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KEYSTONE SHIPPING CO. v. UNITED STATES

September 2, 1992

KEYSTONE SHIPPING CO., et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, et al., Defendants.



The opinion of the court was delivered by: PRATT

MEMORANDUM OPINION

 This is a consolidated action seeking review of decisions of the Maritime Administration ("MarAd"), the Maritime Subsidy Board ("MSB"), and the United States Coast Guard ("Coast Guard") concerning a U.S. vessel built with subsidies, Barge 4102, and a wrecked foreign-built vessel, the Fuji. "Seabulk America" is a vessel constructed from the Fuji and Barge 4102, owned by Seabulk Transmarine Partnership, Ltd. ("Seabulk") and which, pursuant to the decisions here under review, is eligible for and is operating in the United States domestic trades.

 Plaintiffs Keystone Shipping Co. and Marine Transport Lines, Inc. (hereinafter "Keystone") operate chemical and tanker vessels in domestic shipping which directly compete with Seabulk. Specifically, plaintiffs challenge three decisions which permit Seabulk America to operate in the domestic trades. They have moved for summary judgment, claiming that the decisions by MarAd, MSB, and Coast Guard were arbitrary and capricious. Plaintiffs challenge the Coast Guard decision that the Seabulk America is the rebuilt Fuji and that as a result is now eligible to participate in the U.S. domestic trades. Plaintiffs also challenge the MarAd and MSB decisions that rescinded the domestic trading restrictions attached to Barge 4102. Defendants include the United states of America; Samuel K. Skinner in his capacity as Secretary of the United States Department of Transportation; and Admiral William Kine in his capacity as Commandant of the United States Coast Guard (hereinafter "United States"). Defendants have moved to affirm the decisions at issue. Additionally, Seabulk has been permitted to intervene, and has also filed a motion for summary judgment.

 For the reasons given below, we find some of the plaintiffs' arguments meritorious, and we remand the cases back to the appropriate agencies for further development of the record in accordance with this opinion.

 I. Background

 A. Statutory Framework

 This case takes place deep within the ocean of legislative actions designed to protect the domestic shipping and ship building industries. It is awash with agency determinations under several statutes that provide steep subsidies for ships built within the United States that ply foreign waters and that restrict domestic shipping to unsubsidized United States' vessels.

 On the whole, American shipyards are more expensive to operate than foreign yards, and American-built ships cost more than those built outside the United States. Over the years, Congress has addressed this problem by enacting certain statutes. One of these, the Merchant Marine Act of 1936 ("1936 Act"), 46 U.S.C. §§ 1101 et seq., establishes various assistance programs to support the construction, operation, and acquisition of American-flag merchant vessels. These programs are designed to allow American ships to compete with those in foreign commerce, and generally they restrict ships that receive the subsidies from operating in coastwise (domestic) trade. Section 501 of the 1936 Act, 46 U.S.C. App. § 1151, establishes a construction-differential subsidy ("CDS") to aid construction of new vessels that will be used in foreign commerce. Section 506 of the 1936 Act mandates that a vessel which receives a CDS operate "exclusively in foreign trade." 46 U.S.C. App. § 1156.

 The 1936 Act also authorizes a capital construction fund ("CCF") which enables the owners of American-flag vessels to acquire vessels with favorable tax treatment given for monies deposited in the funds. Vessels acquired with CCF must be operated "in the United States foreign, Great Lakes, or non-contiguous domestic trade." 46 U.S.C. App. § 1177(k)(2)(C). Further, the 1936 Act establishes an operating-differential subsidy ("ODS") program for American-flag vessels operating in foreign trade. See 46 U.S.C. App. §§ 1171-76.

 A second statute, the Jones Act, 46 U.S.C. App. § 883, regulates coastwise or domestic trade. In order for a vessel to be used in domestic trade, the Coast Guard must document the vessel as a United States vessel with a coastwise endorsement. 46 U.S.C. § 12106(b). The coastwise endorsement is obtainable if the vessel has been built in the United States *fn1" or qualifies under the Wrecked Vessel Act ("WVA"), 46 U.S.C. § 14.

 The Wrecked Vessel Act, an act of ancient origins, permits any vessel wrecked in United States or adjacent waters and purchased by a United States citizen, to be used in domestic trade if repairs equal to three times the "appraised salved value of the vessel" are performed in a U.S. shipyard. The Coast Guard appoints a board of independent appraisers to assess the value of the salvaged ship and the value of repairs. 46 C.F.R. § 67.19-9.

 B. Barge 4102

 The integrated tug/barge Oxy producer was built by Suwanee River Spa Finance, Inc. using CDS pursuant to Section 501 of the 1936 Act. Consequently, its contract with MarAd limited its use to foreign commerce. *fn2" MarAd Administrative Record ("MarAd AR") Add. Ex. D.

 In 1981, the tug unit of Oxy Producer was lost at sea when it separated from the barge unit, Barge 4102. The storm apparently did not significantly damage Barge 4102. Hvide Shipping, Inc. ("Hvide") and Seabulk Tankers, Ltd. sought MarAd approval to purchase Barge 4102 using monies from CCF. Barge 4102 would remain under the ODS contract which would be assigned to Hvide and Seabulk Tankers. On March 22, 1982, MarAd approved the purchase of Barge 4102 using CCF and the assignment of the contract to Seabulk and Hvide. The assignment of the contract provided that the Barge was still restricted from engaging in domestic trade because it was constructed with CDS. MarAd AR Add. Ex. D. *fn3"

 C. The Fuji

 The Fuji is a tanker built in Japan in 1975. Coast Guard Administrative Record ("Coast Guard AR") Ex. LL. In 1985, an explosion occurred on board and it was towed from approximately 235 miles off Cape Hatteras to a U.S. shipyard. While being towed, the forward portion of the tanker sank, but the surviving stern section was brought to Newport News, Virginia. Coast Guard AR Ex. YY. On April 18, 1985, Seabulk purchased the Fuji for $ 1,050,000 from Southway Voyage C.V., which had bought the vessel after the explosion. Coast Guard AR Ex. B. Seabulk sought a determination from the Coast Guard that the Fuji had been wrecked in "adjacent waters" within the meaning of the WVA. Coast Guard AR Ex. VV. The Coast Guard determined that the Fuji was wrecked in adjacent waters on June 14, 1985. Coast Guard AR Exs. OO, PP, ZZ.

 The Coast Guard appointed a board of appraisers that determined the salved value of the Fuji to be $ 6,703,000. Coast Guard AR Ex. JJ. This determination was based upon an estimate of the current cost of rebuilding a similar stern section in a U.S. shipyard. Seabulk protested the finding, arguing that the appraisers should have taken into account the difference in fuel consumption between a new stern and the Fuji, and claiming that the $ 1.05 million sales price was indicative of the Fuji's value. Coast Guard AR Ex. FF, GG. Seabulk also claimed that the salved value of the Fuji should be $ 380,000. Coast Guard AR Ex. FF. The Coast Guard submitted Seabulk's analysis to the board of appraisers, and on January 23, 1986, the board issued a revised estimate which gave a salved value of $ 3,834,000, taking into account a "fuel differential". Coast Guard AR Ex. CC. The Coast Guard adopted the board's appraisal. Coast Guard AR Ex. CC.

 Seabulk proposed that it use Barge 4102 in the Fuji's repair. Accordingly, it sought acknowledgement from the Coast Guard that such action was permissible under the WVA and that the combined vessel would be considered the rebuilt Fuji so that it could be used in domestic trade. See Coast Guard AR Ex. AA. The Coast Guard made a preliminary determination that the new vessel would be the rebuilt Fuji. Coast Guard AR Ex. W.

 Seabulk then filed an application with MarAd, requesting that MarAd terminate the CDS Agreement and amend the CCF agreements covering Barge 4102. MarAd AR Ex. H. On January 16, 1987, MarAd determined that the domestic trading restrictions imposed on Barge 4102 by the CCF agreements would not apply once Barge 4102 was joined with the Fuji because Barge 4102 would lose its character as a vessel. MarAd noted that the Coast Guard had decided that the joining of the two parts would constitute the rebuilt Fuji, and that was a decision within the Coast Guard's expertise. The removal of the domestic trading restrictions was subject to Seabulk's reduction in the adjusted basis of the vessel by $ 4.1 million to represent the withdrawal of CCF funds. The MSB ruled as well that the CDS contract could be terminated. MarAd AR Ex. D.

 The Coast Guard appointed another board of appraisers to determine the value of the repairs. Coast Guard AR Exs. Q, R, S. The board issued its appraisal on August 20, 1990, finding that the value of the repairs equalled or exceeded $ 20,409,339, more than three times the salved value of $ 3.8 million. The board did not include the value of Barge 4102 in reaching this figure. Coast Guard AR Exs. Q, R, S.

 On September 20, 1990, the Coast Guard issued its decision that the Fuji was eligible for coastwise trade under the WVA. Coast Guard AR Ex. U. The Coast Guard adopted the findings of the board of appraisers and authorized the issuance of a coastwise endorsement. Coast Guard AR Ex. V.

 Three actions have been brought by plaintiffs to challenge these decisions. In August of 1988, plaintiffs filed an action seeking review of the Coast Guard's decision. Keystone Shipping Co. v. United States, 729 F. Supp. 132 (Keystone I). At that time, plaintiffs were unaware of the MarAd and MSB decisions. When plaintiffs learned of those decisions, they filed another action seeking their review. Keystone Shipping Co. v. United States, Civ. Act. No. 88-3202 (Keystone II). On January 17, 1990, Judge Harris dismissed Keystone I on the grounds that the Coast Guard determination was not administratively final and not ripe for review. On October 31, 1990, Judge Harris of this Court denied a similar motion to dismiss filed in Keystone II. On November 9, 1990, the plaintiffs filed a third action, Keystone Shipping Co. v. United States, Civ. Act. No. 90-2762 (Keystone III), seeking to vacate the Coast Guard's rulings on the use of the Barge 4102 as a "repair" under the WVA and the determination that the Fuji resulted from the joinder of the Fuji and Barge 4102. On December 19, 1990, the Court consolidated Keystone II and Keystone III. The cases at bar are these consolidated actions.

 II. Standard of Review

 Summary judgment pursuant to Federal Rule of Civil Procedure 56 is appropriate when there are no genuine issues of material fact. Summary judgment is especially appropriate in cases such as this where the Court is called on to review a decision of an administrative agency. In these cases, what is often in issue are not the facts, but whether the agency erred in applying the law. See, e.g., 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure § 2733 at 366-67 (2d ed. 1983).

 If Congress has spoken to the precise question at issue, then "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). When Congress is silent, the question for the court is whether the agency's interpretation is based on a permissible construction of the statute. Id. This is a highly deferential standard. Decisions of administrative agencies are subject to review in federal court under a standard that examines whether the decision was arbitrary and capricious. See Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 77 L. Ed. 2d 443 (1983); Administrative Procedure Act, 5 U.S.C. § 706(2). "The scope of review under the 'arbitrary and capricious' standard is narrow and a court is not to substitute its judgment for that of the agency." 463 U.S. at 43. A de novo review of the facts underlying the decision is not appropriate although the court must "'consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.'" Motor Vehicle, 463 U.S. at 43 (quoting Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 286, 42 L. Ed. 2d 447, 95 S. Ct. 438 (1974)); Cooperative Services, Inc. v. United States Department of Housing & Urban Development, 183 U.S. App. D.C. 344, 562 F.2d 1292, 1295 (D.C. Cir. 1977).

 With this standard in mind, we now turn to the challenged actions.

 III. The Coast Guard Decision

 Plaintiffs argue that the Coast Guard's ruling that the Seabulk America was the rebuilt Fuji instead of the rebuilt Barge 4102 was rendered in contravention of established law. Essentially, plaintiffs challenge the Coast Guard's determination that the joining of the Fuji and Barge 4102 qualified as a "repair" under the WVA, thereby allowing the rebuilt Fuji to engage in coastwise trade. They charge that the Coast Guard departed from its previous precedent in determining which of the two preexisting vessels survived the merger, and they further challenge the appraisal of the salved value.

 In determining that the Fuji was the resulting vessel and that it qualified under the WVA, the coast Guard necessarily made three determinations: first, they decided that the materials used in a WVA repair did not have to be new; second, they accepted the appraisal by the board as valid; and third and most crucial for this case, the Coast Guard decided that the rebuilt ship was the Fuji and not Barge 4102. We will treat each of these decisions and the plaintiffs' challenges separately.

 Our first step is to determine if Congress has spoken directly to the issue. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). The WVA provides:

 The Commissioner of Customs may issue a register or enrollment for any vessel wrecked on the coasts of the United States or her possessions or adjacent waters, when purchased by a citizen or citizens of the United States and thereupon repaired in a shipyard in the United States or her possessions, if it shall be proved to the satisfaction of the Commissioner, if he deems it necessary, through a board of three appraisers appointed by him, that the said repairs put upon such vessels are equal to three times the appraised salved value of the vessel: Provided, That the expense of the appraisal provided for shall be borne by the owner of the vessel: Provided further, That if any of the material matters of fact sworn to or represented by the owner, or at his instance, to obtain the ...


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