Appendix — Seatrain Shipbuilding Corp. v. Shell Oil Co.
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Supreme Court, U. &,
FILED
APPENDIX AUG 16 1979
MIGHABL RODAK, JR., CLERK |
,
ne tlle
IN THE
Suprene Court of the Hnited States
OCTOBER TERM, 1978
No. 78-1651
SEATRAIN SHIPBUILDING CORPORATION, et al.,
Petitioners,
Vv.
SHELL OIL COMPANY, et al.,
Respondents.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
PETITION FOR CERTIORARI FILED APRIL 30, 1979
CERTIORARI GRANTED JUNE 18, 1979
ee
IN THE
Supreme Court of the United States
OCTOBER TERM, 1978
No. 78-1651
SEATRAIN SHIPBUILDING CORPORATION, et al.,
Petitioners,
Vv.
SHELL OIL COMPANY, et al.,
Respondents.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
TABLE OF CONTENTS *
Page
Chronological List of Relevant Docket Entries ............ 2
Verified Complaint in No. 77-1645 (with exhibits), filed
A ES 6
Complaint in No. 77-1647 (with exhibits), filed Sep-
Neen ee a sncencnenesenecs 45
Affidavit of John J. Ervin, filed September 22, 1977.... 82
*The opinion and dissent issued by the court of appeals on
February 6, 1979 are reproduced in Appendix A of the Petition
at pages la-6la. The opinion issued by the district court on
November 22, 1977 is reproduced in Appendix A of the Petition at
pages 65a-95a.
ii
TABLE OF CONTENTS—Continued
Affidavit of Larry F. Liddle (with attachment), filed
IOI Ts TIO ricied ovapnnsfaninachetressvasenntanenesecoscnnsoesces
Motion of Intervenor-Defendants To Dismiss with
portion of supporting Memorandum, filed September
sa cslisemieiinnse
Affidavit of Robert Brown, filed September 28, 1977.....
Affidavit of James Carthaus, filed September 28, 1977..
Affidavit of Robert M. Macy, Jr., filed September 28,
BET sctipbeibssinceciens 2 SC IE CE Eee eT
Motion of Federal Defendants to Dissolve the Tempo-
rary Restraining Order and Dismiss with supporting
Memorandum, filed September 29, 1977 ....................
Affidavit of Russell F. Stryker, filed September 29,
ON Nac a Ls aaecirmabeinnsine
Affidavit of Dennis Burgess (with exhibits), filed Sep-
Rg RIN RCT RRAT Ere RCO
Affidavit of James S. Dawson, Jr., filed September 29,
aS aa acclaasastsisbapmadbgsabisabeaon’
Order of September 30, 1977 ............2...........ccccesseeeseeeees
Findings of Fact and Conclusions of Law of September
I a hl aensuniagnpebcancadbonse
Opinion of the Comptroller General, B-155039, filed
October 12, 1977 ...............
Affidavit of Charles E. Dunagan (with exhibits), filed
lsh cilacnionmee
Affidavit of William Karas (with exhibits), filed Oc-
SN CU TEE © sverscabscistensihicasicncdiaigninnananiesinisnnidaaenisntabianecaaaees
Affidavit of Edmond J. Fitzgerald, filed October 18,
a a sesiismunnenes
Supplemental Affidavit of Russell F. Stryker (with
attachment), filed October 18, 1977 -...................
Page
111
122
iii
TABLE OF CONTENTS—Continued
Amendment of Complaint in C.A. No. 77-1645, filed
ge E.R RETR are NIMC cee NE eee On om
Affidavit of William Karas (with exhibits), filed Oc-
I I os tsetse dodges temieneninaliinibtiaaiiaies
Amendment of Complaint in C.A. No. 77-1647, filed
I a Toe canslalail
Stipulation of Undisputed Facts (with exhibits), filed
ase saiacumatianiicniianios
Maritime Administration Action Memorandum of June
BE, Fire Te CON Beg BGT cncvveccccsnvecenesscccseccccciccoss
oe SD, , pO ny ay raeC enna EO oe
CE Or es BPE cicieccsiciccccnnecteninccwenecntscseccnninose
Notice of Appeal by plaintiffs in C.A. 77-1647, filed
I
Notice of Appeal by plaintiffs in C.A. 77-1645, filed
I
Notices of Appeal by interyenor-defendants, filed Janu-
ae a sctiatdecrerecastndatesats Hants Gsnmanitinticnssebitinpennines
Final Opinion and Order of Remand of Maritime Sub-
sidy Board, filed October 12, 1978 .....000000000002--ooeee
Orders Denying Petitions for Rehearing and Sugges-
tions for Rehearing En Banc, filed March 22, 1979....
Amended Order Denying Suggestions for Rehearing
Be Be ee. Cs I indie it ceicectensicdencitlacnccasns
Order Granting Stay, filed April 19, 1979.00.00...
Order Granting Certiorari, filed June 18, 1979
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 77-1645
SHELL OIL COMPANY,
Plaintiff,
Vv.
JUANITA M. KREPS
(Individually and as Secretary of the United
States Department of Commerce acting in
her official capacity) ,
ROBERT J. BLACKWELL
(Individually, as Assistant Secretary of
Commerce for Maritime Affairs and as
Chairman of the Maritime Subsidy Board
acting in his official capacity),
HOWARD F. CASEY
(Individually, as Deputy Assistant Secre-
tary of Commerce and as Member, Mari-
time Subsidy Board acting in his official
capacity),
SAMUEL B. NEMIROW
(Individually as General Counsel, Maritime
Administration and as Member Maritime
Subsidy Board, acting in his official ca-
Defendants,
SEATRAIN SHIPBUILDING CORPORATION,
POLK TANKER CORPORATION,
Intervenor-Defendants.
2
Civil Action No. 77-1647
ALASKA BULK CARRIERS, INC.,
TRINIDAD CORPORATION,
Plaintiffs,
Vv.
JUANITA M. KREPs,
Secretary of Commerce, U.S. Department
of Commerce,
MARITIME ADMINISTRATION,
U.S. Department of Commerce,
MARITIME SUBSIDY BOARD,
U.S. Department of Commerce,
ROBERT J. BLACKWELL,
Individually and as Assistant Secretary of
Commerce for Maritime Affairs, Maritime
Administrator and Chairman, Maritime
Subsidy Board, Maritime Administration,
U.S. Department of Commerce.
Defendants,
SEATRAIN SHIPBUILDING CORPORATION,
POLK TANKER CORPORATION,
Intervenor-Defendants.
CHRONOLOGICAL LIST OF RELEVANT
DOCKET ENTRIES
September 22, 1977—Verified complaint, motion for tem-
porary restraining order, and motion for preliminary
injunction filed by plaintiff in C.A. 77-1645.
3
September 22, 1977—Complaint, motion for temporary
restraining order, motion for preliminary injunction,
affidavits of Larry L. Liddle and John J. Ervin filed
by plaintiffs in C.A. 77-1647.
September 22, 1977—Oral motion of Seatrain Shipbuild-
ing Corporation and Polk Tanker Corporation to
intervene as party defendants granted.
September 22, 1977—Hearing held and order granting
motions for temporary restraining order issued.
September 26, 1977—Order filed granting motion to
intervene.
September 28, 1977—Motion to dissolve temporary re-
straining order and to dismiss, and affidavits of
James Carthaus, Robert M. Macy, Jr., and Robert
Brown filed by intervenor-defendants.
September 29, 1977—Motion to dissolve temporary re-
straining order and to dismiss, and affidavits of
James §. Dawson, Jr. and Russell F. Stryker, filed
by federal defendants.
September 29, 1977—Affidavit of Dennis Burgess filed.
September 29, 1977—-Hearing memorandum filed by plain-
tiffs in C.A. 77-1647.
September 29, 1977—Plaintiffs’ motion for preliminary
injunction heard and taken under advisement.
September 29, 1977—Proposed findings of fact and con-
clusions of law filed by intervenor-defendants.
September 30, 1977—Order entered consolidating C.A.
77-1645 and C.A. 77-1647.
September 30, 1977—Findings of Fact and Conclusions
of Law, and Order dissolving temporary restraining
order, denying plaintiffs’ motions for preliminary in-
junction, and denying without prejudice intervenor-
defendants’ motion to dismiss entered.
4
October 12, 1977—Motion for summary judgment and in
opposition to motion to dismiss, statement of ma-
terial facts, and affidavit of William Karas, filed by
plaintiffs in C.A. 77-1647.
October 13, 1977—Motion for summary judgment and in
opposition to motion to dismiss filed by plaintiff in
C.A. 77-1645.
October 13, 1977—Status Call.
October 18, 1977—Memorandum in opposition to plain-
tiffs’ motions and in support of motion to dismiss,
and statement of material facts, filed by intervenor-
defendants.
October 18, 1977—-Memorandum in opposition to plain-
tiffs’ motion for summary judgment and in support
of motion to dismiss, and affidavits of Russell F.
Stryker and Edmond J. Fitzgerald filed by federal
defendants.
October 18, 1977—Amendment to complaint filed by plain-
tiff in C.A. 77-1645.
October 20, 1977—Stipulation of Undisputed Facts filed.
October 20, 1977—Statement of Issues and Response filed
by federal defendants and intervenor-defendants.
October 20, 1977—Amendment to complaint filed by plain-
tiffs in C.A. 77-1647.
October 21, 1977—Response to statement of issues filed
by plaintiffs in C.A. 77-1647.
October 24, 1977—Cross motions for summary judgment
heard and taken under advisement.
October 28, 1977—Administrative record filed.
November 22, 1977—Memorandum Opinion and Order
declaring certain action by Secretary of Commerce
to be arbitrary and capricious and an abuse of dis-
5
cretion in violation of 5 U.S.C. 706(2) (A); grant-
ing plaintiffs motions for summary judgment in
part; denying defendants’ and intervenor-defendants’
motion for summary judgment in part; remanding
case to the Secretary for reconsideration in accord-
ance with the memorandum opinion within 45 days;
setting status call for 11-30-77, 9:30 a.m.
November 29, 1977—Motion for amendment of order and
other relief filed by plaintiffs in C.A. 77-1647.
November 30, 1977—-Status call and hearing on motion
to amend order. Order filed granting plaintiffs’ mo-
tion to amend order and dismissing remaining claim
of plaintiffs.
December 2, 1977—Notice of appeal filed by plaintiffs
in C.A. 77-1647.
December 29, 1977—Notice of appeal filed by plaintiff
in C.A. 77-1645.
January 30, 1978—Notices of appeal filed by intervenor-
defendants in both cases.
October 16, 1978—Argument before court of appeals.
February 6, 1979—Opinion and judgment of the Court,
and dissenting opinion of Judge Bazelon, filed.
March 22, 1979—Orders entered denying petitions for
rehearing and suggestions for rehearing en banc.
April 3, 1979—Order filed by Clerk vacating order of
March 22 denying suggestions for rehearing en banc
and entering amended order denying suggestions for
rehearing en banc.
April 19, 1979—Order filed granting motions for eed of
mandate until May 1, 1979.
April 30, 1979—Notification from Clerk, Supreme Court
that petition for writ of certiorari was filed on
April 30 in S.C. No. 78-1651.
6
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 77-1645
SHELL OIL COMPANY,
(a Delaware Corporation)
One Shell Plaza
P.O. Box 2463
Houston, Texas 77001
(713) 241-6492
Plaintiff,
v.
JUANITA M. KREPS
(Individually and as Secretary of the
United States Department of Commerce
acting in her official capacity). United
States Department of Commerce, 14th and
E Streets, N.W., Washington, D.C. 20230,
and,
ROBERT J. BLACKWELL,
(Individually, as Assistant Secretary of
Commerce for Maritime Affairs and as
Chairman of Maritime Subsidy Board act-
ing in his official capacity). United States
Department of Commerce, 14th and E
Strets, N.W., Washington, D.C. 20230,
and,
HOWARD F. CASEY,
(Individually, as Deputy Assistant Secre-
tary of Commerce and as Member, Mari-
time Subsidy Board acting in his official ca-
pacity). United States Department of Com-
merce, 14th and E Streets, N.W., Washing-
ton, D.C. 20230,
and,
—
7
SAMUEL B. NEMIROW,
(Individually, as General Counsel, Mari-
time Administration and as Member Mari-
time Subsidy Board, acting in his official
capacity). United States Department of
Commerce, 14th and E Streets, N.W., Wash-
ington, D.C. 20230,
Defendants.
VERIFIED COMPLAINT
(Declaratory and Injunctive Relief)
I. Jurisdiction and Venue
1. The court has jurisdiction over this action pur-
suant to 28 U.S.C. §§ 1331, 1346 and 2201.
2. Venue lies in the District of Columbia pursuant
to 28 U.S.C. §§ 1891(a) and (e).
Il. The Parties
8. Plaintiff Shell Oil Company (“Shell”) is a Dela-
ware corporation and its operations are primarily with-
in the United States. Approximately 69 percent of Shell’s
stock is owned by Shell Petroleum, N.V., a Netherlands
corporation, of which, in turn, 60 percent is owned by
Royal Dutch Petroleum Company, a Netherlands cor-
poration, and 40 percent by Shell Transport and Trading
Company, a United Kingdom corporation.
4. Shell is currently the purchaser under a construc-
tion contract entered into on February 28, 1975 of two
188,500 deadweigi:t ton San Diego class tankers being
constructed by National Steel and Shipbuilding Company,
San Diego, California. Both vessels are being built with-
out government subsidies or financing aids. The ap-
proximate cost of each vessel is estimated at $92 million.
8
The first vessel is scheduled for delivery in January, 1978
and the second vessel in September, 1978.
5. The vessels being constructed for Shell are designed
specifically for the Alaskan oil trade and meet or ex-
ceed the highest world and U.S. safety standards for
tank vessels. Each vessel will have full segregated bal-
lest to world (IMCO) standards, double bottoms and
advanced cargo handling, safety and navigation features.
_ 6. At delivery, title to each vessel now under con-
struction will be transferred to a separate subsidiary of
Bankers Trust Company, since Shell as a non-US. citi-
zen corporation under the Shipping Act, 1916, as amended
(46 U.S.C. 801, et seg.) cannot take title to the vessels.
Shell will then time charter each vessel for an initial
period of 23 years. The vessels are expected to be op-
erated by Marine Transport Lines, Inc., a major in-
dependent U.S. ship eperator.
7. The time charters to Shell will be set at such a
rate not only to cover operating costs but as to repay
Bankers Trust Company the cost of each vessel over the
course of the 23 years period. Shell will be required to
make these payments whether or not the vessel is op-
erated, such charters being known as “hell or high
water” charters.
8. The only commercial possibility for. operation of the
ships in the Alaskan oil trade is by subcharter to trans-
port Alaskan crude oil owned by Standard Oil Company
of Ohio (“SOHIO”), Atlantic Richfield Company
(“ARCO”), or Exxon Corporation (“Exxon”).
9. On information and belief, the ARCO and Exxon
needs for transport of crude oil over the next three to
five years can be met by unsubsidized vessels owned,
being constructed or currently chartered by ARCO and
Exxon themselves. SOHIO has evidenced its willingness
= lil
9
ot charter the STUYVESANT. On information and be-
lief, SOHIO has the need for at least one ship for full
time employment over the next three to five years in the
Alaska trade, and is the only real potential subcharterer
for Shell’s vessels in the Alaska trade.
10. There is no commergiaily viable use for the Shell
ships other than in the Alaskan oil trade.
11. Defendant Juanita M. Kreps is Secretary of the
United States Department of Commerce. In this ca-
pacity, she is responsible for administration of the Mer-
chant Marine Act of 1936, as amended, 46 U.S.C. § 1101
et seq. (“Act”), and the regulations promulgated there-
under, 46 C.F.R. Part 200.
12. Defendant Robert J. Blackwell is Assistant Sec-
retary of Commerce for Maritime Affairs and Chair-
man, Maritime Subsidy Board (“MSB”). In his ca-
pacity as Assistant Secretary, the Secretary has delegated
to him responsibility for administration of specific duties
under tke Act, including management of the Federal
Ship Financing Program authorized by Title XI of the
Act, 46 U.S.C. § 1271 et seg. (1976). In his capacity
as Chairman, MSB, the Secretary has delegated to him
responsibility, in concert with the two remaining mem-
bers of the Board, for managing the Construction-Dif-
ferential Subsidy (“CDS”) Program authorized by Title
V of the Act, 46 U.S.C. § 1151 et seg. (1976).
13. Defendant Howard F. Casey is Deputy Assistant
Secretary of Commerce and Member, MSB. As an MSB
member he participates in the management of the CDS
Program.
14. Defendant Samuel B. Nemirow is General Coun-
sel, Maritime Administration and Member, MSB. As an
MSB member, he participates in the management of the
CDS program.
10
III. Cause of Action
15. Pursuant to Title V of the Act, 46 U.S.C. § 1151
et seq., the Maritime Subsidy Board is empowered to
award persons building new vessels for use in the “for-
eign commerce of the United States” a “construction-
differential subsidy.” The CDS program permits the
United States-flag shipping industry to compete in United
States foreign trade by lowering the effective construc-
tion costs of United States-flag ships. This permits United
States-flag ships to offer in charter rates which are com-
petitive with those charged by foreign-flag vessels, which
were built in foreign shipyards at lower costs due to
lower wages or material costs or subsidies from their own
governments.
16. Section 501 of the Act, 46 U.S.C. § 1151, pro-
vides for the payment of CDS for ships to be used in the
United States foreign trade. Section 506 of the Act, 46
U.S.C. § 1156, provides that owners of vessels for which
CDS has been paid must contract to use the vessel only
in U.S. foreign trade or in limited domestic service asso-
ciated with such foreign trade, or in temporary use in
domestic trade for no more than six months in any one
year upon a determination that such temporary use is
“necessary and appropriate to carry out the purposes”
of the Act. Section 506 reads, in relevant part:
Every owner of a vessel for which a construction-
differential subsidy has been paid shall agree that
the vessel shall be operated exclusively in foreign
trade ... The [Board] may consent in writing to
the temporary transfer of such vessel to service
other than the service covered by such agreement
for periods not exceeding six months in any year,
whenever the [Board] may determine that such
transfer is necessary and appropriate to carry out
the purposes of this Act. Such consent shall be con-
11
ditioned upon the agreement by the owner to pay
to the [Board], upon such terms an@-senditions as
it may prescribe, an amount which bears the same
proportion to the construction-differential subsidy
paid by the [Board] as such temporary period bears
to the entire economic life of the vessel.
17. While section 506 would thus allow a CDS vessel
to be used in the Alaskan trade for a period of six
months, it also protects Shell against competition from
CDS vessels in the Alaskan trade for any period longer
than six months in any one year.
18. The MSB has promulgated regulations under sec-
tion 506 further limiting the circumstances under which
CDS vessels may be used in the domestic trade for pur-
poses of carrying Alaskan crude oil. 46 C.F.R. Part 250,
42 Fed. Reg. 33035 (June ®, 1977). These regulations
incorporate the statutory six month limitation on waivers
and, in addition, restrict waivers to the use of subsidized
vessels in the Alaska-Panama Canal segment of the
Alaska to U.S. Gulf Coast trade. The restriction is
based on a specific administrative finding that sufficient
unsubsidized vessels will be available to handle all other
movements of Alaskan oil:
The Maritime Administration has determined that
suitable tank vessels, built without CDS appear to
be available to serve the Alaska-West Coast trade
and the Panama Canal-Atlantic/Gulf Coast trade.
19. Section 27, Merchant Marine Act, 1920, as
amended, 46 U.S.C. § 883 (1976), provides that only ves-
sels constructed in the United States may engage in
domestic trade (trade from one point to another in the
United States). Thus, no CDS is necessary to compensate
for lower construction costs in foreign shipyards and
none is provided for by act of Congress.
12
20. Pursuant to Title XI of the Merchant Marine Act,
42 U.S.C. § 1271 et seg., (1976), the Assistant Secretary
is authorized to provide loan guarantees for United
States-flag vessels. The shipowner sells bonds which the
Government guarantees in case of default. The vessel
collaterializes the debt. This program is designed to
provide low-cost financing for vessel owners. Section
1274(b) (2) provides that financing under this program
shall not exceed 87.5 percent of cost for vessels con-
structed without CDS and 75.0 percent for CDS vessels.
21. On June 20, 1972, MSB Seatrain Shipbuilding Corp.
(“Seatrain”), and Polk Tanker Corporation (‘Polk’),
executed CDS contracts for a 225,000 deadweight ton
tanker to be called the STUYVESANT. Pursuant to
Board Contract No. MA/MSB-165, Polk, as the vessel
purchaser, agreed to operate the STUYVESANT in USS.
foreign trade, as required by section 506 of the Act.
Pursuant to Board Contract No. MA/MSB-164, MSB
agreed to pay Seatrain CDS funds. Polk and Seatrain
are wholly owned subsidiaries of Seatrain Lines, Inc.
22. On information and belief, between the inception
of its CDS contract, and September 23, 1977, Seatrain
received some $30,156,529 in CDS payments.
23. The construction cost of the STUYVESANT is
approximately $70,180,428.
24. On July 8, 1977, Polk filed with MSB a request
that the domestic trade restrictions of section 506 be
waived with respect to the STUYVESANT, then nearly
ready for delivery, for a period of three years, provided
a pro rata portion of CDS was repaid. The request stated
that if a waiver were granted, the STUYVESANT
would be chartered to the SOHIO Petroleum Corpora-
tion (“SOHIO”) for use in the Alaska Oil trade. (The
request is attached hereto as Exhibit A and incorporated
herein by reference. )
pq a 8 a
13
25. The MSB, by published notice, opened a Docket,
S-565, for the Polk request and invited public comment,
’ 42 Fed. Reg. 37229 (1977).
26. On August 8, 1977, Plaintiff Shell, among others,
filed comments that the Polk request was beyond the
lawful authority of MSB.
27. Polk apparently modified its request on August
25, 1977, by a letter to the MSB not made available to, or
served on, Shell.
28. By two letters dated August 31, 1977, without
notice to or service on Shell, the Assistant Secretary and
the MSB ruled that Polk could operate the STUYVE-
SANT in domestic trade without limitation, provided that
the CDS was repaid over 20 years pursuant to an in-
terest bearing promissory note secured by a third pre-
ferred ship mortgage on the vessel. The letters did not
require payment of any interest on the CDS received by
Seatrain for the approximate 5 year construction period.
The letters further provided that Polk’s eligibility for
guaranteed debt financing under Title XI of the Act
would be determined according to a construction price
reflecting the full value of the CDS to be repaid, even
though none of the CDS had in fact been repaid and
would not be fully repaid for a period of 20 years. By
so providing, the Assistant Secretary and the MSB has
permitted Polk to “double finance” the CDS portion of
the construction price. Consequently Polk and Seatrain
will have received funds amounting to approximately 120
percent of the vessel’s construction costs and exceeding
the 87.5 percent lending limit of Title XI. (The letters
are attached hereto as Exhibits Bl and B2 and incor-
porated herein by reference. )
29. The letters cite no legal authority for the MSB
action. On its face, the action is plainly in conflict with
numerous provisions of the Merchant Marine Act and
14
underlying regulations, and Defendants are wholly with-
out power to take the action described above.
30. The Secretary’s regulations, 46 C.F.R. § 202.1
(1976), provide that an MSB order becomes final in 20°
days unless (1) the Secretary reverses or suspends it or
(2) an interested party requests Secretarial Review with-
in 10 days. If a party requests review within 10 days,
another party has five days to oppose review. Whether
or not review is opposed within five days, the Secretary
has an additional 10 days to act (or 25 total days after
the Assistant Secretary of MSB action). If the Sec-
retary does not reverse or stay the action within that
time, it becomes final.
31. Shell filed a timely request for review on Sep-
tember 12, 1977, the first business day following the
tenth day after August 31, 1977. If the request was
timely, the Assistant Secretary and the MSB orders be-
come final on September 26, 1977, if the Secretary fails
to act or declines to review the orders, or such sooner
date on which the Secretary approves the orders.
32. Polk, in its opposition to Shell’s request filed Sep-
tember 14, 1977, stated to the Secretary that although
the Assistant Secretary and MSB letters approving the
waiver of CDS restrictions on the STUYVESANT were
dated August 31, 1977, the “action” took place on August
30, 1977. If this argument is correct, the Assistant Sec-
retary and MSB order became final on September 19,
1976. Polk has informed the Secretary that it, Seatrain,
SOHIO, and General Electric Credit Corporation, a third
party involved in the financing, have scheduled a closing
for the STUY VESANT on September 23, 1977.
33. The MSB decision to waive CDS restrictions on
the STUYVESANT and the failure of the Secretary to
reverse the MSB decision is arbitrary, capricious, an
abuse of discretion, and contrary to the law in that:
15
a. it is in violation of the Merchant Marine Act of
1936, as amended, and regulations promulgated there-
under;
b. it is based upon the Defendants’ unlawful and ar-
bitrary interpretation of the Merchant Marine Act of
1936, as amended;
ce. it effectively denies Shell property without due
process of law.
34. Shell will be immediately and irreparably harmed
by the implementation of the Assistant Secretary and
MSB rulings and the resulting consummation of the
STUYVESANT transaction which contemplates a three-
year charter to SOHIO. SOHIO is the only potential sub-
chapter for Shell’s vessels.
35. Shell has exhausted all administrative remedies.
IV. Prayer
WHEREFORE Plaintiff prays as follows:
a. That the Court enter a judgment declaring that
defendant MSB’s entry and the defendant Secretary’s
approval of the August 31, 1977, decisions of the 'MSB
regarding the repayment of CDS subsidy and the removal
of any restrictions prohibiting the STUYVESANT from
being used in domestic trade are arbitrary and capri-
cious, an abuse of discretion and otherwise unlawful;
b. That the Court enter an order prohibiting, restrain-
ing, and enjoining Defendants from implementing, now
or in the future, the MSB’s decision with respect to the
STUYVESANT.
ce. That the Court enter a judgment declaring that
Defendant Secretary or her designated representative,
Defendant Assistant Secretary are without power to au-
thorize or approve financing guarantees on the STUYVE-
sulli
16
SANT under Title XI of the Act, or to commit to guaran-
tee financing on the STUYVESANT under Title XI of
the Act in accordance with the Assistant Secretary’s
letter of August 31, 1977.
d. That the Court enter an Order prohibiting restrain-
ing and enjoining Defendant Secretary or her designated
representative, Defendant Assistant Secretary from au-
thorizing or approving financing guarantees on the
STUYVESANT, or committing to guarantee financing on
the STUYVESANT under Title XI of the Act in accord-
ance with the Assistant Secretary’s letter of August 31,
1977.
e. That the Court enter such further temporary and
preliminary orders as may be necessary to preserve Plain-
tiff’s rights;
f. That the Court enter such further and order re-
lief as the Court may deem necessary and appropriate
in the circumstances of this case.
Respectfully submitted,
/s/ Stephen N. Shulman
STEPHEN N. SHULMAN
/s/ Joseph A. Artabane
JOSEPH A. ARTABANE
/s/ Mark C., Ellenberg
MARK C, ELLENBERG
CADWALADER, WICKERSHAM & TAFT
11 Dupont Circle, Suite 450
Washington, DC 20036
(202) 387-8100
17
Washington, D.C.: ss
AFFIDAVIT OF VERIFICATION
I, THOMAS J. LENGYEL, being duly sworn, depose
and say:
3
My name is Thomas J. Lengyel. I am the Manager,
Marine Department of the Transportation and Distribu-
tion Department, Shell Oil Company, One Shell Plaza,
Houston, Texas.
2.
In my employment with Shell, I am responsible for the
implementation of all corporate plans necessary to pro-
vide marine transportation for Shell Oil Company and
Shell Chemical Company.
3.
In the course of my employment with Shell, I have
become personally familiar with the facts relating to the
transportation activity of Shell Oil Company as it relates
to the foregoing Complaint.
4,
I have read the foregoing Complaint (Declaratory and
Injunctive Relief) and know the contents thereof. The
facts stated which I know of first hand knowledge are
true and those stated upon information and belief, I be-
lieve to be true.
/s/ Thomas J. Lengyel
THOMAS J. LENGYEL
Subscribed and sworn to before me this 22nd day of
September, 1977.
/s/ Shawn E. Kearsey
Notary Public
My Commission Expires August 31, 1982.
18
EHXIBIT A
SEATRAIN LINES
1 Chase Manhattan Plaza
New York, New York 10006
HOWARD M. PACK, President
July 8, 1977
Honorable Robert J. Blackwell
Assistant Secretary for Maritime Affairs
United States Department of Commerce
Room 3898-B
Washington, D.C.
RE: Polk Tanker Corporation
Dear Sir:
Seatrain Shipbuilding Corp. an affiliate of Seatrain
Lines, Inc., is owner of the VLCC Stuyvesant, being con-
structed for Polk Tanker Corporation (“Polk”) at the
Seatrain shipyard. Polk, on its behalf and that of any
successor in interest, as owner or bareboat charterer,
hereby requests approval of the Assistant Secretary (‘the
Secretary”) of a time charter with The Standard Oil
Company, an Ohio Corporation (“Sohio”) for operation
of the Stuyvesant in the Alaska (domestic) trade for
a period of three years from date of delivery of the
vessel. In return, Polk, or such successor in interest,
would agree to repay or cause to be repaid, to repay, on
a monthly basis during the period of the time charter,
an amount which bears the same proportion to the con-
struction-differential subsidy paid by the government to
Seatrain Shipbuilding Corp. in respect of the construc-
tion of the Stuyvesant as the period of operation under
the time charter bears to the entire life of the vessel.
The Seeretary is requested to grant this permission pur-
suant to the discretion vested in him by § 207 of the
Shipping Act, 1918, [“MMA”] as amended (“the Act”).
19
Polk entered in a contract in Construction Differential
Subsidy for the Stuyvesant on June 30, 1972. At that
time prospects for the employment of the vessel in the
foreign trade appeared promising. Polk undertook to
build the vessel in the expectation that a long-term char-
ter would become available before completion of the ves-
sel. Since that time, however, circumstances entirely
beyond the control of Polk or its affiliates have made
such a charter an impossibility. There is, at present, no
possible way in which the vessel could be utilized in the
foreign trade of the United States. Even if a charter
were available, current rates would preclude any return
to the vessel for interest payment or amortization.
As the Assistant Secretary is aware, due to the world-
wide drop in tanker rates, Polk and its affiliates, includ-
ing Seatrain Lines, Inc. and Seatrain Shipbuilding Corp.
were faced with short-term cash problems which required
the temporary closing of the Seatrain Shipyard, and the
laying off of substantially all of its employees, and jeopar-
dized the continuation of Seatrain’s other operations.
Seatrain’s short-term problems were resolved at that
time through the negotiation of a loan guaranteed by the
Economic Development Administration. That loan guar-
antee was collateralized in part, by pledges and security
derived from the expected value, at completion, of the
Stuyvesant. MARAD and the EDA valued the collateral
based upon their expected use of the vessel in the Alaska
trade.
The vessel was originally financed with $30,200,000 in
Title XI insured debt financing. Level semi-annual debt
repayment of $1,528,000 (plus or minus $5,000) com-
menced November 1, 1975. There is currently $28,845,000
insured indebtedness outstanding on the vessel.
Seatrain Shipbuilding Corp. has outstanding notes pay-
able to banks due in 1980, 1982 and 1983 totaling $77,-
20
000,000. The Stuyvesant will be looked to for repay-
ment of half this amount, or $38,500,000.
In order to arrange repayment of this indebtedness,
substantially all of which is insured by the Department
of Commerce, the vessel must be chartered. Seatrain has
arranged a three-year time charter to Sohio for use in
the Alaska trade at $5.40 per DWT. This time charter
will generate a net cash flow sufficient to service the
indebtedness on the vessel, including the second mort-
gage which the vessel would carry as part of a sales
transaction, and the annual repayment of the pro rata
portion of CDS. In addition it would generate a sub-
stantial net cash flow over the three-year charter after
debt service and CDS repayment which would be avail-
able for deposit in a restricted fund to help ensure debt
repayment in years following the expiration of the time
charter. :
Upon execution and approval of the charter, Polk would
negotiate for the sale of the vessel in a leveraged lease
transaction. The purchase price is to be approximately
$86,000,000; financing will include the existing Title
XI debt, an insured second mortgage on the vessel, and
the equity owner’s cash contribution.
The sale of the vessel by Polk will generate approxi-
mately $26 million in cash. Pursuant to the terms of the
agreement with the equity owner, this will be placed
in an interest-bearing fund to protect the equity owner
against loss in the event of default. As the amount re-
quired to indemnify the equity owner declines, the amount
in the fund will become available to repay the indebted-
ness on government insured loans, and for the building
of reserves for future repayment. Thus virtually all the
net cash proceeds of the charter and the sale will be
utilized to retire the government insured indebtedness
and reduce the government’s exposure to collection on its
guarantees.
2 FL I RR Cans
21
The Secretary’s permission for Polk to utilize the ves-
sel in the domestic trades is necessary for the realization
of the charter and the sale revenues. Without the char-
ter no sale is possible.
Conversely, the failure to approve the proposed time
charter could trigger a default and subsequent major
loss to the government. Unless the Secretary approves
the proposed contract amendment, allowing Polk or its
successor to utilize the vessel in the domestic trade, Sea-
train faces the possibility that it will be unable to con-
tinue the repayment of the Title XI insured debt, and
will be forced to default on its obligations in this re-
spect. Thus the government faces a situation involving
the very real possibility of default with respect to ap-
proximately $116,000,000 in debt insured by the Depart-
ment of Commerce.
In addition to the potential loss to the government
if Seatrain defaults, the Seatrain Shipyard would prob-
ably be closed. This would result in the loss of over
2,500 jobs in New York City and the loss of a valuable
shipbuilding facility. Approximately 85 percent of the
yard’s work force are members of disadvantaged mi-
nority groups. Seatrain’s experience with the previous
yard closing demonstrates that the vast preponderance
of these employees are not readily re-employable and will
require government funded benefits.
On the other hand, the yard, if kept open, is a going
facility, generating new jobs and productively employ-
ing thousands of persons in the generally depressed New
York City area. The yard is attracting new orders, and
will continue, on a self-sustaining basis, to help carry
out the mandate of Section 101(e) of the Act to main-
tain efficient facilities for shipbuilding.
The remainder of this memorandum discusses the au-
thority of the Secretary of Commerce to enter into the
proposed transaction under § 207. The basis of this argu-
22
ment is that the language concerning preservation and
improvement of collateral in § 207 is an independent
grant of authority which gives the Secretary broad power
to protect the government’s collateral. In order to in-
voke this provision of § 207, the Secretary must be faced
with a realistic possibility of default, an expected eco-
nomic loss on default, and an economically viable method
for avoiding that default. These circumstances are pres-
ent here. The Secretary, therefore, has the discretion to
avoid a default through the approval of this request.
I. CONGRESS GRANTED THE SECRETARY SPE-
CIFIC AND INDEPENDENT AUTHORITY UNDER
§ 207 TO “PROTECT, PRESERVE OR IMPROVE THE
COLLATERAL HELD . . . TO SECURE INDEBTED-
NESS”
Section 207 of the Act reads, in relevant part, as
follows:
“The Commission may enter into such contracts, up-
on behalf of the United States, and may make such
disbursements as may, in its discretion, be neces-
sary to carry on the activities authorized by this
Act, or to protect, preserve, or improve tite col
lateral held by the Commission to secure indebted-
ness, in the same manner that a private corpora-
tion may contract within the scope of the authority
conferred by its charter.” [Emphasis added. ]
In plain terms, § 207 sets forth a specific grant of
authority empowering the Secretary, to “protect, preserve,
or improve” its collateral. Under that section, this grant
of authority appears wholly apart from the more gen-
eral reference to the other “activities authorized by this
Act,” and was intended by Congress as an addition to
the authority otherwise available to the Secretary under
other provisions of the Act. In fact, in 1938, Congress
amended § 207 to explicitly provide for this authority,
23
which was deemed necessary for the sound and efficient
administration of the Act and for protection of the gov-
ernment’s interests generally. It is precisely in circum-
stances such as those giving rise to this application that
the Secretary’s authority under § 207 was designed to
be exercised. For unless the Secretary acts to preserve
and improve its collateral in these circumstances, the
government could incur substantial liabilities on its loan
guarantees.
On the other hand, the approval requested here will
clearly protect and improve the Secretary’s collateral.
The vessel must, in ‘the immediate future, be used in the
domestic trade. Currently available foreign charters
would not make the government whole in the event of de-
fault. The vessel’s value, and therefore the government’s
collateral, depends on its operation in the domestic trade;
the charter for which approval is sought will therefore
not only protect the government’s collateral by prevent-
ing a default, but will improve it to the point where the
government will have to face neither the prospect of a
laid-up, unchartered asset, nor a protracted default
proceeding.
The legislative history of § 207 underscores the im-
portance attached by Congress to this specific and in-
dependent grant of authority for the preservation of
collateral. In its Report, the Senate Committee on Com-
merce explained the amendment to § 207 as follows:
“Section 207 of the Act now provides that ‘the Com-
mission may enter into such contracts upon behalf
of the United States, as may, in its discretion, be
necessary to carry on the activities authorized by this
Act, in the same manner that a private corporation
may contract within the scope of the authority con-
ferred by its charter’. The amendment adds that it
‘may make such disbursements as may, in its dis-
cretion be necessary ‘to protect, preserve, or improve
24
the collateral held by the Commission to secure in-
debtedness’, as is the practice in the private corpora-
tion.” S. Rep. No. 618, 75th Cong. 3rd Sess. (1938)
Prior to the 1938 amendments, the Act made no mention
of any authority to “protect, preserve or improve” col-
lateral; the Secretary was arguably foreclosed under
§ 207 from entering into contracts for that purpose. In
other words, the “activities authorized by this Act” ar-
guably did not include the preservation of collateral.
This was obviously a serious gap in the Secretary’s over-
all authority under the Act. In response, Congress
amended § 207 to clearly and unequivocally provide the
Secretary the authority to “protect, preserve or improve”
collateral. This additional grant of authority was de-
signed to supplement the other “activities authorized by
this Act”, and to correspondingly enlarge upon the scope
of the Secretary’s contractual authority.
It is therefore evident from a straight-forward read-
ing of § 207 and its history that it was Congress’ intent
to supply the Secretary with authority under the Act
to protect the government’s collateral. Nor was this Con-
gressional intent lost on those courts which have subse-
quently reviewed § 207, its history and its significance.
As the United States District Court for the District of
Columbia has stated, upon rejecting a narrow construc-
tion of § 207:
It seems obvious from these reports that the drafts-
man was in doubt as to whether or not a contract ‘to
protect, preserve’, etc., collateral was within the
‘activities authorized by this act’ even though the
draftsman had so intended it; therefore the amend-
ment addition was in order to make this certain. The
scope of authority which may or may not have in-
cluded such a purpose previously certainly included
it thereafter.
25
. [Plaintiff’s contention is] to say that in con-
structing the word ‘preserve’, in Sec. 1117 the Court
should find the interest of Congress to be that the
Commission or any private corporation with like pow-
ers must as a rescuer of its collateral sit idly by and
watch while all is lost. This does not make sense.”
Dollar v. Land, 82 F. Supp. 919, 923, f.n. 1. (D.D.C.
1948), rev’d on grounds that sovereign immunity not
applicable, 81 U.S. App. D.C. 28, 154 F.2d 307
(1946) aff’d 330 U.S. 731 (1951).
Similarly, § 207 empowers the Secretary to take the
action requested in this application. Pursuant to its
authority under that section, the Secretary need not “sit
idly by and watch while all is lost.”
II. THE LIMITATIONS ON THE SECRETARY’S
ACTION UNDER THE GENERAL AUTHORITY OF
§ 207 ARE NOT APPLICABLE WHEN THE SECRE-
TARY ACTS TO PROTECT, PRESERVE, OR IM-
PROVE COLLATERAL
On a few occasions the Comptroller General has limited
plans to utilize § 207 where there appeared to be a con-
flict with other provisions of the Act. In none of those
cases, however, was the question of the protection, pres-
ervation or improvement of collateral in question.
It is not the applicant’s contention that § 207 as a whole
is a general license to avoid the terms of the Act when-
ever the Secretary finds it convenient to do so. The
Comptroller General has ruled out such an interpretation.
The Comptroller General’s limitations, however, have been
imposed when the Secretary has sought to utilize the gen-
eral authority of § 207 to make contracts or disburse-
ments “necessary to carry on the activities authorized by
this Act” in contravention of other terms of the Act.
For example, in the Opinion of the Comptroller General
concerning American President Lines, B-135884, 38
26
Comp. Gen. 722 (1959), a plan was disapproved whereby
the Secretary would, through actions as an escrow agent,
undertake liabilities in excess of those authorized by Title
XI as then in effect. The justification offered by the
Secretary for that undertaking was that it would aid in
carrying out the policies expressed in § 101 of the Act.
In ruling that the language in § 207 limited the Secretary
to activities authorized by the remaining provisions of the
Act, the Comptroller General was clearly on firm ground.
The language of the first part of § 207 cannot be a
mandate for overruling the balance of the Act. Such a
reading would leave the remaining language in the Act
with little purpose.
Similarly, in 1952 the Comptroller General rejected the
Secretary’s contention that the Comptroller General could
not oversee the activities of the Maritime Administration
because of the broad language in § 207 giving the Secre-
tary authority to carry out the policies of the Act. The
Comptroller General asserted that the remaining language
of the Act limited the Secretary’s actions. Against the
Secretary’s assertion of unfettered license to ignore the
Act, it is hard see how a different result could have
issued. The much more narrow authority to protect, pre-
serve, or improve collateral, however, was not in issue.
Opinion of the Comptroller General concerning sales
under the Merchant Marine Act of 1936. As amended,
B-58323, 31 Comp. Genl. 695 (1952).
The language in the Act allowing the Secretary to
protect his existing investment suffers no such limitation.
By giving that language independent meaning to act in
any emergency where the likely alternative could be de-
fault, the Secretary is not rendering the remaining lan-
guage in the Act meaningless; absent a threat to the
collateral, the Secretary’s actions are limited to the ex-
press or implied terms of the Act.
a ae
27
The Comptroller General has recognized the need to
give § 207 independent meaning in order to protect the
government’s collateral. In the Opinion of the Comptrol-
ler General concerning the SS Matsonia, B-151860, 43
Comp. Gen. 98 (1963), the Comptroller General found,
under the authority of § 207 to protect, preserve and im-
prove collateral that the Secretary could reschedule debt,
notwithstanding language in § 1106 which might have
prohibited such an action. The Comptroller General spe-
cifically said that under such circumstances the Act must
be construed so as to effectuate its policies and purposes,
and so as to avoid rendering § 207 meaningless. A simi-
lar interpretation is warranted here.
III. CONGRESS INTENDED THAT THE SECRE-
TARY’S CONTRACTUAL AUTHORITY UNDER § 207
BE BROADLY CONSTRUED.
Section 207 authorizes the Secretary to contract to
“carry on the activities authorized by this Act... in
the same manner that a private corporation may contract
within the scope of the authority conferred by its charter.”
As the legislative history makes clear, it was Congress’
intention that this analogy to the powers of a private cor-
poration be construed as a conferral of the broadest con-
tractual authority. The analogy employed by the drafters
was designed to ensure the most expansive reading of
the powers granted under § 207. As the House Report
on the 1938 amendments stated in analyzing § 207:
“The amendment (empowering the Commission to
‘preserve, protect or improve’ collateral) is designed
to make clear a power which it is thought already
existed in the Commission but about which some
doubt has been expressed. Under the Act, the Mari-
time Commission has all the general and implied
powers of a business corporation. H.R. Rep. No.
1268, 75th Cong. 3rd Sess, at 17. (1938)
28
Furthermore, judicial construction of the authority
granted under § 207 has been similarly liberal, reflecting
the thoroughly expressed, and commonly understood, legis-
lative intent:
‘ “First of all as to the power [under § 207] of the
Maritime Commission to enter into a transaction of
the character it alleges it did, the court holds that
it has the power to negotiate and to take absolute
title to the stock in question. It was created, from
a functional point of view, for the purpose of per-
mitting the conduct of its business in a manner simi-
lar to that of private enterprise and free as a con-
sequence of the ordinary inhibitions applied to the
regular executive branches of the government.
Its powers in this respect are similar to that of a
business corporation.” Dollar v. Land, supra, at 922.
(citations omitted).
In short, Congress intended that the analogy to private
corporations set forth in § 207 be understood as a broadly
gauged grant of power to the Secretary. Congress chose
to express its intention through analogy, and it is only as
an analogy that the “private corporation” language of
§ 207 can be properly understood. Furthermore, if cor-
rectly viewed as an analogy, § 207 could sustain a re-
strictive reading only if Congress, in turn, is presumed
to have selected an extremely poor and misleading analogy
for its purposes. It is a commonplace of modern cor-
porate law that a corporation’s powers are too broadly
construed, and that, in practice, few corporate acts are
beyond “the scope of the authority conferred by its
charter.” Indeed, the traditional doctrine of ultra vires,
which traditionally prohibited acts by a corporation be-
yond the “scope” of its charter, has experienced so steady
and complete a decline that “within a few years the sub-
ject of ultra vires will be of historic value only.” N. Lat-
tin, The Law of Corporations, § 66 (2d ed., 1971). Con-
29
gress surely understood the import of the analogy which
it selected, as corroborated by the unqualified emphasis of
the legislative history on “all the general and implied
powers of a business corporation” which the Secretary
was intended to possess under § 207.
IV. THE SECRETARY HAS DISCRETION TO RE-
SOLVE CONFLICTS BETWEEN § 207 AND § 506 OF
THE ACT.
Polk and Seatrain are seeking the Secretary’s approval
of a three-year transfer of the Stuyvesant to service in
the Alaska trade. A transfer of this duration is required
to enable Seatrain to generate the cash needed to service
the debt on the Stuyvesant, and to thereby avoid default
on its insured loans. Since a default by Polk and Seatrain
would trigger government liability on Title XI insured
debt, the Secretary’s approval of this transfer should law-
fully be based on its authority under § 207 to “protect,
preserve or improve” collateral.
The Act contains a grant of authority under § 506 al-
lowing the Secretary to consent to the transfer to the
domestic trades for periods up to six months per year.
Arguably this grant of authority conflicts with the need
under § 207 for the three year charter in order to gen-
erate sufficient revenue to prevent the default by Polk
and Seatrain. This conflict may be more apparent than
actual, however.
Previous interpretations of § 506 have found, where
economically necessary, implied authority to transfer a
vessel to the domestic trades notwithstanding the statu-
tory time limitation, Opinion of the Comptroller General
concerning the S.S. Santa Leonor, B-155039, 44 Comp.
Gen. 130 (1964). While the statute was admittedly silent
on the point, the Comptroller General found that so long
as repayment of CDS was provided, the Secretary had
30
authority to allow transfer of the vessel to the domestic
trade. Obviously, then, the time limitations imposed by
§ 506 do not fully occupy the field, especially where, as
both for the Santa Leonor and the Stuyvesant, economic
necessity requires a transfer for a longer period of time.
The implied authority found by the Comptroller General
in 1964 can be equally applicable to an exercise of this
authority to transfer a vessel to the domestic trade pur-
suant to § 207 rather than § 506.
If, however, it is accepted that § 506 does conflict with
approval of this charter, then the Secretary must resolve
any such conflict in the interest of effective administra-
tion of the Act, through a careful weighing of the policies
underlying both §§ 207 and 506 in light of the circum-
stances of the particular case. Conflicts and inconsist-
encies arise inevitably out of the legislative drafting
process, particularly where, as here, the statute in ques-
tion has undergone various amendments over a forty year
history. These conflicts and inconsistencies must be re-
solved if the Secretary is to discharge its responsibilities
under the Act.
Well accepted canons of statutory construction require
a resolution which allows § 207 to serve the function in-
tended by Congress. It is axiomatic that provisions within
a statute should be construed harmoniously, and should
not be permitted effectively to cancel out one another.
This has been otherwise stated by the United States
Supreme Court as “the rule which requires that a prac-
tice which is permitted by one section should not be pro-
hibited upon the theory that it is forbidden by another.”
United States of America v. Louisville and Nashville
Railroad Company, 235 U.S. 314, 326 (1914). It is a rule
widely followed by the courts in matters of statutory
construction. See, R.V. McGinnis Theatres v. Video In-
dependent Theatres, Inc., 262 F. Supp. 607, 613-614
(N.D. Okla.), aff'd, 386 F.2d 592 (10th Cir. 1967) ; In
—
Sic
31
Re Presault 180 Vt. 348, 292 A.2d 832, 834-835 (Sup.
Ct. 1972) ; Cooper Motors v. Commissioners, 131 Colo. 78,
279 P.2d 685, 688 (1955).
In some instances, this rule of construction may re-
quire that where two provisions of a statute cannot be
construed consistently or harmoniously under all circum-
stances, one such section must be interpreted to prevail
or supersede the other under the particular circumstances
involved. Since § 506 would conflict with the Secretary’s
ability to take an action necessary for the preservation of
the collateral in this case, § 506 would have to give way
to § 207.
An illustration of the approach urged upon the Secre-
tary here can be found in Commissioner v. Credit Alliance
Corp., 316 U.S. 107 (1941). In that case, the Supreme
Court confronted a conflict between § 27(f) and 27(h)
of the Internal Revenue Act of 1936 governing the appli-
cation of “dividends—paid credit” to a corporation mak-
ing distributions in liquidation. The liquidating corpora-
tion in Credit Alliance was seeking this credit on dis-
tributions made to its parent company. Briefly stated,
under the clear terms of § 27(f), the liquidating corpora-
tion was entitled to a dividends-paid credit on this distri-
bution to its parent company, whereas under the equally
clear terms of § 27(h), a dividends-paid credit under
these circumstances was prohibited. The Court chose to
resolve the conflict in favor of allowing the credit in the
particular case before it, and stated as follows:
“As above said, each of the subsections of § 27 deals
with a specific and particular topic. Subsection (f)
deals with ‘distributions in liquidation’ while sub-
section (h) deals with ‘non-taxable distributions’.
If (f) applies in this case, (h) is left to cover a sub-
stantial field of other sorts of distributions. We
should, of course, read the two sections as consistent
rather than conflicting, if that be possible. Here,
32
it is not only possible but begets no absurb or im-
practical result. We hold that (h) is not applicable
to the facts of this case and that (f) is.” Commis-
sioner V. Credit Alliance Corp., supra, at 111-112.
The Court’s approach in Commissioner v. Credit Al-
liance Corp. applies with equal force to the issue pre-
sented in this application. Here, if § 207 were viewed as
controlling, the result would not be either “absurb or
impractical.” On the contrary, unless the Assistant Secre-
tary exercises discretion by approving the charter of the
Stuyvesant for a three year period, the policy underlying
§ 207 will be frustrated. Without approval of this charter,
the possibility of improving the government’s collateral
is doubtful.
The exercise of the discretionary authority under § 207,
moreover, not only effectuates the policy of improving the
government’s collateral, but also aids in carrying out the
policies set forth in § 101. By protecting the. government’s
collateral under § 207 the government will also assure the
continuation of the shipbuilding facility, rather than the
potential permanent loss of the facility. The approval
would, therefore, not only satisfy the statutory standard
of § 207, but the broader policies underlying the Act as
well.
CONCLUSION
Section 207 confers upon the Secretary specific and in-
dependent authority to “preserve, protect or improve” the
government’s collateral. Congress intended this authority
to be exercised in circumstances such as those present
here, where there is a genuine and immediate threat to
the government’s collateral, but also an economically
viable approach to the protection of that endangered col-
lateral, as outlined above. If, under these circumstances,
the Secretary is deemed powerless to act under § 207, the
expressed Congressional mandate underlying that section
would have little practical meaning or significance. For
wa
33
these reasons, Polk requests that the Secretary approve
its proposed time charter with Sohio for operation of the
Stuyvesant in domestic trade for a period of three years.
/s/ Howard M. Pack
HOWARD M. PACK
34
[SEAL]
EXHIBIT Bl
UNITED STATES DEPARTMENT OF COMMERCE
Maritime Administration
Washington, D.C. 20230
August 31, 1977
Polk Tanker Corporation
One Chase Manhattan Plaza
New York, New York 10005
Gentlemen:
For over two years the Maritime Administration has
been considering the possibility that at the time of deliv-
ery there might be no market for the STUYVESANT
other than the movement of Alaskan oil to the lower 48
states. The Economic Development Agency in June 1975
agreed to guarantee additional funding to Seatrain Ship-
building Corporation to reopen its yard to complete this
vessel taking into account the same possibility. In light
of the fact that several years of work and negotiations
have generated no other opportunities for employment of
this vessel, and being persuaded that approval of the
proposed CDS repayment and the time charter of the
Sohio Petroleum Company will improve the collateral
position and prevent possible default on various obliga-
tions insured and guaranteed by the Department of
Commerce, and failure to approve the proposal would
jeopardize continued operation of the Seatrain Shipbuild-
ing Corporation, the Maritime Subsidy Board (Board) /
Assistant Secretary of Commerce for Maritime Affairs
(Assistant Secretary) with respect to the requests dated
July 12, 1977 and August 25, 1977, from Polk Tanker
Corporation (Polk) pertaining to the T. T. STUYVE-
SANT, took the following actions on August 30, 1977:
iiss
I.
II.
35
By the Assistant Secretary:
A. Approved, pursuant to sections 9, 37 and 41 of
the Shipping Act, 1916, as amended (the Shipping
Act), the time charter by United States Trust Com-
pany of New York, as owner trustee, and Queens-
way Tankers, Inc., as charter owner, of the tanker
Builder’s Hull No. 102 (to be documented under
U.S. flag and named STUYVESANT), to Sohio
Petroleum Company, a Delaware corporation but not
a citizen of the United States within the meaning of
section 2 of the Shipping Act, for a period of three
(3) years commencing on or about the date of Mari-
time Administration approval, for the carriage of
crude oil and/or dirty petroleum products in per-
missible worldwide trade, upon the conditions: (1)
that without the prior written approval of the Mari-
time Administration the vessel shall not be sub-
chartered to aliens, except as may be permitted by
General Order 59, 2d Revision, as amended; and (2)
that the operating range of said vessel shall not in-
clude the Soviet Union, Latvia, Lithuania, Estonia,
Czechoslovakia, Hungary, Bulgaria, Albania, North
Korea, the Soviet Zone of Germany, Manchuria, the
People’s Republic of China, Cambodia, North Viet-
nam, South Vietnam, Cuba or Southern Rhodesia,
unless otherwise permitted by regulations of the De-
partment of Commerce.
By the Board:
A. Found, pursuant to section 501(a) of the Mer-
chant Marine Act, 1936, as amended (the Act), that
United States Trust Company, as owner trustee and
Queensway Tankers, Inc., as charter owner, are ac-
ceptable transferees of the T. T. STUYVESTANT,
subject to both companies demonstrating their U.S.
citizenship, under section 2 of the Shipping Act, to
the satisfaction of the General Counsel.
36
B. Approved, pursuant to Article 14 of Board Con-
tract No. MA/MSB-165, the assignment of the
T. T. STUYVESANT to United States Trust Com-
pany as owner trustee and the bareboat charter of
the vessel to Queensway Tankers, Inc.
C. Authorized the repayment to the United States on
the date of delivery of the T. T. STUYVESANT, of
the total amount of construction-differential subsidy
paid in connection with the construction of the vessel,
including the cost of National Defense Features, as
determined by the Maritime Administration, in the
form of a promissory note issued by Polk and to be
assumed by the United States Trust Company as
trustee upon purchase of the vessel, payable in level
installments of principal and interest, semi-annually
in arrears for twenty years beginning on the date of
delivery of the vessel, provided that:
(1) The note is secured by a preferred ship
mortgage on the vessel to be given by the owner
trustee in favor of the United States which will
be subject and subordinate to a first preferred
mortgage and second preferred mortgage to be
given by the owner trustee to secure obligations
insured and/or guaranteed under Title XI of the
Act, in connection with financing the vessel.
(2) The note is also secured by the owner trus-
tee’s interest in (a) the bareboat charter; (b)
the time charter; and (c) the Seatrain Security
agreement.
(3) All documents related to the repayment of
CDS have been found to be satisfactory, in form
and substance, to the Office of the General
Counsel.
D. Determined that interest is payable on the
promissory note authorized in paragraph C above,
-_-—-— .-
37
with interest thereon to be at the same rate borne
by the second tier of Title XI debt from date of
execution.
EK. Authorized the amendment of Board Contract
No. MA/MSB-165 to release the vessel owner from
all restrictions, obligations and duties contained
therein, except those contained in Articles 4 and 11
pertaining to the right of the Board to the engineer-
ing and design data for the vessel, and the purchase
and requisition rights of the United States to the
vessel pursuant to section 802 of the Act, respec-
tively. It shall be understood that with respect to
the compensation formula contained in Article 11,
the amounts of CDS repaid pursuant to paragraph C
above, shall be considered in the calculation of com-
pensation.
F. Authorized the Assistant Secretary of Commerce
for Maritime Affairs (the Secretary), on behalf of
the Board, to accept or enter into the following
documents :
1. Promissory Note from Polk;
2. Novation Agreement among United States
Trust Company as owner trustee, Polk and the
Secretary ;
3. Security Agreement between United States
Trust Company as owner trustee and the Secre-
tary; and
4. Preferred Ship Mortgage (Third) between
United States Trust Company as owner trustee
and the Secretary
in substantially the form submitted, proof date Au-
gust 25, 1977, or with such changes as the Secretary
shall approve and delegated to the Assistant Admin-
istrator for Maritime Aids authority to take all
38
actions necessary in connection with the administra-
tion of the above mentioned documents.
Your attention is invited to the provisions of Department
of Commerce Organization Order 10-8, section 7, and we
ask that you indicate your acceptance of the above ac-
tions by signing, dating, and returning the enclosed copy
of this letter.
Sincerely,
/s/ James S. Dawson, Jr.
JAMES S. DAWSON, JR.
Secretary
Enclosure
39
[SEAL]
EXHIBIT B2
UNITED STATES DEPARTMENT OF COMMERCE
Maritime Administration
Washington, D.C. 20230
August 31, 1977
Polk Tanker Corporation
One Chase Manhattan Plaza
New York, New York 10005
Queensway Tankers, Inc.
110 Wall Street
New York, New York 10005
Gentlemen:
With respect to the proposed sale of the STUYVESANT
(Vessel) by Polk Tanker Corporation (Polk) to The
United States Trust Company of New York (Shipowner),
not in its individual capacity but solely as owner trustee
under a Trust Agreement between it and General Elec-
tric Credit Corporation (GECC), and the proposed addi-
tional bond sale, you are advised that on August 30, 1977,
the Assistant Secretary for Maritime Affairs (Secretary)
took the following actions:
I. Approved the Shipowner, not in its individual capacity
but solely as owner trustee under a Trust Agreement be-
tween it and GECC, as lessor under the lease financing
arrangement.
II. Found that Cove Shipping, Inc. (Cove) possesses the
ability, experience, financial resources, and other qualifi-
cations necessary to the adequate operation and mainte-
nance of the Vessel.
III. Approved Queensway Tankers, Inc. (Queensway) as
bareboat charterer and, found pursuant to Section 1104
(b) (1) of the Merchant Marine Act, 1936, as amended
40
(Act), subject to compliance with the requirements herein
stated, and the execution of the Management Agreement
required below, that Queensway and the Shipowner pos-
sess the ability, experience, financial resources, and other
qualifications necessary to the adequate operation and
maintenance of the Vessel.
IV. Approved the proposed sale and lease financing ar-
rangement, whereby Polk will assign its rights and obli-
gations under the construction contract for the Vessel to
the Shipowner, pursuant to Section 8.01 of the Trust
Indenture.
V. Required that the lease terms of the sale and lease
proposal be subject to approval by the Maritime Admin-
istration including, but not limited to, the lease rate,
indemnification, etc.
VI. Found under Section 1104(d) of the Act that the
property or project with respect to which the additional
guaranteed obligations will be issued remains, in his
opinion, economically sound.
VII. Determined, pursuant to Sections 1101(f) and
1104(b) (2) of the Act, that the final actual cost of con-
struction of the Vessel is as follows:
Construction Costs $70,180,428
Net Interest 5,372,679
Total Actual Cost $75,553,107
On this basis fixed the guarantee amount at $60,200,000,
which amount does not exceed 8714% of the actual cost
of the Vessel.
VIII. Found that on the basis of the repayment of con-
struction-differential subsidy (CDS) the Vessel is eligible
for a guarantee in an amount not to exceed 8714% of
the actual cost of construction of the Vessel.
IX. Approved the amortization of the proposed additional
obligations ($31,355,000) on a twenty year level debt
service basis (equal payments of principal and interest).
41
X. Required Queensway to execute a Management Agree-
ment with Cove and required that said Management
Agreement be approved in form and substance by the
Secretary.
XI. Required that at or prior to the guarantee closing
the Economic Development Administration (EDA) sub-
ordinate its preferred position on the BAY RIDGE,
presently being constructed at Seatrain, in favor of the
Maritime Administration.
XII. Required that Chase Manhattan Bank, N.A,,
(Chase) agree to subordinate their position on the BAY
RIDGE to the Maritime Administration and to EDA up
to $40,000,000 even should the Letters of Credit issued
by Chase for use with respect to the BAY RIDGE be
drawn down.
XIII. Required that Queensway execute a Title XI Re-
serve Fund and Financial Agreement (Financial Agree-
ment) in the form of our standard Financial Agreement
dated December 1, 1974.
XIV. Required that Queensway deposit 100% of its
profits into the Reserve Fund until it has accumulated
an amount in the Reserve Fund and Seatrain Security
Fund equal to 50% of the outstanding principal balance
of the First and Second Mortgage.
XV. Required that for purposes of Section 12 (negative
covenants) of the Financial Agreement the working capi-
tal and net worth requirements be set at $11,027,700 for
both.
XVI. Required that at or prior to the guarantee closing,
the Shipowner have funds available equal to the differ-
ence between the outstanding indebtedness on the Vessel
and the capitalizable cost of the Vessel (approximately
$32.7 million).
XVII. Required that at the guarantee closing Queensway
have working capital sufficient to supply the Vessel on its
42
initial voyage, obtain the necessary marine insurance, and
pay the Title XI guarantee and insurance fees and that
an officer of Queensway certify that Queensway has this
amount.
XVIII. Required that for purposes of meeting the work-
ing capital requirement of Section 12 of the Financial
Agreement, 50% of the amounts in the Reserve Fund will
be counted towards working capital so long as the 100%
deposit of profits requirement is in effect.
XIX. Required that Seatrain establish a Seatrain Secu-
rity Fund and deposit into this fund from the escrowed
equity investrnent of GECC plus its earnings any amounts
in excess of these required to protect GECC.
XX. Determined that Seatrain will not have to make
deposits into the Seatrain Security Fund if the amount
on deposit in the Security Fund plus the amount in the
Reserve Fund equals 50% of the outstanding indebted-
ness (relating to the First, Second, and Third Mortgages)
related to the Vessel.
XXI. Considered the release of the Seatrain Security
Fund to Seatrain if any of the following conditions are
met:
(A) If Queensway should secure a time charter or con-
tract of affreightment to an acceptable credit risk, as
determined by the Secretary, equal to at least 1% of the
remaining original term of the bareboat charter wherein
(1) the charter hire is sufficient to service the bareboat
charter hire and is paid on a hell-and-highwater basis,
(2) the operating component of the charter hire is suffi-
cient for all operating expenses, and (3) there is a rea-
sonable profit to Queensway.
(B) If Queensway should secure a time charter or con-
tract of affreightment meeting all the conditions in (A)
above except that it was not for % of the remaining
43
original term of the bareboat charter, and if this time
charter or contract affreightment plus the amount in
Queensway’s Reserve Fund assured the payout of at least
50% of the outstanding indebtedness of the Vessel at the
end of the charter period.
(C) If the Vessel is sold to a buyer possessing acceptable
substantial credit as determined by the Secretary.
(D) If Queensway were to merge into a company that
has sufficient assets and credit, as determined by the Sec-
retary, to service the bareboat charter hire.
(E) The presence of any other conditions or circum-
stances as determined by the Secretary which would give
the Maritime Administration security in an amount at
least equal to any of the four above stated conditions.
XXII. Required Queensway to (1) establish United
States citizenship in form and manner prescribed in 46
CFR 355 within 30 days after date of this Commitment
or this Commitment may be terminated by the Secretary
at his sole discretion; provided, however, if a Commit-
ment to Guarantee Obligation closing is scheduled to occur
within said 30 days period, required such parties to
establish United States citizenship at least 15 days prior
to the Commitment to Guarantee Obligation closing and
(2) submit satisfactory evidence of continuing United
States citizenship on the date of Commitment to Guaran-
tee Obligation closing, at all Guarantee closings and all
Mortgage closings with pro forma evidence of citizenship
to be submitted at least 10 days prior to the appropriate
Commitment, Guarantee and/or Mortgage closing.
XXIII. Required the Shipowner, Polk, Cove, and GECC
to submit satisfactory evidence of continuing United
States citizenship at the guarantee closing.
XXIV. Required satisfactory evidence of Vessel insur-
ance at least 10 days prior to the guarantee closing.
XXV. Required that any services performed by or for
Queensway by or for an affiliated company be at a fair
44
and reasonable rate or approved by the Secretary as to
fairness and reasonableness.
XXVI. Required that at least 5 days prior to the guaran-
tee closing Queensway submit to the Secretary a financial
statement certified by an officer of the company indicat-
ing all non-Title XI debt then in existence.
XXVII. Fixed the additional investigation fee authorized
by Section 1104(f) of the Act at $39,193.75, less the
$3,000 amendment fee previously paid, which amount
must be paid within 30 days of the date of this action
but in any event prior to the guarantee closing.
XXVIII. Required that the guarantee fee under the
Second Mortgage and the insurance fee under the First
Mortgage be fixed at 34% until reduced by the Secretary
based upon Queensway having secured a charter justify-
ing the reduction.
XXIX. Authorized the Assistant Administrator for Mari-
time Aids to approve all appropriate documents and to
take such other actions as may be necessary to effectuate
the purposes of this action.
XXX. Required that all documentation be in form and
substance satisfactory to the Secretary.
XXXI. Authorized the execution of this letter to Polk
and Queensway which will constitute a Letter Commit-
ment to Guarantee Obligations with respect to the sale of
the Vessel and additional Title XI obligations, subject
to the conditions contained herein, and required Polk and
Queensway to accept the provisions hereof by signing
and returning a copy to the Secretary.
Sincerely,
/s/ James §S. Dawson, Jr.
JAMES §. DAWSON, JR.
Secretary
45
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. CA 77-1647
ALASKA BULK CARRIERS, INC.
Foot of Morton Avenue
Chester, Pennsylvania 19013
(Phone: 215/876-9121)
TRINIDAD CORPORATION
926 Public Ledger Building
6th & Chestnut Streets
Philadelphia, Pennsylvania 19106
(Phone: 215/574-3300)
V.
JUANITA M. KREPS, Secretary of Commerce,
U.S. Department of Commerce
MARITIME ADMINISTRATION,
U.S. Department of Commerce
MARITIME SUBSIDY BOARD,
U.S. Department of Commerce
ROBERT J. BLACKWELL, individually and as
Assistant Secretary of Commerce for Maritime Affairs,
Maritime Administrator and Chairman,
Maritime Subsidy Board, Maritime Administration
U.S. Department of Commerce
Street Address for all Defendants:
U.S. Department of Commerce
14th and E Streets, N.W.
Washington, D.C. 20235
United States of America
‘——* @
46
COMPLAINT FOR REVIEW OF AGENCY ACTION,
DECLARATORY JUDGMENT AND
INJUNCTIVE RELIEF
Jurisdiction
1. This is a civil suit for judicial review of unlawful
actions of the Maritime Administration/Maritime Sub-
sidy Board (1) lifting statutory restrictions governing
the operation of a vessel built with federal subsidy; and
(2) awarding unauthorized financial (“loan”) assistance
amounting to 27.2 million dollars so as to permit the SS
STUYVESANT to operate in U.S. domestic trades which
are open only to U.S.-built ships constructed without fed-
eral subsidy assistance, although the ship was built with
the assistance of federal subsidy funds to enable it to
compete with foreign flag ships in U.S. foreign trades.
The court has jurisdiction pursuant to 28 USCA §§ 1331,
1333, 1337, 1651, 2201-2202 and under 5 USCA §§ 701-
706. Venue is proper pursuant to 28 USC § 1391.
Plaintiffs
2. Plaintiff Alaska Bulk Carriers, Inc. is a corporation .
organized and existing under the laws of the Common-
wealth of Pennsylvania, having its principal place of busi-
ness in Chester, Pennsylvania. Alaska Bulk Carriers is
the bareboat charterer of two recently-constructed United
States-flag oil tankers, the PRINCE WILLIAM SOUND
and the GLACIER BAY (ex JOSEPH D. POTTS), which
were not built with federal subsidy. It is also committed
to a third recently-constructed unsubsidized United
States-flag oil tanker.
8. Plaintiff Trinidad Corporation is a corporation
organized and existing under the laws of Delaware. It
is engaged in the operation of bulk tank vessels some of
which were built without federal subsidy and are used in
the transportation of oil from Alaska.
Le
47
Defendants
4. Defendant Juanita M. Kreps is Secretary of Com-
merce (“Secretary”) and as such is responsible for ad-
ministering the Merchant Marine Act, 1936. Defendant
Robert J. Blackwell is Assistant Secretary of Commerce
for Maritime Affairs and as such is also Maritime Ad-
ministrator of the defendant Maritime Administration, a
constituent agency of the Department of Commerce, and
ex officio member of the defendant Maritime Subsidy
Board (“MSB’’), a constituent agency of the Maritime
Administration (“MarAD”) both constituent agencies
and the Administrator having been delegated by the said
Secretary of Commerce under existing departmental or-
ders to perform certain duties in administering the said
Merchant Marine Act, 1936. Department of Commerce
Organization Order 10-8 (formerly 117-A and 25-2A), as
amended, Pike and Fischer, SR 105:101. All defendants
are officially resident in Washington, D.C.
Statutes Involved
5. The statutes involved are:
(a) The Merchant Marine Act of 1936, as amended,
46 U.S.C. § 1101ff, particularly the provisions of Title
V. This title authorizes, under certain conditions, the
payment by the Government of construction-differential
subsidy (“CDS”) with respect to the construction of ships
in United States shipyards for use in United States for-
eign commerce.
(b) 28 U.S.C. § 2201, § 2202 providing for declaratory
judgment and injunctive relief;
(ec) The provisions of the Administrative Procedure
Act, 5 U.S.C. § 551ff and § 702 et seq., particularly 5
U.S.C. § 704, providing for judicial review of Agency
actions.
48
Domestic and Foreign Commerce
6. The domestic maritime commerce of the United
States is the carriage by water of merchandise between
points in the United States. Water carriage between US.
and foreign points, or between foreign points only, is
foreign commerce. By law (Section 27 of the Merchant
Marine Act, 1920, 46 U.S.C. § 883, commonly known as
the Jones Act), only ships built in the U.S. and docu-
mented under the laws of the U.S. (i.e., U.S.-flag vessels)
may operate in domestic commerce. There are no such
restrictions on vessels engaged in foreign commerce.
Construction Sudsidy Program
7. In the absence of construction-differential subsidy,
vessels engaged in foreign commerce would ordinarily be
built in foreign, not U.S., shipyards. The costs of build-
ing vessels in U.S. shipyards are substantially higher
than in shipyards of other maritime nations. The govern-
ment’s construction-differential subsidy program was es-
tablished to enable U.S. citizens building ships for use in
foreign commerce to use U.S. shipyards and still remain
economically competitive with foreign shipowners. When
a shipowner builds a vessel under Title V of the Merchant
Marine Act, 1936, the federal government pays up to
50% of the cost of such vessel to offset the higher costs
of U.S. construction as compared with foreign construc-
tion. By contrast, an unsubsidized shipowner operating
in domestic trade must bear the full cost of vessel con-
struction in U.S. shipyards. Since low-cost foreign-built
vessels may not engage in domestic trade, there is no
need for payment of construction-differential subsidy
with respect to the U.S.-built vessels which engage in
such trade.
8. Under the Title V construction subsidy program,
ships built for operation in the domestic trades are not
eligible for subsidy and ships which have been built with
WA Rise:
49
subsidy may not be operated in the domestic trade. Sec-
tion 506 of the Merchant Marine Act, 1936, 46 U.S.C.
§ 1156, provides that the owner of any ship built with
construction differential subsidy must agree that the ves-
sel is to be operated exclusively in the foreign trade
(except for certain intermediate stops at U.S. ports as
part of foreign voyages and these exceptions are spe-
cifically enumerated in the statute). To meet emergencies
or other special needs, the Secretary of Commerce has
the discretion under Section 506 to permit CDS-built
vessels to be temporarily transferred to the domestic
trades for a short period (not exceeding six months in
any year). Section 506 does not authorize—and does not
empower the Secretary to authorize—either the transfer
to the domestic trades of a CDS-built vessel for more
than six months, or the permanent use of a CDS-built
vessei in domestic trades.
9. There are only two situations wherein Section 506
permits a CDS-luilt vessel to be used in domestic trades
—to make (1) incidental stops on a foreign voyage;
(2) for a temporary period of 6 months or less. In those
situations § 506 requires that a pro rata share of the
construction subsidy be returned to the government. No
statutory provision authorizes the Maritime Administra-
tion to remove the restrictions prohibiting the vessel’s use
in domestic commerce whether or not its action is con-
ditioned on the payback of all unamortized construction
subsidy.
10. Each grant of construction-differential subsidy
generally involves the execution of three contracts: a
construction contract between the shipowner and the
shipyard, a contract between MarAd/MSB and the ship-
yard, and a contract between MarAd/MSB and the ship-
owner. The last contract incorporates numerous obli-
gations of the shipowner in consideration of the CDS
grant. The contractual commitment of the shipowner to
50
comply with the operating restrictions of Section 506 is
set forth in a specific article in the contract. The contract
provides that the provisions of the article incorporating
the Section 506 restrictions “shall run with the title of
the vessel and be binding on all owners thereof.” A
typical example of such an article from a tanker CDS
contract (Article 9) is attached hereto as Exhibit A.
Title XI Guarantees
11. The Maritime Administration also promotes the
U.S. shipbuilding industry and its merchant marine by
providing guarantees which finance private borrowing at
favorable interest rates. This program is authorized by
Title XI of the Merchant Marine Act of 1936, as amend-
ed. The government insures obligations to pay ship con-
struction costs for U.S. built and documented ships. Ordi-
narily, the agency takes a first preferred mortgage as
security. Both subsidized and unsubsidized U.S. built
ships may be insured—but while the agency may guar-
antee up to 8714% of the actual costs of construction of
unsubsidized vessels, there are more stringent limits on
its insuring obligations for subsidized ships.
The U.S.-Flag Tanker Industry
12. The U.S.-flag oil tanker industry consists of two
physically and economically distinct fleets: (1) unsub-
sidized tankers operating in Jones Act (domestic) trades
and (2) CDS-built tankers operating in foreign trades.
Unsubsidized tankers generally cannot successfully com-
pete against CDS-built—and foreign-built—tankers in
foreign trades because of the higher costs of building
ships in the U.S., and CDS-built tankers cannot lawfully
operate in Jones Act trades, except in the limited cir-
cumstances permissible under Section 506.
18. Tanker rates (as reflected in charters and con-
tracts of affreightment) in the Jones Act (domestic)
A omens. seme
51
trades are higher than the rates for U.S.-flag tankers of
the same type in foreign trade since the rates of the
unsubsidized Jones Act carriers do not reflect the subsidy
assistance granted to U.S. tankers which compete with
foreign tankers in foreign trades. Jones Act tanker rates
are set in the marketplace by competition among unsub-
sidized U.S.-flag ships, and are generally sufficient to pro-
vide a fair return to the unsubsidized tanker owner and
to stimulate the construction of new tonnage, as market
forces dictate.
14. An important new market for Jones Act tankers
was created in the early 1970’s when plans were laid, and
Congressional authority was secured, for construction of
the Trans-Alaska Pipeline System (“TAPS”) through
which Alaskan oil will be transported from the North
Slope of Alaska to the Southern Alaska port of Valdez.
Oil tankers are to carry the oil from Alaska to various
destinations in the “lower 48” states beginning in late
summer/early fall of 1977 when the North Slope oil is
expected to move through the TAPS pipeline for on-
carriage to the lower 48. The market responded to these
economic developments by the placing of orders for the
construction of unsubsidized tankers which could operate
in the TAPS trade. As a result of the unauthorized ac-
tions of the defendants, as described below, the owners
and charterers of unsubsidized tankers to be used in the
TAPS trade are faced with imminent illegal and unfair
competition from the CDS-built tanker fleet.
SS STUYVESANT
15. Seatrain Shipbuilding Corporation (Seatrain) of
Brooklyn, New York is a shipyard building liquid bulk
vessels. It is the recipient of construction differential sub-
sidy amounting to approximately $27.2 million paid by
MarAd/MSB for the construction of the SS STUYVES-
ANT, a 225,000-dwt tanker under Construction Dif-
———S EEE oo
i Sl hl i a a
52
ferential Subsidy Contract No. MA/MSB-164 with the
United States. The vessel is the subject of a Title V
(subsidy) Contract No. MA/MSB-165 between MarAd/
MSB and the owner, Polk Tanker Corporation (Polk) as
the owner or prospective owner which contract includes
the restrictions of Section 506 of the Merchant Marine
Act, 1936, as amended, prohibiting the vessel’s permanent
operation in U.S. domestic trades. Additionally, the SS
STUYVESANT was financed in.1972 with the payment
of approximately $30.2 million of the debt insured by the
United States Government through MarAd/MSB under
Title XI of the Merchant Marine Act, 1936.
16. In addition to the Assistance given Seatrain by
MarAd/MSB for the SS STUYVESANT, including (1)
construction differential subsidy of upwards of 27.2 mil-
lion paid by MarAd/MSB to Seatrain to meet costs of
constructing the SS STUYVESANT and (2) the $30.2
million debt guarantee made by MarAd to secure financ-
ing for the vessel, the Department of Commerce has pro-
vided further financial assistance to aid the SS STUY-
VESANT. In June, 1975, the Economic Development
Administration guaranteed loans in the amount of $77
million so that Seatrain and Polk could overcome financial
difficulties which had led to the closing of Seatrain’s
yard. With this loan, Seatrain reopened its yard and
completed the STUYVESANT;; on information and belief,
the loan guarantee was collateralized by pledges and
security derived from the expected value of the SS STUY-
VESANT on completion. On information and _ belief,
MarAd and EDA valued this collateral based upon the
expected use of the vessel in the Alaska trade—despite
the fact that the law forbids the operation of a vessel
built with CDS in domestic trades.
17. On information and belief Seatrain Lines, Inc.
(the parent company of the shipyard and the shipowner)
made the decision to build the SS STUYVESANT and
= _.
geo mn, —— a.
PTS:
53
commenced its construction “on speculation.” That is, the
shipowner, Polk, did not have a long-term charter (or any
charter, for that matter) in hand during the lengthy
construction period when construction began. Polk and
Polk’s parent were thus “speculating” that an appro-
priate charter for use of the vessel in foreign commerce
would materialize.
18. Despite the lack of a charter or charters, the ship-
owner in 1972 or earlier applied for and received the
federal maritime aids described in paragraph 18, above
(over $27 million in an outright subsidy grant and over
$30 million in Title XI guarantees). Title XI at § 1104
(d), and Title V at § 501, each require that the agency
make a finding that the project for which the aid is given
is economically sound and viable. On information and
belief, MarAd/MSB has never granted aid even closely
approximating the magnitude of aid granted to Seatrain
and Polk without requiring, in order to make the statu-
tory finding, that the shipowner have a long-term charter
insuring that the vessel will be employed profitably in
lawful trade and will generate sufficient funds to service
the U.S.-guaranteed debt and to justify the grant of
subsidy.
19. On information and belief, MarAd/MSB and the
shipowner/shipyard interests gravely miscalculated the
likelihood that a profitable charter for the use of the
SS STUYVESANT in non-domestic trade would ma-
terialize, for no such charter has materialized.
20. By 1974, international tanker rates had declined
precipitously from levels which had been reached just
prior to the Arab oil embargo in 1973, thus further re-
ducing the likelihood that a profitable non-domestic
charter for the STUYVESANT would even be executed.
21. In June 1975, despite depressed market conditions
and the lack of a charter, the Department of Commerce,
ee Se OE a eS
LO LOE EE Fl FO EE Ie
54
through its Economic Development Administration, guar-
anteed massive additional loans to Seatrain (as alleged
in paragraph 19), the partial collateral for which con-
sisted, on information and belief, of a $38.5 million se-
curity interest in the vessel in favor of the United States.
22. In early 1975, prior to the issuance of $77 million
in U.S. guarantees in 1975 for the benefit of Seatrain,
officials representing the EDA, MarAd/MSB and Seatrain
corporate interests met and discussed the eventual use of
the vessel in the Alaska trade despite the vessel’s CDS
status, and, on information and belief, the government
officials assured Seatrain that the agency or agencies
could accomplish certain official acts purportedly enabling
Seatrain or successor interests to operate the vessel in
the Alaska domestic market. Those official acts have in-
deed taken place and are the acts complained of herein.
23. At the time of the discussion alleged in the pre-
ceding paragraph and up to the date of the actions com-
plained of herein (August 31, 1977), neither MarAd/
MSB nor EDA had ever given any notice to the public,
and to the domestic tanker industry and plaintiffs in
particular, that there even existed a possibility that
MarAd/MSB, EDA, and Seatrain interests would seek
to have the vessel employed in the Alaska trade and to
have the CDS contract cancelled fully.
24. During the period of the government’s and Sea-
train’s public silence, both shipyards and shipowners in
the domestic tanker industry, including plaintiffs herein,
expended massive funds (without aid of federal sudsidy)
to build and. buy ships based on projected rates and pro-
jected total capacity which did not—and could not—in-
clude the competition of the SS STUYVESANT (as well
as its sister vessel the SS BAY RIDGE).
ee ee ee
55
Maritime Administration/Maritime Subsidy
Board Actions
25. On July 20, 1977, MarAd/MSB published in the
Federal Register notice of a request for approval of the
operation of the SS STUYVESANT in the Alaska trade
for a period of three years. This request had been made
by Polk Tanker Corporation and Seatrain Shipbuilding
Corporation. The Seatrain-Polk application asked for the
approval of a three-year time charter to Standard Oil
Company (Sohio), an Ohio corporation. Publication of
the request was made pursuant to agency regulations, 46
CFR § 250.1-250.6, setting out procedures for the agency’s
considering requests for participation of vessels built with
- the CDS in the carriage of Alaskan oil. Section 250.5 of
these regulations repeats the statutory restriction that
MarAd/MSB cannot approve “an application where the
result would be to allow a vessel of the applicant to par-
ticipate in the trade for a period exceeding six months
in any consecutive 12-month period.” The Seatrain-Polk
request was made an official MarAd/MSB proceeding en-
titled Docket S-565.
26. Plaintiffs and other unsubsidized carriers filed
timely comments opposing the Seatrain-Polk request.
27. On information and belief, after receiving com-
ments in Docket S-565, MarAd/MSB held private ex-
parte meeting(s) with representatives of Seatrain/Polk/
Queensway discussing Seatrain-Polk’s application. As a
result of such discussion(s), Polk Tanker Corporation
changed the terms of its request to the Maritime Ad-
ministration. In a letter dated August 25, 1977, Polk
proposed that it be released from the restrictions of its
subsidy contract Ma/MSB-165, including the restriction
against operation in the Alaska (domestic) trade, upon
its execution of a twenty-year promissory note payable in
40 semi-annual installments for the amount of the con-
struction differential subsidy and national defense fea-
Sa ——— = =
ee Oe ee
56
tures paid for by the government under CDS Contract
No. MA/MSB-164. Polk proposed various financing
measures. This letter did not include any request for
approval of a charter.
28. By separate letter dated August 26, 1977, Polk
Tanker Corporation withdrew the application filed on
July 8, 1977.
29. MarAd/MSB did not publish notice of the Polk
Tanker Corporation application described in Polk’s Au-
gust 25, 1977 letter in the Federal Register, nor did the
agency otherwise follow the procedures set forth in 46
CFR 250-1 et seg. Instead, on August 30, 1977 MarAd/
MSB took a series of actions approving Polk’s August
25, 1977 proposal.
30. These actions are described in two letters, each
dated August 31, 1977, to Polk Tanker Corporation and
Queensway Tankers, Inc. from Secretary James S. Daw-
son, Jr., attached as Exhibit B. One letter describes the
actions taken by the Maritime Subsidy Board/Assistant
Secretary of Commerce for Maritime Affairs with respect
to (1) approving the so-called “subsidy repayment” which
is not in fact a repayment of subsidy but merely the
issuance of a promissory note to be paid over twenty
years, and (2) amending the subsidy contract with Polk
to release the vessel from restrictions. The second letter
describes actions taken by the Assistant Secretary with
respect to the Title XI debt financing guarantees.
31. Under the terms of the arrangement with Sea-
train/Polk MarAd will get a first and second preferred
mortgage on the SS STUYVESANT to secure the obli-
gations guaranteed under Title XI of the Act. MarAd
will get a third preferred mortgage on the SS STUY-
VESANT to secure the note promising subsidy repay-
ments. This note is also secured by the charters for the
SS STUYVESANT’s operation in the Alaska trade.
RUPEES atest A
57
MarAd is also getting a preferred security interest in the
BAYRIDGE, another vessel under construction by Sea-
train. MarAd/MSB’s actions are summarized in a press
release dated September 1, 1977 a copy of which is at-
tached as Exhibit C. The press release explains that the
agency is attempting to secure the use of the SS STUY-
VESANT in the Alaska trade in order to protect its own
interests.
32. The net effect of the action taken by MarAd/MSB
in accepting a promissory note in lieu of actual repay-
ment of subsidy is to make an outright loan of the amount
of the construction differential subsidy originally paid to
Seatrain.
33. On information and belief, MarAd/MSB will be
making similar arrangements to lift restrictions on the
SS BAY RIDGE, another Seatrain-built vessel.
34. There was considerable ferment within the mer-
chant marine industry after it learned of the aforesaid
actions of MarAd/MSB, and a meeting of the Inde-
pendent Tankers Owners Committee specifically to dis-
cuss these actions was scheduled for Thursday, Septem-
ber 8, 1977. At or before this meeting, communications
were made by the Maritime Administrator to some or all
of the persons attending the Independent Tanker Owners
Committee that the decisions taken by MarAd/MSB in
respect of the SS STUYVESANT, were for the good of
the merchant marine industry and that, in consideration
for a promise by some or all of the protestants in 8-565
and/or other persons with similar interests not to appeal
these decisions to a court and not to seek review of them
by the Secretary of Commerce, the Maritime Administra-
tor would agree to “shut the door” behind the SS STUY-
VESANT and the BAY RIDGE by enacting regulations
designed for that purpose, such regulations to be drafted
by the Independent Tankers Owners Committee. Counsel
for the Independent Tankers Owners Committee did draft
Sa
Se ae
ee se ee
58
such regulations and they were circulated to members of
the aforementioned industry and/or their counsel on Mon-
day, September 12, 1977. A copy of said regulations is
attached hereto as Exhibit D. Upon information and be-
lief, when Shell«<Oil Company filed its petition seeking
a discretionary review by the Secretary of Commerce of
the MarAd/MSB actions on September 12, 1977, the sug-
gested “deal” became inoperative.
MarAd/MSB Actions are Unlawful
35. The actions taken by MarAd/MSB approving the
Seatrain/Polk proposal are wholly unauthorized and be-
yond its powers in that the agency:
(a) lacks authority to release the vessel owner from
the statutory restrictions of section 506 barring opera-
tion of a vessel built with CDS in domestic trades;
(b) lacks authority to accept the repayment of con-
struction differential subsidy in full so as to “cleanse”
the vessel of statutory restrictions governing vessels built
with the subsidy;
(c) lacks authority to make a loan either for con-
struction of a vessel or for repayment of construction
differential subsidy. The actions are also unlawful in
that they were taken in violation of the agency’s regu-
lations, 46 CFR Part 250, and contrary to standards of
due process.
36. There are no provisions of the Merchant Marine
Act, 1936 or any other statute which permit the agency
to take these extraordinary actions and MarAd/MSB let-
ters of August 31, 1977 fail to state any basis for the
actions. In Docket S-565, Seatrain/Polk argued that Sec-
tion 207 of the Merchant Marine Act, 1936 permitted the
agency to lift restrictions against operating in the Alaska
trade for a three-year period. But Section 207 is a house-
keeping provision which merely authorizes the agency to
ee ea
59
enter into contracts or make disbursements to protect,
preserve or improve the government’s collateral in the
same manner as a private corporation and does not
authorize the lifting of statutory restrictions against
using CDS-built vessels in domestic trades or the making
of loans to finance construction or subsidy repayment.
37. On information and belief, the agency may be re-
lying, in whole or in part, on Section 1104 (a) of the
Merchant Marine Act, 1936 dealing with guarantees
under Title XI. Section 1104(a) lists the permissible
purposes of obligations which the agency may guarantee.
One such purpose is “financing, in whole or in part, the
repayment to the United States of any amount of con-
struction-differential subsidy paid with respect to a vessel
pursuant to title V of this Act... .” This section con-
tains no authorization to make loans, or approve the
permanent transfer of a CDS-built vessel to domestic
trades, or to accept subsidy repayments. There are no
statutory provisions of the Act permitting MarAd to
make loans for building ships or repaying subsidy. The
only provision of the Merchant Marine Act, 1936, or any
statute, authorizing the agency to accept repayment of
construction differential subsidy with the concomitant
lifting of restrictions against operating in domestic trades
is Section 506 which provides for lifting restrictions and
partial pro rata repayment of subsidy in two carefully
defined situations, i.e., (a) a temporary transfer of six
months or less, or (b) incidental stops at domestic ports
as part of a round-the-world voyage.
Agency’s Actions Contradict Statutory Policies
38. Not only are the agency’s actions statutorily un-
authorized, but they are also contrary to the objectives
of the construction subsidy program. The program is
designed to promote the building of ships to be used in
foreign commerce in U.S. shipyards. Since ships used in
60
domestic trades are required by law to be built in U.S.
shipyards, there is no need for the government to pay
subsidies. To permit a CDS built vessel to be used in
either domestic trades or foreign trades (simply by re-
paying subsidies) discourages the building of unsub-
sidized vessels. The building of a ship without subsidy
involves a much greater economic risk than building with
subsidy where as much as 50% of the costs of construc-
tion are paid by MarAd. If it is possible to use a sub-
sidized vessel in domestic trades, domestic operators will
not wish to build unsubsidized ships.
39. The building of unsubsidized vessels for domestic
trades, particularly the Alaskan tanker trade, is dis-
couraged by the prospect that any perceived short-fall in
the supply of unsubsidized vessels can be met by the use
of vessels built with construction-differential subsidy.
The ship building industry has experienced severe in-
flation. Since presently existing subsidized ships were
built when construction costs and interest costs were
lower than at present, the base cost of these subsidized
vessels would be lower than the cost of new unsubsidized
vessels, even if unamortized subsidy is repaid. Prospec-
tive purchasers of new vessels for domestic trades are
reluctant to place orders for the construction of such
vessels since they face the prospect of competing against
CDS-built vessels which cost less even with subsidy to be
repaid. Using a CDS-built ship is even more attractive
if, as in the case of the SS STUYVESANT MarAd fi-
nances the subsidy repayment over a 20-year period.
40. The permanent transfer of even one or two CDS-
built vessels has a spiraling effect. If domestic operators
do not place orders for new unsubsidized ships fearing
CDS competition, then there will be a future shortage of
ships for use in the domestic trades. This future short-
age will lead to the permanent transfer of additional
CDS vessels to service the domestic trades which in turn
61
will further discourage the building of unsubsidized ships
for the domestic trades with the result that only subsi-
dized vessels are built in U.S. shipyards. This will place
an unnecessary burden on the subsidy program and the
U.S. taxpayer.
Unlawful Agency Action Harms Plaintiffs
41. Shipowners who have paid the full cost of U.S.-
built tankers and have not received federal subsidy are
subject to unfair and unlawful competition from the
SS STUYVESANT, and from other CDS-built vessels
with respect to which vessels the agency may likewise
lift operating restrictions if this action is permitted to
stand. Plaintiffs who made the economic decision to in-
vest in ships built in U.S. shipyards without subsidy,
relying on a market for the ships to be used in domestic
trades, will forever be subject to competition from these
vessels. Unsubsidized U.S.-built tankers cannot compete
on an even footing with foreign-built and CDS-built
tankers in foreign trades. They are at a disadvantage
in competing in the domestic trade with CDS-built tank-
ers owners—particularly if, as is in the case of the SS
STUYVESANT, the government has made an outright
loan of the amount of the subsidy and is permitting re-
payment over a 20-year period.
42. MarAd/MSB’s action creates severe economic hard-
ships disrupting the market for unsubsidized U.S.-built
vessels. The fact that the SS STUYVESANT has been
“cleansed” of subsidy and will operate permanently in
the Alaska and other domestic trades, and that similar
action will be taken to release the SS BAY RIDGE,
raises uncertainty about whether, and under what cir-
cumstances, other CDS-built vessels will be cleansed and
transferred to the domestic fleet. Since there are about
as many CDS-built tankers as there are unsubsidized
tankers, the prospect is that the domestic fleet could be
62
doubled. With the statutorily established guidelines over-
turned by MarAd/MSB actions to release the SS STUY-
VESANT, it is not possible to anticipate what will hap-
pen. Thus, the market cannot function. Oil companies
which would purchase tanker space for the Alaskan oil
trade will be unwilling to presently contract for existing
tanker tonnage built without subsidy at rates which re-
flect the costs of building unsubsidized ships and the
supply of unsubsidized ships anticipating that the sup-
ply of vessels available for use in domestic trades will
increase as CDS-built vessels enter the market. (CDS-
built vessels will be available at lower rates because they
were constructed with subsidy.) This means that the
unsubsidized owners and operators face difficulties in
meeting financing obligations incurred to own and/or
operate unsubsidized ships in domestic trades. It also
means that plans to add additional vessels in domestic
trades have become problematical—as has the financing
for such vessels.
Relief Requested
WHEREFORE, Plaintiffs respectfully request that this
court issue an order
(1) permanently enjoining the agency from taking any
steps to carry out the actions set forth in two letters each
dated August 31, 1977 from MarAd/MSB, to Polk Tanker
Company and Queensway Tankers, Inc. and declaring all
such actions null and void.
(2) declaring that the Secretary of Commerce, the
Maritime Administration and the Maritime Subsidy
Board lack. authority to waive the restrictions of Sec-
tion 506 of the Merchant Marine Act, 1936 so as to per-
mit the operation of vessels built with construction differ-
ential subsidy in domestic commerce either on condition
of repayment of unamortized subsidy or otherwise (ex-
cept on a temporary basis for less than six months in
any year).
63
(3) permanently enjoining the Secretary of Commerce
the Maritime Administration and the Maritime Subsidy
Board from amending any constructicn-differential sub-
sidy contracts or taking any other action to lift the re-
strictions of Section 506 of the Merchant Marine Act,
1936 permitting the operation of vessels built with con-
struction-differential subsidy in domestic commerce either
on condition of repayment of unamortized subsidy or
otherwise (except on a temporary basis for less than six
months in any year) ;
(4) granting such other relief as the court may deem
appropriate.
Respectfully submitted,
ALAN G. CHOATE
PEPPER, HAMILTON & SCHEETZ
123 South Broad Street
Philadelphia, Pennsylvania 19109
Tel. (215) 545-1234
AMY LOESERMAN KLEIN
OLGA BOIKESS
WILLIAM KARAS
THOMAS A. JOHNSON
GALLAND, KHARASCH, CALKINS &
SHORT
1054 Thirty-first Street, N.W.
Washington, D.C. 20007
Tel. (202) 333-2200
Attorneys for
ALASKA BULK CARRIERS, INC.
TRINIDAD CORPORATION
September 22, 1977
64
EXHIBIT A
ARTICLE 9. DOCUMENTATION AND OPERATION
OF THE VESSELS
(a) The Vessel shall remain documented under the
laws of the United States for not less than twenty (20)
years from the date of delivery of each of the Vessels by
the Contractor to the Purchaser or so long as there is
outstanding a preferred ship mortgage from the Pur-
chaser insured under Title XI of the Act, whichever is
the longer period, subject however, to the provisions of
section 611 of the Act.
(b) (i) Purchaser hereby agrees, in accordance with
section 506 of the Act, that the Vessel shall be oper-
ated exclusively in foreign trade, or on a round-the-
world voyage, or on a round voyage from the West
Coast of the United States to a European port or
ports which includes intercoastal ports of the United
States, or a round voyage from the Atlantic Coast of
the United States to the Orient which includes inter-
coastal ports of the United States, or on a voyage in
foreign trade on which the Vessel may stop at the
State of Hawaii, or an island possession or island
territory of the United States, and that if the Vessel
is operated in the domestic trade on any of the
above-enumerated services, he will pay annually to
the Board that proportion of one-twentieth of the
construction-differential subsidy paid for such Vessel
as the gross revenue derived from the domestic trade
bears to the gross revenue derived from the entire
voyages completed during the preceding year; and
(ii) Purchaser agrees to comply in all other respects
with Section 506 of the Act.
(c) The Purchaser agrees that for the twenty-year
economic life of the Vessel that the Vessel shall be oper-
—— e
65
ated in the foreign commerce of the United States pursu-
ant to Section 905(a) of the Act and the regulations is-
sued thereunder consistent with such section.
(d) The foregoing provisions of this Article shall run
with the title to the Vessel and be binding on all Owners
thereof.
ARTICLE 10. NATIONAL DEFENSE FEATURES
(a) The Purchaser agrees that, for the purposes of
paragraphs (b) and (c) below, the foreign cost of the
National Defense Features incorporated into the Vessel
shall be as follows
(1) (2) (3)
Foreign Cost
Feature Cost of Feature of Feature
Fueling at Sea $70,000 $41,349
Highline Transfer 4,000 2,363
Prohibition of Gray
Cast Iron 77,000 45,484
provided that in the event the cost of National Defense
Features is increased or decreased by reason of a change
or changes, the foreign cost of National Defense Features
will be adjusted accordingly.
66
[SEAL]
EXHIBIT B-1
UNITED STATES DEPARTMENT OF COMMERCE
Maritime Administration
Washington, D.C. 20230
August 31, 1977
Polk Tanker Corporation
One Chase Manhattan Plaza
New York, New York 10005
Gentlemen:
For over two years the Maritime Administration has
been considering the possibility that at the time of deliv-
ery there might be no market for the STUYVESANT
other than the movement of Alaskan oil to the lower 48
states. The Economic Development Agency in June 1975
agreed to guarantee additional funding to Seatrain Ship-
building Corporation to reopen its yard to complete this
vessel taking into account the same possibility. In light of
the fact that several years of work and negotiations have
generated no other opportunities for employment of this
vessel, and being persuaded that approval of the proposed
CDS repayment and the time charter of the Sohio Petro-
leum Company will improve the collateral position and
prevent possible default on various obligations insured and
guaranteed by the Department of Commerce, and failure
to approve the proposal would jeopardize continued opera-
tion of the Seatrain Shipbuilding Corporation, the Mari-
time Subsidy Board (Board) /Assistant Secretary of Com-
merce for Maritime Affairs (Assistant Secretary) with
respect to the requests dated July 12, 1977 and August
25, 1977, from Polk Tanker Corporation (Polk) pertain-
ing to the T. T. STUYVESANT, took the following ac-
tions on August 30, 1977:
I.
Il.
67
By the Assistant Secretary :
A. Approved, pursuant to sections 9, 37 and 41 of
the Shipping Act, 1916, as amended (the Shipping
Act), the time charter by United States Trust Com-
pany of New York, as owner trustee, and Queensway
Tankers, Inc., as charter owner, of the tanker Build-
er’s Hull No. 102 (to be documented under U.S. flag
and named STUYVESANT), to Sohio Petroleum
Company, a Delaware corporation but not a citizen
of the United States within the meaning of section 2
of the Shipping Act, for a period of three (3) years
commencing on or about the date of Maritime Admin-
istration approval, for the carriage of crude oil and/
or dirty petroleum products in permissible worldwide
trade, upon the conditions: (1) that without the prior
written approval of the Maritime Administration the
vessel shall not be subchartered to aliens, except as
may be permitted by General Order 59, 2d Revision,
as amended; and (2) that the operating range of
said vessel shall not include the Soviet Union, Latvia,
Lithuania, Estonia, Czechoslovakia, Hungary, Bul-
garia, Albania, North Korea, the Soviet Zone of
Germany, Manchuria, the People’s Republic of China,
Cambodia, North Vietnam, South Vietnam, Cuba or
Southern Rhodesia, unless otherwise permitted by
regulations of the Department of Commerce.
By the Board:
A. Found, pursuant to section 501(a) of the Mer-
chant Marine Act, 1936, as amended (the Act), that
United States Trust Company, as owner trustee and
Queensway Tankers, Inc., as charter owner, are ac-
ceptable transferees of the T. T. STUYVESANT,
subject to both companies demonstrating their U.S.
citizenship, under section 2 of the Shipping Act, to
the satisfaction of the General Counsel.
68
B. Approved, pursuant to Article 14 of Board Con-
tract No. MA/MSB-165, the assignment of the T. T.
STUYVESANT to United States Trust Company as
owner trustee and the bareboat charter of the vessel
to Queensway Tankers, Inc.
C. Authorized the repayment to the United States on
the date of delivery of the T. T. STUYVESANT, of
the total amount of construction-differential subsidy
paid in connection with the construction of the vessel,
including the cost of National Defense Features, as
determined by the Maritime Administration, in the
form of a promissory note issued by Polk and to be
assumed by the United States Trust Company as
trustee upon purchase of the vessel, payable in level
installments of principal and interest, semi-annually
in arrears for twenty years beginning on the date of
delivery of the vessel, provided that:
(1) The note is secured by a preferred ship
mortgage on the vessel to be given by the owner
trustee in favor of the United States which will
be subject and subordinate to a first preferred
mortgage and second preferred mortgage to be
given by the owner trustee to secure obligations
insured and/or guaranteed under Title XI of
the Act, in connection with financing the vessel.
(2) The note is also secured by the owner trus-
tee’s interest in (a) the bareboat charter; (b)
the time charter; and (c) the Seatrain Security
Agreement.
(3) All documents related to the repayment of
CDS have been found to be satisfactory, in form
and substance, to the Office of the General
Counsel.
D. Determined that interest is payable on the prom-
issory note authorized in paragraph C above, with
69
interest theron to be at the same rate borne by the
second tier of Title XI debt from date of execution.
EK. Authorized the amendment of Board Contract
No. MA/MSB-165 to release the vessel owner from
all restrictions, obligations and duties contained
therein, except those contained in Articles 4 and 11
pertaining to the right of the Board to the engineer-
ing and design data for the vessel, and the purchase
and requisition rights of the United States to the
vessel pursuant to section 802 of the Act, respec-
tively. It shall be understood that with respect to
the compensation formula contained in Article 11,
the amounts of CDS repaid pursuant to paragraph C
above, shall be considered in the calculation of com-
pensation.
F. Authorized the Assistant Secretary of Commerce
for Maritime Affairs (the Secretary), on behalf of
the Board, to accept or enter into the following
documents:
1. Promissory Note from Polk;
2. Novation Agreement among United States
Trust Company as owner trustee, Polk and the
Secretary ;
3. Security Agreement between United States
Trust Company as owner trustee and the Secre-
tary; and
4. Preferred Ship Mortgage (Third) between
United States Trust Company as owner trustee
and the Secretary
in substantially the form submitted, proof date Au-
gust 25, 1977, or with such changes as the Secretary
shall approve and delegated to the Assistant Admin-
istrator for Maritime Aids authority to take all
70
actions necessary in connection with the administra-
tion of the above mentioned documents.
Your attention is invited to the provisions of Department
of Commerce Organization Order 10-8, section 7, and we
ask that you indicate your acceptance of the above ac-
tions by signing, dating, and returning the enclosed copy
of this letter.
Sincerely,
/s/ James §. Dawson, Jr.
JAMES S. DAWSON, JR.
Secretary
Enclosure
71
[SEAL]
EXHIBIT B-2
UNITED STATES DEPARTMENT OF COMMERCE
Maritime Administration
Washington, D.C. 20230
August 31, 1977
Polk Tanker Company
One Chase Manhattan Plaza
New York, New York 10005
Queensway Tankers, Inc.
110 Wall Street
New York, New York 10005
Gentlemen:
With respect to the proposed sale of the STUYVESANT
(Vessel) by Polk Tanker Corporation (Polk) to The
United States Trust Company of New York (Shipowner),
not in its individual capacity but solely as owner trustee
under a Trust Agreement between it and General Electric
Credit Corporation (GECC), and the proposed additional
bond sale, you are advised that on August 30, 1977, the
Assistant Secretary for Maritime Affairs (Secretary)
took the following actions:
I. Approved the Shipowner, not in its individual capacity
but solely as owner trustee under a Trust Agreement be-
tween it and GECC, as lessor under the lease financing
arrangement.
II. Found that Cove Shipping, Inc. (Cove) possesses the
ability, experience, financial resources, and other qualifi-
cations necessary to the adequate operation and mainte-
nance Of tne “Vessel.
III. Approved Queensway Tankers, Inc. (Queensway) as
bareboat charterer and, found pursuant to Section 1104
(b) (1) of the Merchant Marine Act, 1936, as amended
(Act), subject to compliance with the requirements herein
72
stated, and the execution of the Management Agreement
required below, that Queensway and the Shipowner pos-
sess the ability, experience, financial resources, and other
qualifications necessary to the adequate operation and
maintenance of the Vessel.
IV. Approved the proposed sale and lease financing ar-
rangement, whereby Polk will assign its rights and obli-
gations under the construction contract for the Vessel to
the Shipowner, pursuant to Section 8.01 of the Trust
Indenture.
V. Required that the lease terms of the sale and lease
proposal be subject to approval by the Maritime Admin-
istration including, but not limited to, the lease rate
indemnification, ete.
VI. Found under Section 1104(d) of the Act that the
property or project with respect to which the additional
guaranteed obligations will be issued remains, in his opin-
ion, economically sound.
VII. Determined, pursuant to Sections 1101(f) and 1104
(b) (2) of the Act, that the final actual cost of construc-
tion of the Vessel is as follows:
Construction Costs $70,180,428
Net Interest 5,372,679
Total Actual Cost $75,553,107
On this basis fixed the guarantee amount of $60,200,000,
which amount does not exceed 8714% of the actual cost
of the Vessel.
VIII. Found that on the basis of the repayment of con-
struction-differential subsidy (CDS) the Vessel is eligible
for a guarantee in an amount not to exceed 8714 % of the
actual cost of construction of the Vessel.
IX. Approved the amortization of the proposed additional
obligations ($31,355,000) on a twenty year level debt
service basis (equal payments of principal and interest).
73
X. Required Queensway to execute a Management Agree-
ment with Cove and required that said Management
Agreement be approved in form and substance by the
Secretary.
XI. Required that at or prior to the guarantee closing
the Economic Development Administration (EDA) sub-
ordinate its preferred position on the BAY RIDGE, pres-
ently being constructed at Seatrain, in favor of the Mari-
time Administration.
XII. Required that Chase Manhattan Bank, N.A.,
(Chase) agree to subordinate their position on the BAY
RIDGE to the Maritime Administration and to EDA up
to $40,000,000 even should the Letters of Credit issued by
Chase for use with respect to the BAY RIDGE be drawn
down.
XIII. Required that Queensway execute a Title XI Re-
serve Fund and Financial Agreement (Financial Agree-
ment) in the form of our standard Financial Agreement
dated December 1, 1974.
XIV. Required that Queensway deposit 100% of its prof-
its into the Reserve Fund until it has accumulated an°
amount in the Reserve Fund and Seatrain Security Fund
equal to 50% of the outstanding principal balance of the
First and Second Mortgage.
XV. Required that for purposes of Section 12 (negative
covenants) of the Financial Agreement the working capi-
tal and net worth requirements be set at $11,027,700 for
both.
XVI. Required that at or prior to the guarantee closing,
the Shipowner have funds available equal to the difference
between the outstanding indebtedness on the Vessel and
the capitalizable cost of the Vessel (approximately $32.7
million).
XVII. Required that at the guarantee closing Queensway,
have working capital sufficient to supply the Vessel on its
.
74
initial voyage, obtain the necessary marine insurance, and
pay the Title XI guarantee and insurance fees and that
an officer of Queensway certify that Queensway has this
amount.
XVIII. Required that for purposes of meeting the work-
Ing capital requirement of Section 12 of the Financial
Agreement, 50% of the amounts in the Reserve Fund will
be counted towards working capital so long as the 100%
deposit of profits requirement is in effect.
XIX, Required that Seatrain establish a Seatrain Se-
curity Fund and deposit into this fund from the escrowed
equity investment of GECC plus its earnings any amounts
in excess of those required to protect GECC.
XX. Determined that Seatrain will not have to make de-
posits into the Seatrain Security Fund if the amount on
deposit in the Security Fund plus the amount in the
Reserve Fund equals 50% of the outstanding indebted-
ness (relating to the First, Second, and Third Mortgages)
related to the Vessel.
XXI. Considered the release of the Seatrain Security
thong to Seatrain if any of the following conditions are
met:
(A) If Queensway should secure a time charter or con-
tract of affreightment to an acceptable credit risk, as
determined by the Secretary, equal to at least 1/2 of the
remaining original term of the bareboat charter wherein
(1) the charter hire is sufficient to service the bareboat... ----—..-
charter hire and is paid on a hell-and-highwater basis,
(2) the operating component of the charter hire is suf-
ficient for all operating expenses, and (3) there is a
reasonable profit to Queensway.
(B) If Queensway should secure a time charter or con-
tract of affreightment meeting all the conditions in (A)
above except that it was not for 1/2 of the remaining
75
original term of the bareboat charter, and if this time
charter or contract aflreightment plus the amount in
Queensway’s Reserve Fund assured the payout of at least
50% of the outstanding indebtedness of the Vessel at the
end of the charter period.
(C) If the Vessel is sold to a buyer possessing acceptable
substantial credit as determined by the Secretary.
(D) If Queensway were to merge into a company that
has sufficient assets and credit, as determined by the Sec-
retary, to service the bareboat charter hire.
(E) The presence of any other conditions or circum-
stances as determined by the Secretary which would give
the Maritime Administration security in an amount at
least equal to any of the four above stated conditions.
XXII. Required Queensway to (1) establish United
States citizenship in form and manner prescribed in 46
CFR 355 within 30 days after date of this Commitment
or this Commitment may be terminated by the Secretary
at his sole discretion; provided, however, if a Commit-
ment to Guarantee Obligation closing is scheduled to occur
within said 30 day period, required such parties to estab-
lish United States citizenship at least 15 days prior to
the Commitment to Guarantee Obligation closing and (2)
submit satisfactory evidence of cuntinuing United States
citizenship on the date of Commitment to Guarantee
Obligation closing, at all Guarantee closings and all
Mortgage closings with pro forma evidence of citizenship
to be submitted at least 10 days prior to the appropriate
Commitment, Guarantee and/or Mortgage closing.
XXIII. Required the Shipowner, Polk, Cove, and GECC
to submit satisfactory evidence of continuing United
States citizenship at the guarantee closing.
XXIV. Required satisfactory evidence of Vessel insur-
ance at least 10 days prior to the guarantee closing.
XXV. Required that any services performed by or for
Queensway by or for an affiliated company be at a fair
76
and reasonable rate or approved by the Secretary as to
fairness and reasonableness.
XXVI. Required that at least 5 days prior to the guaran-
tee closing Queensway submit to the Secretary a financial
statement certified by an officer of the company indicating
all non-Title XI debt then in existence.
XXVII. Fixed the additional investigation fee authorized
by Section 1104(f) of the Act at $39,193.75, less the
$3,000 amendment fee previously paid, which amount
must be paid within 30 days of the date of this action but
in any event prior to the guarantee closing.
XXVIII. Required that the guarantee fee under the
Second Mortgage and the insurance fee under the First
Mortgage be fixed at 3/4% umi\! reduced by the Secretary
based upon Queensway hav. secured a charter justi-
fying the reduction.
XXIX. Authorized the Assistant Administrator for Mari-
time Aids to approve all appropriate documents and to
take such other actions as may be necessary to effectuate
the purposes of this action.
XXX. Required that all documentation be in form and
substance satisfactory to the Secretary.
XXXI. Authorized the execution of this letter to Polk
and Queensway which will constitute a Letter Commit-
ment to Guarantee Obligations with respect to the sale
of the Vessel and additional Title XI obligations, subject
to the conditions contained herein, and required Polk and
Queensway to accept the provisions hereof by signing and
returning a-copy to the Secretary.
Sincerely,
/s/ James S. Dawson, Jr.
JAMES S. DAWSON, JR.
Secretary
OCD RP HOS Oe WR kT iw
cxf
EXHIBIT C
U.S. DEPARTMENT OF COMMERCE
Maritime Administration
September 1, 1977
Page 1 of 3
B77-506
The Assistant Secretary and the Maritime Subsidy Board
have taken several actions to permit the use of the SS
STUYVESANT, a 225,000-dwt tanker built with con-
struction-differential subsidy, in permissible worldwide
trade.
The actions clear the way for the tanker’s owners to
charter it to Sohio Petroleum Company for a 3-year
period for the Alaskan oil trade. The Maritime Admin-
istration has for 2 years been considering the possibility
that upon delivery there might be no market for the
STUYVESANT other than the Alaskan oil trade. Sev-
eral years of negotiations have generated no other em-
ployment opportunities for the vessel. In June 1975 the
Economic Development Administration guaranteed loans
in the amount of $77 million to permit Seatrain Ship-
building Corporation, N.Y., N.Y., to reopen its yard to
complete the STUYVESANT.
Approval of the proposal by the ship’s owners, Polk
Tanker Corporation, to repay the entire amount of CDS
and to time charter the vessel to the Sohio subsidiary will
improve the collateral position and prevent possible de-
fault on various obligations insured and guaranteed by
the Department of Commerce. Failure to do so would
jeopardize the continued operation of Seatrain Shipbuild-
ing Corporation. In light of these considerations, the
Board and the Assistant Secretary took the following
actions on August 30, 1977.
BR eB ws we
78
The Board approved the transfer of ownership from Polk
to United States Trust Company, which will bareboat
charter it to Queensway Tankers, Inc., which will then
time charter it to Sohio Petroleum. Polk will issue a
promissory note—which U.S. Trust will assume—payable
to the United States Government in the amount of $27.2
million. The note represents the aggregate amount of
CDS and the cost of National Defense Features paid by
the U.S. to Seatrain. The note will be payable for 20
years in 40 level semi-annual installments of principal
and interests. The note will be secured by a third pre-
ferred ship mortgage, subordinate to the first and sec-
ond preferred mortgages to be given by U.S. Trust to in-
sure Title XI obligations issued to finance the vessel. The
note will also be secured by U.S. Trust’s interest in the
bareboat charter and the Seatrain Security Agreement.
Interest on the promissory note will be at the same rate
as the second tier of Title XI debt.
The vessel may not be subchartered to aliens without
prior written permission from MarAd, and it may not
trade in specified Communist countries or in Southern
Rhodesia.
The CDS contract will be amended to release the vessel
from all restrictions, obligations, and duties, except those
concerning the right of the Board to the engineering and
design data for the vessel and the Board’s purchase and
requisition rights.
The STUYVESANT is one of three 225,000-dwt tankers
which Seatrain has built with CDS. Polk, a Seatrain
affiliate, applied on July 12, 1977, for approval of the
3-year charter and prorated CDS payback. It later with-
drew that application and requested permission to repay
the entire amount of CDS and to release the vessel from
its CDS contract restrictions.
Nee ER Gree t-te
79
EXHIBIT D
The Maritime Administration has recently approved
an application by the owner of a vessel built with con-
struction-differential subsidy under Title V, Merchant
Marine Act, 1936, as amended, to repay such subsidy in
order to remove the vessel’s statutory disability to engage
in coastwise service.
On September 12, 1977, the American Maritime Asso-
ciation and the Independent Tanker Owners Committee
filed a petition for issuance of a rule setting forth the
principles on which the aforesaid action was based and
prescribing their future applicability. The Maritime Ad-
ministration hereby grants the petition and, subject to
due consideration of comments that may be submitted,
is disposed to adopt an appropriate rule in the terms ap-
pearing below.
The considerations supporting the rule are two-fold:
First. Construction-differential subsidy is awarded un-
der Title V when the particular vessel is found to be
needed to meet the requirements of, and to aid in promot-
ing, the-foreign- commerce of the United States. The
applicant will have warranted that he is, and will have
been found, qualified in respect of ability, experience
and financial resources necessary for the operation; and
where Title XI is involved, as is usual, the operation will
have been warranted and determined to be economically
sound. These judgments contemplate cyclical market
downturns, which even when severe would not ordinarily
be deemed to create conditions negating such findings and
determinations. Subsidized operations would therefore be
expected to maintain their status in foreign trade pend-
ing cyclical improvements, especially (but not exclusively)
where the vessel is under term charter to substantial
charterers. To allow repayment of subsidy in other
than limited and exceptional circumstances would dero-
80
gate from the purposes and policy of the act respecting
our services in foreign trade, since once deprived of the
subsidy, the vessel would obviously not be able to compete
against foreign operators again.
Second. It would further derogate from the purposes
and policy of the act to allow significant transfers from
subsidized foreign trade into the domestic trade outside
the limited and temporary ambit of Section 506. Such
transfers would not merely reduce available shipping for
foreign trade, but would have the effect of displacing ex-
isting tonnage or eliminating to that extent opportunities
for new construction in domestic trade. Our recent rule
applying Section 506 to the Alaska trade illustrates our
general approach in this regard: Subsidized tonnage may
be used for not to exceed six months upon a finding of
real need in the trade, and will in any case give way to
unsubsidized tonnage with coastwise privileges as it is
delivered from shipyards or otherwise becomes available.
Widespread permanent transfer would negate this policy.
These dual elements of the coherent national policy for
procuring an adequate fleet respectively for foreign and
domestic commerce require that as a general rule vessels
properly awarded construction-differential subsidy shall
be held to their contractual agreements to operate ex-
clusively in the foreign trade, and that transfers to do-
mestic trade shall be limited in accordance with Section
506.
From this general principle the Maritime Administra-
tion will in exceptional individual cases consider a de-
parture where certain combinations of circumstances are
found to exist, including at least the following:
1. No other opportunities for employment in foreign
trade can be generated for the vessel during a protracted
period that demonstrably exceeds normal cyclical excep-
tions;
SE ewe « sos’.
81
2. Specifically because of the vessel’s unemployment,
the holder of title (as distinguished from a lessee or
charterer), whose primary business must be the construc-
tion or operation of ships (as distinguished from financ-
ing such construction or operation), is threatened with
corporate bankruptcy, which cannot be ameliorated by
other financial concessions or means;
3. The government will sustain substantial financial
loss through such bankruptcy; and
4. Agreement to accept repayment of subsidy will, on
balance, result in greater benefit than detriment to the
purposes and policy of the act. In measuring this balance,
opportunity on ten-days’ notice to be heard in writing will
be granted to affected interests in the domestic trade and
in the shipbuilding industry.
[As at present advised, the Maritime Administration
has reason to believe that only one additional vessel, the
BAY RIDGE, would present a case for qualifying under
this rule. However, market conditions may substantially
alter before delivery of this vessel. ]
82
Civil Action No. 77-1647
[Caption Omitted in Printing]
AFFIDAVIT OF JOHN J. ERVIN
John J. Ervin hereby certifies that:
1. He is a United States citizen, age 49, residing at
5838 North 4th Street, Philadelphia, Pennsylvania 19120;
2. He is President of Trinidad Corporation, a Dela-
ware corporation (“Trinidad”) ; and
3. The following statement concerning Trinidad is true
and correct to the best of his knowledge, information and
belief :
Trinidad, a wholly-owned subsidiary of Barber Oil Cor-
poration, was formed in 1944 to operate and manage a
fleet of U.S. flag tankers under long and short term
charters to major oil companies. Trinidad presently con-
ducts its business from offices in the Public Ledger Build-
ing in Philadelphia, Pa. and has approximately 37 employ-
ees. Trinidad’s assets are in excess of $23,000,000 and the
Shareholder’s Equity is approximately $11,600,000.
Trinidad is the owner of five 27,000 DWT U.S. Flag
tankers, four of which are operating under transportation
contracts with a major oil company. The fifth tanker is
under charter to the Military Sealift Command of the
U.S. Department of the Navy.
In 1976 Trinidad purchased all the capital stock of
Mathiasen’s Tanker Industries, Inc. (‘‘Mathiasen’s’’).
Mathiasen’s has on long term bareboat charter threé
80,000 DWT U.S. Flag tankers. Two of these vessels are
under time charter for terms equal to their correspond-
83
ing bareboat charter. The third vessel has been sub-
bareboat chartered to an affiliate of Trinidad, Glacier
Bay Transportation Corporation (“GBC”) for a term
coinciding with the term of the bareboat charter to Ma-
thiasen’s. GBC in turn has sub-bareboat chartered the
third vessel to ABC for a term of three years.
None of the eight U.S. Flag tankers mentioned above
is the beneficiary of a construction-differential subsidy.
Each must compete on its own in the domestic or foreign
trade upon expiration of the charter or transportation
contract to which it is presently subject.
In April, 1976, Barber announced its intention to be-
come a major carrier of Alaskan crude oil through its
subsidiary, Trinidad. The plan was to be implemented
through the acquisition by Trinidad of Mathiasen’s as
above indicated and the acquisition of an interest in
Alaska Bulk Carriers, Inc. (“ABC”), which holds a con-
tract of affreightment with The Standard Oil Company
(Ohio), (“Sohio”), contemplating the annual transport
by ABC of up to 51 million barrels of crude oil from
Alaska to California and the two acquisitions placed Trin-
idad in a position to participate as a major factor in this
transport. The acquisitions represent a combined Barber
and Trinidad commitment in excess of $9,000,000.
Subsequent to the two acquisitions, Trinidad entered
into a multi-million dollar bank loan agreement to finance
its cash requirements during the term of the contract of
affreightment with Sohio.
Trinidad’s acquisition of Mathiasen’s and Trinidad’s
acquisition of an interest in ABC and the internal and
external financial commitments of Trinidad relevant
thereto were all undertaken in reliance on projections
which assumed that U.S. Flag tankers which are the bene-
ficiaries of construction-differential subsidies would con-
tinue to be barred by statute from the Alaska crude oil
trade in particular and the U.S. coastal trade in general.
84
It is fair to say that if Barber and Trinidad had known
in early 1976 that any tonnage then barred from partici-
pation in these trades would subsequently, by administra-
tive fiat, be permitted to operate therein, the acquisitions
may very well never have been consummated or, if con-
summated, would have been on terms far more favorable
to Trinidad than those in effect at the present time.
More specifically, during the period from June, 1979
through August, 1980, Trinidad may have to find em-
ployment for a total of 215,000 DWT of U.S. Flag tank-
ers in the open market. As a practical matter, the
U.S. coastal trade is the only viable market. It is a mat-
ter of public record that the U.S. Flag tankers quali-
fied to operate in the U.S. coastal trade have an aggre-
gate dead weight tonnage of approximately 9,500,00.
Similarly, U.S. Flag tankers in existence or under con-
struction which enjoy or will enjoy construction-
differential subsidy and are, therefore, precluded from
that trade, have an aggregate dead weight tonnage of
approximately 5,000,000. Obviously, any projections which
Trinidad has made in the past or may make in the fu-
ture with respect to the deadweight tonnage available in
U.S. coastal trade during the period from June, 1979
through August, 1980 will be greatly distorted if the
T. T. STUYVESANT (22,5000 DWT) or the TT. BAY
RIDGE (225,000 DWT) or other vessels within the
5,000,000 tonnage category, suddenly become available to
compete, long term, in the coastal trade which now has a
maximum available dead weight tonnage of 9,500,000.
The U.S. coastal charter market has already softened to
reflect this possibility but presumably would regain sta-
bility if the removal of the statutory disability to enageg
in coastwise service was the subject of a judicial restrain-
ing order.
The impact on Trinidad of the removal of the statu-
tory disability as to a significant amount of tonnage
ards,
me SPST ee
85
(and 225,000 dead weight tons is significant) ranges from
materially adverse at best to disastrous at worst. More-
over, if the Maritime Administration action which is the
subject of the litigation captioned as above is not re-
strained, the adverse financial impact on the assets and
operations of Trinidad and other companies similarly
situated will be irreparable in that the permanent long
term financing for the construction costs of the T. T.
STUYVESANT will have been accomplished by the pub-
lic sale of millions of dollars of government-insured bonds,
the proceeds of which will have been distributed to con-
struction lenders, contractors and other parties without
possibility of recall or recision.
/s/ John J. Ervin
JOHN J. ERVIN
Sworn to and subscribed before me this 21st day of
September, 1977.
/s/ Dorothy D. Barbuscia
DoroTHY D. BARBUSCIA
Notary Public, Philadelphia, Philadelphia Co.
My Commission Expires March 13, 1980.
wile
86
Civil Action No. 77-1647
[Caption Omitted in Printing]
AFFIDAVIT OF LARRY F. LIDDLE
I am Larry F. Liddle, Secretary of Alaska Bulk Car-
riers, Inc. (ABC).
1. Alaska Bulk Carriers, Inc. is a Pennsylvania cor-
poration. Its address is Foot of Morton Avenue, Chester,
pennsylvania 19013.
2. Alaska Bulk Carriers charters and employs three
unsubsidized U.S. tankers. Each of these vessels was
built without construction subsidy. The three ships are
the PRINCE WILLIAM SOUND, of 124,000 deadweight
tons (DWT), the GLACIER BAY (formerly JOSEPH
D. POTTS), of 80,000 DWT, and the AQUILA (formerly
NOTRE DAME VICTORY), of 80,000 DWT.
3. All three ships were designed and built by Sun
Shipbuilding and Dry Dock Company. The ships, by de-
sign, are suited to the carriage of oil from Alaska to the
U.S. west coast or to transshipment facilities on the west
coast of Panama. The decision to build these ships was
made by management, relying on their use in the Alaska
trade to carry oil. They are too large for transit through
the Panama Canal and for use in any other domestic
trade. Because of the statutory restrictions imposed by
law on ships built with construction differential subsidy,
the ships were built without benefit of subsidy.
4. All three ships are used by ABC to fulfill a contract
with Standard Oil of Ohio (SOHIO) to carry oil from
the Trans-Alaska Pipeline. The contract has a term of
87
three years, ending in 1980. After 1980, the PRINCE
WILLIAM and the GLACIER BAY will not be employed
unless a new domestic charter is made for these vessels.
5. Decisions are made with respect to the building and
chartering of U.S. ships based on the restrictions in the
Merchant Marine Acts which (1) permit only U.S.-built
and registered ships to operate in the domestic trades in-
cluding the trades from Alaska to the mainland, and (2)
prohibit ships built with construction differential subsidy
(CDS) from operating in the domestic trades. Until
now, the decision to build or to undertake financial com-
mitments with respect to unsubsidized vessels were based
on assessments of the capacity of the already existing
unsubsidized fleet, and the prospects for these vessels’ em-
ployment in the domestic trades. An undertaking to build
an unsubsidized ship means that the owner must assume
the financial risk of the full cost of a ship, whereas an
undertaking to build a subsidized ship involves much less
financial risk.
6. In the late 1960’s and again in the 1970’s, the
prospect of increased need for large tankers to carry
Alaska oil to the U.S. mainland encouraged the invest-
ment of private capital resources or credit lines for tanker
construction without CDS subsidy. Each owner evaluated
the anticipated volume of Alaskan oil, the likely desti-
nations, and the other ships in the market which likely
would be competing to transport the oil. Ships which
were built in U.S. shipyards with” subsidy ‘were “birt ”
knowing that they could only be used in foreign trades.
on. aj . Lhe. established ground rules have been that vessels
built with CDS are not able to operate in domestic trades
and the domestic trades were reserved for U.S.-built
ships. The economic decisions of the industry have been
based on these rules.
8. Unsubsidized vessels cannot compete on an even
footing with subsidized vessels. The costs of materials
88
and labor involved in ship construction have been steadily
accelerating for many years. The table below gives Bu-
reau of Labor Statistics indexes which measure inflation
in the major components of ship prices.
INCREASED SHIPBUILDING COSTS
Costs of Labor Material Cost Index
/Dollars/Hour (base 1967)
1973 July $4.58 100% 1973 July 132.8 100%
1974 July 4.94 1974 July 180.3
1975 July 5.50 120% 1975 July 183.4 138%
1976 July 6.00 1976 July 198.7 “™
1977 July 6.40 140% 1977 July 210.3 158%
Bur. of Labor Stat.—Class 3731 Bur. of Labor Stat—Code 10
Shipbuilding and Ship Rep. Mater. Esc. Factor (Metal and
(Labor) Hourly Index Metal Prod.)
In only four years, labor costs rose 40% and material
costs rose 58%. Thus, a subsidized ship built four years
ago is available at a base cost 50% below that of an un-
subsidized ship now being delivered—even if unamortized
subsidy is repaid. Of course, if the subsidy is not repaid
but the owner of the subsidized vessel merely promises
to repay the subsidy over twenty years the base cost is
even lower. These lower base costs mean that if a sub-
sidized vessel could he “cleansed” (i.e., permitted to repay
CDS and operate without restriction in domestic trades)
it could be offered at a significantly lower charter rate
than an unsubsidized vessel and recover the same rate of
return.
9. IF CDS vessels were available for use in the do-
mestic trades, the maritime industry will not be willing
to make financial commitments for new vessels without
construction subsidy. CDS permits the maximum flexi-
bility for the investment. With CDS, a ship could operate
in foreign commerce. In bad times, it could be “cleansed”
Mt Re EES Bt OBE eb ed “> OE) ent Je?
Cc Nite i att tS ILA AA CRA D wD ne
ween cr tie
89
and enter the domestic market. The result would be heavy
and unnecessary pressure on the subsidy program.
10. Therefore if CDS-built vessels were available for
use in the domestic trades, new ships would not be built
without construction subsidy. This in turn, results in
increased future pressures for “cleansings.” If new un-
subsidized vessels are not built, there will be a future
shortage of ships for use in the domestic trades which
will lead to further “cleansings.”
11. The action of the Maritime Administration per-
mitting the repayment of construction differential sub-
sidy and lifting restrictions on operation in domestic
trades with respect to the SS STUYVESANT has created
uncertainty within the industry. No one knows whether,
and under what circumstances other CDS built vessels
may be cleansed and made available for use in the do-
mestic trade. The existence of this uncertainty seriously
hurts the industry. It is of the utmost importance to the
industry that there be a settled rule governing the com-
petitive position of subsidized and unsubsidized vessels.
Shipsowners are accustomed to dealing with various types
of uncertainty and risk. Risks and uncertainties created
by ad hoe government decisions, without any known guide-
lines, create disruption in the marketplace. The uncer-
tainty engendered by MarAd’s action “cleansing” the SS
STUYVESANT is highly disruptive both to the shipbuild-
ing and domestic charter markets.
12. The serious disruption and damage that is caused
by the “cleansing” of the SS STUYVESANT (and the
projected cleansing of its sister ship, the SS BAY RIDGE)
from the restrictions governing operation of a vessel built
with construction differential subsidy can more easily be
understood when one considers that recently 29 unsub-
sidized U.S. tankers suitable for the Alaska trade (ie.,
domestic unsubsidized tankers too large to transit the
Panama Canal) have been built or ordered. The cleansing
i Sl lta tn eta i ee
es a EN eR
90
of the SS STUYVESANT and the SS BAY RIDGE will
increase the supply of large tankers “authorized” for
domestic trade but unable to transit the Panama Canal
by thirteen percent.
13. The serious impact of this uncertainty upon the
Maritime industry is reflected in the objections registered
by the Shipbuilders Council of America to the action
taken by MarAd with respect to the SS STUYVESANT.
These are set forth in a letter dated September 20, 1977,
which I have attached. This letter in markedly strong
tones expresses “unanimous concern” about the “impli-
cations of this decision as affecting (1) a precedent
whereby others may be tempted to seek the same devia-
tion from long-standing policy, (2) the statutory obli-
gation of the Congress to continue to provide CDS funds,
(3) the prospects of new building opportunities for Jones
Act ships, (4) the current or prospective availability of
Jones Act vessels built specifically for domestic trade
operations, and (5) the inherent movement toward put-
ting the Federal Government in the questionable role of
banker in refinancing, over a long term, at probably less
than commercial rates of interest, a straitened project
which had been initially supported by public funds and
guaranteed by the full faith and credit of the public
treasury.”
14, Because the MarAd action with respect to the
SS STUYVESANT caused an uproar in the industry, a
meeting of the Independent Tanker Owners Committee
was called for Thursday, September 8, specifically to dis-
cuss this action. At that meeting, it was learned that the
Maritime Administrator had assured some of the Com-
mittee members that MarAd would issue regulations de-
signed to bar future “cleansings” if the industry would
agree not to appeal the SS STUYVESANT decisions to
the Secretary of Commerce and especially to a court.
Counsel for the Independent Tanker Owners Committee
91
was invited to and did draft regulations for that purpose
and they were circulated to many industry members or
representatives. I believe that when Shell Oil Company
asked for a discretionary review by the Secretary of Com-
merce, the proposal was dropped by MarAd, although talk
of regulations designed to “shut the door” behind the
STUYVESANT and possibly the BAY RIDGE (I under-
stand MarAd would not commit itself to foreclose the
possibility of “cleansing” the BAY RIDGE) still con-
tinues.
15. MarAd’s actions permitting the SS STUYVESANT
to repay CDS and to permanently operate without restric-
tion in the domestic trade (and its probable intention to
take similar actions for the SS BAY RIDGE) cause
serious, immediate and irreparable harm to ABC. In the
first place, ABC is damaged in terms of its ability to go
out into the charter market now and secure future char-
ters for its three vessels which have no employment past
1980. The uncertainty engendered by MarAd’s actions
has disrupted the charter market. Not only has great
tonnage been added by fiat, with the “cleansing” of the
SS STUYVESANT, but prospective charterers are taking
a “wait and see” attitude, waiting to see if the SS BAY
RIDGE and other CDS vessels are made available.
16. Long-term financing is still needed for the Prince
William. (ABC is committed to a charter for the Prince
William for at least 20 years.) We are presently in the
market seeking this financing, but our ability to secure
bank financing now is seriously weakened by the prospect
of competition of CDS-built vessels. Investors rely on the
future prospect of employment for the vessel, looking at
the demand for the type of vessel and the expected sup-
ply. But the uncertainties created by MarAd’s action and
the competition of the SS STUYVESANT and the SS
BAY RIDGE upset the equation upon which ABC relied
in undertaking its charter commitments and seriously im-
pair its position with investors.
92
17. If the SS STUYVESANT and SS BAY RIDGE
are permitted to repay CDS and permanently operate
without restriction in the domestic trade, these ships will
be direct, lifelong competitors of the three ABC ships
and other tankers built for the Alaska oil trade. The
only domestic trade for which the SS STUYVESANT and
SS BAY RIDGE are suitable is the carriage of oil from
Alaska to the U.S. west coast. Their size precludes them
from other domestic markets. (The other major domestic
market involves the movement of petroleum products
from the U.S. Gulf Coast to the U.S. east coast. The
terminals in this market cannot handle ships which are
larger than 35,000 DWT.)
18. This is unfair competition. In undertaking the re-
sponsibilities of ownership or primary financial responsi-
bility (such as that of a long-term bareboat charterer)
for a CDS-built ship, Seatrain/Polk made a conscious
election to limit trading opportunities to foreign com-
merce. The U.S. government paid up to half of the costs
of the ship in order to have the ship participate in foreign
commerce in the national interest. For ABC, committing
to charter a U.S. ship built without subsidy was a con-
scious election to operate in the domestic trade. Because
of the higher costs of building the ship, only rarely can it
participate in the foreign market. In forgoing the CDS,
a far greater risk is assumed.
19. Government-insured financing and CDS aid for the
SS STUYVESANT was committed as early as 1972.
From that time until the MarAd actions which are the
subject of the pending motion, the domestic tanker indus-
try made numerous serious financial decisions and com-
mitments based on market and capacity projections which
did not include Seatrain’s vessels (STUYVESANT and
BAY RIDGE) which were contractually excluded from
domestic trade.
—
walt Susetes ot
PRAMS EW ve 2 r ee nit,
awe one OP Been mite Net Sie Cet Ys
ELE a TAA yl! alae APNE CLI AEA
93
20. If the unsubsidized operator must see his invest-
ment through good times and bad, the subsidized operator
should have no more favorable treatment. Yet in the case
of the SS STUYVESANT, the unsubsidized U.S. Mer-
chant Marine and U.S. taxpayers must bear the burden
of saving a subsidized shipbuilder from the economic con-
sequences of an unsuccessful and unwise decision.
21. The “cleansings” permit owners and operators of
“CDS” ships to cash in on an increase in the value of
subsidized ships, resulting from inflation, at the expense
of unsubsidized shipowners and operators who took
greater risks in forgoing federal aid. But even if the
costs of a “cleansed’’ subsidized ship were the same as
that of its unsubsidized competitor, it would still be
unfair to change the ground rules and to subject unsub-
sidized ships to the competition of subsidized ships when
the unsubsidized fleet took the economic risks.
22. Emergency injunctive relief is essential to remove
the uncertainty introduced by MarAd’s action and to
prevent the unsubsidized fleet from the permanent unfair
and illegal competition of the SS STUYVESANT, and
probably the SS BAY RIDGE. The issuance of an emer-
gency injunction will be a signal to the industry that
MarAd will not be permitted to make up the rules as it
goes along, with no laws or guidelines applicable to all.
This will counter the disruptive effect of MarAd’s action
on the charter and shipbuilding markets and on the eco-
nomic position of the owners and operators of unsub-
sidized ships.
23. Unless emergency relief occurs, the domestic tanker
industry and the U.S. taxpayer -will almost certainly be
faced with a fait accompli whose effects could not be
undone by any relief resulting from an ultimate finding
that MarAd/MSB has acted unlawfully. After the deliv-
ery of the SS STUYVESANT and the MarAd closing—
both are slated for September 23, 1977—the financial
94
affairs of the many participants in the proposed STUY-
VESANT transactions will be so intertwined that sort-
ing out the pieces and restoring the parties to their pre-
“closing” positions will be almost impossible. Indeed (as
described in the following paragraph), it would seem that
MarAd could never be placed in a pre-closing position hav-
ing once guaranteed a huge amount of new Title XI debt
on the vessel. Its potential liabilities for Title XI guar-
antees will have more than doubled.
24. At the present time (prior to implementation of
the MarAd actions protested herein) MarAd has com-
mitted the United States to $28,845,000 in presently-
placed Title XI debit in respect of the STUYVESANT.
That is, if Seatrain/Polk were to default on its presently
outstanding Title XI debt, MarAd would be liable for
$28,845,000 in obligations which it has insured against
default. If the contemplated Title XI closing (among
MarAd, Seatrain/Polk, General Electric Credit Corpora-
tion, Chase Manhattan Bank afd others) take place,
MarAd will have guaranteed an additional $31,355,000 in
Title XI obligations. If the pending motion for emer-
gency relief is not granted, and assuming that plaintiffs
ultimately prevail on the merits, the following conse-
quences will ensue. The Sohio domestic charter will be
declared unlawful in violation of Section 506 restrictions.
That declaration of illegality will almost certainly cause
Queensway (the bareboat charterer of the vessel) to de-
fault in its charter hire obligations, thus setting the stage
for further litigation seeking an (administrative of judi-
cial) declaration of the rights as between the bondhold-
ers, MarAd, Queensway, and General Electric Credit Cor-
poration (GECC), the equity participant in the complex
leveraged-lease, Title XI transaction (scheduled for Sep-
tember 23, 1977). The exact outcome of such a complex
dispute is impossible to predict, at least not without op-
portunity to examine all the documents which the parties
to the transaction intend to execute. The Maritime Ad-
95
ministration, having pledged the full faith and credit
of the United States with respect to all the Title XI obli-
gations (including $31,355,000 in new obligations), is the
party which could very well bear the financial brunt of its
own illegal actions.
25. Thus, if the proposed “cleansing” and “closing” are
allowed to proceed, an additional $31,355,000 of govern-
ment funds will be placed at risk in the “second mort-
gage” Title XI guarantee tier; the financial lessor
(GECC) will have purchased the vessel and the purchas-
ers of the Title XI “second mortgage” obligations will
have committed their funds. Later developments in this
ease could force an unwinding of these financial arrange-
ments with serious consequences to the financial parties,
as well as exposing the government to large monetary
losses on its guarantees.
/8/
Signed and sworn before me this 22nd day of Septem-
ber, 1977.
/8/
96
SHIPBUILDERS COUNCIL OF AMERICA
800 New Hampshire Ave., N.W.
Washington, D.C. 20037
September 20, 1977
Dear Mr. Secretary:
The recent decision of the Maritime Subsidy
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