With gaming established as one of America's fastest-growing industries, financing casinos may appear to be a sure thing for bankers.

The reality is more complex, however, in particular when it comes to "floating" dockside casino gambling and inland "cruising casinos." Unlike their land-based counterparts, operators of these facilities are subject to a panoply of maritime laws, many of which may be unfamiliar to traditional gaming industry lenders.

When it comes to legal definitions, there's little dispute that a cruising casino should be treated like a ship. On the other hand, a floating but permanently moored dockside casino may seem to have little or no connection with maritime concerns.

That's not how many courts have viewed things, however. In fact, any casino that is built on a floating structure, however permanently fixed, may for some purposes actually be a "vessel" under maritime law.

By law, a ship must be documented as a U.S.-flag vessel if it operates on the navigable waters (including inland waterways) of the United States and measures over five net tons. Most cruising casinos meet these standards. Whether dockside casinos also meet these standards is an issue that remains unresolved.

To further confuse matters, what may be considered a vessel for the purposes of some laws, such as the Anti-Gambling Statute, may not be defined as a vessel for the purposes of the laws governing documentation.

U.S.-Flag Documentation Good for Lenders

From a financing perspective, U.S.-flag documentation is desirable because a preferred ship mortgage may be recorded only against a U.S.-flag vessel. Such a mortgage offers significant benefits. For example, in a foreclosure or bankruptcy proceeding the preferred ship mortgage is given priority over all nonmaritime liens or claims and all maritime liens as well, with certain limited exceptions.

By contrast, the best security obtainable against a vessel under state law is that of a perfected security interest. That interest would rank behind all maritime liens. From the lender's point of view, a universal consensus that the term "vessel" includes a permanently moored casino is therefore advantageous.

When a Ship Is Not a Ship

The 1995 case of the Biloxi Belle indicates the kind of issues that can arise with regard to permanently moored dockside casinos. The ship's owners filed for bankruptcy protection, and the company's lenders subsequently asserted their rights as a preferred ship mortgageholder.

The case was tried in the U.S. Bankruptcy Court in the Southern District of Mississippi, which ultimately held that the Biloxi Belle was not a vessel, even though it had been documented as such and a preferred ship mortgage had been recorded against it by the U.S. Coast Guard.

The court noted that the Biloxi Belle had very few attributes commonly associated with a vessel. For example, it was not capable of moving under its own power, was not seaworthy, and had no captain or crew concerned with vessel operation other than activities related to the casino. As a result, the mortgage was denied the priority over other creditors granted to the holder of a preferred ship mortgage.

The Biloxi Belle case is currently under appeal to the U.S. District Court. Regardless of how it is resolved, the lesson for lenders is clear: Don't assume you'll automatically receive preferred mortgage treatment when financing any part of a dockside casino.

In for a Dime, In for a Dollar

The Ship Mortgage Act and Maritime Law generally presumes that a vessel constitutes not only the hull but all of its appurtenances. For maritime law purposes, this is likely to include gaming and restaurant equipment. Moreover, the Ship Mortgage Act requires that a mortgage cover the "whole" of a vessel.

As a result, lenders financing only gaming equipment cannot obtain a separate ship mortgage covering only that equipment, nor can an institution providing financing for a casino's hull obtain a ship mortgage covering the hull but not the gaming equipment. In each case the ship's mortgage must cover the whole of the vessel. If lenders have financed different aspects of the casino, complex inter-creditor issues can arise.

Maritime lienors have the right to force a judicial auction of the vessel against which the lien exists. Courts have tended to be inclusive when determining what equipment and appurtenances are included in the term "vessel."

In the example of gaming equipment on a dockside casino, that equipment will be included as appurtenance because it is necessary to the functioning of the enterprise. Separate ownership of the hull and the gaming equipment will not insulate the latter from being a part of the vessel against which a maritime lien may be enforced by third parties.

Known maritime lienors, such as mortgagees, can reach other agreements by separate contract, spelling out their respective rights. However, third parties such as suppliers of necessaries, will not be affected by these agreements unless they are party to them. As a result, a default on a debt owed to a supplier could result in a lien being foreclosed against the vessel as a whole.

Not for Citizens Only

Historically, in order for a ship mortgage covering a U.S.-flag vessel to have preferred status under U.S. law, there were restrictions as to eligible mortgagees, who had to be U.S. citizens. This requirement was eliminated by the U.S. Coast Guard Authorization Act of 1996, which allows foreign-controlled lending institutions to make loans secured by mortgages on U.S.-flag vessels on the same basis as their domestic counterparts.

However, in the not unheard of event that a lender may come to control a floating or dockside casino, foreign lenders should note that restrictions limiting the operation of a U.S.-flag vessel by a non-U.S. citizen mortgagee remain unchanged.

Maritime laws can work both for and against a lender in financing riverboat and permanently moored casinos. In order to take advantage of these regulations - and to avoid potential pitfalls - it is necessary to understand how and where they apply.

Ms. Hengen is a partner in the New York office of the Haight Gardner law firm, which specializes in transportation and international commerce.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.