting
the requirements of the Florida UCC at or before the time of closing and execution of the mortgage.
The Bank proffered no evidence of “some writing” sufficient to indicate that a contract for sale of
the vessel - initially valued at over $2,000,00.00 - had been made between Sculley Boatbuilders and
Mr. Sculley. See e.g. Casazza v. Kiser, 313 F.3d 414 (8th Cir. 2002)(purchaser failed to produce
sufficient writings evincing parties’ agreement for sale of boat to satisfy statute of frauds). 22 See
generally Impossible Electronic Techniques, Inc. v. Wackenhut Protective Systems, 669 F.2d 1026
Section 672.201, Fla. Stat. provides in pertinent part:
(1) Except as otherwise provided in this section a contract for the sale of goods for
the price of $500 or more is not enforceable by way of action or defense unless there
is some writing sufficient to indicate that a contract for sale has been made between
the parties and signed by the party against whom enforcement is sought or by his or
her authorized agent or broker. ...
(3) A contract which does not satisfy the requirements of subsection (1) but which
is valid in other respects is enforceable... (c) with respect to goods for which payment
has been made and accepted or which have been received and accepted.
Urging a contrary result, the bank invokes § 672.401(3)(b), Florida Statutes, in
support of its contention that title to the Sculley 60' passed to Mr. Sculley pursuant to an
implied sales agreement with Sculley Boatbuilders at some indeterminate point in time prior
to closing. The essential defect with this position is that § 672.401 (3)(b), defining the time
for passage of title to goods identified to a contract, presumes the existence of a “contract for
sale” in the first instance. The bank presents no evidence of such a contract here, rendering
§ 672.401 inapplicable.
(11th Cir. 1982)(Fla.); Topp, Inc. v. Uniden American Corp., 483 F. Supp. 2d 1187 (S.D. Fla. 2007);
Specialized Transportation of Tampa Bay v. Nestle Waters North America, Inc. 2008 WL 786319
(M.D. Fla. 2008); Esrick v Mitchell, 2009 WL 2985679 (M.D. Fla. 2009).
To the contrary, the Bank acknowledged that “there is no written contract between Sculley
Boatbuilders and Mr. Sculley” governing the sale of the Sculley 60'. Moreover, the Bank did not
proffer evidence of any conduct between Sculley and Sculley Boatbuilders which would excuse the
requirement of a writing under § 672.201(c).
Mr. Sculley’s signature on the builder’s certificate is not itself a “writing sufficient to indicate
that a contract for sale” had been made between Sculley Boatbuilders and Sculley, where the
designation of “James C. Sculley” as the “person(s) for whom built,” on the builder’s certificate, and
the implication of ownership which the Bank seeks to derive from it, is contradicted by every other
piece of loan documentation in the Bank’s file;23 where the Bank and Mr. Sculley plainly recognized
Sculley Boatbuilders as owner of the collateral both at the time of closing and five years later, in
February, 2008, when they modified the note and designated Sculley Boatbuilders as “grantor(s)”
and “owners ...of any property designed to secure performance of Borrower’s obligations to the
Bank, ” and where there is no pre-closing evidence of any sales agreement, bill of sale or other
writing memorializing a sale or purporting to effect a conveyance of title between these parties.
That the Bank recognized Sculley Boatbuilders as owner of the collateral at the time
of closing is further supported by the “Certificate of Corporate Resolutions and Authorization
to Borrow,” which the Bank required as a condition to funding the loan. This document
purportedly memorialized the corporation’s consent to Mr. Sculley’s use of corporate
property as collateral to secure his personal obligations [Claimant Exhibit No. 51].
On this evidentiary predicate, the Bank has failed to show, by a preponderance of the
evidence, that Mr. Sculley held good and valid legal title to the Sculley 60' on January 17,
2003, the day he executed the mortgage. Without title, he had nothing to convey to the Bank, and
the mortgage is invalid to create a security interest in the Sculley 60'.24 Because only a valid
mortgage under the Shipping Act is eligible for preferred status under the Ship Mortgage Act, the
Bank is not entitled to priority status under the Act.
C. “Documented” Status of the Sculley 60'
Sunfish alternatively attacks the Bank’s claim to priority status by arguing that the Sculley
60' was not a properly “documented” vessel and therefore not eligible for recording under 46 U.S.
C. §31321 in the first instance. More specifically, it argues that the vessel did not have an affixed
HIN, in violation of federal law, at the time of application for initial issue of certificate of
documentation, that the Bank knew of this deficiency when it caused submission of Sculley’s
application for certificate of documentation along with the supporting builder’s certificate. As
Sunfish views it, the Bank’s complicity in Sculley’s misconduct regarding the HIN deficiency led
the Coast Guard to issue invalid documentation on the Sculley 60,' thereby defeating the Bank’s
ability to show the existence of a properly “documented vessel,” entitled to recording under §
31322(a) of the Act.
The relevant issue is not whether Mr. Sculley had authority to act on behalf of Sculley
Boatbuilders to effect a sale or conveyance of the vessel to himself under the ultra vires act doctrine.
See e.g. Cambridge Credit Counseling Corporation v. 7100 Fairway, LLC,, 993 So.2d 86 (Fla. 4th
DCA 2008). For purposes of this discussion, the court assumes that he had such apparent authority
to act. Rather, the issue is whether the Bank can show, by a preponderance of the evidence, that Mr.
Sculley in fact exercised or attempted to exercise such authority on behalf of the corporation by
entering into a contract for sale of the vessel, on behalf of Sculley Boatbuilders, with James Sculley,
individually. The record does not reveal evidence of such a contract.
The court disagrees. Substantial compliance with the recordation requirements of the Ship
Mortgage Act is adequate to show eligibility for preferred status under the Act. Hence, irregularities
in the recorded mortgage documents or failure to comply with the minutiae of recording will not
result in loss of preferred status of the mortgagee where there is “honest and substantial compliance”
with the statutes. Prudential Ins. Co. of America v. S.S. American Lancer, 686 F. Supp. 469 (S.
D. N. Y. 1988), citing In re Alberto, 823 F.2d 712, 719 (3d Cir. 1987) and Seattle-First National
Bank v. Bluewater Partnership, 772 F.2d 565, 570 (9th Cir. 1985). “A strict construction of the
statutory terms should only occur in the face of fraud or, at a minimum, when the complainant can
show some injury attributable to [the error].” Id., citing Morgan Guaranty Trust Co v. Hellenic
Lines, Ltd., 621 F. Supp. 198, 215 (S.D. N.Y. 1985), quoting Lake Jackson State Bank v O/S
Kingfish Too, 240 F. Supp. 450, 452 (S.D. Tex. 1965).
In this case, there is no evidence that the Bank knew of any fraudulent design or bad faith
on the part of Mr. Sculley when it first accepted his application for initial issue of certificate of
documentation and caused it to be submitted to the Coast Guard on Sculley’s behalf. Mr. Sculley’s
failure to permanently affix the HIN to the vessel indisputably violated Coast Guard regulations, but
it was not, standing alone, reason to suspect that Mr. Sculley acted in bad faith or with fraudulent
design in making his initial application for issuance of certificate of documentation.
Finding no evidence of fraud or “purposeful intent to evade or to mislead,” on the part of the
Bank, the court finds “substantial compliance” with the recording requirements of the Act, and
declines the claimant’s invitation to declare the initial documentation on the Sculley 60' invalid due
to the HIN misstatement in the underlying application for documentation. See generally Merchants
National Bank of Mobile v. Ward Rig No. 7, 635 F.2d 952, 958 (5th Cir. 1981)(upholding validity
and preferred status of ship mortgagees in face of numerous errors where there was “not the first
breath of fraud or purposeful intent to evade or mislead”). The court, however, will evaluate the
Bank’s inaction in 2003 in determining whether it is relevant to the claimant’s invocation of the
doctrine of equitable subordination discussed below.
D. Equitable Subordination
Finally, Sunfish attacks the Bank’s claim to priority by invoking the doctrine of equitable
subordination. Originally developed in bankruptcy law, the doctrine of equitable subordination is
used to avoid the inequity of a claim brought against a bankruptcy estate that would produce unfair
results. It allows for subordination of claims when the claimant has engaged in some type of
“inequitable conduct” which has conferred an unfair advantage on the claimant or resulted in injury
to creditors. In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir. 1977). Inequitable conduct
“encompasses conduct that may be lawful but is nevertheless contrary to equity and good
conscience.” Picard v Katz, 462 B.R. 447 (S.D.N.Y. 2011)(trustee of Madoff Securities’ estate
could potentially subordinate claims of brokerage firm customers, where they invested with Madoff
Securities with knowledge or in reckless disregard of its fraud), citing In re Verestar, Inc., 343 B.R.
444, 461 (S.D.N.Y. 2006). For non-insider creditors, it must encompass “egregious misconduct,”
variously described as “very substantial” misconduct involving “moral turpitude” or some breach
of duty or other misrepresentation whereby other creditors are deceived to their detriment, or gross
misconduct amounting to fraud, overreaching or spoliation.” In re M. Paolella & Sons, Inc., 161
B.R. 107, 118 (E.D. Pa. 1993), citing In re Osborne, 42 B.R. 988 (W.D. Wis. 1984); Century Glove
Inc. v. Iselin, 151 B.R. 327 (B.R. 1993); In re Delphi Corp., 2008 WL 5146952 (S.D. N.Y.
2008)(gross negligence reflecting reckless indifference to the rights of others).
While mere negligence in continuing to lend to a grossly undercapitalized debtor has been
held insufficient, by itself, to invoke the doctrine, see e.g. Stratton v Equitable Bank, N.A. , 104
B.R. 713, 731 (D. Md. 1989), actual knowledge of improper or fraudulent behavior of the debtor is
not required. “[A] creditor cannot be willfully blind to the details of a fraud to avoid actual
knowledge.” Grede v Bank of New York Mellon, 441 B.R. 864 (N.D. Ill. 2010), citing Mishkin v.
Siclari (In re Adler, Coleman Clearing Corp.), 277 B.R. 520, 544, 566 (S.D. N.Y.
2002)(subordinating claim of defendant who “knowingly closed his eyes” to a fraud).
Extension of the doctrine of equitable subordination to admiralty law is also wellestablished. Compare Dresdner Bank AG v. M/V Olympia Voyager, 463 F.3d 1233 (11th Cir. 2006)
(postponement of declaration of default on loan for a reasonable period of time (six months) held
insufficient to warrant equitable subordination of bank’s preferred ship mortgage) with Wardley
International Bank, Inc. v. Nasipit Bay Vessel, 841 F.2d 259 (9th Cir. 1988)(subordinating bank’s
alleged preferred ship mortgage to maritime liens of suppliers, where bank engaged in inequitable
conduct to effectively extend its rights in vessel for additional five years); Custom Fuel Services,
Inc. v. Lombas Industries, Inc., 805 F.2d 561 (5th Cir. 1986)(sham mortgage taken by corporation
which transferred title to wholly owned subsidiary); Cantieri Navali Riuniti v. M/V Skyptron , 621
F. Supp. 171 (W.D. La. 1985); citing G. Gilmore & C. Black, The Law of Admiralty (2d ed. 1975)
§ 9-84. See also TransMontaigne Product Services, Inc. v. M/V Wilbur R. Clark, 679 F. Supp. 2d
1308 (S.D. Ala. 2009); United States v. Pride of Texas, 964 F. Supp. 986, 990 (E.D. Va. 1994).
In determining whether the doctrine should be applied in the case at bar, the court first
considers the Bank’s action – or rather inaction – in 2003. By virtue of the Harbour survey, the Bank
knew that Sculley Boatbuilders had failed to affix the HIN to the vessel before the vessel was
documented in 2003. This constituted a serious violation of federal regulations and industry
practices. Yet the Bank agreed to fund the loan without insisting that Sculley Boatbuilders comply
with the law. In this very real sense, the Bank’s gross negligence paved the way for Mr. Sculley’s
Next, the court considers the Bank’s actions during the 2008 modification process. Although
the Bank did not have cause to initially suspect wrongdoing by Mr. Sculley when it closed the loan
in January, 2003, it had cause to suspect something was terribly amiss by February, 2008, when Mr.
Sculley had just defaulted on a $800,000 balloon payment, presented with a stunning debt-to-income
ratio of 157%, reported an $11 million decrease in net worth, and was besieged with tax liens.
Despite the debtor’s escalating financial stranglehold, the bank granted Mr. Sculley a five-year
extension of the loan term, without inspecting the collateral, much less reevaluating it or insisting
on proof of insurance. Had the Bank exercised a modicum of due diligence at that juncture, it would
have learned that Sculley Boatbuilders had long since sold the boat to a third party purchaser under
a different HIN, a blatant “red flag” of fraud.
There was nothing remotely reasonable about the Bank’s decision to forego a declaration of
a default on Mr. Sculley’s loan in January, 2008 and attempt to extend its rights in the collateral for
an additional five years. Under the original mortgage, the Bank was entitled to take possession of
the vessel after Mr. Sculley defaulted on the balloon payment. Instead, it chose to enter into a note
modification agreement, and did not proceed judicially to enforce Mr. Sculley’s obligations under
the note until Mr. Sculley died – long after the vessel had been conveyed to subsequent innocent
purchasers for value.
Having failed to take the most elementary, reasonable precautions to protect its security
interest in the collateral in early 2008, when it had the right, cause and opportunity to do so -- all
to the foreseeable detriment of subsequent purchasers and lienors of the collateral -- the doctrine of
equitable subordination is appropriately invoked now to displace its claimed priority status under
the Act. 25
Viewed in combination, these two events – the Bank’s gross deviation from acceptable
banking practices in 2008 and its failure to insist that Sculley Boatbuilders permanently affix the
HIN on the vessel before initial documentation in 2003 --justify the subordination of the Bank’s
mortgage in this case. Compare Maryland National Bank v Vessel Madam Chapel, 46 F.3d 895 (9th
Cir. 1995)(declining to disturb mortgagee’s preferred status under Ship Mortgage Act under doctrine
of equitable subordination where bank was unaware of events leading to issuance of second federal
III. Decretal Provisions
Based on the foregoing, it is ORDERED AND ADJUDGED:
1. The Plaintiff BRANCH BANKING & TRUST CO. of VIRGINIA’s complaint to
foreclose a First Preferred Ship Mortgage is DENIED.
2. Final judgment is entered against the Plaintiff, BRANCH BANKING & TRUST CO.
of VIRGINIA, and in favor of the Claimant, SUNFISH MARINE VENTURES, LTD., which
shall take the M/Y BEOWULF free and clear of any mortgage liens claimed by the Plaintiff.
3. The arrest of the M/Y BEOWULF is vacated, and the U.S. Marshal is directed forthwith
As discussed, supra, the court has concluded that the mortgage claimed by the bank is
invalid because the Bank does not show, by a preponderance of the evidence, that Mr. Sculley held
valid title to the vessel at the time he made the mortgage. The court’s ruling on equitable
subordination is an additional and alternative basis for its decision in this action.
to return the vessel to SUNFISH MARINE VENTURES, LTD., its rightful owner.
4. The court reserves jurisdiction to tax costs in favor of Claimant, SUNFISH MARINE
DONE AND ORDERED in West Palm Beach, Florida this 7th day of June, 2012.
Daniel T. K. Hurley
United States District Judge
cc. All counsel
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