Guest Feature: U.S. Fifth Circuit Clarifies the Point at Which a Maritime Lien is Extinguished

Written by: Philip C. Brickman

The U.S. Fifth Circuit recently addressed the issue of whether a company that provided fuel to a vessel can apply the payment for the most recent delivery to past due invoices and subsequently arrest the vessel to enforce a maritime lien for nonpayment of the most current invoice.  In World Fuel Services, Inc. v. M/V MAGDALENA GREEN,  the Fifth Circuit Court of Appeals reviewed the District Court’s decision to grant a motion for wrongful arrest arising out of enforcement of a maritime lien for necessaries under the Maritime Lien Act.   In World Fuel Services, vessel owners, Green and SE Shipping Lines (“SEL”), entered into a time charter party for the vessel M/V MAGDALENA GREEN.  Prior to the charter party, SEL entered into a general fuel purchase agreement with World Fuel Services (“WFS”).  Pursuant to that agreement, WFS delivered $167,339.68 worth of fuel to the vessel.  On September 16, 2010, WFS sent an e-mail to SEL stating that “UTA (another vessel) and MAGDALENA GREEN paid today”.  On the same day, SEL responded by attaching remittance slips and advising that all payments have been made.  Also on September 16, WFS sent SEL a receipt confirming a total payment of $241,520.24 for the fuel deliveries to UTA and MAGDALENA GREEN. 

On February 23, 2011, WFS filed a verified complaint, in rem, for the arrest of the MAGDALENA.  WFS alleged that SEL had not timely paid for the fuel supplied to the MAGDALENA.  Vessel owners then filed a motion to dismiss and vacate the arrest of the MAGDALENA, as well as for damages for wrongful arrest.  Green argued that SEL extinguished any maritime lien on the MAGDALENA through its payment on September 16, 2010, citing the receipt as confirmation and satisfaction of all outstanding bills.  WFS responded that a provision in the General Fuel Purchase Agreement allowed it to apply payments made by SEL to accrued contractual interest and fees from older invoices, thereby leaving the current invoice outstanding for the MAGDALENA.

The District Court held that the fuel delivered to MAGDALENA by WFS constituted a necessary, which established a maritime lien against the vessel under the Federal Maritime Lien Act.  However, based on e-mails between WFS and SEL, as well as the generated receipts, it was clear that the debt of the vessel had been paid in full. Consequently, the lien on the vessel had been extinguished at the time it was arrested.  The District Court also denied the motion for wrongful arrest of the vessel because there was no showing of bad faith, malice or gross negligence on the part of the arresting party.  WFS subsequently filed a motion for reconsideration, which was denied by the District Court and then appealed the matter to the U.S. Fifth Circuit. 

Both parties agreed that the delivery of fuel provided gave rise to a lien for necessaries. The parties disagreed as to whether SEL’s September 16th payment extinguished the most recent delivery and alleged unpaid invoice for fuel to the MAGDALENA.  The issue before the court was whether SEL payment extinguished the lien for the current fuel invoice.  The Fifth Circuit agreed that after SEL rendered payments, WFS no longer had a lien.  The Fifth Circuit took a closer look at the general terms and conditions of the global fuel purchase agreement and noted when more than one invoice is past due at the same time, the seller (WFS) shall be entitled, at its sole discretion, to specify the particular invoice to which any subsequent payment shall be applied.  In the present case, the MAGDALENA’s invoice was due on September 5th, which was one week past due at the time it was paid.  In confirming that the MAGDALENA GREEN invoice was paid (on September 16th), WFS exercised its discretion to decide how that payment should be applied.  The Court of Appeals interpreted this contractual provision to mean that the seller had the contractual right to allocate payments at the time the payment is made, but the seller does not have the right to then reallocate those payments in a different manner at a later time.  Such a reallocation would be unfair to the purchaser, who is operating under the impression that the invoice has been paid and confirmed by the seller.  To allow the seller to reallocate payment would put the purchase at a significant business disadvantage, since its vessel would be unknowingly subject to arrest.

In addition, the Fifth Circuit reiterated the concept that under the Federal Maritime Lien Act, a vessel is a distinct entity and, therefore, statutory liable for its own debts.   The MAGDALENA could not be held liable for other outstanding debts of SEL.  Rather it could only be held liable for its own debt, which was extinguished when SEL made the payment on September 16, 2010.  The Fifth Circuit also reinforced the premise that a maritime lien arises when the debit arises, and grants the creditor a right to the arrest the vessel, have it sold, and be repaid the debt from the proceeds.  When the debt is repaid and satisfaction is acknowledged, the lien ceases to exist.  When WFS confirmed that payment was received and the debt was satisfied, it no longer had a valid lien against the MAGDALENA GREEN under the Federal Maritime Lien Act.

The case is instructive in that the Fifth Circuit has narrowed the circumstances where a provider of necessaries can electively apply payments for past due invoices in manner to preserve its right to a maritime lien for any current outstanding invoices. Depending on the terms of the fueling agreement, a fuel supplier must allocate the payment at the time it is received, not confirm acknowledgement and extinguishment of an outstanding invoice, and reallocate at a later time. 

Please contact Phil Brickman at 504-523-2600 or [email protected] for further information on this issue.