These are suits in admiralty to foreclose two mortgages given by the Barlum Steamship Company upon the vessels Thomas Barlum and John J. Barlum, respectively. The mortgages purported to be preferred mortgages under the Ship Mortgage Act 1920. 41 Stat. 1000-1006, 46 U.S.C. c. 25, §§ 911-984 (46 USCA §§ 911-984). The mortgagor, appearing as claimant, contended that the admiralty was without jurisdiction. The District Court overruled that contention and, finding that all the requirements of that Act had been met, entered decrees of foreclosure and sale. 56 F.(2d) 455; 2 F.Supp. 733. In the case of the John J. Barlum the decree provided for the recovery by certain seamen, intervening libelants, of amounts due for wages, as preferred maritime liens. The Circuit Court of Appeals reversed the decrees, holding that the suits should have been dismissed for the want of jurisdiction. 68 F.(2d) 946. This Court granted certiorari. 292 U.S. 619, 54 S.Ct. 717, 78 L.Ed. 1476.
The mortgagor, at the time the mortgages were executed, was a close corporation, about four-fifths of its shares being owned by John J. Barlum, who was also interested in several nonmaritime enterprises. The mortgage, in No. 13, on the Thomas Barlum was executed in March, 1929, to petitioner, as trustee, to secure $200,000 of bonds which were purchased by petitioner with a definite understanding as to the application of the proceeds. Approximately $50,000 were to meet obligations secured by a prior mortgage upon the same vessel; about $100,000 were to take up loans of John J. Barlum and Thomas Barlum & Sons, a concern which was engaged in a nonmaritime enterprise; and the remainder, about $42,000, were to provide for repairs and for refitting the vessels Thomas Barlum and John J. Barlum. The mortgage was executed while the Thomas Barlum was laid up.
The mortgage, in No. 14, on the John J. Barlum was executed in December, 1927, to petitioner, as trustee, to secure an issue of $200,000 of bonds purchased by petitioner with the understanding that, of the proceeds, petitioner was to retain about $82,000 to cover principal and interest on bonds of John J. Barlum secured by a mortgage on real estate, and about $10,000 to be applied on one of his notes. Most of the remaining proceeds, which were paid over to the mortgagor, was used to take up loans in connection with nonmaritime enterprises, only a small part being devoted to payments relating to the operation of the vessels.
In both instances, the bonds secured by the mortgages were negotiable bonds and were purchased by petitioner for sale to the general public and were largely so sold.
There is no question as to the validity of the mortgages or of the bonds which they secure or as to the default in payment. The question is solely one of jurisdiction in admiralty of the foreclosure suits. Respondent contends that the mortgages 'were so devoid of connection with maritime purposes' that the provision of the Ship Mortgage Act conferring jurisdiction in admiralty 'either does not, or cannot constitutionally, apply.'
The Circuit Court of Appeals was divided in opinion. The majority of the judges, without passing on the extent of congressional authority, thought that it was sufficient to point out that the mortgagor and mortgagee knew, before the mortgages were made, that the moneys advanced 'were intended for and actually were used for non-maritime purposes,' and they concluded that the provisions of the Ship Mortgage Act did not extend to such a case. The minority view, supporting the decision of the District Court, was that the Congress intended to encourage the investment of capital in ships; that it might well be that this object could best be promoted by allowing vessels 'to be hypothecated as readily and with the same effect as other personal property'; that a mortgage on a ship would be 'a most undesirable security' if purchasers of bonds so secured must at their peril ascertain how moneys advanced upon the mortgage are to be spent; and that Congress had constitutional authority to give to a valid mortgage a preferred status, and to provide for the enforcement of the lien in admiralty, by virtue of its control over ships as essentially marine instrumentalities, a control which includes the promotion of their development and the regulation of their use.