The Bank of New Orleans and Trust Company, Plaintiff-appellee,andstapp Bros. Towing, Inc., Intervenor-appellee, v. Marine Credit Corporation, Intervenor-appellant, 583 F.2d 1063 (8th Cir. 1978)

Frank J. Dantone of Swank, Land & Associates, Greenville, Miss., for appellant Marine Credit Corp.; Joel J. Henderson, Greenville, Miss., filed briefs.

Charles A. Newman of Thompson & Mitchell, St. Louis, Mo., for appellee Bank of New Orleans; Michael D. O'Keefe, St. Louis, Mo., filed brief.

John B. Carothers, III, St. Louis, Mo., for appellee-intervenor Stapp Bros. Towing, Inc.; Wayne K. Anderson, Hinds & Meyer, Houston, Tex., filed brief.

Before HEANEY and HENLEY, Circuit Judges, and HANSON,^*  Senior District Judge.

HANSON, Senior District Judge.

This is an appeal in an admiralty case from the district court's¹  dismissal of Marine Credit Corporation's (Marine) motion to reclaim electronic equipment from four oil screws on which the Bank of New Orleans and Trust Company (the Bank) instituted an in rem action to foreclose preferred ship mortgages. See 46 U.S.C. § 951. Because the res is no longer under the jurisdiction of the district court, we dismiss the appeal for want of jurisdiction.

The pertinent facts are uncomplicated. The Bank was the holder of properly perfected preferred ship mortgages on four vessels, the M/V BAYOU LAFOURCHE, the M/V BAYOU ST. JOHN, the M/V BAYOU TERREBONNE, and the M/V BAYOU CHENE. See 46 U.S.C. §§ 921-22, 953. On January 31, 1977 the Bank filed its complaint in the district court alleging, Inter alia, that defendant mortgagors named in the complaint were in default on a promissory note secured by the preferred ship mortgages. The complaint sought warrants of arrest for the vessels, foreclosure of the preferred ship mortgages, and judgment for the balance owing on the promissory note. The complaint specifically asked for condemnation and sale of the vessels, "their engines, tackle, apparel, furniture, and equipment." See Rule C, Supplemental Rules, F.R.Civ.P.

The vessels were subsequently seized by the U. S. Marshal and the district court ordered notice of the seizure published in a newspaper of general circulation. No person appeared to claim an interest in the vessels or to otherwise resist the foreclosure as provided in the published notice of seizure. See Rule C(6), Supplemental Rules, F.R.Civ.P. Accordingly, the district court entered default judgment against the vessels, including their equipment, and ordered them condemned and sold on April 29, 1977. Bank of New Orleans and Trust Co. v. Big B Towboat Services, Inc., 435 F. Supp. 997, 1001-02 (E.D. Mo. 1977).

Notices of the impending sale of the vessels were published on May 7, 1977, May 14, 1977, and May 28, 1977. On May 19, 1977 Marine filed a motion to intervene pursuant to Rule 24, F.R.Civ.P. In its motion, Marine alleged that in 1973 and 1974 Specialized Electronics leased certain electronics equipment to Big B Towboat Services, Inc.,²  a mortgagor defendant, and certain affiliated corporations, for placement on the vessels in question. Marine, assignee of the leases in question, sought intervention to recover rent due, and asked leave to file a "Motion to Reclaim" to recover the equipment. Involved were radar units, radio telephones, and similar electronic paraphernalia. The district court granted the motion to intervene on May 20, 1977.

The vessels were sold on June 3, 1977. The Bank was the high bidder on the M/V BAYOU ST. JOHN, the M/V BAYOU CHENE and the M/V BAYOU TERREBONNE. Stapp Bros. Towing, Inc., bid the highest on the M/V BAYOU LAFOURCHE. Thereafter, on June 6, 1977, the district court entered orders confirming the sale of the vessels. That same day, the U. S. Marshal executed a bill of sale for the M/V BAYOU LAFOURCHE. On June 13, 1977 the Marshal executed bills of sale for the remaining three vessels.

After its motion to intervene was granted on May 20, Marine took no further action until June 14, 1977, after the vessels had been sold and bills of sale executed. At that time Marine filed its "Motion to Reclaim" in which it alleged that it was assignee of the leases of electronic equipment located on the vessels, that the leases were in default, and asked that it be permitted to remove the equipment. At no time prior to the sale of the vessels and their equipment did Marine seek recovery of its alleged property pursuant to Rule C(6), Supplemental Rules, F.R.Civ.P. Nor did Marine take any action in the district court to stay sale of the vessels or disposition of the proceeds until its ownership interest was adjudicated.

On June 17, 1977 the district court entered its order establishing priorities and distributing the proceeds of the sale of the vessels.³  The district court recognized Marine's claim for rent on the delinquent leases in the amount of $21,736.37 as a maritime supply lien, but with respect to all the vessels, held that the Bank had a preferred mortgage lien having priority over Marine's ordinary supply lien. See 46 U.S.C. §§ 951, 953. The proceeds were exhausted in satisfaction of the Bank's preferred mortgage lien, and preferred maritime liens asserted by other parties, with the result that no funds remained to settle the lower priority claims of Marine.

Marine subsequently filed a "motion to alter, amend and/or correct order establishing priorities and distributing the proceeds" on June 23, 1977. Marine sought, Inter alia, amendment of the court's order to allow removal of the electronic equipment. Marine appeared to accept the district court's decision as it related to Marine's lower priority on its claim for delinquent rent, and we do not understand Marine to have appealed from that aspect of the district court's rulings. On June 24, 1977 Stapp Bros. Towing, Inc., the purchaser of the M/V BAYOU LAFOURCHE entered a restrictive appearance for the limited purpose of protecting its title in the vessel by opposing the motion to reclaim. See Rule E(8), Supplemental Rules, F.R.Civ.P.

After a hearing, the district court dismissed Marine's motion to reclaim and overruled the motion to alter or amend, for four reasons: (1) lack of jurisdiction over the vessels; (2) lack of a substitute res in view of the fact that proceeds from the sale of the vessels had been distributed;⁴  (3) Stapp Bros. was a bona fide purchaser for value without notice; and (4) the motion was not timely. It is from the district court's order of dismissal that Marine appeals.

Marine insisted in the district court and in this Court that its motion to reclaim was directed specifically to the recovery of the possession of the electronic equipment involved. Marine did not attempt to secure the value of its alleged property from the proceeds of the sale of the vessels in the district court, and it has only been in this Court, and then reluctantly, that Marine indicated a willingness to accept a monetary substitute for the equipment.

Accordingly, the primary issue is whether, on the facts of this case, in rem jurisdiction over the vessels remains to grant relief in the nature of the return of electronic equipment, after the vessels have been sold at a Marshal's sale. We hold that the district court does not retain jurisdiction. We also hold that, inasmuch as Marine did not heretofore seek recovery of the value of its alleged property and all proceeds have now been distributed, the district court is without in rem jurisdiction to determine whether Marine is entitled to have its asserted ownership interest satisfied out of proceeds. It follows that the appeal is now moot.

For present purposes, we assume arguendo that substantive proposition of law on which Marine rests, that as a security instrument pledging the mortgagor's ownership interest in a vessel a preferred ship mortgage does not extend to equipment which a mortgagor does not own and therefore could not mortgage; for example, leased equipment. See C.I.T. Corporation v. Oil Screw Peggy, 424 F.2d 767, 768 (5th Cir. 1970); Payne v. SS Tropic Breeze, 412 F.2d 707, 708-09 (1st Cir. 1969); First National Bank and Trust Co. v. Oil Screw Olive L. Moore and Barge Wiltranco I, 379 F. Supp. 1382, 1390-91 (W.D. Mich. 1973), Aff'd 521 F.2d 1401 (6th Cir. 1975); United States v. F/V Golden Dawn, 222 F. Supp. 186, 188 (E.D.N.Y. 1963). Marine asserts that the equipment in question was leased to the defendants in the foreclosure action and that it is entitled to board the vessels and remove it. This, of course, raises at least one factual issue which has not been properly presented to the district court; whether the leases in question were true leases, or were intended to operate as a form of conditional sales contract.⁵  See C.I.T. Corporation v. Oil Screw Peggy, supra at 768; United States v. F/V Golden Dawn, supra at 186-87. If the latter, Marine's claim as against the Bank's preferred ship mortgage would be no greater than that of a maritime lienholder. 46 U.S.C. § 971. See Layton Industries v. Sport Fishing Cruiser Gladiator, 263 F. Supp. 356, 359 (D. Mass. 1967). Accordingly, we operate under no assumption that Marine is attempting to recover leased property; rather, the question is better stated in terms of whether in rem jurisdiction remains so that the district court may properly address factual issues of this nature.

The Bank's foreclosure of its preferred ship mortgages was, by statutory definition, accomplished through a "suit in rem in admiralty." 46 U.S.C. § 951. Generally, removal of the res from a court's jurisdiction, or distribution of a substitute res deposited in the registry of the court, destroys in rem jurisdiction. See Inland Credit Corp. v. M/T Bow Egret, 552 F.2d 1148, 1151-52 (5th Cir. 1977); Platoro Ltd. v. Unidentified Remains of a Vessel, 508 F.2d 1113, 1115-16 (5th Cir. 1975); American Bank of Wage Claims v. Registry of District Court of Guam, 431 F.2d 1215, 1218-19 (9th Cir. 1970); Martin v. Bud, 172 F.2d 295, 296 (9th Cir. 1949). See also Rules C(2), E(3) (a), Supplemental Rules, F.R.Civ.P.⁶ 

Though Marine's motion to intervene requested leave to assert a motion to reclaim its allegedly leased equipment, Marine did not attempt to pursue its ownership interest until it filed its motion to reclaim on June 14, 1977, after the vessels had been sold and confirmation thereof ordered by the district court. See Wong Shing v. M/V Marinda Trader, 564 F.2d 1183, 1188-89 (5th Cir. 1977). Admiralty procedure is generally to be liberally construed to enable creditors to assert their claims against a libeled vessel. See The Charles D. Leffler, 100 F.2d 759, 760 (3d Cir. 1938). But it was incumbent on Marine, if it desired the return of specific property, to put its ownership clearly in issue before foreclosure and sale by filing its claim in accordance with Rule C(6), Supplemental Rules, F.R.Civ.P., followed by an answer to the Bank's complaint, See 7A Moore's Federal Practice P C.16, at 700.13-15,⁷  or by timely filing a proper motion to intervene.⁸  Rule 24(c), F.R.Civ.P. Marine failed to employ either of these well-defined mechanisms. And, even if it had, Marine was obligated to seek release of the property pending the judgment of the district court, a stay of execution of the district court's judgment, or file a supersedeas bond in other words, to take some action to preserve the res until Marine's in rem ownership claim was adjudicated in the district court and reviewed on appeal. See Rules 60(b), 62(b), (d), F.R.Civ.P.; Rule E(5), Supplemental Rules, F.R.Civ.P.; Rule 8, F.R.App.P. See also The Denny, 127 F.2d 404, 406-07 (3d Cir. 1942). Instead, Marine took no action to either assert its ownership claim before sale of the vessels, or to preserve the district court's in rem jurisdiction for purposes of appeal. No satisfactory explanation has been advanced for this failure. The vessels were sold and passed out of the control of the district court in due course. Clearly, the district court no longer has jurisdiction to afford Marine any in rem relief which would operate on specific items of equipment. See Schaaf v. S.S. North American, 368 F.2d 925, 926-27 (3d Cir. 1966).⁹ 

In any event, the result sought by Marine is pregnant with potential for abuse. Any procedure which would permit in rem claims to be asserted after foreclosure and sale of chattels on the basis of an antecedent ownership interest would obviously render title taken by a purchaser at a judicial sale of doubtful value. Thus we are inclined to agree with the district court that Marine's motion to reclaim was untimely.

There remains the question of whether jurisdiction exists to grant relief to Marine from the proceeds of the sale of the vessels, the substitute res. Assuming that an award from proceeds to compensate a party asserting an ownership interest is permissible, on the facts of this case we hold that no in rem jurisdiction exists to make a post-distribution alteration in the district court's disposition of proceeds.

In Inland Credit Corp. v. M/T Bow Egret, supra, the Fifth Circuit concluded that it retained in personam jurisdiction on appeal to correct errors in a district court's in rem adjudication of entitlement to the proceeds from the sale of a vessel. The proceeds had been distributed and the appellant lienholders had not sought a stay or filed a supersedeas bond. Finding itself at the "interface of in rem and in personam jurisdiction," the Fifth Circuit determined that it could exercise "broad in personam power" to correct error. Id. at 1152. The Fifth Circuit recognized that in so holding it was departing to some extent from usual notions as to the limitations of in rem jurisdiction.

Marine asks us to apply the principle of Inland Credit. However, even if we were to agree with the rationale of the Fifth Circuit, Inland Credit is completely inapposite here. Inland Credit presented a situation where lien claims were asserted against proceeds and the district court made an erroneous distribution. Here, however, the only claim Marine ever asserted against the proceeds of the sale of the vessels in the district court was its claim for overdue rental payments, the disposition of which is not here in issue. Marine never asked the district court for satisfaction of its alleged ownership interest out of proceeds, for it consistently insisted on return of the equipment. Even as late as Marine's motion to alter or amend the district court's order distributing proceeds, Marine asked only that it be permitted to "assert its claim against its leased equipment And remove it from the vessels which are subject to the above action." (Emphasis added.) The motion to reclaim was to the same effect. It follows that the district court could not have committed error in distributing proceeds that Marine never claimed. Thus the original in rem error on which Inland Credit was predicated is missing here. Since the proceeds have now been properly distributed, it is too late to assert new in rem claims against them.

We know of no admiralty procedure or equitable principle which would warrant the exercise of in personam power against the Bank to, in essence, recreate a substitute res in order to permit the adjudication of an ownership claim which could and should have been placed in issue in the district court in the normal course of in rem jurisdiction.

Appeal dismissed.