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In re Mission Marine Associates Inc.

decided: October 30, 1980; As Amended November 20, 24, 1980.

IN THE MATTER OF: MISSION MARINE ASSOCIATES, INC., A CORPORATION OF THE STATE OF CALIFORNIA AUTHORIZED TO DO BUSINESS IN NEW JERSEY, DEBTOR MISSION MARINE ASSOCIATES, INC., APPELLANT ; IN THE MATTER OF: MISSION MARINE ASSOCIATES, INC., A CORPORATION OF THE STATE OF CALIFORNIA AUTHORIZED TO DO BUSINESS IN NEW JERSEY, DEBTOR A.J. ARMSTRONG COMPANY, INC., LAZERE FINANCIAL CORPORATION AND FUQUA INDUSTRIES, INC., APPELLANTS


ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

Before Gibbons, Weis and Sloviter, Circuit Judges.

Author: Gibbons

Opinion OF THE COURT

Mission Marine Associates, Inc., a debtor which filed a petition for an arrangement with its creditors pursuant to Chapter XI of the Bankruptcy Act (Mission Marine), and A.J. Armstrong Co., Inc., Lazere Financial Corporation and Fuqua Industries, Inc., secured creditors of Mission Marine (the secured creditors) appeal from orders of the United States District Court reversing an order of the Bankruptcy Court. The Bankruptcy Court had held that Penske G M Power, Inc. (Penske) had no lien on any property of the debtor. The district court, reversing, held the New Jersey Maritime Lien Act, N.J.S.A. 2A:44-59, confers on Penske a lien superior to claims of Mission Marine's secured and unsecured creditors. We reverse.

Mission Marine engaged in the business of manufacturing and selling yachts. Since 1976 Penske has sold diesel engines for installation in those yachts, on open account with ninety-day credit. The yachts were sold, upon completion, to independent dealers who in turn resold them to the general public. When, on May 23, 1979, Mission Marine filed its Chapter XI petition fifteen Penske invoices for engines totaling $498,379.50 were unpaid. None of the vessels in which the engines covered by those invoices were to be installed were yet complete. Unlike the secured creditors, Penske had taken no steps to obtain or perfect a security interest in accordance with the Uniform Commercial Code. N.J.S.A. 12A:9-101 et seq. Nevertheless it filed a complaint in the Bankruptcy Court claiming that as a matter of law it had a continuing lien on the vessels and the proceeds of their sale, preferred over all of Mission Marine's creditors including secured creditors holding perfected security interests. The Bankruptcy Court rejected, but the district court accepted this contention. The latter relied on a New Jersey statute enacted in 1877 which provides:

A debt contracted by an owner of a vessel within this State, shall be a continuing lien upon the vessel and her apparel until paid, for:

a. Labor performed or materials or articles furnished in this State for the building, repairing, fitting, furnishing, or equipping the vessel in this State at the time when the same was performed or were furnished; or

b. Supplies, provisions and stores furnished within this State for the use of the vessel; or

c. Towing, wharfage and drydockage of the vessel and the expense of keeping the same in storage in port in water or on land, including expenses incurred in taking care of and employing persons to watch the vessel.

The lien shall be preferred to all other liens on the vessel, except mariner's wages.

N.J.S.A. 2A:44-59. The statute is one of those state enactments, now largely obsolete, passed to fill in the gap in maritime lien law caused by the Supreme Court's announcement of the home port rule. The General Smith, 17 U.S. (4 Wheat.) 438, 4 L. Ed. 609 (1819), The Lottawanna, 88 U.S. (21 Wall.) 558, 22 L. Ed. 654 (1874). The rule held federal admiralty law did not afford a lien to suppliers and repairers of a vessel in its home port. The enactment of the Federal Maritime Lien Act of 1910, 36 Stat. 604 obsoleted most of the New Jersey and similar statutes, for in § 1 it revoked the home port rule, and in § 5 it provided expressly for federal preemption.*fn1 Prior to 1910, however, the Court had held that an unlaunched vessel was merely a land based structure to which admiralty law had no application. E. g. Tucker v. Alexandroff, 183 U.S. 424, 438, 22 S. Ct. 195, 201, 46 L. Ed. 264 (1901). Even after the enactment of the Federal Maritime Lien Act, the Court continued to hold that a contract for construction of a vessel was not a maritime contract and that furnishing of necessary parts for a newly constructed vessel, even after the hull is in the water, does not give rise to a maritime lien. E. g. Thames Towboat Co. v. The Francis McDonald, 254 U.S. 242, 41 S. Ct. 65, 65 L. Ed. 245 (1920). Thus only so much of N.J.S.A. 2A:44-59(a) as provides for a state law lien for parts furnished for a vessel's initial construction remains effective.*fn2 That much, however, fits Penske nicely, giving it a non-possessory statutory materialman's lien that does not require filing or other notice to creditors.

The appellants contend this secret lien is ineffective against them for three reasons. They contend, first, that a priority of lien provision in the Uniform Commercial Code, N.J.S.A. 12A:9-310, subordinates Penske's non-possessory materialman's lien to perfected security interests.*fn3 New Jersey has not ruled definitively on the priority of non-possessory secret liens over perfected security interests.*fn4 Second, they urge that the debtor in a Chapter XI proceeding, armed with the same rights as a trustee in bankruptcy by virtue of Section 342 of the Bankruptcy Act, is treated by virtue of Section 70(c) of that act as an ideal lien creditor under the applicable state law.*fn5 That section may not advance their cause, however, unless a judgment creditor would in New Jersey come ahead of a maritime lien creditor. On that question, as well, we find no definitive answer in the New Jersey cases. Finally, appellants rely on Section 67(c)(1)(B) of the Bankruptcy Act, which invalidates, against a trustee in bankruptcy, statutory liens which would on the date of bankruptcy be invalid against a bona fide purchaser from the debtor.*fn6

As with Section 70(c), the Bankruptcy Act's reference is to state law; in this instance the position of a bona fide purchaser under New Jersey law against the holder of a non-possessory non-filing statutory lien. Here we do find clear instruction in the New Jersey caselaw. Penske's lien is a typical New Jersey materialman's lien, such as that provided for garagemen and repairers. In Lanterman v. Luby, 96 N.J.L. 255, 114 A. 325 (E&A 1921), the state's highest court held that while the garagekeepers lien statute provided that loss of possession of the automobile would not deprive the repairman of his lien, if he did not retain possession the lien was not good against a subsequent purchaser without notice. The court announced the New Jersey policy concerning the protection of bona fide purchasers against secret non-possessory liens in these broad terms:

Secret liens upon chattels are an obstruction and a menace to trade and as such are against the policy of the law. They attempt to contradict and to destroy the universally accepted and natural, as well as legal, badge of ownership of chattels, which is possession. The law is most jealous in its protection of an innocent purchaser of a ...


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