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EXHIBIT
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CAUSE NO. 2010-63264
ENCORE BANK § IN THE DISTRICT COURT OF
§
VS. § HARRIS COUNTY, TEXAS
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§
ALLEN L, BERRY; JOSEPH D.
MeCORD, and ROBERT G. TAYLOR, II § 152™ JUDICIAL DISTRICT
AFFIDAVIT OF RICHARD A. STANFORD
STATE OF TEXAS §
COUNTY OF HARRIS §
Before me the undersigned notary, on this day personally appeared Richard A. Stanford
the affiant, a person whose identity is known to me. Alter 1 administered an oath to
affiant, affiant testified:
1 “My name is Richard Stanford. I am over 18 years of age, of sound mind, and
capable of making this affidavit. 1 have never been convicted of a felony or a crime
involving moral turpitude. | have personal knowledge of the facts stated in this affidavit.
The facts stated within this affidavit are true and correct.
2 Tam an attorney duly licensed and in good standing in the State of Texas. The
facts stated in this affidavit are within my personal knowledge, based upon my education
and experience in documenting marine loan transactions and the usual and customary
loan documentation for such loans.
3 My education and experience in marine loan transactions are as set forth in detail
on my attached resume. I attended Jaw school at the University of Houston Bates College
of Law, graduating in 1976. I specialize in maritime commercial matters including
marine loans, documentation of vessels, ship mortgages, and ship construction and ship
repair contracts, and have engaged in this specialty for approximately 36 ycars. 1
represent both lenders and borrowers and vessel owners as well as shipyards.
4 In formulating and expressing the opinions set forth in this affidavit, I have been
provided copies of pertinent documentation including but not limited to Plaintiff's
original and amended petitions, motions for summary judgment, certain pleadings and
orders from the United States District Court of the Southern District of Alabama,
Southern Division, the United States Court of Appeals for the Eleventh Circuit, the
EXHIBIT
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United States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division, and the United States Court for the Souther District of Texas, Corpus Christi
Division, the depositions taken in this case of employees of Encore Bank (the “Bank”)
including exhibits, the Abstract of Title issued by the United States Coast Guard National
Vessel Documentation Office on March 8, 2007 (the “Abstract of Title”), copies of
vatious minutes of meeting of committees of the Bank including its Board of Directors
and Special Asset group and litigation reports, the loan documentation prepared by the
Bank dated March 28, 2007 in connection the $6,000,000 loan (the “$6,000,000 Loan’)
made by the Bank to BLyn I] Holding, LLC (the “Borrower”) including security
documents, and the 1 & M refurbishment contract between Horizon Shipbuilding /
Crimson Yachts (the “Shipyard”) and BLyn il Holding, LLC dated August 1, 2006 (the
“Shipyard Contract”).
5 The Borrower owned a documented U.S. flag vessel called the BETTY LYN H,
Official No, 555036 (the “Vessel”*}. The Vessel was built in 1974 and in 2006 purchased
by the Borrower, The Borrower intended to substantially refurbish the Vessel for use as a
premium yacht suitable for charters to third parties. The Borrower moved the Vessel to
the Shipyard, which is located in Bayou La Batre, Alabama, in mid-2006. The Shipyard
and Borrower entered into the Shipyard Contract on August 1, 2006. After the Vessel was
at the Shipyard and the Shipyard Contract was signed, the Borrower sought and obtained
unsecured loans from the Bank in 2006 in amount of $460,000 and $600,000 for the
purpose of paying certain of the costs of refurbishment.
6. On March 28, 2007, the Borrower sought and obtained the $6,000,000 Loan from
the Bank. The $6,000,000 Loan was evidenced by loan documents including a letter loan
agreement, promissory note, preferred ship mortgage on the Vessel (the “FPSM”), and
personal guaranties from four individuals (the “Guarantors”). The FPSM was a preferred
mortgage under the Federal Ship Mortgage Act, 46 USC Section 31322, from the date of
recordation with the United States National Vessel Documentation Center on June 11,
2007. The FPSM was a first preferred ship mortgage in the sense that there were no
preferred ship mortgages on the Vessel recorded prior to the Bank’s FPSM and the FPSM
was entitled to the preferred status granted under the Ship Mortgage Act, 46 U.S.C.
Section 31326. However, the FPSM was subject and subordinate to preferred maritime
liens under 46 U.S.C. Section 31326, which included maritime liens for necessaries under
the Federal Maritime Lien Act in existence prior to the date of recording of the FPSM, as
provided in 46 U.S.C. Section 31301. Preferred maritime liens on ihe Vessel included
liens for ship repair which arose prior to the date of recordation of the FPSM. The
Shipyard had a maritime lien on the Vessel which arose prior to the date of recordation of
the Bank’s FPSM and thus was a preferred maritime lien which primed the Bank’s
TPSM. Further, the Shipyard’s lien was both possessory and non-possessory, in that the
Shipyard could maintain possession and prevent the Vessel from leaving the premises of
the Shipyard and could also judicially foreclose its preferred maritime lien.
7 The parties including the Borrower, the Guarantors, and certainly the Bank all
mistakenly believed the Bank’s FPSM was a first priority preferred ship mortgage
entitled the preferred status granted by the Ship Mortgage Act and not subject to any
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preferred maritime liens, including any shipyard maritime liens which arose before the
date of recordation of the FPSM. The maritime lien of the Shipyard arose, for purposes of
the Federal Maritime Licn Act, the Ship Mortgage Act, and the priority of the Bank’s
FPSM, not later than the date of execution and first performance by the Shipyard of the
Shipyard Contract on August {, 2006. The Bank’s mistaken belief was based on the
Abstract of Title, which showed no other mortgages or recorded liens on the Vessel.
However, maritime liens are secret liens, which arise by operation of law and do not
depend on recordation with the U.S. Coast Guard for attachment and perfection.
Maritime liens for shipyards are deemed to arise when work is first begun under a single
hip repair contract, and prime a subsequently filed proferred ship mortgage even if no
unpaid charges are due at the time of recordation of the subsequently filed preferred ship
morigage. With respeci io subsequently incurred shipyard charges under the single ship
repair contract, the date of the shipyard’s maritime lion relates back to the original date of
the single ship repair contract.
8 The usual and customary loan documentation for marine toans involving
refurbishment of vessels which are in a shipyard at the time the loan is made and the
lender’s preferred ship mortgage is filed includes a subordination agreement between the
bank and the shipyard, whereby the shipyard subordinates any maritime or other liens to
the tender’s preferred ship mortgage. The use of subordination agreements subordinating
otherwise preferred maritime liens to preferred ship mortgages is expressly authorized by
federal statute, 46 U.S.C. Section 31305. A subordination agreement from the shipyard is,
under usual and customary loan documentation for such marine loans, a condition
precedent for the making of the loan. Simply stated, without a subordination agreement,
no loan is made. Borrowers, guarantors, and banks regularly involved in marine loans
where the vessel in question is in a shipyard at the time of making of the loan and filing
of the lender’s preferred ship mortgage know or should know of this requirement and rely
on the signing of a subordination agreement by the shipyard as a means of protecting the
borrower’s property and the bank’s collateral. Thus, a prudent lender for such marine
loans will obtain a subordination agrecment from the shipyard before making the loan.
Encore Bank failed to do so prior to making the $6,000,000 loan.
9. The detriment to the Borrower, the Guarantors, and the Bank in connection with
the $6,000,000 Loan in not obtaining a subordination agreement from the Shipyard as a
condition precedent to making this loan was that the Shipyard was in control of the
Vessel, could charge unreasonable time and materials charges with relative impunity,
could assert a lien for both contested and uncontested shipyard charges, could prevent the
Vessel from leaving the Shipyard, could arrest the Vessel and be appointed the substitute
custodian without fear that the Bank would also arrest or join in the arrest by the
Shipyard since the Bank’s FPSM was subordinate to the Shipyard’s preferred maritime
lien, and at foreclosure sale could bid on the credit of the repair lien without even having
to put up cash. In practice, when the bank obtains a subordination agreement from a
shipyard having a prior maritime lien, the bank is in control, can arrest and judicially or
non-judicially foreclose, or become a mortgagee in possession and remove the vessel
from the subordinated shipyard. In other words, had the Bank in this case obtained a
subordination agreement from the Shipyard, the Bank would have been in a position to
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deal with the Vessel, the Borrowers, and the Guarantors and dispose of the Vessel, their
collateral, in a commercially reasonable manner. Moreover, had the Bank obtained a
subordination agreement from the Shipyard and proceeded to foreclose the FPSM and bid
in at foreclosure sale, the deficiency owed by the Guarantors would be little or nothing
based on the Bank’s own appraisal of the condition and valuation of the Vessel, since in
that event the amount of the deficiency of the Guarantors is generally the difference
between the value of the Vessel and the Bank’s legal debt. Thus, the failure by Encore
Bank to obtain a subordination agreement from the Shipyard resulted in significant
damages to the Borrower in the form of loss to the Shipyard of a vessel valued by the
Bank as worth at least $6,000,000 for only the $500,000 credit bid made by the Shipyard
and significant damages to the Guarantors in the form of loss of their investment in the
Borrower and liability to the Bank for a deficiency,
10. The cxistence of the maritime lien of the Shipyard on the Vessel on March 28, 2007
was an event of default under several provisions of the FPSM which existed on the date of
the morlgage. Essentially, the parties closed the $6,000,000 Loan in default on March 28,
2007. The FPSM made the Guarantors a party to the instrument. ‘his event of default
occurred on the date of the FPSM, continued in effect at the beginning of March, 2008 when
a dispute arose between Shipyard and the Borrower, and remained in effect at the time the
Vessel was ultimately sold at foreclosure sale in April 2013.
Further Affiant sayeth not.”
Richard A, Stanford
SUBSCRIBED AND SWORN TO BEFORE ME on August 29, 2013, to certify
which witness my hand and official seal.
®
LAWRENCE RODRIGUEZ JR “
Notary Public
STATE OF TEXAS Notary Publi for the
My Comm. Exo. Sep. 17, 2086 State of Texas
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BIOGRAPHICAL INFORMATION FOR RICHARD A. STANFORD, ESQ.
Current Employer- Title Stanford Law Firm- Principal
Profession Attorney
Work History Principal of Stanford Law Firm, 1999 to present, Vice President and General
Counsel of Horizon Offshore Contractors, Inc., 1998-1999; Principal of Stanford Law Firm 1995-1998;
Of Counsel to Bell and Murphy, 1997-1998; Member of Spagnoletti and Associates, 1991-1994; Partner
of Vinson and Elkins, 1976-1991,
Experience Principally engaged in maritime and offshore related construction, general commercial,
corporate, and banking law. Matters regularly handled include vessel acquisitions and financing, marine
regulatory matters, marine construction related matters, commercial transactions, insurance, corporate,
and banking matters, and assistance with commercial litigation and arbitrations. Commercial practice
includes preparation and negotiation of offshore and onshore construction contracts, drilling, pipelay,
installation, and dredging contracts, master service agreements, shipping matters, maritime and project
financings, documentation and preparation of loan agreements, security agreements, and ship mortgages,
vessel sales, vessel and equipment leasing, shipyard construction and repair contracts, charter parties,
towage contracts, and other vessel utilization contracts, insurance coverage questions, formation of
domestic and foreign business entities including limited partnerships, limited liability companies,
corporations, and joint ventures, asset and security purchase agreements, business acquisitions and sales,
and other maritime and offshore related transactions, commercial contracts, and corporate matters.
Litigation practice extends to assistance with maritime and non-maritime commercial litigation and
arbitrations, including construction claims, shipyard disputes, breach of contract, fraud and
misrepresentation cases, shareholder and partnership litigation, ship mortgage and maritime lien
foreclosures and vessel arrests, charter party disputes, and insurance coverage disputes.
Alternate Dispute Resolution Experience Arbitrated and mediated cases in area of principal practice
Professional Licenses Admitted to the State Bar of Texas in 1976; U.S. District Court for the
Southern District of Texas in 1976 and Eastern District of Texas in 1977, and U.S. Fifth Circuit Court of
Civil Appeals in 1977.
Professional Associations Member of the Maritime Law Association of the United States, the
Houston Maritime Arbitrators Association, and the Construction Sections of the State Bar of Texas and
the Houston Bar Association.
Education University of Texas (B.A.-197{) / University of Houston Law School (J.D.- 1976)
Compensation $350.00 Per Hour / $2,800.00 Per Day
Pre/post study and/or preparation time, if any, billed at $350.00 per hour plus expenses. Cancellation
policy: If any case (scheduled for a minimum of three days of hearing) settles or is continued within
fourteen (14) days of the hearing date, one-half of the daily fee times the number of hearing days may be
charged.
Citizenship United States of America
Locale Houston, TX