On January 15, 2013, the United States Supreme Court issued its decision in Lozman v. City of Riviera Beach, Fla.,¹ which examined one of the most fundamental questions in vessel finance – what is a vessel? This decision is of great importance to vessel financiers for many reasons, but perhaps the most important of these reasons is that a watercraft’s status as a “vessel” is critical to its eligibility for documentation and imposition of a preferred mortgage, which is the primary vehicle for financing vessels in the United States and elsewhere in the world.²

In its decision, the Court analyzed the proper factors to consider in applying the definition of “vessel” found in the Rules of Construction Act:³

The word “vessel” includes every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.⁴

This definition of “vessel,” which is commonly referred to as the default definition, applies throughout the U.S. Code, except where a different definition is set forth for a specific purpose. As neither the Vessel Documentation Act nor CIMLA sets forth a different definition, the default definition applies for purposes of determining whether a watercraft is eligible for documentation and imposition of a preferred mortgage.

Facts of the Case

The watercraft under scrutiny in Lozman was a non- self-propelled, homemade floating structure comprised of a plywood hull with bilge space and a deck capped with a house constructed with land-based materials, including French doors and windows, and containing everyday household appliances. The craft was secured by rope in a public marina in the City of Riviera Beach, Florida and connected to shore-side utilities by an extension cord and a garden hose. The Court observed that nothing about the structure was of marine quality, although it had been towed over water long distances twice during a seven-year period. As the result of disputes with Mr. Lozman, the City of Riviera Beach arrested the craft on alleged maritime lien claims for failure to pay dockage fees. The District Court held that Mr. Lozman’s structure was a vessel, and the Eleventh Circuit Court of Appeals affirmed, whereupon the structure was ordered sold at auction to the municipal claimant, which destroyed the craft after unsuccessful efforts to sell or donate it.

Mr. Lozman petitioned for certiorari on the basis that the arrest and sale of his floating structure was wrongful in that the structure was a floating home and not a “vessel” and therefore could not be arrested or sold in an in rem action, as there was no admiralty jurisdiction. The Court granted certiorari to resolve conflicts among the federal circuits on the proper factors to be considered in applying the statutory definition of “vessel.” The gaming industry and two floating home associations, among others, submitted briefs amici curiae in support of Mr. Lozman’s position. A labor union, a large group of law professors, the National Marine Bankers Association and the Maritime Law Association of the U.S. (MLA) submitted amici briefs in support of the City of Riviera Beach. Vedder Price New York shareholders Francis X. Nolan, III and John C. Cleary authored the amicus curiae brief in the case on behalf of the MLA.⁵

The Court's Opinion

Justice Breyer wrote the Court’s opinion, joined by six other justices, reversing the Eleventh Circuit and holding that Lozman’s structure was not a “vessel” within the meaning of the Rules of Construction Act. Justice Sotomayor, joined by Justice Kennedy, filed a dissenting opinion. Although the Court and the dissent agreed that not everything that floats is a vessel, they disagreed on the interpretation of the statutory definition. The majority opinion focused specifically on the meaning of the phrase “capable of being used” and referred to a series of cases as possibly being read to support the just-discredited “anything that floats” approach. While not expressly overruling the holdings of these decisions, the majority at least cast doubt on this series of cases, which had been considered settled law on various classes of waterborne structures.

Clearly frustrated at oral argument by the inability or unwillingness of the parties to articulate a test, the majority held that whether an object is a vessel from now on will depend in each case on the perception of a “reasonable observer” viewing the physical attributes of a craft and its “activities” or “behavior.” The Court also stated that the subjective intent of the owner of the craft should not be taken into account in determining vessel status. The Court indicated that the reasonable observer’s analysis should focus on whether the structure was “designed” at least in part to any practical degree “to serve a transportation function” and actually did so sometimes. The Court further noted that it is possible that a watercraft that at one time may have been a “vessel” may depart that status if it is altered in some way or “permanently moored” so as to disable its ability to perform transportation on water. Further, capability to perform transportation on water was to be determined on a “practical, not a theoretical” level. In its discussion of “activities” or “behavior,” the Court gives no hint as to the extent of the activities or behavior required to support a finding that a watercraft is a “vessel”; however, the Court did observe that two lengthy trips in tow over water is insufficient activity.

The dissenting opinion pointedly criticized the majority for announcing a wholly unprecedented “reasonable observer” standard that abandoned years of precedent sorting out which craft are or are not “vessels.” As the dissent rightly warned:

without knowing whether a particular ship is a [vessel under the Rules of Construction Act], it is impossible for lenders to know how properly to characterize it as collateral for a financing agreement because they do not know what remedies they will have recourse to in the event of a default.⁶

Although Mr. Lozman’s contraption was neither documented nor mortgaged under federal law, the Lozman Court’s “reasonable observer” standard for determining whether a watercraft is a vessel will apply to vessel documentation and mortgaging because the Court was interpreting the default definition of vessel contained in the Rules of Construction Act. As a consequence, whether a watercraft can be lawfully documented and mortgaged and be subject to in rem arrest is now a determination that is left to the reasonable observer viewing not only physical characteristics, but also the activity and behavior of the craft at a given moment in time. And because, as the Court noted, status can change, what is a vessel on the day a mortgage is imposed may not remain a vessel until the mortgage is satisfied.

Questions Left Unanswered

The Court’s decision did not address many issues of concern raised by certain amici, and in announcing the “reasonable observer” standard, the Court left open more questions than it answered.

Gaming Industry and Floating Home Associations

The principal concerns of the gaming industry and the floating home associations appear to arise out of fears that an expansive view of vessel status would result in bartenders, card dealers and domestic employees being treated as “seamen” under federal maritime laws such as the Jones Act.⁷ This is so even though many waterborne casinos continue to assert vessel status for the very same structures for purposes of documentation and encumbrance with preferred mortgages. The Lozman Court ignored this incongruity, as has the U.S. Coast Guard in past practice. It remains to be seen whether Coast Guard practice will allow many of these casino boats to remain documented as vessels following the decision in Lozman.

Maritime Law Association

Although urged to do so by the MLA, the Court was silent on the issue of what constitutes “permanently moored,” a matter of continuing uncertainty in determining vessel status on a case-by-case basis.⁸ In addition, the Court did not address the need to sharply distinguish between the “existential vessel” that is capable of transportation on water and the vessel in navigation. If anything, the Court’s appointment of the “reasonable observer” to evaluate physical attributes together with “behavior and activities” seems to undermine and perhaps vitiate the capability test. Many existential watercraft that are “capable of being used as a means of transportation on water” likely would not be viewed by a “reasonable observer” as being either designed to serve, or actually serving, a transportation function. In addition, the status of vessels in longer-term “cold layup” and that of tankers dedicated to stationary offshore storage of oil and gas may need to be addressed in the wake of Lozman.

* * *

Given the new “reasonable observer” standard, maritime financiers should (i) carefully consider the risk of financing structures at the edges of the maritime world; (ii) confine their finance activities to more traditional vessel types and uses; and (iii) consider the uses to which a vessel is devoted during the term of a mortgage in order to minimize the possibility that a financed watercraft will suffer an adverse change in status as a “vessel.” Financiers who do otherwise run the risk that a court will, after the fact, determine that a financier’s collateral was not a “vessel,” or at some point ceased to be a vessel, which, in either case, would render a preferred mortgage invalid – all under the guise of what a “reasonable observer” would think.

As we all know, reasonable minds may differ.

_{¹ 133 S. Ct. 735 (2013).}

_{² The preferred mortgage had its genesis in U.S. law with the Ship Mortgage Act of 1920, and is currently codified in the Commercial Instruments and Maritime Lien Act (46 U.S.C. §§31301 et seq. (2006)) (CIMLA). A preferred mortgage enjoys high priority in the hierarchy of liens and claims, and it permits the enforcement of the mortgage by arrest in rem against the encumbered vessel. To be encumbered with a preferred mortgage, a U.S. vessel must first be documented with the National Vessel Documentation Center. In addition, the vessel must weigh at least five net tons. For foreign flag vessels, CIMLA recognizes similar foreign instruments as preferred mortgages for purposes of enforcement in the United States.}

_{³ 1 U.S.C. §§ 1-8 (2006).}

_{⁴ 1 U.S.C. § 3 (2006).}

_{⁵ The MLA’s amicus brief is accessible under “Library” on the MLA’s website (www.mlaus.org).}

_{⁶ 133 S. Ct. at 754, n. 6.}

_{⁷ 46 U.S.C. § 30104 (2006).}

_{⁸ The Court did conclude that the flimsy connections securing and servicing Lozman’s craft did not constitute permanent mooring.}