A Title Nightmare: Two Titles and Two Owners for One Yacht

Copyright © 2005 Weil & Associates and David Weil, Esq.

Overview:

This case involved a retired husband and wife who had sold their home, with a dream of buying a large sailing yacht and cruising the Pacific (we'll call them Mr. & Mrs. Smith). The Smiths were California residents, but they ultimately made an offer on a $300,000 yacht in Florida. They did a lot of research prior closing the deal. They found a qualified marine surveyor to inspect the boat and it passed the survey and sea trial with flying colors. They researched California and Florida sales tax law and successfully completed the transaction with no tax liability. They retrieved an Abstract of Title from the Coast Guard and confirmed that there were no recorded liens, and that the seller was in fact the sole owner. So, they paid their $300,000 and eventually transported the boat to California.

Upon arriving in California, they started to prepare the boat for their voyage, but their dreams of cruising the Pacific were changed dramatically when they started to experience certain health problems. They decided to offer the boat for sale, but they received a disturbing communication from the Coast Guard. It seems that a lawsuit concerning their boat was underway in South Carolina, and that someone else was claiming ownership of the boat.

The South Carolina lawsuit involved a boat owner (we'll call him Mr. Jones) who had lost his boat in a tax auction, for failing to pay his local property tax in South Carolina. Jones claimed that the sale should be reversed because the County had failed to properly publicize the auction, and because of certain other technical problems with the sale. The Smiths initially believed that the lawsuit was related to a different boat. The suit made reference to a different boat name, and - more importantly - the boat in the lawsuit had a different Coast Guard Official Number. Further, the Coast Guard Abstract of Title for the Smiths' boat made no reference to a South Carolina tax sale or to the name of the boat owner who had filed the lawsuit. There was, however, one glaring problem: The first entry on the Abstract of Title was a transfer from a South Carolina title into Coast Guard documentation. This indicated that the boat was not originally documented with the Coast Guard, and that the title history reported on the Smiths' Abstract of Title was incomplete.

Upon investigation, a complicated and tragic story surfaced. Jones had in fact lost the boat in the tax auction, six years prior to the purchase by the Smiths, and Jones was mounting a vigorous fight to unwind that sale. The boat had been purchased at the tax auction by someone that we will call Mr. Johnson. Johnson was issued a South Carolina title and a Coast Guard Bill of Sale at the time of the auction, but he was unable to transfer Coast Guard title into his name because a mortgage had been recorded against the boat and the tax sale had no effect on the status of the mortgage. Johnson was not interested in paying off the mortgage, but he nonetheless wanted to clear it from the title and was prepared to go to take whatever steps were necessary. His prayers were answered when he found that the hull identification number stamped onto the yacht differed from the number on his title paperwork, by one digit. Armed with this information, he applied to the South Carolina officials for a new title, and was granted a South Carolina title under the new hull number. He then applied for a new Coast Guard Certificate of Documentation, with the new South Carolina title as the sole proof of ownership. Notably, Johnson perjured himself when he filled out the application materials, by stating that the vessel had never been documented with the Coast Guard. His application was approved, and he was issued a Certificate of Documentation under a new Official Number. The new number had no mortgage connected to it, and at the time the number was issued, the Coast Guard had no idea that it was connected in any way to the boat's other number. A new chain of title was born.

Some time later, Mr. & Mrs. Smith conducted their title search by reviewing the Abstract of Title for the second Official Number. The Abstract appeared to be clean and they bought the boat. Jones, meanwhile, took his case all the way to the South Carolina Supreme Court, where it was indeed found that the technical problems with the tax sale were sufficient to void the sale. This meant that Johnson never purchased the boat, and therefore had no right to sell the boat to the Smiths. Mr. & Mrs. Smith therefore paid $300,000 to someone who never owned the boat, and their title was found to be void. They filed a lawsuit against Jones to hold him responsible for his fraud, but he had lost or hidden all of his assets and the Smiths were not able to recover from him. A hard working and honest retired couple carefully researched the purchase of their dream yacht, but they lost everything.

Lessons Learned:

In hindsight, it's easy to identify the alarm that should have sounded in this case. The first entry on the Smiths' Abstract of Title was a title transfer from State registry into Coast Guard documentation. This is a frequent process, especially for older yachts, and the vast majority of these transfers are perfectly legitimate. It nonetheless adds a huge element of risk because a State title does not generally allow for an adequate search of the title history. Further, most larger yachts are documented (rather than State registered) with the first owner, so the initial State registration for the Smith's yacht was unusual. And, for the past ten years most marine lenders have required a vessel to be documented before they will loan any money, so it is very unusual to find a State registered boat over 30 feet in length.

So, what should the Smiths have done? Their first step should have been to retain a maritime attorney to advise them during the purchase process. This was one of the most significant transactions of their lives, and the cost of an attorney would have been insignificant in comparison to the cost of the yacht.

OK, so they hire an attorney - - - what would the attorney have done? Again, hindsight is 20/20, but here are the steps we would have taken. First, we would have consulted with a vessel documentation specialist to determine whether South Carolina maintains a title history for vessels. Each of the fifty states has a different process for vessel registration, and a vessel documentation specialist (a member of the American Vessel Documentation Association) is a great source for this type of information. If no title history was available, we would have discussed the problem with the seller and researched his story. We may also have conducted a limited background check on the seller to determine whether he was a respected member of his community with resources to draw from, rather than a transient with no credit history. If the seller's story did not check out, we probably would have advised the client to reject the vessel. This particular boat was in great shape, but it was a production sailing yacht and they could have found something else.

If the Smiths had been determined to buy the boat notwithstanding the uncertainty surrounding the title history, we would have made one final suggestion. We would have advised them to finance the purchase rather than to spend their savings on a full cash purchase. A lender would have recorded a preferred ship mortgage on the Coast Guard title held by the Smiths, and when the title dispute surfaced they would have risked losing their mortgage interest in the vessel. As such, the lender would most likely have directed their own attorneys to lead the battle against Jones and Johnson, which would have saved the Smiths thousands of dollars in legal fees.

Finally, a new solution has developed over the past few years to address the problem described in this case study: Title Insurance. This product, which is so common in real estate transactions, was not available for vessels until very recently. It was, unfortunately, not available at the time that Mr. & Mrs. Smith bought their boat. The policy is available from First American Title, a company with a huge portfolio of real estate title policies. They are currently the only company offering the product, and we give them our highest recommendation. Check them out here.