Who Should Hold Title While Constructing a Yacht?
Investing in yacht construction can be risky business for owners and builders alike. Defaulting buyers can cause huge cash flow problems for builders, which spill over to impact other projects under construction. Buyers are concerned about their projects getting bogged-down by or absorbed into a builder’s insolvency.
When a builder files for bankruptcy, who owns the projects under construction is frequently an issue. At such times, owners holding title to what they have paid for can usually extricate those assets from the builder’s bankruptcy and move the project elsewhere for completion. Builders, on the other hand, often prefer to hold title to the yacht until they have been paid in full. Further complicating the issue may be sales tax concerns and the blurring of when and where the sale of the yacht occurred. If the builder holds title to the yacht until completion and delivery, the yacht, in its incomplete state, becomes an asset of the builder’s bankruptcy estate and is potentially available to pay the claims of creditors if the builder is in a liquidation proceeding (Chapter 7) or abandons the construction contract in a reorganization proceeding (Chapter 11).
Where the builder holds title until completion and delivery, the best way to protect the buyer is usually to have the builder grant the buyer a UCC security interest in the uncompleted hull and all materials purchased for the construction of the yacht. To properly protect their interests, buyers must properly perfect their security interest and ensure that all materials purchased for the construction of the yacht are promptly and properly identified (labeled) as being allocated to the project, and preferably segregated from other materials in the builder’s yard. But there are also additional means to protect a buyer’s interest in purchasing a yacht that are beyond the scope of this post.
