Royal Bank of Scotland v. Golden Trinity (Ship)

Royal Bank of Scotland v. Golden Trinity (Ship)
Court (s) Database
Federal Court Decisions
Date
2004-05-31
Neutral citation
2004 FC 795
File numbers
T-119-99, T-18, T-32-99, T-38-99
Notes
Digest
Decision Content
Date: 20040531
Docket: T-32-99
T-38-99
T-119-99
T-186-99
Citation: 2004 FC 795
Docket: T-32-99
BETWEEN:
THE ROYAL BANK OF SCOTLAND plc
Plaintiff
and
THE OWNERS AND ALL OTHERS
INTERESTED IN THE SHIP "GOLDEN
TRINITY" AND GOLDEN TRINITY MARITIME INC.
Defendants
Docket: T-38-99
BETWEEN:
THE ROYAL BANK OF SCOTLAND plc
Plaintiff
and
THE OWNERS AND ALL OTHERS
INTERESTED IN THE SHIP "KIMISIS III"
AND MADONNA NAVIGATION (MALTA) LIMITED
Defendants
Docket: T-119-99
BETWEEN:
THE ROYAL BANK OF SCOTLAND plc
Plaintiff
and
THE OWNERS AND ALL OTHERS
INTERESTED IN THE SHIP "YPAPADI"
AND YPAPADI MARITIME INC.
Defendants
Docket: T-186-99
BETWEEN:
NEDSHIP BANK N.V.
PREVIOUSLY KNOWN AS
NEDERLANDSE SCHEEPSHYPOTHEEKBANK N.V.
Plaintiff
and
THE OWNERS AND ALL OTHERS
INTERESTED IN THE SHIP "ZOODOTIS"
AND ZOODOTIS NAVIGATION INC.
Defendants
REASONS FOR ORDER
HARGRAVE P.
TABLE OF CONTENTS
Paragraphs
SUMMARY
1 - 6
SOME BACKGROUND AND SOME DETERMINATIONS
(7 - 53)
- The Vessels and Their Management
8 - 9
- RBS Security
(10 - 34)
- First Supplemental RBS Agreement
13
- Kimisis Loan Agreement with RBS
14 - 15
- Second Supplemental Agreement and Second Kimisis III Mortgage
16 - 25
- Advance of Loan Proceeds
26 - 27
- Default on RBS Loans
28 - 29
- Realizations and RBS Balances
30 - 34
- The Claim of Nedship Against the Zoodotis and Nedship's Security
35 - 41
- Default and Debt Owed to Nedship
42 - 45
- Claim of Tramp Oil & Marine Ltd.
46 - 53
ANALYSIS
(54 - 175)
- Tramp's Maritime Lien Against Golden Trinity
55 - 74
- Contractual Lien Claims by Tramp
75 - 78
- Maritime Liens and Sistership Procedure
79 - 109
- Priority to the Sale Proceeds
110 - 111
- Equitable Re-ordering of Priorities
112 - 150
- Claim of Calogeras Marine Inc. and Calogeras Master Supplies Inc.
151 - 160
- Claim of Aduanera Columbia S.I.A. Ltd. Inc.
161 - 168
- United Maritime Supplies Inc.
169 - 173
- Sheriff's Fees, Wages, Repatriation and Marshal's Expenses
174 - 175
CONCLUSION
176 - 180
SUMMARY
[1] These reasons arise out of the Court-approved sales of four ships, Golden Trinity, Ypapadi, Kimisis III and Zoodotis and a priorities hearing, initially set for four days, but which concluded, after much diligent and thorough work by counsel, with 11 days of hearing.
[2] The vessels at issue in these proceedings were managed by Pronoia Ship Agents & Brokers Inc. ("Pronoia") and after their arrest were all, through excellent marketing, good vessel-condition and generally fortuitous circumstances, sold above appraised value, for a gross return of $17,771,639.15, that amount including several notionally separate sales of bunker fuel aboard. All of the figures I will use in these reasons are in American dollars, unless otherwise specified.
[3] Some 20 of the claims against the sale proceeds were settled on consent, largely on the basis that they constituted maritime liens with an evident priority to the sales proceeds. Included among the claims settled was that of IMS Oil Trading Ltd. v. The Zoodotis, T-48-99, a full and final settlement of $103,500.00 (US). The claim was not opposed: no costs are payable by or to anyone on the IMS claim. Some claimants abandoned or withdrew their claims, perhaps by reason of their apparent low priorities. The bulk of the balance of the sale proceeds have been paid out, principally to the two mortgagees, on the understanding that they may be called upon if they received too generous a portion.
[4] Claimants to the balance of the proceeds, as mortgages, are The Royal Bank of Scotland plc ("RBS"), the mortgagee of the Ypapadi, Golden Trinity and Kimisis III and Nedship Bank N.V. ("Nedship"), mortgagee of the Zoodotis. Those banks, caught in a falling market and by an unfortunate disruption in the management of the fleet to which the ships belonged, recognise that they will be losers regardless of the outcome of the present priority determination.
[5] The principal challenge that the banks face are the claims of Tramp Oil & Marine Limited ("Tramp") for bunkers supplied to the four defendant vessels and to various other ships, which were also managed by Pronoia, and which are said to be sisterships. Tramp bases its claims in part on a maritime lien for bunkers supplied to the Golden Trinity, but largely on a challenge of the security held by the banks and on the actions of the banks.
[6] The outcome of the priorities determination is as set out below, but one must keep in mind that some of the claims have had proceeds put toward them already:
(01) Royal Bank of Scotland plc
- Sheriff's fees and marshal's fees and expenses, as presented, as a first priority.
- The balance available from the sale proceeds to go toward satisfying the claims of RBS after the payment of the maritime lien referred to below and the owned bunkers' claim of Tramp.
(02) Nedship Bank N.V.
- As there are no sistership rights of action and no remaining direct claims against the Zoodotis, taking priority over Nedship, the claim of Nedship succeeds to the extent of funds that are available.
(03) Tramp Oil & Marine Limited
- In this proceeding Tramp was granted settlement funds equal to the bunkers aboard the Golden Trinity and Kimisis III, in the amounts of $56,314.75 and $43,219.00.
- Tramp's claim on a subrogated maritime lien at Long Beach against the Golden Trinity, in the amount of $55,211.10, is accorded the priority of a maritime lien. That amount include interest to 30 June 2001. Tramp will receive a pro rata share of interest as accumulated on the ship sales proceeds.
- Tramp does not succeed in establishing a priority by way of contractual lien claims.
- The vessels involved are not sisterships.
- There being insufficient proceeds from which the banks might satisfy their claims, the concept of marshalling does not apply.
(04) Calogeras Marine Inc. and Calogeras & Master Supplies Inc.
- These claims are necessaries claims. They do not succeed because RBS and Nedship, as mortgage holders, take priority.
(05) Aduanera Columbiana S.I.A. Ltd.
- Aduanera succeeds in the amount of $5,338.62 together with a pro rata share of the interest which has accrued on the Golden Trinity sale proceeds.
(06) United Maritime Supplies Inc.
- United Maritime is an unpaid Canadian supplier of necessaries and as such, holding a priority below that of the mortgage holders, does not succeed.
I turn now to some general background.
SOME BACKGROUND AND SOME DETERMINATIONS
1) There are some issues which require substantial legal analysis, issues which I will deal with in due course. There are, however, other issues which are more efficiently dealt with in the course of considering the relevant facts. I turn now to the vessels involved and their management.
The Vessels and Their Management
[7] At relevant times the Golden Trinity was owed by Golden Trinity Maritime Inc., the Ypapadi by Ypapadi Maritime Inc., the Kimisis III by Madonna Navigation (Malta) Limited ("Madonna") and the Zoodotis by Zoodotis Navigation Inc., all Liberian companies except for Madonna. Also involved, as alleged sisterships, are the Litrotis, said to be a sistership of the Zoodotis and the Agios Nikolas, Agni, Golden Eagle, Golden Horizon, Golden Polydinamos, Karadmyla, Mana, Mesitria, Ocean Spirit and Theonymphos, said to be sisterships of Golden Trinity, Kimisis III, Ypapadi and Zoodotis. Each one of the vessels were owned by separate companies, but all of the vessels were under the management of Pronoia of Piraeus, Greece. The principal of Pronoia was Mr Peter Lygnos.
[8] Those connected with and servicing the shipping industry knew that the dry bulk carrier market was in difficulty during relevant years, being between 1996 and 1998. It is fair to say that those involved in the present proceedings, as mortgage holders, Tramp as an in rem claimant supplying bunkers, and to a lesser degree the remaining suppliers of necessaries, were knowledgeable about the shipping industry. While of those presently claiming may have had concerns from time to time, each recognised that the Pronoia ships were well managed and appeared to be weathering the difficult times, until the event which resulted in the present crisis, the death of Mr Peter Lygnos on 7 July 1998. His experience and ability were key to the success of the whole operation. The fate of the operating company, Pronoia, the owing companies and all the vessels, which had been operating and surviving under the management of Peter Lygnos, through Pronoia, in good times and in difficult times, was sealed when Pronoia was taken over by the less experienced adult children of Peter Lygnos. This was unfortunate for all concerned. However I should return to an earlier and more favourable time when the Pronoia ships were being financed by RBS and by Nedship.
RBS Security
[9] In 1995 RBS, a knowledgeable maritime lender of Edinburgh, Scotland, decided to advance $60,000,000.00 to seven borrowers to refinance various vessels and provide working capital. Among the borrows were the owners of the Golden Trinity and Ypapadi. The loan was secured by marine mortgages dated 12 October 1995 and was pursuant to the terms of a loan agreement of 6 October 1995. Here I would note that I am satisfied that the mortgages of the Golden Trinity and Ypapadi, as well as the subsequent mortgages granted to RBS, were properly registered, constituting first registered charges over each of the vessels, or in the case of subsequent mortgage security, a second charge behind that already held by RBS: this is apparent from the evidence overall and from the fact that the opinions on the security given by Dr Bianchi and by Ms Diaz, experienced maritime lawyers familiar with marine securities, were neither subject to cross-examination nor contradicted by other evidence.
[10] The relevant provisions of the lengthy loan agreement of 6 October 1995 need not be set out in full. It is sufficient to make various observations. The intent and indeed the effect of the loan agreement, and each of the mortgages, was to secure present and future advances, other expenses incurred by RBS and interest owed, from time to time, on a continuing basis. Each vessel owner as mortgagor and thus each vessel, was jointly and severally liable for the debt owed RBS: in effect, each borrower was a principal debtor, not a guarantor. Principal was to be paid in quarterly instalments, 27 instalments at $2,142,500.00 and a final instalment of $2,152,000.00. Finally, the loan agreement deals with default: the various events of default, include any late payment, breach of provision of the agreement and a general catch-all provision allowing RBS freedom to form an opinion that a change in financial condition of any of the borrowers, affecting the ability of such borrowers to pay its debts, constituted an event of default allowing RBS the option of making demand, at which point the loan became payable:
10.1 [RBS] may, without prejudice to any of its other rights, terminate its obligations to advance the Loan or if the Loan has been advanced, the Loan shall upon demand addressed to the Borrowers by [RBS] immediately, or in accordance with such demand, become repayable together with all interest accrued thereon and all other amounts payable hereunder or under any of the Security Documents up to the date of repayment and/or [RBS] may take any other action, exercise any other right or pursue any other remedies conferred upon [RBS] by this Agreement, the Master Agreement and/or by all or any of the Security Documents or by any applicable law or regulation or otherwise as a consequence of an Event of Default, ...
[emphasis added]
It is important to note here that the entitlement of RBS to make a demand, or otherwise invoke or rely upon an event of default, is permissive. Indeed, one would observe that in the case of a loan in the shipping industry, neither the lender nor the borrower would have it any other way, for each side would look for some flexibility in order to preserve an ongoing relationship during fluctuations in the worldwide shipping industry. In the event of a default RBS is to have an indemnity from the borrowers as to all consequences and the interest rate increases, but the default does not either bring the loan to an end or require RBS to take any immediate steps.
[11] The terms applicable to the Golden Trinity and Ypapadi mortgages generally reflect the loan agreement terms, but also grant RBS more flexibility, including a liberty or entitlement allowing RBS, from time to time, to protect and maintain its security, at the expense of the mortgagors and the usual very broad enforcement powers exercisable by RBS "as and when it may see fit" (section 9.1): see also section 9.1 of the Deed of Covenant to the Kimisis III mortgage.
First Supplemental RBS Agreement
[12] The schedule of payments under the first loan agreement of 6 October 1995 was amended by a supplemental loan agreement of 19 May 1997, which gave relief for quarterly payments 5 through 12, reducing them from $2,142,500.00 to $1,250,000.00, this reduction reflecting difficult times in the shipping industry. I accept that RBS made a reasoned and reasonable commercial decision to accommodate Mr Lygnos and Pronoia, the former having family resources upon which to draw. Further, I also accept that, as a practical matter, it would have been a form of commercial suicide on the part of RBS to call its loans and to realize on its mortgage security, or to take other drastic action, when RBS, even given the difficult times in the shipping market, was generally comfortable with its customers' resources, management and track record. The first mortgages of the Golden Trinity and the Ypapadi were amended on 19 May 1997, to reflect the first supplemental loan agreement. Here I would also observe that as of May 1997 RBS estimated the value of the fleet over which RBS held mortgage security at $130,500,000.00.
Kimisis Loan Agreement with RBS
[13] On 19 June1998 RBS advanced $6,770,000.00 pursuant to a second loan agreement with the borrowers of the first loan and with Madonna in order to assist Madonna with the acquisition of the Kimisis III. The Kimisis III came from another branch of the Lygnos family. Apparently RBS felt that the vessel, under the management of Peter Lygnos and Pronoia, could be a going concern. The Kimisis loan was to be repaid by 31 October 2001, by way of quarterly instalments, the repayment schedule to be agreed in writing by RBS, the borrowers under the first loan agreement of 6 October 1995 and Madonna. Here I must keep in mind that one should not too easily characterized such a term as an agreement to agree which is too uncertain to result in a contract. Indeed, I have in mind the decision of Mr Justice of Appeal Morden in an Ontario case, Canada Square Corporation Ltd. v. Versafood Services Ltd. (1981), 130 D.L.R. (3d) 205 at 218 where, commenting upon a crudely and loosely expressed agreement to lease, he wrote:
Nonetheless, accepting that the parties intended to create a binding relationship and were represented by experienced businessmen who had full authority to represent their respective companies, a Court should not be too astute to hold that there is not that degree of certainty in any of its essential terms which is the requirement of a binding contract.
In the present instance the parties involved were sophisticated bankers and shipowners, who required an ongoing relationship, but who recognised that the times were temporarily too uncertain to determine a repayment schedule in advance, yet needed each other's business in order to exist. Typical of drafting for banks and of standard form banking documents, the Kimisis III loan agreement contained broad enough wording in the Events of Default section to allow termination of the loan in the event that the parties could not reach agreement as to the scheduling of payments.
[14] As underlying security for the Kimisis III loan Madonna granted to RBS a first Maltese account current mortgage of the Kimisis III and signed a Deed of Covenant to supplement the account current mortgage, which mortgage was registered 19 June 1998. This transaction had an effect on all of the other shipowners whose vessels were managed by Pronoia, in that they were required to grant RBS a second mortgage as further security for the Kimisis III loan. These mortgages appear, in the present context, as second preferred Panamanian mortgages of the Golden Trinity and the Ypapadi: the second mortgages are not by way of guarantee but are joint and several obligations to secure amounts from time to time owing. Again RBS, as mortgagee, has a wide discretion as to enforcement options.
Second Supplemental Agreement and Second Kimisis III Mortgage
[15] The first loan agreement, of 6 October 1995 was further amended by a second supplemental agreement between all of the borrowers and RBS on 19 June 1998. Of relevance here, to submissions made by Tramp, was a further reduction in principal payments for 31 July and 30 October 1998 and 29 January 1999, each payment to be in the amount of $950,000.00. The balance of the first loan of 6 October 1995 was to be repaid pursuant to a schedule to be agreed in writing between RBS and all the borrowers, not later than 29 January 1999.
[16] I will here note a structural weakness in the process of determining complex priorities to ship sale proceeds on a motion, as contrasted with a determination of priorities by way of a trial. On a motion there is no production of documents, as such, but rather only cross-examination on affidavits and documents coming within the scope of affidavit, a procedure which does not necessarily result in all relevant documents being before the Court.
[17] In relation to the initial loan and the first loan agreement Madonna executed a second Maltese account current mortgage of the Kimisis III . In effect Madonna's position become the same as that of the initial borrowers, who were jointly and severally liable to RBS for all the funds advanced by RBS to the Pronoia fleet. The security consisted of a properly registered account current mortgage, dated 6 July 1998, the agreements of 6 October 1995 and 19 June 1997, a loan agreement and a deed of covenant of 6 July 1998 with the mortgage regulated by a guarantee of 6 July 1998, supplemented by the loan agreements and a deed of covenant of even date with the second mortgage.
[18] Through oversight the guarantee of 6 July 1998 was not attached to any affidavit material sworn on behalf of RBS, although it was produced to Tramp for their cross-examination of the RBS deponent. Tramp chose not to cross-examine on the guarantee and thus it did not become a part of the record.
[19] In the determination of priorities by way of a motion a plaintiff seeking to establish a priority must lay out its case in advance. The plaintiff cannot necessarily forecast all of the approaches that the various other in rem claimants may take, or the attacks on the security or the position of the plaintiff that they might make. In the result, from time to time, there may be a deficiency in the record before the court. It would be unfortunate if in future, priorities will come to be established with the full panoply of trial, rather than in a summary and inexpensive manner on a motion, however this is merely an observation.
[20] In the present instance there less than a full record before the Court, the 6 July 1998 guarantee, being omitted from the RBS material. As I say, the guarantee was produced to Tramp during cross-examinations with Tramp choosing not to make part of the record by way of cross-examination. In that Tramp raised the issue of the guarantee only in a subsequent brief, it left RBS no chance of reply, a situation markedly at odds with what would be the case where priorities determine, as is the case, from time to time, by way of trial. This position of Tramp leads to a closer examination of the second mortgage security by which RBS obtained from Madonna a direct joint and several liability for the debt owed, by a group of vessel owners, by way of mortgage over the Kimisis III, all is set out in the relevant loan agreements and deed of covenant. To begin, the Kimisis III second mortgage provides, in part, that:
Whereas (a) there is an Account Current between MADONNA NAVIGATION (MALTA) LIMITED, a limited liability incorporated and existing under the laws of the Republic of Malta having its registered office situate at 66 Old Bakery Street, Valletta VLT 09, Malta (hereinafter sometimes called the "Mortgagor") and THE ROYAL BANK OF SCOTLAND plc, a company incorporated and existing under the laws of Scotland having its registered office situate at 36 St. Andrew Square, Edinburgh EH2 2YB acting through the Shipping Business Centre at 5-10 Great Tower, London EC3P 3HX, England (hereinafter sometimes called the "Mortgagee") regulated by a Guarantee of even date herewith executed by the Mortgagor in favour of the Mortgagee (the "Guarantee") relating to a Loan Agreement dated 6th October, 1995 made between (I) Golden Trinity Maritime Inc., Prince Navigation Inc., Ypapadi Maritime Inc., Golden Falcon Maritime Inc., Marmaro Navigation Inc., Soliras Navigation Inc., and Pantodinamos Maritime Inc., as joint and several borrowers (the "Borrowers") and the Mortgagee as Lender, as supplemented by a First Supplemental Agreement dated 19th May, 1997 and a further Supplemental Agreement dated 19th June, 1997 (together, the "Loan Agreement") and a Deed of Covenant bearing even date herewith made between (I) the Mortgagor and (ii) the Mortgagee (which said Loan Agreement and Deed of Covenant as the same may from time to time be supplemented, varied and/or amended are hereinafter called the "Loan Agreement" and the "Deed of Covenant" respectively) and WHEREAS pursuant to the Guarantee the Mortgagor has agreed to execute this Mortgage for the purposes of securing (a) payment by the Borrowers (including the Mortgagor) to the Mortgagee of all sums for the time being owing to the Mortgagee, whether by way of principal, interest or otherwise, (whether actually, contingently, presently and/or in the future) as well as costs, charges, expenses of other moneys connected with or for the purpose of creating, preserving, maintaining, administering, protecting, enforcing or attempting to enforce this security, in the manner and at the times set forth in the Loan Agreement and the Deed of Covenant and (b) the performance of all obligations of the Borrowers under the Loan Agreement and the Mortgagor under the Guarantee and the Deed of Covenant and WHEREAS the amount of principal and interest or other moneys due to the Mortgagee at any given time can be ascertained by reference to the Loan Agreement and the Deed of Covenant and/or to the books of account (or other accounting records) of the Mortgagee and/or a certificate issued by the Mortgagee which amount shall be (save for manifest error) the certain and liquidated amount due by the Mortgagor to the Mortgagee ...
This mortgage sets out and incorporates an obligation secured against the Kimisis III: that there may be a document referred to in the mortgage which is not in evidence does not necessarily preclude the enforcement of a marine mortgage. Indeed, security documentation consisting merely of a ship's mortgage in statutory form will be interpreted and enforced pursuant to the common law bearing on mortgages of ships and the provisions of any relevant underlying legislation: see for examples Buchan on Mortgages of Ships: Marine Security in Canada, Butterworths, Toronto and Vancouver, 1986, at page 57 and Constant on The Law Relating to the Mortgage of Ships, Sweet & Maxwell, London, 1920 at pages 15 and 16, where Mr Constant makes it clear that while the statutory form of mortgage is mandatory, there is no requirement that it must be supplemented by a collateral marine agreement stipulating some further advantage. To the same effect, see Neves v. The Kristina Logos (2001), 220 F.T.R. 15 (F.C.T.D.) at 23, a decision of Mr Justice MacKay and Nova Scotia Barristers' Liability Claims Fund v. The Ashley Lynn (1994), 80 F.T.R. 141, (F.C.T.D.), a decision of Mr Justice Strayer, as he then was.
[21] In the Kristina Logos (supra) Mr Justice MacKay did not have before him any interest rate for the mortgage but nonetheless, to avoid unjust enrichment resulting from the determination of priorities, was prepared to award the cost of borrowing, prime plus 3/8 percent per annum, as a fair resolution. In contrast, in the present instance, one need look no further than a loan agreement and a deed of covenant in order to determine an interest rate.
[22] There is even some question as to whether the guarantee, referred to in the context of a direct liability, is either particularly relevant or at all necessary. Indeed, here I would refer to The Ashley Lynn (supra), beginning with the view of Roger T. Hughes, Q.C. set out in the looseleaf version of the Federal Court of Canada Service, Butterworths, Toronto, at paragraph 22:459, summarising The Ashley Lynn:
The Court granted summary judgment for an amount secured by a mortgage on a ship but not on the promissory note in respect thereof as the Court has no jurisdiction in respect of the notes.
In the Ashley Lynn Mr Justice Strayer was faced with conflicting claims, one in personam based on the note and solicitor's negligence, in the Nova Scotia Supreme Court, and the other in rem by the assignee of the mortgage in the Federal Court. Mr Justice Strayer pointed out at page 144 that "[T]he action in this Court is and must be limited to the enforcement of the mortgage on the ship." and that " ... all that this Court can do is order enforcement of the mortgage for such amounts as may be owing under the loan for whose repayment the mortgage is secured (sic).". In my view, just as this Court, as a statutory court, has no jurisdiction over a promissory note, outside of section 23 of the Federal Court Act, dealing specifically with promissory notes where the Crown is a party, the Court has no direct jurisdiction over guarantees, but only by way of enforcement of a mortgage, although, as I pointed out, the mortgage of the Kimisis III is not one by way of guarantee, but on its face, on the loan agreements and on the deed of covenant, is a joint and several obligation.
[23] To the extent that the guarantee might be relevant, there is substantial evidence of the guarantee, the existence of which is not denied and which is referred to in a second supplemental loan agreement and various other security documents, including in the second account current mortgage, in the relevant deed of covenant, in a power of attorney and a directors' resolution of 3 July 1998 and in the affidavit of Dr Philip Bianchi. Dr Bianchi, in exhibit B to its 29 May 2000 affidavit, sets out that he examined various documents, including the guarantee and the second Kimisis III mortgage. He gave his opinion that both of these documents were properly authorised, executed and delivered and constituted legal, valid and binding obligations. More important is that the second account current mortgage itself, without the need for collateral agreements, contains a covenant to pay:
Now we the (b) MADONNA NAVIGATION (MALTA) LIMITED in consideration of the premises for ourselves and our successors, covenant with the said (c) THE ROYAL BANK OF SCOTLAND plc and (d) ITS assigns, to pay to him or them or it the sums for the time being due on this security, whether by way of principal or interest, at the times and manner aforesaid. And for the purpose of better securing to the said (c) THE ROYAL BANK OF SCOTLAND plc the payment of such sums as last aforesaid, we do hereby mortgage to the said (c) THE ROYAL BANK OF SCOTLAND plc all the shares of which we are the Owners in the Ship above particularly described, ...
The second Kimisis III mortgage would only come into play if there had been full recovery on the initial Kimisis III debt, in the amount of $6,770,000.00. However, the security over the vessels being structured as a joint and several obligation RBS, with an overall shortfall, need not apply funds in any particular manner.
[24] As additional security for the 6 October 1995 loan Madonna was required to provide an account current mortgage against Kimisis III, accomplished 6 July 1998 and a second Deed of Covenant in order to provide additional security for that initial loan. Thus all three vessels became jointly and severally liable on all the money borrowed from RBS. I now turn to the advance of the money loaned by RBS.
Advance of Loan Proceeds
[25] I accept as established the advancement of the initial loan proceeds of $60,000,000.00 as follows:
(01) $26,159,117.97 transferred to Den Norske Bank in satisfaction of its loan to certain of the Borrowers;
(02) $8,869,000.00 to RBS to liquidate loans held by some of the Borrowers;
(03) $21,131,000.00 to RBS to liquidate loans held by some of the Borrowers;
(04) $150,000.00 to RBS to pay for the facility fee of the First Loan;
(05) $3,670,000.00 to Pluto Enterprises Corporation; and
(06) Balance of $20,882.03 which remained in the account of Aigida Enterprises. Part of these funds were used to pay interest accrued ($1,739.93 and $4,072.12) on the liquidation of loans held by some of the Borrowers.
[26] Tramp expresses some concern that the funds advanced by RBS, except as to Madonna and Kimisis III, were advanced to Aigida Enterprises Inc. and asked as to the consideration given by Aigida. Here I accept that the borrowers were associated companies with a parent company, Aigida. The borrowing from RBS was to refinance the ships owned and previously mortgaged to another lender by the subsidiaries and to make payments which benefited the subsidiaries. There is no want of consideration which might taint the position of RBS.
Default on RBS Loans
[27] Following the death of the principal of Pronoia, Mr Peter Lygnos, who died in 1998, his two adult children were able to operate the company for a few months, however the borrowers, including Madonna, defaulted on a 30 October 1998 instalment of $950,000.00, being the payment due by the terms of the second supplemental agreement.
[28] As I have already observed, a default did not automatically bring the operations of the borrowers to a halt. In this instance it is clear from the affidavit material that there were discussions between borrowers, including Madonna, and RBS, to see what might be done to remedy the default. RBS was not convinced that the business could be profitable under
the existing market conditions and particularly given the new management. Clearly the original borrowers and Madonna had become insolvent in that they were unable to pay either their creditors or RBS. Thus, as set out in the affidavit of Robert J. Manners sworn 4 February 1999, RBS gave formal notice of demand on 5 January 1999 in the amount of $51,397,026.70. The owners of the vessels which were mortgaged to RBS despatched those vessels to various ports where they were arrested by RBS and in due course sold by court orders.
Realizations and RBS Balances
[29] In the Vancouver realizations on the four ships sold, and here I include the price of the Zoodotis, mortgaged to Nedship, in gross figures, including bunkers, was as follows:
Golden Trinity
$4,200,000.00
Bunkers
$52,261.65
Kimisis III
$4,750,000.00
Ypapadi
$3,775,000.00
Bunkers
$19,717.50
Sub-total
$12,796,979.15
Zoodotis
$4,950,000.00
Bunkers
$24,660.00
Sub-total
$4,974,660.00
Total
$17,771,639.15
[30] The RBS loans are in two parts. There was an original $60,000,000.00 loan, which goes back to November 1995 and a smaller loan, of $6,770,000.00, to Madonna for the purchase of the Kimisis III. These loans were the joint and several obligations of all of the shipowners. In calculating the final balance owing there have been difficulties. Tramp questioned whether there had been a full accounting for funds received, both generally and particularly, as to the Kimisis III. One of the difficulties faced by RBS and also by Nedship has been the on-going nature of recovery of money to be applied to their loans, for various vessels were sold by courts in different parts of the world, some with arrangements that if the value of the vessel increased, or if a vessel was profitable beyond a certain amount in the hands of the new owners, RBS would enjoy further recovery against its loans.
[31] When this matter neared readiness for hearing there were mortgage realization proceedings, in other jurisdictions, against the Pronoia fleet, with the potential of some further recovery. Initially RBS set out a balance owing, which was then a workable and realistic figure, as of June 2000, of $24,733,535.97, together with some accrued interest and ongoing interest and expenses. However the 19 July 2001 affidavit of Mr Manchester, filed at the hearing, provided an up-to-date accounting to take into account amounts realized in the interim on the sale of eight vessels which were mortgaged to RBS. The eight vessels were purchased by eight companies each of whom assumed part of the outstanding debt from the original loan and from the loan for the purchase of the Kimisis III, that outstanding debt to be repaid from any residual earnings or from the proceeds of a future sale of a vessel. Here I accept in part the accounting set out in and attached as exhibits to the Manchester affidavit of 19 July 2001 which sets out a principal balance on the Kimisis III loan to Madonna, as of 5 June 2001, of $1,861,750.00 and accrued interest of $18,745.75. As to the balance of the loan which was advanced to other borrowers, including Golden Trinity and Ypapadi Maritime Mr Manchester sets out a principal balance owing of $10,571,281.41 and accrued interest of $75,290.90, being a total debt owed to RBS of $12,527,068.06. However Mr Manchester notes a recently agreed re-sale of the vessels which were formally the Golden Trinity and Golden Prince, two of the vessels mortgaged to RBS, for $11,900,000.00: Mr Manchester goes on to expect that from these sales there will be a balance of approximately $3,690,000.00 to be applied against the outstanding balance owed RBS.
[32] Mr Manchester estimates the "residual debt outstanding in both the original loan and the Kimisis loan of approximately US $8,743,000.00.". In arriving at this figure it is clear that Mr Manchester did not take into account the accrued interest as of the date of his calculation owing on the Kimisis III and original loan, of just over $94,000.00.
[33] To the nearest $1000.00 I calculate that the outstanding debt owed to RBS is $8,837,000.00. I accept the evidence of Mr Manchester that there are no remaining assets which might surface by which to service principle or interest. I now turn to the claim of Nedship against the Zoodotis.
The Claim of Nedship Against the Zoodotis and Nedship's Security
[34] By way of a broad overview, the claim of Nedship against the Zoodotis is for an advance related to a loan agreement of 26 March 1996, pursuant to which five joint and several ship-owning borrowers, including Zoodotis Navigation Inc. ("Zoodotis Navigation"), the Liberian owner of the Zoodotis, borrowed $40,000,000.00 from Nedship. The parent of each of the five vessel owners and borrowers was Aegean Enterprises Company Ltd., which was controlled by Peter Lygnos. Nedship assumed, without knowing the corporate structure of each shipowner, that Peter Lygnos was, by reason of his share holdings, at least the majority, and perhaps the sole owner of the companies which owned these vessels. At all relevant times, as with the vessels mortgaged to RBS, the Zoodotis was managed by Pronoia. The Zoodotis was arrested by another creditor, at Vancouver, on 8 January 1999, with an order for sale issuing, at the request of Nedship, 16 February 1999. The Zoodotis was sold on 10 March 1999, by the Court, for $4,950,000.00 and the bunkers aboard for $24,660.00, a total of $4,974,000.00. Nedship, which had conduct of the sale, claims deemed Marshal's expenses, including crew wages which it paid, in the amounts of $234,500. 65 (US) and $82,610.46 (CDN) as set out in Ms Novak's affidavit of 31 March 1999, together with a current shortfall, as of 28 June 2001 and as set out in Mr Bulling's 3 August 2001 affidavit, of $23,777,996.81, with daily interest of $5,909.82.
[35] Following the sale Nedship took default judgment against the Zoodotis. Nedship, on appropriate undertakings, received prepayments from the Zoodotis sale proceeds, pending the determination of priorities, in the total amount of $3,227,016.00. Here I would observe that all of the direct claims against the Zoodotis have either been settled and paid, or have been withdrawn. There are, however, sistership claims of Calogeras Marine Inc., Calogeras & Master Supplies Inc. and Tramp Oil & Marine Limited of $657,528.74 (US). I now examine this in more detail.
[36] The $40 million loan by Nedship, referred to above, was to refinance existing indebtedness and to provide capital with which to purchase the Zoodotis and a second vessel.
[37] The $40 million loan was, in the instance of each ship in the fleet financed by Nedship, secured by first preferred agreed ships' mortgage. Funds were for advancement in three portions: $18,500,000.00 by 22 March 1996 and $9,000,000.00 and $12,500,000.00 by 22 June 1996.
[38] In the case of the Zoodotis the registered first preferred mortgage, with a face value of $50 million, is dated 15 May 1996. As an account current mortgage it secured all sums of money which might from time to time be owing. Interest on the mortgage is specified at 1 1/8 % above the prime rate as designated, from time to time, by the London Interbank Eurocurrency Market. Again, as in the case of the fleet financed by RBS, Nedship included a provision, in its loan agreement, providing for joint and several liability by each borrower. The $40,000,000.00 loan was to be repaid through 27 quarterly instalments of $1,200,000.00 and a 28th quarterly instalment of $7,600,000.00. While the security documentation provided to Nedship sets out various events in default and a discretion to protect the security when Nedship thought fit, important in the present instance is provision 10.1 of the mortgage which allows Nedship freedom to proceed to enforce, or not to enforce, its security, or to grant time or indulgence, basically as it wished.
[39] As in the case of RBS, Nedship did, indeed, grant indulgences to its borrowers pursuant to various addendums. These included a reduction in quarterly instalments by reason that the third advance was not drawn down in a timely manner, subsequently to add two new borrowers, to transfer financing to a new vessel and to deal with a third advance. The net result of all of this was to reduce the loan to $35 million. This second addendum, 11 July 1996, also amended a repayment schedule. It was followed by a third addendum of 4 December 1996, a fourth addendum of 5 December 1997 and a fifth addendum of 30 April 1998 the net result of which was to add an additional borrower, the owner of a vessel called the Gold Horizon and to reduce the remaining 21 of the initial 28 instalments, pursuant to the 30 April 1998 addendum, to four instalments of $675,000.00, ten instalments of $1,200,000.00, six instalments of $825,000.00 and a final payment of $9,850,000.00.
[40] To bring the status of the loan up to the point of default, as seen by Nedship, a first advance of $18,500,000.00, of 22 March 1996, went largely to liquidate existing loans upon which some of the borrowers were liable, a second advance of 10 May 1996, in an amount of $9,000,000.00, went largely to the purchase of the Zoodotis w