Précis: The purchase of a vessel through the medium of a company accompanied by a loan to purchase shares in the company is not a secured transaction entitling foreclosure against the purchased vessel.
Facts:The plaintiff and defendant agreed to purchase the “Sea Senor”, a 34-foot trawler. The vessel was put in the name of a company the shares of which were owned 51% by the defendant and 49% by the plaintiff. The parties agreed that operating expenses were to be apportioned by a similar ratio of 51%/49%. The defendant loaned to the plaintiff the funds for his share of the purchase price on terms that it be repaid over time at 5% interest. As security for this loan, the plaintiff endorsed and delivered to the defendant 50,000 shares, worth about $46,000, in an unrelated company. A dispute arose over the repayment of the loan and allocation of the expenses which resulted in the plaintiff commencing this proceeding and arresting the vessel. The defendant then gave notice of foreclose on the vessel under s. 61 of the Personal Property Security Act and also filed a counter-claim alleging the plaintiff defaulted on the loan and owed operating expenses.
Decision:Judgment to the defendant for the amounts owing but the claim for foreclosure is dismissed.
Held:The defendant says: that in substance the transaction as a whole was a secured transaction with the vessel as security; that the voluntary foreclosure provisions of s. 61 of the Personal Property Security Act applied to the vessel as security; and, that the plaintiff’s interest in the vessel is now foreclosed with the result that the vessels is now owned by the company free and clear of any interest of the plaintiff. However, the only secured aspect of the transaction was the loan which was secured by the shares. There was no security interest in the vessel which belongs to the company of which the parties hold the shares. The plaintiff is, however, in default under the loan agreement and owes the defendant.