An Unhappy Marriage With Christensen Shipyards
By Dean W. Baker
The recent demise of a well known and respected builder of custom yachts in the United States market underscores the significance of state law issues to the “financing buyer’s” 1 interest in the vessel under construction and the options the buyer retains in the wake of the builder’s insolvency. On February 9, 2015 Christensen Shipyards, Ltd., (“Christensen”) stopped construction of all vessels located at its Vancouver, Washington shipyard. See The Columbian, Christensen Shipyards Close Gates, February 9, 2015. Prior to November of 2014, potential buyers, as well as existing buyers whose boats were under construction would not have predicted the collapse of Christensen. The yard was teeming with workers constructing more than seven new builds. Despite the appearance of a healthy boatyard, Christensen stopped paying some of its vendors in the last quarter of 2014. Whatever the cause of that failure, buyers found themselves in the uncomfortable position of having to deal with a shipyard that was unable to pay its debts as they became due. The effect on buyers was immediate, resulting in the realization that the boats under construction were now subject to vendor’s liens for unpaid bills and that Christensen could no longer perform existing construction contracts for previously agreed-upon fixed prices.
With respect to the vendor liens, Washington state (similar to federal law) sanctions “secret liens”. The liens are “secret” because they do not need to be recorded at either the county or state level. Although, claims for materials, labor, and services rendered prior to completion of new construction of a vessel are characterized as nonmaritime “dry land” liens, the Washington statute explicitly provides that they have “preference over all other demands”. See RCWA 60.36.010. Accordingly the statutory language suggests that these liens have priority over all other liens, including any lien that buyers were afforded under their original construction contracts to secure the payment and performance obligations of Christensen. In that regard, Christensen construction contracts were typical of most American-build contracts, providing title to the vessels under construction resided in the builder until delivery and granting the “financing buyer” a security interest in the vessel under construction to secure builder’s obligations to the buyer under the contract. Notwithstanding the fact that vendor liens prime the buyer security interest, it is critical that the buyers do have liens (perfected under American law by filing in accordance with the Uniform Commercial Code) in order to preserve their interests in the face of any ensuing bankruptcy or receivership proceedings. 2 Without a lien, the buyer’s contractual interest (as well as all advances made by the buyer to the builder) in delivery of a completed vessel is at risk of being lost. A trustee or receiver has the power to reject the contract, retain the vessel under construction and relegate the buyer to the status of an unsecured creditor in the bankruptcy or receivership proceeding — a disastrous outcome for the buyer who might receive pennies or no dollars on account of his unsecured claim. The security interest that was afforded buyers under the Christensen contracts, however, does not insulate the buyers from the reach of the vendor liens. The burden of satisfying those liens has now shifted to the only deep pocket available, namely the buyers.
The other immediate consequence of Christensen’s bleak financial condition is the certainty that each buyer’s bargained for fixed-price contract is no longer possible. Buyers are faced with the choice of moving their vessels to another yard or renegotiating their contracts with Christensen, in some cases for millions of dollars more than what they originally budgeted for a completed vessel. In either case, buyers understand that the original fixed price may be exceeded substantially.
In March of 2015 certain vendors initiated lawsuits to foreclose their liens and on March 20, 2015 a receiver was appointed to take control of and manage Christensen’s operations. 3 A receivership proceeding under Washington law is analogous to a bankruptcy proceeding the receivership statute borrows heavily from the federal bankruptcy code. There is now an automatic stay in effect and buyers that would like to remove their vessels will need to seek court permission to do so, most likely on the ground that there is no residual value in the vessel for the receiver because of the security interest initially granted by Christensen in favor of the buyer. 4 Simply, there is little doubt that the value of each of the vessels under construction is substantially less than the debt owed by the builder to the buyer. 5 In short there is no equity available for the receiver. Additionally, the buyers as secured creditors enjoy a constitutionally protected property interest in the vessels that will diminish over time 6 , unless the buyers agree to renegotiate their contracts with the receiver or any purchaser of Christensen’s operations that succeeds the receiver through a court approved sale consummated by the receiver. For now the receiver is educating himself on Christensen’s operations and ideally would like to turn a dead shipyard into a going concern that he can either operate or sell to a ready and willing purchaser. Either objective will require at least some level of participation by buyers willing to renegotiate their contracts. Certain buyers have already indicated a willingness to work with the receiver, believing that the option to remove their vessels to another shipyard will be more costly in the long run. At the time of this article is too early to tell whether the receivership proceeding will benefit the buyers or delay any particular buyer’s decision to divorce himself from the proceedings.
1A “financing buyer” provides financing to the shipyard to build the vessel by making payments in installments, typically at agreed-upon milestones of completion. The Christensen contracts provided for monthly installment payments, presumably to better manage cash flow. That arrangement is not standard in the large custom yacht industry and may have been a red flag, reflecting a thinly capitalized builder.
2If the construction project is in fact deemed to be construction of a new vessel, buyers perfect their security interests (typically granted under the construction contract) by the filing of a financing statement with the Secretary of State in the state where the builder is incorporated. We have seen form new build contracts that do not provide for the grant of a security interest in favor of the buyer. A buyer that is lulled into signing such a contract is playing russian roulette and any lawyer who blesses such an arrangement is risking a malpractice claim.
3Any decision to remove a vessel from the yard would have required a transfer from Christensen to the buyer of title to the vessel. Such a title transfer could be effected either voluntarily (i.e. with the agreement of Christensen) or involuntarily by a foreclosure of the buyer security interest.
4Any buyer that gained title to the vessel through foreclosure (of its security interest) prior to appointment of a receiver will have an easier time convincing the court that it should be afforded relief from the automatic stay in order to remove the vessel, since the receiver has at most a possessory interest in that vessel.
5The debt owed by the builder to a buyer under a defaulted construction contract includes, inter alia, return of all advances made by the buyer to the builder on account of the contract.
6The value of Buyer’s secured interest will potentially erode from the accrual of interest (if that is allowed under Washington law) on any paramount liens that vendors have under the secret lien statute and from any diminution in the value of the vessels as they sit in the builder’s yard and are not worked on.