How to tell if a yacht has a lien on it ?

This question has been in the back of my mind for a long time.

How to tell if a yacht has a lien on it or other legal trap?

With many yachts not for sale in certain jurisdictions one wonders how can you tell if they have a hidden lien on them. In the USA this is pretty straight foreward if the boat never leaves the territorial waters (one might think) as one can do a UCC filing search... before buying the boat with a lien... yes I have been stuck that way.

Long time ago I bought a boat in the USA... it had a lien... which was arranged to be paid off with the purchase... and according to records they were the current lien holder. And, it was paid off with the purchase. However, the note had been negotiated from two another loan companies and the original lien holder sued me to collect the lien... rather large suit too. Though they had produced no evidence they had the lien or that the UCC filing was current... they never produced the original to either. The Court kept granting them continuances for two years to provide proof on my attorney making motions to admit. This cost a huge hassle. The gentleman that perviously 'owned' the boat in Florida turned out to be not so reliable and a deadbeat though he was know to be a wealthy individual to the public. It turned out the loan company that had the original lien had borrowed the money form two banks to fund it but years before had never paid either off, and it had an agreement with them to do collection on their debt... a total mess legally. Eventually, after spending about 105% of the boats original cost in legal fees I got tired and total my attorney to settle, essentially the thing cost me almost twice the cost of the boat. Now it was not a huge number but totally about 600k US dollars for a sailboat I could have purchased for less than 60% of that money new. So I was burned and learned.

In France this is pretty straight forward issue to avoid... if the boat is purchased in France or French controlled territory or water... if the boat is bought using a Notaire services, typically costs about a little less than 2% of total. The Notaire seal has the effect of a superior court in the USA judgment as far as ownership, liens and taxes is concerned. A Notaire typically handles contracts; transfers of land or property of large value; inheritance, and; sales of companies etc. They are private attorneys specially trained and licensed by the government, and belonging to the organization of all Notaires that combined self insure the whole. Basically the Notaire official seal (its is a government agent but a private business) confers absolute ownership guarantee clear title to the property to the value of the property under the legal power for the French Government. Compared to USA title insurance on real property the Notaire is a much more secure guarantee. However, cheating VAT tax or other regulatory controls is not possible, as they are basically the tax collector and regulatory controller for the government too. The only possible issue one may run into is that if the boat was subject to an inheritance sometime... an undiscovered descendant of a deceased owner's estate could lay and obtain claim but such is rare. So that is a nice way of doing business.

Now the question concerns what about purchase of a Yacht outside of that protection? What if the yacht is in Italy with a beneficial owner in America but the thing is home ported and with an ownership holding company in one of the Island tax havens? Or, the boat is in the Caribbean (not in US waters) is flagged in Marshal Islands and owned by a company in the Cayman Islands and the seller is an American? How does one protect oneself? I am not too sure brokerage firms really have a handle on this... or asset attorneys... who does? Perhaps it is just safer to buy only new from the builder... but how are you sure they are really solvent and not hiding an undisclosed lien? Or, going bankrupt sometime. Yes, you can buy insurance but the question remains.

Why I bring this up is I have not seen posts as to the issue here on Yachtforums... and it is a real concern.
Generally on large yachts they are tied to the beneficial owner and reputations do matter.
However, world with Greece and China on the brink is a dangerous place financially, and the recent changes in US financial laws have by in large gutted protections of Dodd Frank.
And, when there are financial pressures on people make them do illegitiment things.

The issue NYCAP123 brings up of all the various jurisdictions and possible issues with them is even more complicated as the yacht can be registered in one country... even if owned by a company or holding company in that flag country... but that company might appear to be owned by an entity in another country... with a lien against it for a loan in another... and none of this ties back to the real controlling interest or as I put it beneficial owner.

Lets make it simple. This may not seem simple to some but I can assure you it is simple.

To explain terms a derivative is when one thing is converted to another. Typically derivatives as they apply here are loans that are converted into an investment this can be a publically or privately traded (a security is basically a relatively safe investment security can traded freely) that security and it can be pledged for as security for another loan. To make a security there are some legal requirements more or less restrictive depending on jurisdiction where it was created.

For example in the mortgage and banking industry the most simple example... I think most will understand is a mortgage loan: In the home mortgage industry a mortgage loan (can be a house, boat loan or any loan) consists of two instruments (contracts that are negotiable in trade from one owner to another by simple endorsement) a promissory note (a promise to pay money) and a mortgage (a promise of property to secure the payment of money). In fact, the note cross collateralizes the mortgage because the mortgage cannot exist without a note, i.e. a promise of security without it securing a another promise is a non sequitor in law. When these two instruments are executed (signed) by the maker (the borrower) they form a secure loan. Generally, they are signed at or to the same date to tie them together, must state the same amount of loan and same borrower (if not they are not a loan) and not enforceable. At the time they are signed, if the note is payable in a bank; the bank can create on its books the money for the loan (the promise to pay backed by the promise of valuable property legally allows the bank to create money on its books nearly equal to the value of the loan... usually some tiny reserve must be maintained). At the time of execution the note must be payable in a bank in the jurisdiction it was signed to be negotiable in trade. And to be negotiable in trade both contracts must be separate and separate in there terms for the purpose of the respective contract, though they are separate contracts by law and cannot depend on the each other for their basic terms... they cannot refer to the other or any other writing for terms for each the respective contracts terms (the note cannot refer to the mortgage for its basic terms as to amount, who, where or how or interest to be paid, for example... it has to be complete in itself).

Generally whosoever holds the note (literally physically) or is assigned it can enforce it against its maker. They are fully negotiable meaning whomsoever holds them and is legally assigned can enforce. If he has taken the note it is assumed under law he also has the mortgage. If a note is taken without notice of default, dishonor or other fault contractional fault or defense it is taken by a holder in due course meaning the holder of it can enforce it against the maker having any defense... including fraud, duress, theft on or by the maker of the note (i.e. if you got beat up to sign the note but someone takes it without knowledge of that fact they can legally enforce it against you as maker). Interestingly in the 16 through 18th century people used to assault someone with money on the street and drag them in a back alley and force them to sign a promissory note... and it was enforced! This usually happened on things like bad or gambling debts. So if this happens to you, you better publish an notice of dishonor in a legal newspaper and file a suit to have the note ruled a nullity before someone tries to enforce it on you! But FYI Banks never make the loans directly they use an intermediate company to act as a straw man to initiate the loan... yes you may be setting in the bank when you sign the papers and they may say a name you think is the bank you thing you are in but I can guarantee you they are only acting as a loan originator... why is the protections of holder in due course. So nearly as soon as you sign the thing it is negotiated to a holder in due course so it is easy to enforce. Many times notes are converted into bearer instruments by a holder simply by assigning the note leaving the name of who it is assigned to blank... basically simply signing with the words "pay to the order of _____.", or more rarely "pay to the order of the holder". Interestingly, anybody that has to note can enforce if against its maker. Worse, a holder can say 'I lost the note' and file a affidavit of lost note... and fully enforce!

Now what is scary is if you own your home, boat or whatever outright some fraudster can mortgage it without you knowledge and you can be stuck with either paying or losing. You realize (and it is worse than I have explained simply) you might have very few defenses open against a 'holder in due course'. Even if it is done by fraud. Nearly all countries financial systems work this way. So owning something outright is not smart policy... very hard to police anything you own like that. Good idea to have it mortgaged even if the mortgage is basically held by an entity you control.

Now in buying a business, house, boat or bicycle you might be buying something that has been promised as security to a loan. Generally in law if you simple buy it without having the debts cleared and an legal filings (anywhere) cleared you will also be buying the liabilities. In the case of the boat I bought long ago in Florida the gentleman had pledged it as security for purchase of a family members construction company... and the UCC filing in the USA listed several pieces of construction equipment in the filing. The family member had not paid the loan for all this stuff fully with the originating bank (along the way supposedly the boat was released) but on the filing it had been listed as a piece of construction equipment and it was not clear it was a boat or bulldozer... see it had a small CAT auxiliary engine that the serial number for that had been listed under CAT on the UCC filing. What the suit was about me paying for several pieces of construction equipment that had not been paid for after I owned the boat for a couple years. even the original loan companies investigators said from his investigation the boat had been released and I legally owned it in court. The court was not sure because of the CAT engine number listed on the original filing... which was only produced as a murky faxed document. We ended up settling for the value of the boat. So as settlement I paid basically for it twice and paid for legal bills totaling more than the price of the boat new.

The mortgage meltdown in 2008 was primarily due to the fact the law allowed anybody to make loans (usually as a straw man for a bank) where the loan was bad or defective technically or legally. Technically means someone was not able to pay from the beginning or the security promised was not really worth the value of the loan. Legally means defective like missing a mortgage or note (really it was that bad). These garbage loans were packaged into groups and securities and sold as derivative investments... on a vast scale. This is still happening but the rules are different... now it is basically a scheme to gain government guarantees and insurance rather than stiff investors in the investment markets.... Oh, they are still being stiffed just in a different manner and on an even bigger scale.

Ok with the basics in place we can discuss the dangers in buying yachts.

See on asset protection schemes often debt instruments are used. Where the official owner is an entity in lets say an offshore paradise somewhere with good flag rules. Usually that entity or company owns the boat and all the stock in the company, per British Corporate law, but the company is controlled by a managing director (who has no ownership stake in the boat or the company). The company that holds the boat has promised its assets, which the boat is one or the primary one does not matter, in a convertible debt instrument... promissory note (promise to pay a debt) and mortgage (promise of the boat to secure payment on a debt). This is a lien against the yacht and that lien is really against the company which the boat is an asset of. Therefore, the boat may or may not be listed on the mortgage. The real owner holds the debt instrument usually as a derivative investment. See the problem.... and even if buying form the shipyard... you might be buying the shipyards liabilities.

Well it is very late here but I will explain a little more.

Quite often significant assets are protected by turning the asset into a derivative. I have done these many times. Not because I am trying to get away with something illegal but simply protect an asset or investment or myself. A yacht has lots of potential liabilities associated with it and usually is worth a lot of money.

How do you protect that... well you can buy some insurance but that you will find is basically to make the insurance company money. They are not in the business of losing money so the coverage is structured to minimize losses to them. I have posted about the issue of subrogation of the insurance claim here. Subrogation allows the insurer to step into the insured shoes in a legal sense. Few understood but basically that is the claim and the property protected by the insurance become the insurance company's if you have a claim... and you as the owner of the yacht may not like it very much. Also, quite often they recover more than they pay out on the claim by action of subrogation law. Yes, that is hard to believe for most but that is the game in making money in the insurance business. I can almost guarantee that your insurance will not work to your best interest. So that is not really the best thing unless you have penny-ante claims but have enough of those and your rates increase. The insurance company effectively is in the business of making money on the claim... you or someone else pays for that. That is the insurance business.

Basically protecting the asset and yourself is your responsibility in the end. The liabilities can be the slip and fall, serious injuries etc those are usually small liabilities. Those and accidents are usually covered by insurance as that is often required by law or the other authority. The real issues are things like drugs this includes criminal use of the asset; where if you own personally you may have criminal liability for the action of a guest or crew. Or, it could be loss due to suit due to some other issue in life. Or, ownership claims. Or, financial claims like another loan taken out against the property, order of the debt usually has precedent but may not be the case in all cases. Or, taxes. And of course, a myriad of other things you may not be able to foresee.

The best way to do this is use debt registered against the asset and/or the entity owning and/or operating the yacht. Fundamentally in nearly all jurisdictions the debt has precedent in claims. Bankruptcy can effect the thing too. Structured use of debt instruments and derivatives in the right way can protect you, the value of the asset and even allow a tax right offs.

So knowing this in a simplistic way one realizes purchasing a large piece of personal property like a yacht is a complex matter if you want to protect yourself, the yacht and the money you buy it with. You could end up without a boat in the water being eaten by sharks or on the short end of the plank with hungry sharks snapping and about to be eaten alive. Because the boat could have been innocently protected by use of such means or in the worst case it might have been promised as security for a loan and you don't know until as you say the debt collector comes to collect.

AffrayedKnot is absolutely right about the debt is directly tied to the mortgaged or promised as security property.
Let me be the ignorant buyer example. It is a good lesson to all. Almost no matter how well you investigate someone could have placed a lien on the boat or a part of its equipment. That goes for shipyards too. I have mentioned that here to... in building your boat you may end up owning a shipyard/yacht builder too.

Meaning you buy any previous debt with buying the asset (boat).

That is what happened to me despite well intentioned and pretty though checking... I bought a small excavating companies debt on a bunch of excavating machines... with the boat all of which had been sold too.

Why because someone along the line had put on a public notice filing on five pieces of construction / excavating equipment.

The UCC filing applicable which was not discovered despite search at time of purchase of the boat listed as follows: A. CAT serial number, CAT serial number, CAT serial number, CAT serial number, and CAT serial number. My problem was the little CAT engine in the boat was one of those serial numbers. Noting the boat had a builder and hull number the court did not care, the fact was the filing existed in Florida and the other fact was the auxiliary engine serial number was on it. The loan company attorney plead that was the only number his client knew about as to the mortgage.

My investigator and the loan companies investigator both determined all the equipment had been sold and release by a subsequent loan. However, the original company claimed they were not ever fully paid and therefore were owed money from the UCC filing they had which they had not released. My attorney and investigator determined they had promised to release but just not got around to it. The judge accepted only the pleading of their attorney that the money was owed and thereby I owned the boat and I thereby owned the whole loan. I believe later the same loan company when and received similarly for the other five well down the stream owners of the equipment... as much as they could. Later I had it investigated and the loan company recovered by payment and recoveries 256% of the original loan... plus costs. I was just interested to see where the scheme would go.
I bet they are still playing this game.
They were unassailable as the loan company operated in Florida but was actually based in Nebraska and of course court filing deadlines and statue of limitations fall away very quickly in the USA. And, in the USA banks (or any sleazy loan company) rules the day in court.

I was considered deep deep pockets, just some rich guy living in Paris had business in USA and France and could afford it that is the impression that carried through.

Now I never went to court or even knew the details of the situation other than pay the bills over the two years it dragged on. Later I had my attorney here get the records for me to read over (best to do that after the smoke had cleared and I was in a frame of mind to accept the mess.) I like to learn about these things a just general information. Very interesting the attorney in the states (hired on recommendation of a friend) did an excellent job. Even the judge disqualified himself and venue was changed... the real reason (not stated) behind that was he did not understand the law well enough and it was too complicated.

Interesting, in France this would not have happened and it anything close had people would be in jail with the largely muslim population in there being beat up every day and passed around like a sheep... really ugly places. Also, I would have been on more equal footing with the financial institution.

The second point AffrayedKnot brings up is the charterer situation... another interesting matter and possibly why chartering your pride and joy may not be a good idea.