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SHELL OIL CO. v. KREPS

November 22, 1977

SHELL OIL COMPANY, Plaintiff,
v.
JUANITA M. KREPS, et al., Defendants. ALASKA BULK CARRIERS, INC., and TRINIDAD CORPORATION, Plaintiffs, v. JUANITA M. KREPS, et al., Defendants



The opinion of the court was delivered by: RICHEY

 UNITED STATES DISTRICT JUDGE CHARLES R. RICHEY

 These consolidated cases are presently before the Court on cross-motions for summary judgment. *fn1" Plaintiffs herein, Shell Oil Company (Shell), Alaska Bulk Carriers, Inc. (Alaska Bulk), and Trinidad Corporation (Trinidad), seek judicial review of certain actions taken by the defendants, Juanita M. Kreps, Secretary of Commerce, the Maritime Administration (MarAd), Robert J. Blackwell, Assistant Secretary of Commerce for Maritime Affairs, and the three members of the Maritime Subsidy Board (MSB). The actions challenged relate to the Secretary's decision to remove domestic trading restrictions from the ship known as the S.S. STUYVESANT in exchange for the repayment of a construction-differential subsidy (CDS) of some $27.2 million by the Polk Tanker Corporation (Polk), the owner of the STUYVESANT and a wholly-owned subsidiary of Seatrain Lines, Inc. Polk and Seatrain Shipbuilding Corporation (Seatrain Shipbuilding), the builder of the STUYVESANT and another wholly-owned subsidiary of Seatrain Lines, Inc., were permitted to intervene herein as party-defendants.

 The cross-motions for summary judgment now before the Court present four legal issues: (1) whether the Secretary has the legal authority under the Merchant Marine Act of 1936 to remove domestic trading restrictions upon the operation of a vessel built with CDS in exchange for repayment in full of the CDS; (2) if the Secretary has such legal authority to remove domestic trading restrictions, whether she has the legal authority to accept as repayment therefor a promissory note payable over 20 years; (3) whether the procedures utilized by the Secretary in taking the actions here in issue deprived plaintiffs of property in violation of the Due Process Clause of the fifth amendment; and, finally, (4) whether the Secretary's decision to exercise such authority on the facts of the instant case was arbitrary and capricious or otherwise violative of the Administrative Procedure Act (APA).

 For the reasons hereinafter stated in sections III and IV, infra, the Court concludes that the Secretary has the legal authority both to remove permanently domestic trading restrictions from a CDS vessel in exchange for CDS repayment and to accept a 20-year promissory note as repayment. The Court further concludes that the procedures utilized by the Secretary did not deprive plaintiffs of any property interest cognizable under the Due Process Clause. Accordingly, the Court will grant defendants' and defendant-intervenors' motions for summary judgment as to these issues. However, for the reasons set forth in section V, infra, the Court concludes that the Secretary failed to consider relevant factors in making her decision to take the actions herein challenged, and the Court therefore concludes that these actions are arbitrary and capricious and an abuse of discretion, within the meaning of section 10(e) of the APA, 5 U.S.C. § 706(2)(A). Accordingly, the Court will grant plaintiffs' motion for summary judgment on this issue, and will remand this matter to the Secretary for further consideration in accordance with this opinion.

 I. STATUTORY FRAMEWORK

 Title V of the Merchant Marine Act of 1936, (the Act), as amended, 46 U.S.C. §§ 1151 et seq., empowers the MSB to award a "construction-differential subsidy" (CDS) to persons building new vessels for use in the "foreign commerce of the United States." 46 U.S.C. § 1151(a). Such a subsidy is intended to equalize the costs of vessel construction between United States and foreign shipyards, where construction costs are lower as a result of lower labor and material costs and/or foreign government subsidies. The CDS program thus enables ships built in the United States to compete in charter rates against foreign-built ships. See generally Moore-McCormack Lines, Inc. v. United States, 188 Ct. Cl. 644, 413 F.2d 568 (1969).

 No such CDS, however, is necessary for ships not in competition with foreign-built ships. Section 27 of the Merchant Marine Act of 1920, as amended, 46 U.S.C. § 883, provides that only vessels " built in and documented under the laws of the United States and owned by persons who are citizens of the United States" may engage in domestic trade -- trade "between points in the United States, including Districts, Territories, and possessions thereof embraced within the coastwide laws." (Emphasis added.) See American Maritime Association v. Blumenthal, No. 77-1508 (D.D.C. October 14, 1977). Since no foreign-built ships can compete in domestic trade with the higher-cost United States-built ships, no CDS may be paid to United States ships engaged in domestic trade.

 In order to protect the unsubsidized vessels, United States ships that are built with the aid of CDS are prohibited from engaging in domestic trade since they are able to offer lower charter rates than unsubsidized United States ships. This prohibition, codified in section 506 of the 1936 Act, 46 U.S.C. § 1156, is the focal point of this litigation. This section, quoted in its entirety in section III(b) infra, requires recipients of CDS to agree not to operate the subsidized vessel in domestic commerce, though it does provide a mechanism whereby the Secretary can waive such domestic trading restrictions for up to six months per year in exchange for a pro rata repayment of CDS.

 One final statutory provision of relevance to this case is Title XI of the Act, 46 U.S.C. §§ 1271 et seq., which authorizes the Secretary to provide loan guarantees for the financing of United States-built vessels. Section 1104(a)(3) of the Act, 46 U.S.C. § 1274(a)(3), authorizes the use of such guarantees for the "financing, in whole or in part, [of] the repayment to the United States of any amount of construction-differential subsidy paid with respect to a vessel pursuant to title V of the Act." Other subsections of section 1104(a) set forth other types of financing for which loan guarantees may be made. Section 1104(b)(2) provides that such financing may not exceed 87.5 per cent of the cost of vessels constructed without CDS and may not exceed 75 per cent of the cost of vessels constructed with CDS.

 II. FACTUAL BACKGROUND

 On June 30, 1972, the MSB executed CDS contracts with intervenors Seatrain Shipbuilding and Polk for a 225,000 deadweight ton (DWT) tanker now known as the STUYVESANT. Pursuant to Board Contract Nos. MA/MSB-164 and MA/MSB-165, the MSB agreed to pay CDS funds to Seatrain Shipbuilding, and Polk, as the vessel purchaser, agreed to operate the STUYVESANT in the foreign trade of the United States, as required by section 506 of the Act.

 Pursuant to the CDS contracts, Seatrain received $27.2 million in construction subsidies for the STUYVESANT which represents approximately 26 per cent of the total construction cost of some $102.7 million. In addition, pursuant to Title XI of the Act, the Secretary guaranteed some $30.2 million in loans. Finally, the Economic Development Administration (EDA), another agency of the Department of Commerce, made loans of $5 million and guaranteed, to the extent of 90 per cent, approximately $82 million in additional loans to Seatrain Shipbuilding for the purpose of developing and maintaining the shipbuilding facilities of the former Brooklyn Navy Yard.

 Construction of the STUYVESANT was completed in 1977. Efforts by Polk to find employment for the STUYVESANT in the foreign trade of the United States proved unavailing as a result of an excess supply of tanker tonnage in foreign trade and other factors influencing the volume of such foreign trade. As a result, Polk sought other employment opportunities for the STUYVESANT and began negotiations with the Standard Oil Company of Ohio [SOHIO] for the transportation of SOHIO's Alaskan oil to the continental United States. These negotiations culminated on June 21, 1977, in an agreement between Polk and SOHIO for a three-year time charter of the STUYVESANT provided that the vessel became qualified to engage in domestic trade.

 On July 8, 1977, in order to so qualify the STUYVESANT for carrying SOHIO's Alaskan oil in domestic trade, Polk filed with the Assistant Secretary of Commerce for Maritime Affairs (hereinafter, MarAd/MSB) an application seeking waiver of the domestic trade restrictions of section 506 for a three-year period in exchange for a pro rata repayment of CDS. MarAd/MSB assigned the application Docket No. S-565, and notice of the application was published in the Federal Register on July 19, 1977. 42 Fed. Reg. 37,229 (1977). Plaintiffs Shell and Alaska Bulk and others filed comments in opposition to Polk's application, and Polk subsequently withdrew the application on August 26, 1977.

 On August 30, 1977, MarAd/MSB took a series of actions with respect to the August 25, 1977, application of Polk; these actions are set forth in two letters dated August 31, 1977, from MarAd/MSB to Polk and Queensway Tanker, Inc. In these letters, MarAd/MSB agreed, inter alia, to release the STUYVESANT permanently from section 506 domestic trading restrictions in exchange for Polk's repayment of the $27.2 million CDS by means of a 20-year interest-bearing promissory note secured by a third preferred ship mortgage on the vessel. In addition, MarAd/MSB approved the following transactions and attendant sale of Title XI-guaranteed bonds, which were in fact consummated on September 30, 1977. At closing, Polk transferred the STUYVESANT to the United States Trust Company (USTC) as owner-trustee for the equity-owner, General Electric Credit Corporation (GECC) and the above-described collateralized promissory note to the Secretary for $27.2 million as repayment for the full amount of CDS. The note was then transferred to USTC which assumed responsibility for $60.2 million of government-insured indebtedness on the STUYVESANT. Of that amount, $31.3 million is indebtedness incurred at the closing through the sale of bonds. The proceeds of these bonds was then used to repay loans of $28 million guaranteed by the Economic Development Administration. USTC also paid Polk $32.6 million, which was placed in an escrow account for the benefit of the equity-owner, GECC. USTC then bareboat-chartered the STUYVESANT to Queensway Tankers, Inc., which in turn time-chartered the vessel to SOHIO for three years for the purpose of transporting Alaskan oil to the continental United States.

 The above-described transactions, of which the Secretary's decision to remove domestic trading restrictions upon the STUYVESANT was an integral part, were originally scheduled for closing on September 23, 1977. But on September 22, 1977, plaintiffs filed these suits and sought a temporary restraining order (TRO) to prevent the scheduled closing. The parties appeared before Judge Gasch on that date, and he granted the requested TRO and scheduled the hearing on plaintiffs' motion for a preliminary injunction for September 29, 1977, before this Court.

 On September 29, 1977, this Court heard extensive arguments on plaintiffs' motion for preliminary injunctive relief. Upon consideration of these arguments and the parties' comprehensive memoranda, and based on its consideration of the four factors enunciated in Virginia Petroleum Jobbers Association v. FPC, 104 U.S. App. D.C. 106, 259 F.2d 921 (1958), the Court found that plaintiffs had failed to demonstrate that they would incur immediate and irreparable injury if the requested relief were denied. The Court therefore, on September 30, 1977, denied plaintiffs' motion for a preliminary injunction. Thereafter, on that same day, the financial transactions involving the STUYVESANT were closed. Since that time, the parties have engaged in extensive and expedited discovery, and, as a result, they have filed the instant cross-motions for summary judgment.

 III. THE SECRETARY OF COMMERCE HAS AUTHORITY UNDER THE MERCHANT MARINE ACT OF 1936 TO ACCEPT TOTAL REPAYMENT OF CONSTRUCTION-DIFFERENTIAL SUBSIDY AND TO WAIVE PERMANENTLY DOMESTIC TRADING RESTRICTIONS IN EXCHANGE FOR SUCH REPAYMENT.

 A. The Secretary's General Contractual Authority

 All parties appear to be in agreement that the Secretary possesses a "general authority" to accept total repayment of CDS. Thus, plaintiffs Alaska Bulk and Trinidad state unequivocally that they "have no quarrel with [the acceptance of] total CDS repayment" as long as such acceptance is not accompanied by a removal of domestic trade restrictions.1a None of the parties, however, has pointed to any particular statutory (provisions) that expressly authorizes the Secretary to accept total CDS repayment under any circumstances.

 Defendants and defendant-intervenors have asserted that this power is inherent in sections 504, 1104(a)(3), and 207 of the Act, 46 U.S.C. §§ 1154, 1274(a)(3), & 1117, and in section 105(1) of the Reorganization Plan No. 21 of 1950 [Plan 21], 64 Stat. 1273 (1950), and section 202(b)(1) of Reorganization Plan No. 7 of 1961 [Plan 7], 75 Stat. 840 (1961). While plaintiffs admit, as indicated above, that the Secretary has such inherent authority to accept total CDS repayment except when such repayment is barred by another provision of the Act, they express neither agreement nor disagreement with the provisions relied upon by defendants and defendant-intervenors.

 The Court has carefully analyzed the provisions invoked by defendants and defendant-intervenors. On the basis of this analysis, the Court concludes that the Secretary does in fact possess general authority to accept total CDS repayment in appropriate cases. The Court agrees with defendants and defendant-intervenors that such authority is inherent in the Secretary's broad contractual authority provided by sections 504 and 207, 46 U.S.C. §§ 1154 and 1117. The Court further agrees that this authority is expressly contemplated by section 1104(a)(3), 46 U.S.C. § 1274(a)(3), which provides that the Secretary

 
may guarantee or make a commitment to guarantee, payment of the principal and interest on an obligation which aids in --
 
(3) financing, in whole or in part, the repayment to the United States of any amount of construction-differential subsidy paid with respect to a vessel pursuant to [Title V].

 Finally, the Court also finds that the two reorganization plans cited by defendants and defendant-intervenors demonstrate that the Secretary of Commerce has authority not only for making Title V [CDS] subsidy contracts, but also, in the words of section 105(1) of Plan 21, for "amending and terminating [such] contracts." While these reorganization plans cannot be interpreted to "[authorize] an agency to exercise a function which is not expressly authorized by law at the time the plan is transmitted to Congress," 5 U.S.C. § 905, they nevertheless demonstrate (1) that the Secretary's broad contractual authority with respect to CDS contracts has been construed expansively, and (2) that Congress was aware of, and approved, ...


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