Shell Oil Co. v. Kreps, Civ. A. No. 77-1645

• Decision Date: 06 March 1978
• Docket Number: Civ. A. No. 77-1645,77-1647.
• Citation: 445 F. Supp. 1128
• Parties: SHELL OIL COMPANY, Plaintiff, v. Juanita M. KREPS et al., Defendants. ALASKA BULK CARRIERS, INC., and Trinidad Corporation, Plaintiffs, v. Juanita M. KREPS et al., Defendants.
• Court: U.S. District Court — District of Columbia

445 F. Supp. 1128

SHELL OIL COMPANY, Plaintiff, v. Juanita M. KREPS et al., Defendants.

ALASKA BULK CARRIERS, INC., and Trinidad Corporation, Plaintiffs, v. Juanita M. KREPS et al., Defendants.

Civ. A. Nos. 77-1645, 77-1647.

United States District Court, District of Columbia.

November 22, 1977.

As Corrected March 6, 1978.

COPYRIGHT MATERIAL OMITTED

Stephen N. Shulman, Joseph A. Artabane, Mark C. Ellenberg, Washington, D.C., for plaintiff, Shell Oil Co.

Amy Loeserman Klein, William Karas, Olga Boikess, Jean H. Lewis, Dale C. Andrews, David P. Street, Washington, D.C., for plaintiffs Alaska Bulk Carriers, Inc., and Trinidad Corp.

R. Joseph Sher, Washington, D.C., for defendants.

John W. Vardaman, William E. McDaniels, Neal Michael Mayer, Jonathan Blank, Washington, D.C., for defendant-intervenors Polk Tanker Corp. and Seatrain Shipbuilding Corp.

MEMORANDUM OPINION

CHARLES R. RICHEY, District Judge.

These consolidated cases are presently before the Court on cross-motions for summary judgment.¹ Plaintiffs herein, Shell Oil Company (Shell), Alaska Bulk Carriers, Inc. (Alaska Bulk), and Trinidad Corporation (Trinidad), seek judicial review of certain actions taken by the defendants, Juanita M. Kreps, Secretary of Commerce, the Maritime Administration (MarAd), Robert J. Blackwell, Assistant Secretary of Commerce for Maritime Affairs, and the three members of the Maritime Subsidy Board (MSB). The actions challenged relate to the Secretary's decision to remove domestic trading restrictions from the ship known as the S. S. STUYVESANT in exchange for the repayment of a construction-differential subsidy (CDS) of some $27.2 million by the Polk Tanker Corporation (Polk), the owner of the STUYVESANT and a wholly-owned subsidiary of Seatrain Lines, Inc. Polk and Seatrain Shipbuilding Corporation (Seatrain Shipbuilding), the builder of the STUYVESANT and another wholly-owned subsidiary of Seatrain Lines, Inc., were permitted to intervene herein as party-defendants.

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

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

I. STATUTORY FRAMEWORK

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

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

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

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

II. FACTUAL BACKGROUND.

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

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

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

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

On August 25, 1977, Polk had filed a second application with MarAd/MSB. This application requested the Secretary and her designees to amend the CDS contract with Polk to permit Polk to repay in full the CDS already paid for the STUYVESANT in exchange for the removal of the section 506 domestic trading restrictions to which Polk had agreed. As stated in Polk's August 25 application itself, the purpose of this...