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06/25/82 Alaska Bulk Carriers, Inc. v. Andrew L. Lewis

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT


June 25, 1982

ALASKA BULK CARRIERS, INC., TRINIDAD CORPORATION, APPELLANTS

v.

ANDREW L. LEWIS, JR., SECRETARY OF TRANSPORTATION, U.S. DEPARTMENT OF TRANSPORTATION, ET AL.; SHELL OIL COMPANY (A

DELAWARE CORPORATION), APPELLANT

v.

ANDREW L. LEWIS, JR., SECRETARY OF TRANSPORTATION, U.S. DEPARTMENT OF

TRANSPORTATION, ET AL.; ALASKA BULK CARRIERS, INC., TRINIDAD CORPORATION

v.

ANDREW L. LEWIS, JR., SECRETARY OF TRANSPORTATION, U.S. DEPARTMENT OF TRANSPORTATION, ET AL.

COMPANY (A DELAWARE CORPORATION

v.

ANDREW L. LEWIS, JR., SECRETARY OF TRANSPORTATION, U.S. DEPARTMENT OF

Before the closing of the complex transaction that would have implemented the permanent-release/full-repayment agreement, appellants filed an action in the district court seeking declaratory and injunctive relief prohibiting the Secretary from granting a permanent release from the section 506 foreign-trade-only requirement.10 Appellants argued that the Secretary lacked authority to grant such a release, and that, even if the Secretary had the authority, the exercise of the authority in this case was an abuse of discretion.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

POLK TANKER CORPORATION, ET AL., APPELLANTS; SHELL OIL

TRANSPORTATION, ET AL. SEATRAIN SHIPBUILDING CORP. and POLK

TANKER CORP., APPELLANTS

Nos. 77-2080, 78-1211, 78-1212, 78-1281 1982.CDC.166

On Remand from the Supreme Court.

APPELLATE PANEL:

Wilkey, Circuit Judge, Bazelon and McGowan, Senior Circuit Judges.

PER CURIAM DECISION

This case, which is before us on remand from the Supreme Court, *fn1 involves the construction-differential subsidy program authorized by Title V of the Merchant Marine Act. *fn2 The Supreme Court held that the Act authorizes the Secretary of Commerce *fn3 to release a ship from the operating restrictions of the CDS program in exchange for the full repayment of the subsidy received. The issue before us on remand is whether the Secretary has authority under the Act to accept full repayment of a CDS in the form of a promissory note. We conclude that the Secretary has such authority, provided that the terms of the promissory note place the shipowner on an equal financial footing with a shipowner who never participated in the CDS program. I. BACKGROUND *fn4

Because the costs of constructing ships in the United States and operating them with American crews are higher than comparable costs in foreign ports, Congress has enacted a number of laws designed to protect the United States shipping and shipbuilding industries. The Merchant Marine Act of 1936, *fn5 intended to promote American participation in foreign trade, is a central pillar of that statutory system. In order to make up for the cost disadvantages of American shipbuilding, Title V of that Act authorizes the Secretary of Commerce to subsidize up to 50% of the cost of constructing a ship in this country. In return for receiving this "construction-differential subsidy" , section 5066 requires the owner of the ship to agree to operate it exclusively in foreign trade except under certain limited circumstances.7

Beginning in the early 1970s, Seatrain Shipbuilding Corporation began building the Stuyvesant, a 225,000 deadweight ton oil tanker. At that time, Polk Tanker Corporation, Seatrain's affiliate and purchaser of the Stuyvesant, agreed to operate the ship exclusively in foreign trade, so that Seatrain received a CDS of $27.2 million.8 By the time construction of the Stuyvesant was completed, however, Polk was unable to find employment for the ship in foreign trade. The employment opportunity that Polk eventually found for the Stuyvesant was in the transportation of Alaskan oil to the eastern United States and the Carribbean. But because that trade is domestic rather than foreign, the Stuyvesant was barred from employment there by section 506 of the Act. To overcome that obstacle, Polk agreed to repay the CDS with a twenty-year promissory note if the Secretary of Commerce would release the Stuyvesant from the section 506 restrictions. The Secretary acceded to the permanent-release/full-repayment agreement for four reasons: First, there were no employment opportunities open to the Stuyvesant in foreign trade; second, employment in the Alaskan trade would strengthen the collateral that secured government-guaranteed loans to Seatrain;9 third, employment in the Alaskan trade might prevent default on those obligations; and fourth, if the Stuyvesant were not permitted to operate in domestic trade, the Seatrain Shipbuilding Corporation might not be able to continue operation.

On November 22, 1977, the district court ruled that the Secretary had the authority to release the Stuyvesant from the section 506 restrictions in exchange for full repayment of the CDS, and that the Secretary had the authority to accept repayment in the form of a promissory note.11 The court also held, however, that the Secretary had abused her discretion by releasing the Stuyvesant from the trade restrictions without analyzing the effect that release would have on the Alaskan trade. The court, therefore, remanded the case to the Secretary for further proceedings but certified its decision as final under Rule 54(b) of the Federal Rules of Civil Procedure.

Alaska Bulk Carriers, Inc., Trinidad Corporation, and Shell Oil Co. appealed the district court's decision to this court and we reversed, holding that the Merchant Marine Act did not authorize the Secretary to enter into a permanent-release/full-repayment agreement.12 The Supreme Court, however, reversed this court and remanded the case to us for review of that part of the district court's decision holding that the Secretary was authorized to accept a promissory note as repayment of the subsidy.13 II. ANALYSIS

As stated above, the Supreme Court has held that the Secretary of Commerce had the authority to release the Stuyvesant from the foreign-trade-only restriction in exchange for full repayment of the CDS. The Court based its decision on the "Secretary's broad contracting powers and discretion to administer the Act."14 Finding that nothing in the Act prohibits the Secretary from entering into a permanent-release/full-repayment agreement, the Court stated that such an agreement "may quite directly further the general goals of the Act by protecting the Government's position as guarantor of substantial financial obligations and improving the chances that a domestic shipyard will survive."15 The Court contrasted a permanent-release agreement with the type of temporary releases governed by section 506,16 noting that the former unlike the latter can neither create long-term instability in the domestic shipping market nor confer a windfall on a previously subsidized ship. The Court stated that "at least where repayment of the CDS includes some amount reflecting capital costs which would have been incurred had no subsidy been available, such a transaction merely permits a once subsidized vessel to enter the domestic trade on a footing equal to that of vessels already in that trade."17

By a parity of reasoning, the Secretary must have authority to accept repayment of a CDS in the form of a promissory note. The broad contracting powers of the Act easily encompass the use of a promissory note.18 Furthermore, no provision of the Act explicitly prohibits the use of such an instrument. And finally, there is nothing inherent in repayment through a promissory note that conflicts with the purposes of the Act: Such an irrevocable obligation does not create instability in the domestic shipping market; nor does it confer a windfall on the owner of a previously subsidized ship, provided that the principal of the note covers the full economic benefit of the CDS and the terms of the note are equivalent to the financing terms available to shipbuilders in general.

Appellant Shell Oil Co. argues that the use of a promissory note violates the Merchant Marine Act because it could convert a permanent-release/full-repayment agreement into a temporary-release/partial-repayment agreement that is prohibited by section 506. Shell argues that, at any time in the future, with no regard for the six-month temporary-waiver limit of section 506,19 the Secretary could forgive or postpone the obligation to make payments on the note in exchange for the Stuyvesant's re-entry into foreign trade. Moreover, through a sequence of these agreements, Shell argues, a ship could move between foreign and domestic trade "at will"20 and thereby create the "long-term instability" that the Act was intended to prevent.21 We disagree. Such revocability is not inherent in the use of a promissory note to repay a CDS. There is no indication in this case that the Secretary anticipated anything less than full and timely payment on the note. Nor is it likely that the Secretary would be authorized under the Act to accept less than full repayment.22 As we interpreted the Secretary's agreement with Polk, the use of a promissory note as the instrument of repayment renders the change in the Stuyvesant's status no less permanent than if the CDS were repaid in cash.

Shell also makes two additional points concerning the promissory note specifically at issue here. First, Shell claims that the interest rate on the note is lower than the rate that would have been available to a shipbuilder who never received a CDS.23 Second, Shell claims that the note does not cover the interest costs that Seatrain avoided as a result of receiving the CDS. If either of these claims is valid, the terms of the note should be amended to place the Stuyvesant on the same financial footing as similarly situated ships that never received a CDS. A central basis for the Supreme Court's conclusion that the Secretary was authorized to enter into a permanent-release/full-repayment agreement was that such an agreement inherently "confers no windfall."24 If an agreement provides for repayment through a promissory note, it is obvious that the terms of the note must be equivalent to the terms generally available to shipbuilders in order to prevent the conferral of a windfall. Specifically, the interest rate on such a note must be set at the same rate a shipbuilder would have to pay if he or she were arranging initial financing for a ship to be employed in domestic trade.25 Similarly, as the Supreme Court stated explicitly, the repayment of a CDS must also cover the capital costs that Seatrain would have borne if it had never received a CDS.26 This is true regardless of whether the CDS is repaid with a promissory note or with cash.

Because the district court made no findings concerning the terms of the promissory note at issue here, we are unable to determine whether the details of the note conform with the mandate of the Act as interpreted by the Supreme Court and by this court. Therefore, we remand the case to the district court for further proceedings and for entry of a judgment consistent with this opinion.

So ordered.


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