Ballantrae Holdings Inc. v. The Ship Phoenix Sun

In Maritime Liens, Mortgages & Priorities on (Updated )

Précis: This case deals with priorities as between various claimants and addresses the relevance of provincial personal property security legislation (PPSA) to maritime claims and priorities.

Facts:The “Phoenix Sun” was purchased while under arrest by a person who intended to repair her, find a cargo and sail her to Turkey where she would be sold for scrap at a profit. The ship was purchased for $1 million which was borrowed from the plaintiff, Ballantrae, and secured by a mortgage on the ship. The mortgage was never registered in a ship registry but it was registered as a charge under the Ontario Personal Property Security Act (“PPSA”). The purchaser hired a crew and persuaded other chandlers and repairers to provide goods and services to the vessel. The purchaser also obtained some additional funds from a Mr. Hamilton. Eventually, the funds ran out and the ship was again arrested in this proceeding commenced by Ballantrae. The ship was subsequently sold for $680,000. Pursuant to the normal procedure established by the Federal Court, claimants to the proceeds of sale filed their claims with the court. The court was called upon to adjudge and rank the claims. The claimants and claims included:

– The Marshall for the fees and expenses of bringing the ship to sale;

– Ballantrae for its costs of bringing the vessel to sale;

– The Master and crew of the vessel for the amounts due to them under their employment contracts;

– The City of Sorel for berthage and the costs of supplying electricity, which it claimed had a priority under either the Canada Marine Act, the Marine Liability Act or in equity;

– Various necessaries supplier who claimed lien rights under s. 139 of the Marine Liability Act;

– Mr. Hamilton, who also claimed lien rights under s. 139 of the Marine Liability Act or in equity;

– Ballantrae for the amount due under the mortgage; and

– Skylane, who also claimed to have a valid mortgage registered in Panama.

Decision:The claims will rank in accordance with the reasons.

Held:Generally, the highest priority claims are the Marshall’s fees and expenses and the costs of the creditor that brought the ship to sale. Thereafter come maritime liens and liens created by statute, which enjoy the same status. Next in ranking are mortgages followed by in rem creditors. On occasion, when the interests of justice require, this traditional ranking may be altered.

The Marshall’s claim for expenses ($39,000) is the claim with the highest priority. Ranking second is the claim of the plaintiff, Ballantrae, for the costs incurred to bring the ship to sale. These costs are not the actual solicitor client costs but are to be taxed under the tariff. Also, this priority is limited to the costs associated with bringing the ship to sale. It does not include the costs of asserting its own claim or contesting the claims of other parties.

Ranking next are the claims of the Master and crew for wages and benefits. These are alleged to be $180,000. However, the claim is calculated using an exchange rate at the date of judgment and includes a retainer or stand-by fee of one third of one month’s wages. The exchange rate to be used is the rate on the date of the breach, not the date of judgement. Additionally, the retainer or stand-by fee component does not enjoy maritime lien status. Finally, although the crew left the ship on 21 September 2014, their wage claims are to be calculated pursuant to the terms of their contracts which give additional payment.

The City of Sorel claims for berthage ($75,000) and for the supply of electricity ($22,000). It argues it is entitled to priority under s. 122 of the Canada Marine Act or s. 139 of the Marine Liability Act or, alternatively, on an equitable basis. Section 122 of the Canada Marine Act gives priority to a Port Authority or to “a person who has entered into agreement under s. 80(5)”. The City of Sorel is not a Port Authority and is not “a person who has entered into agreement under s. 80(5)” since s. 80(5) relates to parts of the Saint Lawrence Seaway and Sorel is not within the Seaway. Sorel therefore has no priority under s. 122 of the Canada Marine Act. Neither does the city’s claim fall under s. 139 of the Marine Liability Act. The claim of the city is not for “goods, materials or services” supplied to a vessel. This follows from the distinction in s. 22 of the Federal Courts Act between necessaries and docking charges and from the purpose of s. 139 of the Marine Liability Act which was to give Canadian necessaries suppliers a priority equal to that enjoyed by foreign suppliers. In the traditional ranking, the claims of the City of Sorel should, therefore, have no priority. However, the court does have an equitable jurisdiction to vary the traditional ranking if the interests of justice so require. It is appropriate to alter the traditional ranking in respect of the claim for the supply of electricity to the ship since this did benefit all of the creditors. The claim for the costs of electricity will rank immediately after the claims of the Master and crew.

The claims of necessaries suppliers with lien claims under s. 139 of the Marine Liability Act rank after the claim of the City of Sorel for the supply of electricity.

One of the claimants, Skylane, claims a Panamanian mortgage over the vessel in the amount of $1.7 million. This court previously ordered that it file evidence as to the validity of its Panamanian mortgage and it failed to do so. The claim of Skylane is struck for failure to comply with this order. In addition, the claim of Skylane would have been defeated because: the only evidence before the court is an affidavit to the effect the Skylane mortgage is invalid under Panamanian law; and, the Skylane mortgage was granted while the ship was under arrest. A shipowner cannot deal with a ship under arrest in such a way as to dissipate its value to other creditors.

Another creditor claimed to be a crew member and entitled to priority for unpaid wages of $50,000. This creditor was not, in fact, a crew member. He was an employee and shore labour and does not benefit from any priority.

Mr. Hamilton claims a priority for various amounts advanced to the purchaser to pay crew, service providers, ship chandlers and other vessel maintenance expenses. However, the evidence establishes Mr. Hamilton was in a joint venture with the purchaser and was not a lender. As a joint venturer he is only entitled to whatever funds are left over after all other creditors are paid.

The claim of Ballantrae as mortgagee is challenged on the grounds that its mortgage was not registered. Hamilton argues that as an unregistered mortgage it is an equitable mortgage which ranks just above ordinary in rem creditors. It is not correct that an unregistered mortgage is necessarily an equitable mortgage. An unregistered legal mortgage would have difficulty ranking ahead of a subsequently registered mortgage but outranks equitable charges and in rem creditors.

The registration of the Ballantrae mortgage under the Ontario PPSA also raises issues. Ballantrae argues this gives the mortgage priority over ordinary in rem creditors whereas Hamilton argues the registration under the PPSA is not relevant. Specifically, Hamilton says the PPSA registration is not relevant because, first, the vessel was never in Ontario and, second, the PPSA cannot constitutionally apply to maritime matters. It is correct that the PPSA does not apply as the vessel was not in Ontario and this is sufficient to dispose of this issue. However, the point of the general application of the PPSA to maritime matters is of such importance that it deserves comment. Recent jurisprudence indicates that the scope for the “incidental” application of provincial statutes in a maritime context is much broader than was thought. This court may “take cognizance of the Ontario PPSA”.

Finally, with respect to interest on the claims, prejudgment interest is in the discretion of the court. In the circumstances, it is appropriate that no prejudgment interest be awarded.

Comment: The statement that maritime liens and liens created by statute have the same status may be questionable as a rigid rule. It will depend in each case on the precise wording of the statute in issue. Also, the court’s treatment of the Ontario PPSA is notable but raises a question of what happens when the priorities established by the PPSA differ from those that arise under Canadian maritime law.