[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Notices]
[Pages 4058-4068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1357]


-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

Maritime Administration

[Docket No. MARAD-2000-8666]


ALASKA ROSE, BERING ROSE, and SEA WOLF--Applicability of 
Preferred Mortgage, Ownership and Control Requirements to Obtain a 
Fishery Endorsement

AGENCY: Maritime Administration, Department of Transportation.

ACTION: Invitation for public comments on a petition requesting MARAD 
to issue a determination that the ownership and control requirements 
and the preferred mortgage requirements of the American Fisheries Act 
of 1998 and 46 CFR Part 356 are in conflict with an international 
investment agreement.

-----------------------------------------------------------------------

SUMMARY: The Maritime Administration (MARAD, we, our, or us) is 
soliciting public comments on a petition from the owners and mortgagees 
of the vessels ALASKA ROSE--Official Number 610984, BERING SEA--
Official Number 609823, and SEA WOLF--Official Number 609823 
(hereinafter the ``Vessels''). The petition requests that MARAD issue a 
decision that the American Fisheries Act of 1998 (``AFA''), Division C, 
Title II, Subtitle I, Pub. L. 105-277, and our regulations at 46 CFR 
Part 356 (65 Fed. Reg. 44860 (July 19, 2000)) are in conflict with the 
U.S.-Japan Treaty and Protocol Regarding Friendship, Commerce and 
Navigation, 206 UNTS 143, TIAS 2863, 4 UST 2063 (1953) (``U.S.-Japan 
FCN'' or ``Treaty''). The petition is submitted pursuant to 46 CFR 
356.53 and 213(g) of AFA, which provide that the requirements of the 
AFA and the implementing regulations will not apply to the owners or 
mortgagees of a U.S.-flag vessel documented with a fishery endorsement 
to the extent that the provisions of the AFA conflict with an existing 
international agreement relating to foreign investment to which the 
United States is a party. This notice sets forth the provisions of the 
international agreement that the Petitioner alleges are in conflict 
with the AFA and 46 CFR Part 356 and the arguments submitted by the 
Petitioner in support of its request. If MARAD determines that the AFA 
and MARAD's implementing regulations conflict with the U.S.-Japan FCN, 
the requirements of 46 CFR Part 356 and the AFA will not apply to the 
extent of the inconsistency. Accordingly, interested parties are 
invited to submit their views on this petition and whether there is a 
conflict between the U.S.-Japan FCN and the requirements of both the 
AFA and 46 CFR Part 356. In addition to receiving the views of 
interested parties, MARAD will consult with other Departments and 
Agencies within the Federal Government that have responsibility or 
expertise related to the interpretation of or application of 
international investment agreements.

DATES: You should submit your comments early enough to ensure that 
Docket Management receives them not later than February 16, 2001.

ADDRESSES: Comments should refer to the docket number that appears at 
the top of this document. Written comments may be submitted by mail to 
the Docket Clerk, U.S. DOT Dockets, Room PL-401, Department of 
Transportation, 400 7th St., S.W., Washington, D.C. 20590-0001. You may 
also send comments electronically via the Internet at http://dms.dot.gov/submit/. All comments will become part of this docket and 
will be available for inspection and copying at the above address 
between 10 a.m. and 5 p.m., E.T., Monday through Friday, except Federal 
Holidays. An electronic version of this document and all documents 
entered into this docket are available on the World Wide Web at http://dms.dot.gov.

FOR FURTHER INFORMATION CONTACT: John T. Marquez, Jr. of the Office of 
Chief Counsel at (202) 366-5320. You may send mail to John T. Marquez, 
Jr., Maritime Administration, Office of Chief Counsel, Room 7228, MAR-
222, 400 Seventh St., S.W., Washington, D.C., 20590-0001 or you may 
send e-mail to <a href="/cdn-cgi/l/email-protection#b0fadfd8de9efdd1c2c1c5d5caf0ddd1c2d1d49ed4dfc49ed7dfc6"><span class="__cf_email__" data-cfemail="c389acabaded8ea2b1b2b6a6b983aea2b1a2a7eda7acb7eda4acb5">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Background

    The AFA was enacted in 1998 to give U.S. interests a priority in 
the harvest of U.S.-fishery resources by increasing the requirements 
for U.S. Citizen ownership, control and financing of U.S.-flag vessels 
documented with a fishery endorsement. MARAD was charged with 
promulgating implementing regulations for fishing vessels of 100 feet 
or greater in registered length while the Coast Guard retains 
responsibility for vessels under 100 feet.
    Section 202 of the AFA, raises, with some exceptions, the U.S.-
Citizen ownership and control standards for U.S.-flag vessels that are 
documented with a fishery endorsement and operating in U.S.-waters. The 
ownership and control standard was increased from the controlling 
interest standard (greater than 50%) of 2(b) of Shipping Act, 1916 
(``1916 Act''), as amended, 46 App. U.S.C. 802(b), to the standard 
contained in 2(c) of the 1916 Act, 46 App. U.S.C. 802(c), which 
requires that 75 percent of the ownership and control in a vessel 
owning entity be vested in U.S. Citizens. In addition, section 204 of 
the AFA repeals the ownership grandfather ``savings provision'' in the 
Anti-Reflagging Act of 1987, Pub. L. 100-239, 7(b), 101 Stat 1778 
(1988), which permits foreign control of companies owning certain 
fishing vessels.
    Section 202 of the AFA also establishes new requirements to hold a 
preferred mortgage on a vessel with a fishery endorsement. State or 
federally chartered financial institutions must now comply with the 
controlling interest standard of 2(b) of the 1916 Act in order to hold 
a preferred mortgage on a vessel with a fishery endorsement. Entities 
other than state or federally chartered financial institutions must 
either meet the 75% ownership and control requirements of 2(c) of the 
1916 Act or utilize an approved U.S.-Citizen Trustee that meets the 75% 
ownership and control requirements to hold the

[[Page 4059]]

preferred mortgage for the benefit of the non-citizen lender.
    Section 213(g) of the AFA provides that if the new ownership and 
control provisions or the mortgagee provisions are determined to be 
inconsistent with an existing international agreement relating to 
foreign investment to which the United States is a party, such 
provisions of the AFA shall not apply to the owner or mortgagee on 
October 1, 2001, with respect to the particular vessel and to the 
extent of the inconsistency. MARAD's regulations at 46 CFR 356.53 set 
forth a process wherein owners or mortgagees may petition MARAD, with 
respect to a specific vessel, for a determination that the implementing 
regulations are in conflict with an international investment agreement. 
Petitions must be noticed in the Federal Register with a request for 
comments. The Chief Counsel of MARAD, in consultation with other 
Departments and Agencies within the Federal Government that have 
responsibility or expertise related to the interpretation of or 
application of international investment agreements, will review the 
petitions and, absent extenuating circumstances, render a decision 
within 120 days of the receipt of a fully completed petition.

The Petitioners

    Alaska Rose L.P., Bering Rose, L.P. and Kendrick Bay, L.P. (each a 
``Vessel Owner'' and collectively, the ``Vessel Owners''), are the 
owners, respectively, of the fishing vessels ALASKA ROSE, BERING ROSE 
and SEA WOLF (each a ``Vessel'' and collectively, the ``Vessels''). 
Wards Cove Packing Company (``Wards Cove''), Gravina Fisheries, Inc., 
Flag Point, L.P., Duke Point, L.P., Island Point Corporation, Maruha 
Corporation (``Maruha''), Western Alaska Fisheries, Inc. (``WAF'') and 
WAFBO, Inc., are owners of direct or indirect interests in the Vessel 
Owners and indirect interests in the Vessels. Alyeska Seafoods, Inc. 
(``Alyeska'') is the owner of direct and indirect interests in the 
Vessel Owners and indirect interests in the Vessels and is the 
mortgagee under preferred mortgages on the Vessels. The parties 
identified above, including the shareholders and the Japanese Bank 
Lenders identified below are hereinafter referred to as the 
``Petitioner'' or ``Petitioners.''

Petitioner's Entry Into and Participation In U.S. Fisheries

    The Petitioner provided the following background on its entry into 
and participation in the fisheries of the United States.
    ``In 1985, Wards Cove, Maruha and Marubeni Corporation 
(``Marubeni'') formed Alyeska to acquire, construct and operate a large 
seafood processing facility at Dutch Harbor, Alaska. Alyeska purchased 
an existing processing facility in 1985 and constructed a surimi 
processing plant and fish meal plant at the site in 1986 and 1987 to 
process pollock. Alyeska's total investment in its processing plant and 
equipment is approximately $70 million.
    ``The Alyeska processing facility is one of the largest fish 
processing facilities in the state of Alaska. Alyeska employs 
approximately 400 people at its Dutch Harbor processing facility and 
processes in excess of 125 million pounds of seafood annually. In order 
to secure a stable supply of raw material to this processing facility, 
Alyeska, Maruha and its subsidiaries, and Wards Cove, Alyeska's U.S. 
Citizen shareholder, have made investments in and provided financing 
for a number of fishing vessels, including the Vessels. By investing in 
the Vessel Owners, Alyeska, Maruha and Wards Cove also sought to 
realize the potential profits that could accrue to the Vessel Owners 
from sales to Alyeska. The Vessel Owners were organized and the Vessels 
were acquired by the Vessel Owners in 1996.
    ``Alyeska assisted in financing the acquisition of the Vessels by 
the Vessel Owners in return for the agreement of the Vessel Owners that 
fish harvested by the Vessels would be sold exclusively to Alyeska and 
in reliance on the assured revenue stream which sales to Alyeska would 
provide to the Vessel Owners. Such financing is a common and 
traditional means in the Alaska fishing industry by which fishing 
vessel owners secure financing for the acquisition, improvement or 
operation of their vessels and seafood processors secure supply 
commitments from fishing vessel owners. Each of the Vessels is 100 feet 
or greater in registered length. Each of the Vessels was designed and 
constructed or rebuilt for operation in the U.S. fisheries of the North 
Pacific Ocean and Bering Sea.
    ``As a result of the enactment of Section 208(a) of the American 
Fisheries Act, the fishing vessels eligible to catch and deliver 
pollock to Alyeska's Dutch Harbor facility are limited to vessels 
meeting specified criteria, including prior deliveries of certain 
quantities of pollock to Alaskan onshore processing plants. 
Accordingly, there is a fixed, limited number of vessels, including the 
Vessels, which are permitted by law to deliver to the Alyeska 
facility.''

Ownership and Mortgage Structure of the Vessels

    The ownership and mortgage structure is substantially the same for 
each of the Vessels and is summarized as follows:

A. Ownership Structure

    Alaska Rose, L.P., and Bering Rose, L.P., are Washington limited 
partnerships that were formed in 1996 for the purpose of acquiring and 
operating the vessels ALASKA ROSE and BERING ROSE, respectively. From 
the time of formation through the present date, Alaska Rose L.P. and 
Bering Rose, L.P. have been owned by Duke Point, L.P. (``Duke Point''), 
as sole general partner, and Alyeska Seafoods, Inc., as sole limited 
partner, in the following percentages: Duke Point--75%; Alyeska--25%.
    Duke Point is a Washington limited partnership. At all times since 
the acquisition of the Vessels by Alaska Rose, L.P. and Bering Rose 
L.P., Duke Point has been owned by Flag Point, L.P. (``Flag Point''), 
as sole general partner, and Alyeska, as sole limited partner, in the 
following percentages: Flag Point--75%; Alyeska--25%.
    Flag Point is a Washington limited partnership. Flag Point is owned 
by Gravina Fisheries, Inc., a Washington corporation, as sole general 
partner; and Island Point Corporation, a Washington corporation, and 
Alyeska, as limited partners, in the following percentages: Gravina 
Fisheries, Inc.--50%; Island Point Corp.--25%; Alyeska--25%.
    Gravina Fisheries, Inc. is a wholly owned subsidiary of Wards Cove, 
an Alaska corporation. Petitioners state that all of the capital stock 
of Wards Cove is owned by United States Citizens, as defined in 46 
C.F.R. Part 356. All of the capital stock of Island Point Corporation 
is owned by Alec W. Brindle, Winn F. Brindle and Harold A. Brindle, 
each an individual United States Citizen.
    Wards Cove is a 100% U.S. Citizen-owned fish processing company 
which has been engaged in processing salmon and other fish and 
shellfish species in Alaska since 1912. In 1928, Wards Cove was 
acquired by two brothers, A. W. Brindle and Harold A. Brindle, and 
continues to be owned by the Brindle family or entities owned and 
controlled by them. All of the officers and directors of Wards Cove, 
Gravina Fisheries, Inc., and Island Point Corporation are U.S. 
Citizens.
    Alyeska is an Alaska corporation, formed in 1985 to acquire, 
construct and operate a large seafood processing facility at Dutch 
Harbor, Alaska. All of the capital stock of Alyeska is owned by

[[Page 4060]]

Wards Cove, Maruha, WAF and Marubeni. Maruha and Marubeni are publicly 
traded Japanese corporations. WAF is a wholly-owned U.S. subsidiary of 
Maruha. Maruha, WAF and Marubeni collectively own more than 25% of the 
capital stock of Alyeska. Accordingly, Alyeska does not qualify as a 
U.S. Citizen under the standards of the AFA and MARAD's implementing 
rules and is therefore a ``Non-Citizen,'' as defined in 46 CFR 
356.3(0).
    The SEA WOLF is owned by Kendrick Bay, L.P. (``Kendrick Bay''), a 
Washington limited partnership formed in 1996 for the purpose of 
acquiring and operating the SEA WOLF. At the time of its formation 
through the present date, Kendrick Bay has been owned by Duke Point, as 
sole general partner, and WAFBO, Inc., as sole limited partner, in the 
following percentages: Duke Point--75%, WAFBO, Inc.--25%,
    The ownership structure of Duke Point is described above in 
connection with the discussion of the ownership of Alaska Rose, L.P. 
and Bering Rose, L.P. WAFBO, Inc. is a Washington corporation wholly 
owned by WAF. WAF is an Alaska corporation wholly owned by Maruha. 
Prior to the acquisition of the SEA WOLF by Kendrick Bay, the SEA WOLF 
was owned by Sea Wolf Limited Partnership, a Washington limited 
partnership in which WAF held a 25% limited partnership interest. Sea 
Wolf Limited Partnership distributed undivided interests in the SEA 
WOLF to its partners in proportion to their interests in the 
partnership prior to the acquisition of the Vessel by Kendrick Bay. 
WAFBO, Inc. is an entity which satisfies the requirements of 46 U.S.C. 
12102(a), commonly referred to as a ``Documentation Citizen,'' and was 
formed by WAF to hold WAF's undivided 25% interest in the SEA WOLF 
prior to transfer of the entire Vessel to Kendrick Bay. The former 
partners in Sea Wolf Limited Partnership with the exception of WAFBO, 
Inc. sold their undivided interests in the Vessel--totaling 75%--to 
Duke Point, which transferred this 75% interest in the SEA WOLF to 
Kendrick Bay as a capital contribution. WAFBO, Inc. transferred its 
undivided 25% interest in the SEA WOLF directly to Kendrick Bay as a 
capital contribution in return for a 25% limited partnership interest 
in Kendrick Bay.
    The ownership structure of the Vessels was reviewed and approved by 
the U.S. Coast Guard under the standards applicable to fishing vessels 
and coastwise qualified vessels in a letter ruling dated December 11, 
1996.

B. Mortgage Structure

    Permanent financing for the acquisition of the Vessels was provided 
by three Japanese banks, Mitsubishi Trust and Banking Corporation, The 
Industrial Bank of Japan, Limited and The Dai-Ichi Kangyo Bank, Limited 
(collectively, the ``Japanese Bank Lenders''), pursuant to a Term Loan 
Agreement dated March 27, 1997 (the ``Alyeska Loan Agreement''). 
Pursuant to the Alyeska Loan Agreement, the Japanese Bank Lenders made 
loans to Alyeska (collectively, the ``Alyeska Loan'') for use by 
Alyeska for loans and capital contributions to the Vessel Owners and 
related entities to finance the acquisition by the Vessel Owners of the 
fishing vessels BERING ROSE, ALASKA ROSE and SEA WOLF.
    Simultaneously with the Alyeska Loan transaction, Alyeska provided 
permanent financing to Alaska Rose, L.P. (the ``Alaska Rose Loan'') and 
Bering Rose, L.P. (the ``Bering Rose Loan'') for the purchase of the 
ALASKA ROSE and the BERING ROSE, respectively. In addition, permanent 
financing for the acquisition of the SEA WOLF was provided by the 
Japanese Bank Lenders through the Alyeska Loan transaction to Duke 
Point (the ``Duke Point Loan'') for Duke Point's purchase of an 
undivided 75% interest in the SEA WOLF. Alaska Rose, L.P., Bering Rose, 
L.P. and Duke Point executed Loan Agreements, Promissory Notes and 
Preferred Ship Mortgages in favor of Alyeska with respect to the loans. 
In consideration of the loans, Alaska Rose, L.P., Bering Rose, L.P., 
and Kendrick Bay also executed Nonrecourse Guaranties in favor of 
Mitsubishi Trust and Banking Corporation, as agent for the Japanese 
Bank Lenders (hereafter referred to as ``MTBC, as agent''), limited to 
the amount of the loans outstanding from time to time plus applicable 
interest, together with the following documents:
    (a) Preferred Ship Mortgages on the Vessels in favor of MTBC, as 
agent, securing the Nonrecourse Guaranties; and
    (b) Assignments of Insurance Proceeds in favor of MTBC, as agent, 
securing the Nonrecourse Guaranties.

C. Exclusive Marketing Agreement

    The Petitioners state that Alyeska financed the purchase of the 
Vessels in order to ensure a stable supply of fish to Alyeska's Dutch 
Harbor facility and in reliance on the assured revenue stream which 
sales to Alyeska would generate for the Vessel Owner. Accordingly, 
Section 5(A) of the loan agreement for each Vessel provides:

    So long as there remains any outstanding balance on the Loan, 
Borrower agrees that the Vessel's sole market shall be Alyeska 
Seafoods, Inc. for any and all products regularly processed by 
Alyeska Seafoods, Inc., and for any and all species of catch 
processed by Alyeska Seafoods, Inc. Exceptions to this requirement 
are specified (1) on a delivery-by-delivery basis, where Alyeska 
informs the partnership that it lacks capacity to process the 
delivery; and (2) where Alyeska and [Vessel Owner] agree that the 
vessel may sell into other markets. Section 5(B) of the [Vessel Loan 
Agreement] provides that, in return for this marketing commitment, 
Alyeska will pay [Vessel Owner] a substantial annual ``commitment 
fee.''

Requested Action

    The Petitioners have requested a consolidated filing for the 
Vessels. MARAD's regulations require at 46 CFR 356.53(c) that a 
separate petition be filed for each vessel for which the owner or 
mortgagee is requesting an exemption unless the Chief Counsel 
authorizes a consolidated filing. The Chief Counsel hereby authorizes 
the consolidated filing by Petitioners relating to the three Vessels.
    The Petitioners seek a determination from MARAD under 213(g) of the 
Act and 46 CFR 356.53 that they are exempt from the requirements of 
sections 202, 203 and 204 of the AFA and 46 CFR Part 356 on the ground 
that the requirements of the AFA and 46 CFR Part 356, as applied to 
Petitioners with respect to the Vessels, conflict with U.S. obligations 
under U.S.-Japan FCN. The Petitioners request a determination that the 
restrictions placed on foreign ownership, foreign financing and foreign 
control of U.S.-flag vessels documented with a fishery endorsement 
contained in 46 C.F.R. Part 356 and sections 202, 203 and 204 of the 
AFA do not apply to Petitioners with respect to:
    (1) the existing ownership interests in the Vessels held, directly 
or indirectly, by the Vessel Owners and their Non-Citizen Investors; 
\1\
---------------------------------------------------------------------------

    \1\ As used herein, the term ``Non-Citizen'' means a person or 
entity which is not a U.S. Citizen, as defined at 46 CFR 
Sec. 356.3(e). The ``Non-Citizen Investors'' are Alyeska, Maruha, 
WAF, Marubeni Corporation, WAFBO, Inc., and Duke Point, L.P.
---------------------------------------------------------------------------

    (2) the existing preferred mortgage interests in the Vessels held 
by Alyeska and the Japanese Bank Lenders identified below, including 
existing exclusive marketing agreements and other contract rights and 
interests ancillary to such financing arrangements; and
    (3) future loan, financing and other transactions between the Non-
Citizen Investors or the Japanese Bank Lenders,

[[Page 4061]]

on the one hand, and the Vessel Owners, on the other, with respect to 
the Vessels.

Petitioner's Description of the Conflict Between the FCN Treaty and 
Both 46 CFR Part 356 and the AFA

    MARAD's regulations at 46 CFR 356.53(b)(3) require Petitioners to 
submit a detailed description of how the provisions of the 
international investment agreement or treaty and the implementing 
regulations are in conflict. The entire text of the FCN Treaty is 
available on MARAD's internet site at http://www.marad.dot.gov. The 
description submitted by the Petitioner of the conflict between the FCN 
Treaty and both the AFA and MARAD's implementing regulations forms the 
basis on which the Petitioners request that the Chief Counsel issue a 
ruling that 46 CFR Part 356 does not apply to Petitioners with respect 
to the Vessels. The Petitioner's description of how the provisions of 
the U.S.-Japan FCN are in conflict with both the AFA and 46 CFR Part 
356 is as follows:

A. The AFA's Limitations and Restrictions on Foreign Involvement in the 
U.S. Fishing Industry Are Inconsistent With U.S. Obligations Under the 
U.S.-Japan FCN.\3\
---------------------------------------------------------------------------

    \3\ The text of the relevant provisions of the U.S.-Japan FCN 
cited herein is found at Attachment 1 to the Annex I of Authorities 
(hereinafter ``Annex''), filed herewith.
---------------------------------------------------------------------------

1. The AFA's Restrictions on Foreign Ownership Violates Article VII
    (a) The AFA's Restrictions on Foreign Investment Impair 
Petitioners' Existing Ownership Interests. The AFA's new restrictions 
on foreign investment in fishing vessels will prohibit the Vessel 
Owners from employing their Vessels in the U.S. fisheries on and after 
October 1, 2001, because the extent of Japanese investment in the 
Vessel Owners exceeds the maximum permitted by the AFA.
    Dept. verify hwer ref. & ft\2\**FOOTNOTES** [1]: [3]:
    A vessel cannot lawfully be employed in the fisheries of the United 
States unless it is documented as a vessel of the United States with a 
fishery endorsement issued by the U.S. Coast Guard pursuant to 46 
U.S.C. Chapter 121. 46 U.S.C. Chapter 121 sets out the requirements 
which must be met for a vessel to be eligible for documentation with a 
fishery endorsement, including requirements related to the citizenship 
of vessel owners.
    The Vessels are fishing vessels, designed and constructed or 
rebuilt for use in the U.S. fisheries and operated in the U.S. 
fisheries of the North Pacific Ocean and Bering Sea. Each of the Vessel 
Owners is eligible to own a vessel with a fishery endorsement under the 
current standards of 46 U.S.C. Chapter 121 and each of the Vessels is 
documented as a vessel of the United States with a fishery endorsement.
    However, the Vessel Owners will be prohibited from owning or 
operating the Vessels in the U.S. fisheries on and after October 1, 
2001 under the new restrictions on foreign investment in fishing 
vessels imposed by the AFA and MARAD's implementing rules, codified at 
46 CFR Part 356 (65 Fed. Reg. 44860 et seq., July 19, 2000). The 
aggregate of the ownership interests held, directly or indirectly, in 
the Vessel Owners by Alyeska (in the case of the SEA WOLF, by Alyeska 
and WAFBO, Inc.) exceeds 25%--the maximum percentage interest permitted 
to be held by Non Citizens under Section 202(a) of the AFA, effective 
on and after October 1, 2001 (see 46 U.S.C. 12102(c)(1), as 
amended).\4\ The AFA requires MARAD to revoke the fishery endorsement 
of any fishing vessel whose owner does not comply with this new 
requirement. AFA Section 203(e). Accordingly, unless exempted from the 
AFA's new requirements, the Vessel Owners will no longer be permitted 
to own and operate their Vessels in the U.S. fisheries as of October 1, 
2001. As a result, the Vessel Owners will be deprived of income from 
their Vessels; will be driven into insolvency and will default under 
the terms of their Guaranties in favor of the Japanese Bank Lenders and 
their Loan Agreements with Alyeska, and Alyeska, in turn, will be 
forced into default under the terms of its loan agreement with the 
Japanese Bank Lenders. Alternatively, the Vessel Owners would be forced 
to sell the Vessels or their Non-Citizen Investors would be forced to 
sell their interests in the Vessel Owners, assuming a buyer could be 
found. In either case, if Alyeska loses access to the fish that would 
otherwise be harvested by the Vessels and delivered to its Dutch Harbor 
processing facility, the $70 million investment which Alyeska and its 
shareholders have made in that facility and the jobs of its employees 
would be jeopardized.
---------------------------------------------------------------------------

    \4\ The AFA makes two primary changes to the existing limitation 
on foreign ownership of fishing vessels: (1) The required percentage 
of U.S. Citizen ownership is increased from ``a majority'' to 75%; 
(2) this new test is to be applied both ``at each tier of ownership 
and in the aggregate,'' whereas the existing standard is applied 
solely at each tier of ownership, allowing foreign interests ``in 
the aggregate'' to exceed 50%, so long as U.S. Citizen ownership is 
maintained ``at each tier.'' See 46 CFR 221.3(c) (a U.S. Citizen is 
a Person who ``at each tier of ownership'' satisfies the requisite 
ownership standard). Compare, 46 U.S.C. 12102(c), as now in effect, 
and 46 CFR 67.31(c), with 46 U.S.C. 12102(c)(1), as amended by 
Section 202(a) of the Act, and 46 CFR 356.9. The Vessels are owned 
by U.S. Citizens (as defined at 46 CFR 356.3(e)) at each ``tier'' of 
ownership but the ``aggregate'' U.S. citizen ownership is less than 
75%. In addition, Section 204 of the AFA repeals a provision of 
prior law which permits 100% foreign owned corporations to own 
certain vessels.
---------------------------------------------------------------------------

    (b) The Impairment of Petitioners' Existing Ownership Interests 
Violates Article VII.1 and the Grandfather Provision of Article VII.2 
The impairment of Petitioners' existing ownership interests in the 
Vessels violates their right to ``national treatment'' under Article 
VII. 1 and the grandfather provision of Article VII.2 of the U.S.-Japan 
FCN.
    The U.S.-Japan FCN was one of a series of similar Friendship, 
Commerce and Navigation (``FCN'') Treaties entered into by the United 
States with various countries after World War II, based on a standard 
State Department treaty text. All of these treaties reflect U.S. post-
war policy to encourage and protect international trade and investment. 
Herman Walker, Jr., the principal author of the standard FCN treaty 
text and one of the principal State Department negotiators during this 
period, has described the FCN treaties as ``concerned with the 
protection of persons, natural and juridical, and of the property 
interests of such persons.'' Herman Walker, Jr., ``Modern Treaties of 
Friendship, Commerce and Navigation,'' 42 Minn. L. Rev. 805, 806 (1958) 
(hereinafter, ``Modern Treaties'').
    Article VII.1 of the U.S.-Japan FCN guarantees broad ``national 
treatment'' for the nationals and enterprises of the U.S. and Japan 
when doing business within the jurisdiction of the other country. 
Article XXII.1 of the U. S.-Japan FCN defines ``national treatment'' as 
``treatment accorded within the territories of a Party upon terms no 
less favorable than the treatment accorded therein, in like situations, 
to nationals, companies, products, vessels or other objects, as the 
case may be, of such Party.'' The principle of national treatment is 
the central principle of all of the post-war FCN treaties. National 
treatment requires that each State Party must treat nationals of the 
other in the same way that it treats its own nationals. The treaties 
focus on business and investment. ``The right of corporations to engage 
in business on a national-treatment basis may be said to constitute the 
heart of the treaty.'' Herman Walker, Jr., ``The Post-War Commercial 
Treaty Program of the United States,'' 73 Pol. Sci. Q. 57, 67 (1958). 
In a case involving interpretation of the U.S.-Japan FCN, the United 
States Supreme Court noted that the purpose

[[Page 4062]]

of the FCN treaties was ``to assure [foreign corporations] the right to 
conduct business on an equal basis without suffering discrimination 
based on their alienage.'' Sumitomo Shoii America v Avagliano, 457 U.S. 
176, 187-88 (1982). ``[N]ational treatment of corporations means equal 
treatment with domestic corporations.'' Id. at 188 n. 18.
    The preamble of the U.S.-Japan FCN provides that guaranteeing 
nationals of each Party ``national * * * treatment unconditionally'' is 
one of the two general principles upon which the U.S.-Japan FCN was 
based. Use of the word ``unconditionally'' in this context clearly 
demonstrates the strength of the drafters' general intent. Accordingly, 
the exceptions to the principle of national treatment stated in the 
U.S.-Japan FCN must be narrowly construed.
    The AFA's retroactive prohibition of ownership interests acquired 
by Alyeska and WAFBO, Inc. in compliance with existing law clearly 
denies national treatment to them and to the Vessel Owners. The AFA's 
new limitation on foreign ownership of fishing vessels is thus 
inconsistent with the most fundamental principle of the U.S.-Japan FCN.
    The first sentence of Article VII.2 of the U.S.-Japan FCN provides 
a limited exception to the principle of national treatment for 
enterprises engaged in ``the exploitation of land or other natural 
resources.'' Even in that context, however, the second sentence of 
Article VII.2 (referred to as the ``grandfather'' provision of Article 
VII.2) prohibits application of new restrictions and limitations to 
Japanese nationals or enterprises which have previously ``acquired 
interests'' in enterprises owning U.S. fishing vessels or have 
previously engaged in the business activities now to be restricted. 
Article VII.2 provides in pertinent part:

    Each Party reserves the right to limit the extent to which 
aliens may within its territories establish, acquire interests in, 
or carry on * * * enterprises engaged in * * * the exploitation of 
land or other natural resources. However, new limitations imposed by 
either Party upon the extent to which aliens are accorded national 
treatment, with respect to carrying on such activities within its 
territories. shall not be applied as against enterprises which are 
engaged in such activities therein at the time such new limitations 
are adopted and which are owned or controlled by nationals and 
companies of the other Party

Emphasis added. The grandfather provision of Article VII.2 thus 
provides that any new limitations on national treatment placed on alien 
participation in the sectors covered by the first sentence of Article 
VII.2 shall not apply to existing enterprises engaged in business 
within those sectors at the time such new limitations are adopted.
    A study commissioned by the State Department of its past 
interpretations of the FCN treaties notes that, under the grandfather 
provision of Article VII.2, ``protection is afforded to any privilege 
granted * * * prior to a change in national treatment; hence at a 
minimum these foreign enterprises are guaranteed the maintenance of 
their existing operations.'' Ronny E. Jones, ``State Department 
Practices Under U.S. Treaties of Friendship, Commerce, and Navigation'' 
(1981) (hereinafter ``Jones Study'') at 57.\5\ ``[R]egulations that 
force divestiture of interests already acquired or established prior to 
promulgation of such regulation * * * raise Art. VII questions.'' Id. 
at 107. Herman Walker, Jr. stated the purpose of the Article VII.2 
grandfather provision clearly: ``The aim is to * * * guarantee duly 
established investors against subsequent discrimination. The failure to 
find a welcome as to entry is of much less importance than would be a 
failure, once having entered and invested in good faith, to be 
protected against subsequent harsh treatment.'' Modern Treaties at 809. 
In describing the import of the phrase ``new limitations,'' another 
State Department study states,

    The net effect [of the second sentence of Article VII.2 is that, 
although not obligated to allow alien interests to become 
established in those fields of activity, rights which have been 
extended in the past shall be respected and exempted from the 
application of new restrictions.
---------------------------------------------------------------------------

    \5\ Petitioners presume that MARAD has access to the Jones Study 
and the Sullivan Study referenced below. Petitioners will provide 
copies of these studies to MARAD on request.

Charles H. Sullivan, ``State Department Standard Draft Treaty of 
Friendship, Commerce and Navigation'' (undated) (hereinafter ``Sullivan 
Study'') at 149 (emphasis added). ``the second sentence of Article 
VII(2) is a grandfather clause intended in the interest of fairness to 
protect legitimately established alien enterprises against retroactive 
impairment.'' Id. at 148.
    Both State Parties placed great importance on the grandfather 
provision of Article VII.2 because they recognized that it would not 
only protect existing property rights but would entitle foreign-owned 
enterprises to continue to operate in the same manner as before, 
notwithstanding later limitations placed on the rights of foreign-owned 
entities to engage in such business activities. It was a ``principal 
negotiating point'' of the U.S. side to ensure that the reservations in 
Article VII.2 would not permit retroactive application of any new 
limits to companies already engaged in relevant business activities.\6\
---------------------------------------------------------------------------

    \6\ Annex, Attachment 2, Department of State Incoming Telegram 
dated March 20, 195, p. 1.
---------------------------------------------------------------------------

    The U.S. negotiators therefore resisted efforts to modify the 
grandfather provision of Article VII.2, despite strong Japanese efforts 
to restrict its application. As an indication of the importance the 
Japanese negotiators attached to the provision, the Japanese Embassy at 
one point late in the negotiations indicated that the Ministry of 
Finance might be persuaded to withdraw ``all other objections'' to the 
draft treaty if the sentence granting grandfather rights to existing 
businesses were deleted.\7\ Eventually, the Japanese negotiators 
accepted the language in Article VII.2 without any change after the 
U.S. agreed to the language appearing in the second sentence of 
Paragraph 4 of the Protocol. The U.S. State Department agreed to the 
Protocol language only on the understanding that it in no way 
undermined the prohibition against application of discriminatory laws 
to existing enterprises in the second sentence of Article VII.2.\8\
---------------------------------------------------------------------------

    \7\ Annex, Attachment 3, Memorandum from Frank A. Waring, 
Counselor of U.S. Embassy for Economic Affairs undated excerpt).
    \8\ Annex, Attachment 2 Department of State Incoming Telegram 
dated March 20, 1953, p. 1, and Attachment Office Memorandum dated 
March 23, 1953, pp. 1-2.
---------------------------------------------------------------------------

    As adopted, the second sentence of Article VII.2 follows the 
standard treaty text developed by the State Department and used as the 
basis for more than a dozen FCN treaties. The Sullivan Study notes the 
breadth of the protection this sentence affords existing companies 
otherwise subject to VII.2. The Sullivan Study indicates that an 
enterprise protected by the Article VII.2 grandfather provision is not 
only protected as to existing property interests or contract rights, 
but ``is able to enjoy what may be considered normal business growth in 
terms of acquiring new customers and increasing the dollar volume of 
its business, but it cannot claim expanded privileges. * * *'' Sullivan 
Study at 150.
    In short, the protections afforded existing investments and 
existing businesses by the second sentence of Article VII.2 were seen 
by the U.S. as a key part of the U.S.-Japan FCN and similar FCN 
treaties, providing substantial protections to foreign investors and 
businesses. The provision affords Alyeska and WAFBO, Inc. the right to 
continue to hold their direct and indirect investments in the Vessel 
Owners and, more generally, to continue to transact business with the

[[Page 4063]]

Vessel Owners on the same basis as permitted prior to passage of the 
AFA. Similarly, the Article VII.2 grandfather provision guarantees the 
Vessel Owners the right to own and operate the Vessels in the U.S. 
fisheries on equal terms with wholly domestic enterprises.
    Maruha and Marubeni are clearly entitled to protection as Japanese 
enterprises which, at the time the AFA was adopted, were ``engaged in * 
* * activities'' within the United States which the AFA but for Section 
213(g), would prohibit, limit or restrict. Alyeska, WAF, WAFBO, Inc. 
and the Vessel owners likewise come within the protection of the 
Article VII.2 grandfather provision by reason of the direct and 
indirect ownership interests in them held by Maruha and/or Marubeni. 
Thus, the Article VII.2 grandfather provision protects the ownership 
interests of Maruha, WAF and Marubeni in Alyeska, the ownership 
interests of Alyeska and WAFBO, Inc. in the Vessel Owners and the 
Vessel Owners' right to continue to own and operate the Vessels in the 
U.S. fisheries.
    However, as noted above, the Article VII.2 grandfather provision 
not only protects preexisting rights and interests acquired, directly 
or indirectly, by Japanese nationals prior to a discriminatory change 
in the law, but protects existing enterprises from such changes. 
Accordingly, the Article VII.2 grandfather provision, together with 
Section 213(g) of the AFA, exempts the Vessel Owners and their Non-
Citizen Investors from the new restrictions of Section 202, 203 and 204 
of the AFA and 46 CFR Part 356 with respect to (a) the Non-Citizen 
Investors' existing direct and indirect ownership interests in the 
Vessel Owners and the Vessels, (b) the continued operations of the 
Vessels by the Vessel Owners in the U.S. fisheries, and (c) future 
transactions between the Non-Citizen Investors and the Vessel Owners to 
further or protect the existing rights and interests of the Non-Citizen 
Investors in the Vessels and the Vessel Owners, such as the refinancing 
of existing loans, the making of new loans, the modification of 
existing mortgages, the taking of new mortgages or other security and 
the conclusion of other contractual arrangements ancillary to such 
financing activities.
2. The AFA's Restrictions on Foreign Financing of Fishing Vessels 
Violate Article VII.
    (a) The AFA's Restrictions on Foreign Financing of Fishing Vessels 
Impair Petitioners' Rights and Interests With Respect to Vessel 
Financing. The AFA will nullify the preferred mortgage interests in the 
Vessels currently held by Alyeska and the Japanese Bank Lenders, impair 
their rights and interests under existing financing documents and 
prevent them from protecting their established businesses and interests 
by entering into future financing and related business transactions 
with the Vessel Owners.
    Current law permits wholly or partly Japanese-owned lenders, 
including the Japanese Bank Lenders, Alyeska and the other Non-Citizen 
Investors, to finance U.S. fishing vessels and to hold preferred 
mortgage interests in U.S. fishing vessels to secure their loans. See 
46 USC 31322. A ``preferred mortgage'' is a creature of federal statute 
and gives the mortgagee a lien on the mortgaged vessel, enforceable in 
U.S. District Court under a priority scheme that protects the mortgagee 
from most maritime liens. See, generally, 46 USC Chapter 313. 46 USC 
31326(b)(1) gives the preferred mortgage lien priority over all 
maritime liens arising after filing of the mortgage except a limited 
number of ``preferred'' maritime liens listed at 46 USC 31301(5) and 
provides that a sale of the vessel by order of the District Court 
terminates all liens or other claims against the vessel, thus ensuring 
the purchaser clear title and allowing the mortgagee to realize maximum 
value for its security. Since maritime liens arise in favor of 
suppliers, materialmen, repairmen and others in the course of the 
ordinary operations of the vessel, protection against such liens is 
essential to the mortgagee's security, as is the ability to terminate 
those liens on foreclosure and to sell the vessel ``free and clear'' of 
liens. Absent preferred mortgage status, a mortgage provides little or 
no security for the lender. Thus, the preferred mortgages which Alyeska 
and the Japanese Bank Lenders hold in the Vessels are valuable property 
interests in the Vessels.
    The AFA will prohibit Alyeska and the Japanese Bank Lenders from 
continuing to hold their existing preferred mortgages on the Vessels 
unless, in the case of the Japanese Bank Lenders, their mortgages are 
transferred to a qualified Mortgage Trustee (see AFA Section 202(b), 
amending 46 USC 31322, and 46 CFR 356.19) and the terms of the 
financing documents are approved by a MARAD under the AFA's new 
``control'' standards (see AFA Section 202(a), adding 46 USC 
12102(c)(4)(A), and 46 CFR 356.15(d) and 356.21(d)). The AFA contains a 
new definition of impermissible Non-Citizen ``control'' (AFA Section 
202(a), codified at 46 USC 12102(c)(2)) and requires transfers of 
``control'' of fishing vessels to be ``rigorously scrutinized'' by 
MARAD under this new standard (AFA Section 203(c)(2)). MARAD has 
implemented the AFA's new ``control'' standard by adopting a host of 
new restrictions and limitations on contractual and other business 
arrangements between fishing vessel owners and Non-Citizens. See, 
generally, 46 CFR 356.11, 356.13-15, 356.21-25, 356.39-45. Unless MARAD 
reviews and approves the terms of the loan agreements, preferred 
mortgages and other financing documents previously executed by the 
Vessel Owners in favor of the Alyeska and the Japanese Bank Lenders 
prior to October 1, 2001 under these new standards, the Vessels will 
lose their fishery endorsements and the Vessel Owners will no longer be 
permitted to own or operate the Vessels in the U.S. fisheries. See 46 
CFR 356.15(d), 356.21(d). This, in turn, will destroy the value of the 
Vessels as security under the mortgages held by Alyeska and the 
Japanese Bank Lenders and destroy the ability of the Vessel Owners to 
pay the debts which the mortgages secure. By prohibiting Alyeska and 
the Japanese Bank Lenders from continuing to hold their existing 
preferred mortgages on the Vessels, imposing new conditions and 
restrictions on the terms of their existing financing documents, 
including a new requirement of administrative review and approval of 
those financing documents under AFA's new ``control'' standards, the 
AFA and MARAD's implementing regulations will impair the contractual 
rights and mortgage interests of Alyeska and the Japanese Bank Lenders 
under their existing preferred mortgages and related financing 
documents.
    In the case of Petitioner Alyeska's mortgages, MARAD has made clear 
that there is no way that Alyeska can preserve its mortgage interests 
under the AFA. MARAD has interpreted the AFA's requirements to prohibit 
Non-Citizen fish processors, such as Alyeska, from holding mortgages or 
other security interests in fishing vessels, even if the mortgage is 
held by a qualified Mortgage Trustee and the loan and mortgage terms 
are otherwise acceptable to MARAD. 65 Fed. Reg. at 44871 c.2 (July 19, 
2000) (``[A]dvancements of funds from Non-Citizen processors will not 
be permitted where the security for the loan is a security interest in 
the vessel''). Thus, in the case of Alyeska, the AFA's requirements 
will nullify Alyeska's existing preferred mortgage interests in the 
Vessels. If Alyeska's mortgages are not released, the Vessels will lose 
their fishery endorsements, destroying the

[[Page 4064]]

value of the Vessels as collateral for Alyeska's loans and destroying 
the Vessel Owners' ability to pay their debts.
    Further, even if Alyeska's existing financial interests in the 
Vessel Owners were found to be exempt from the requirements of the AFA 
and MARAD's implementing rules, the AFA's restrictions on future 
financing transactions between Alyeska or its Japanese shareholders and 
the Vessel Owners will substantially impair the rights and interests of 
Alyeska and its Japanese shareholders in violation of Article VII.1. 
The AFA's restrictions on foreign financing of fishing vessels will 
prevent Alyeska and its Japanese shareholders from protecting their 
investments in Alyeska's Dutch Harbor processing facility and their 
existing investments in and loans to the Vessel Owners by offering the 
Vessel Owners financing, secured by mortgages on the Vessels or 
otherwise, for vessel repairs or improvements which may become 
necessary to permit the Vessel Owners to operate profitably--or at all. 
If alternative financing from a financial institution is unavailable to 
the Vessel Owners, the ability of Alyeska to make loans to support the 
Vessels' continuing operations may be the only means available to 
protect the Vessel Owners from insolvency and default on their existing 
loans from Alyeska--triggering a default by Alyeska under its loan 
agreement with the Japanese Bank Lenders. Thus, the AFA's restrictions 
on the ability of Alyeska or its Japanese shareholders to make new 
loans to the Vessel Owners and to take security in the Vessels 
jeopardize the existing financial interests of Alyeska and its Japanese 
shareholders in the Vessel Owners and the Vessels, as well as Alyeska's 
own financial health.
    Finally, the new restrictions imposed by the AFA and MARAD's 
regulations on the ability of Alyeska to make loans to fishing vessel 
owners will disrupt Alyeska's ability to secure a reliable supply of 
fish to its processing facility. Alyeska's ability to offer financing 
for the construction, acquisition or improvement of fishing vessels is 
a necessary means to secure a stable supply of fish to its processing 
plant. A processor's agreement to provide financing on favorable terms 
to qualified U.S. vessel owners in return for the vessel owner's 
agreement to sell the vessel's catch exclusively to the processor is a 
customary means by which vessel owners finance the acquisition, repair 
or improvement of their vessels and processors secure a reliable supply 
of fish to their plants. Such arrangements between vessel owners and 
processors, both wholly domestic and Non-Citizen processors, are common 
and traditional in the Alaska fishing industry. Non-Citizen processors, 
such as Alyeska, which have invested many millions of dollars in shore-
based processing plants in remote locations in Alaska, must have the 
ability, like their wholly domestic competitors, to secure a reliable 
supply of fish to their plants by financing the acquisition or 
improvement of fishing vessels on normal commercial terms in return for 
the vessel owner's agreement to sell exclusively to that processor 
during the term of the loan. Just as their existing ownership and 
mortgage interests are protected by the Treaty; Alyeska, its Japanese 
shareholders and the Japanese Bank Lenders must also be able to modify 
and restructure their loans and related security arrangements with the 
Vessel owners and make new loans to the Vessel Owners with respect to 
the Vessels in order to further and protect their existing investments, 
mortgages and business interests, as circumstances may require.
    (b) The Restrictions on Foreign Financing of Fishing Vessels 
Imposed by the AFA and MARAD's Implementing Rules Violate Article 
VII.1.
    The new restrictions on foreign financing of fishing vessels 
imposed by the AFA and MARAD's implementing regulations violate Article 
VII.1's national treatment guaranty by (1) depriving Alyeska and the 
Japanese Bank Lenders of existing preferred mortgage interests securing 
existing loans; (2) subjecting the terms of their existing loan 
documents to a new requirement of administrative review and approval by 
MARAD under the new ``control'' standards of the AFA and MARAD's 
implementing rules; (3) depriving Alyeska and the Japanese Bank Lenders 
of the value of their collateral and the income stream from operations 
on which they relied in making their loans; and (4) preventing Alyeska, 
its shareholders or the Japanese Bank Lenders from refinancing existing 
loans, making new loans to the Vessel Owners, taking new mortgages on 
the Vessels or entering into other contractual arrangements with 
respect to the Vessels or the Vessel Owners necessary to further or 
protect their existing financial and business interests.
    Article VII.1 extends full national treatment protection ``with 
respect to engaging in all types of commercial, industrial, financial 
and other business activities.'' The negotiating history of the U.S.-
Japan FCN leaves no doubt that loans and lending by foreign-owned 
lenders are entitled to full national treatment under the first 
sentence of Article VII.1.
    At the fourth informal meeting of the U.S. and Japanese 
negotiators, the Japanese negotiators argued that foreign-owned banks 
should be denied national treatment, as well as most-favored-nation 
protection. One reason given was that their loans could result in the 
foreign-owned bank lender controlling key industries.\9\ For this and 
other reasons, Japan suggested rewriting Article VII.1, and among other 
changes deleting ``financial'' from the activities provided national 
treatment in the first sentence of the provision.
---------------------------------------------------------------------------

    \9\ Annex, Attachment 5, Memorandum of Conversation dated March 
4, 1952, pp. 2-3.
---------------------------------------------------------------------------

    A cable from U.S. State Department headquarters in Washington noted 
that the Japanese proposal, and in particular its interest in denying 
national treatment to bank loans, reflected an attitude that creates a 
``difficulty going to heart of treaty.\10\ The State Department opposed 
any change that would delete the word financial from the first sentence 
of Article VII.1. Subsequently, the Japanese side suggested instead 
adding the word ``lending'' to the exception provided in the first 
sentence of Article VII.2, so the phrase would have read ``banking 
involving depository, lending or fiduciary functions.'' In response, 
the State Department reiterated its opposition to any change that would 
deny foreign lenders the right to full national treatment under Article 
VII.1.
---------------------------------------------------------------------------

    \10\ Annex, Attachment 6, Dept. of State Outgoing Telegram dated 
March 10, 1952, p. 1.
---------------------------------------------------------------------------

    A Department cable explained why the exception to national 
treatment provided by the first sentence of the U.S. draft of Article 
VII.2 was limited to only the depository and fiduciary functions of 
banks.\11\ The cable states: ``Mr. Otabe is incorrect in supposing that 
the U.S. reservation for banking is based on the reason he alleges. The 
reservation has to do with receiving and keeping custody of deposits 
from the public at large; that is, the safekeeping of other people's 
money, a function of particular trust. It does not have to do with the 
lending activities of a bank; and the Department does not feel that a 
reservation is either appropriate or necessary as to a bank's lending 
its own money.'' Id. During the second round of informal meetings, the 
U.S. negotiators continued to oppose adding loans to the banking 
functions excluded from full national treatment by the first sentence 
of Article VII.2, and the Japanese

[[Page 4065]]

government eventually agreed to withdraw its proposed change.\12\
---------------------------------------------------------------------------

    \11\ Annex, Attachment 7, Dept. of State Outgoing Telegram dated 
May 21, 1952, p. 3.
    \12\ Annex, Attachment 8, Memorandum of Conversation dated 
October 15, 1952, p. 15.
---------------------------------------------------------------------------

    The exception to national treatment for certain banking functions 
in the first sentence of Article VII.2 is the same as in the standard 
FCN treaty text. The Sullivan Study notes that ``this reservation is 
stated in terms intended to circumscribe it as much as possible, 
thereby maximizing the extent to which the banking business remains 
subject to the rule [of national treatment] set forth in Article 
VII(1).'' Sullivan Study at 144. The Sullivan Study notes that the two 
areas reserved, depositary and fiduciary functions, involve the custody 
and management of other people's money, and therefore are the most 
sensitive areas of banking.
    It is clear, therefore, that the reference in the first sentence of 
Article VII.2 to ``banking involving depository or fiduciary 
functions'' does not include the lending activities of the Japanese 
Bank Lenders or Alyeska. Both the U.S. and Japanese negotiators were in 
full agreement as to the meaning of this phrase. Thus, the financing 
activities of banks and other lenders are entitled to the full national 
treatment under Article VII.1.\13\
---------------------------------------------------------------------------

    \13\ To the extent that it could be argued that the first 
sentence of Article VII.2 might permit restrictions on foreign 
financing of fishing vessels, the grandfather provision of Article 
VII.2 would clearly protect Alyeska, its shareholders and the 
Japanese Bank Lenders with respect to their existing rights and 
interests, as the holders of ownership and debt interests in the 
Vessel Owners and mortgage interests in the Vessels, and with 
respect to future financing activities undertaken to further or 
protect those interests. Alyeska, WAFBO, Inc., their Japanese 
shareholders and the Japanese Bank Lenders clearly ``acquired 
interests'' in the Vessel Owners prior to enactment of the AFA and 
are thus entitled to national treatment in future dealings with the 
Vessel Owners.
---------------------------------------------------------------------------

    The provisions of the AFA and MARAD's implementing rules which 
restrict the right of Japanese-owned entities to make loans secured by 
mortgages on U.S. vessels or to make such loans without prior MARAD 
approval of the loan terms are inconsistent with the guaranty of 
national treatment in Article VII.1. The rationale that such loan 
activities may be restricted on the grounds that they could result in a 
degree of control over sensitive industries was specifically considered 
by the U.S. negotiators and rejected as a valid reason for limiting the 
Treaty's protections for such lending activities. The control argument 
presented by Japan at that time is the same argument used to justify 
the restrictions of the AFA. Although the negotiating history deals 
largely with banking, the language of Article VII.1 extends the 
protections of national treatment broadly to ``all types of * * * 
financial * * * activities.'' Under Article VII.1, neither State Party 
may restrict loans by foreign-owned entities secured by vessels of 
their national flag.
    The AFA and MARAD's implementing rules impose new restrictions on 
the ability of Alyeska and the Japanese Bank Lenders, going forward, to 
protect their existing financial interests in the Vessel Owners and the 
Vessels by, e.g., re-financing existing loans, advancing new loans for 
repair or improvement of the Vessels or entering into other financing 
or contractual arrangements with the Vessel Owners. These restrictions 
are not permitted by Article VIII of the Treaty. Article VIII extends 
the Treaty's protection both to loans, mortgages and other financing 
arrangements that are now outstanding under the terms of existing 
financing documents and to future financing activities by Alyeska, its 
shareholders or the Japanese Bank Lenders involving the Vessels or the 
Vessel Owners.
    Application of the AFA's new ``control'' standards to restrict the 
ability of Alyeska to do business with the Vessel Owners that supply 
fish to its processing plant, as it has done in the past and on the 
same terms as its U.S. Citizen competitors, would deny national 
treatment to Alyeska and its Japanese shareholders. The State 
Department has recognized that the exception to the requirement of 
national treatment that may apply with respect to the ownership of 
fishing vessels under the first sentence of Article VII.2 does not 
apply to fish processors.\14\ Article VII.1 applies, and it extends the 
protection of full and unconditional national treatment to fish 
processors with Japanese ownership, such as Alyeska. The discriminatory 
restrictions imposed under the AFA on Alyeska's ability to enter into 
future financing and other contractual arrangements with the Vessel 
Owners to ensure a stable supply of fish to Alyeska's Dutch Harbor 
processing facility clearly violate Article VII.1.
---------------------------------------------------------------------------

    \14\ Annex, Attachment 9, Letter to the Chairman of the House of 
Representatives Committee on Merchant Marine and Fisheries from 
Robert Lee, August 17, 1964.
---------------------------------------------------------------------------

    For these reasons, Petitioners seek a determination by MARAD that 
Sections 202, 203 and 204 of the AFA and MARAD's implementing 
regulations do not apply to Petitioners with respect to (a) existing 
preferred mortgages and associated loan and security documents 
previously executed by the Vessel owners in favor of Alyeska or the 
Japanese Bank Lenders, including the exclusive marketing agreements 
contained in Alyeska's loan agreements with the Vessel Owners (or, in 
the case of the SEA WOLF, with the Vessel Owner's general partner); or 
(b) fixture financing and ancillary contractual arrangements between 
Alyeska or the Japanese Bank Lenders and the Vessel Owners, including 
exclusive marketing agreements.
3. Application of the AFA and MARAD's Implementing Rules to Petitioners 
Would Result in a ``Taking'' in Violation of Article VI.3
    The first sentence of Article VI.3 of the Treaty states that 
``[p]roperty of nationals and companies of either Party shall not be 
taken within the territories of the other Party except for a public 
purpose, nor shall it be taken without the prompt payment of just 
compensation.'' This ``takings'' provision precludes expropriations and 
other measures that substantially impair a Japanese national's direct 
and indirect property rights. Applying the AFA's new restrictions to 
prohibit the Non-Citizen Petitioners from holding their pre-existing 
ownership interests, mortgage interests and contract rights would 
deprive them of their property in violation of Article VI.3.
    The term ``property'' in Article VI.3 includes not simply direct 
ownership but also a wide variety of property interests, such as those 
which the Non-Citizen Petitioners have in the Vessel Owners and in the 
Vessels. The Protocol to the U.S.-Japan FCN explicitly states that 
``[t]he provisions of Article VI, paragraph 3 * * * shall extend to 
interests held directly or indirectly by nationals and companies of 
either Party in property which is taken within the territories of the 
other Party.'' Protocol, para. 2 (emphasis added). As the United States 
delegates made clear during the negotiation of the Treaty, the phrase 
``interests held directly or indirectly'' is intended to extend to 
every type of right or interest in property which is capable of being 
enjoyed as such, and upon which it is practicable to place a monetary 
value. These direct and indirect interests in property include not only 
rights of ownership, but [also] * * * lease hold interest[s], 
easements, contracts, franchises, and other tangible and intangible 
property rights.\15\ In short, ``all property interests are 
contemplated by the provision.'' \16\ This necessarily includes the 
direct and indirect ownership interests which

[[Page 4066]]

Petitioners have in the Vessel Owners and in the Vessels and the 
preferred mortgage interests which Alyeska and the Japanese Bank 
Lenders have in the Vessels, together with ancillary contract rights 
granted in their loan documents.
---------------------------------------------------------------------------

    \15\ Annex, Attachment 10, Memorandum of Conversation dated 
April 15, 1952 at p. 3.
    \16\ Id.
---------------------------------------------------------------------------

    The concept of a taking in this context is broad and ``is 
considered as covering, in addition to physical seizure, a wide variety 
of whole or partial sequestrations and other impairments of interests 
in or uses of property.'' Sullivan Study at 116 (emphasis added). Here, 
the AFA's new restrictions on foreign investment and foreign financing 
will prohibit the Vessel Owners from using their Vessels in the U.S. 
fisheries. In effect, the AFA will either deprive the Petitioners of 
the economic value of their interests in the Vessels by prohibiting 
their productive use or force divestiture. The impairment of the 
presently existing rights of the Vessel Owners to use their Vessels in 
the U.S. fisheries--and the rights of the other Petitioners to hold 
their existing direct and indirect ownership interests in the Vessel 
Owners and mortgage interests in the Vessels--is a sufficient 
impairment of those rights and interests as to constitute a violation 
of Article VI.3.
    Further, a taking is permitted under the Treaty only for a ``public 
purpose,'' and it is clear that application of the AFA's ownership 
restrictions to the Vessel Owners so as to force a divestiture of the 
interests of Alyeska or WAFBO, Inc. to a private party which qualifies 
as a U.S. Citizen would not satisfy the ``public purpose'' requirement 
of the U.S.-Japan FCN. Even if such a forced sale to a private party 
could be characterized as having a ``public purpose,'' the AFA makes no 
provision for the ``prompt payment of just compensation,'' as required 
by Article VI.3. The fact that the AFA and 46 CFR Part 356 fail to 
provide any compensation scheme--let alone ``adequate provision * * * 
at or prior to the time of taking for the determination and payment 
thereof''--is another basis for concluding that the AFA's retroactive 
limitations on foreign ownership and foreign financing of fishing 
vessels are inconsistent with Article VI.3 of the U.S.-Japan FCN.
4. The AFA and MARAD's Implementing Rules Impair Petitioners' Legally 
Acquired Rights in Violation of Article V
    The new restrictions imposed by the AFA and MARAD's implementing 
rules on foreign involvement in the U.S. fishing industry are 
``unreasonable or discriminatory measures'' that impair the legally 
acquired rights and interests of Petitioners in violation of Article V 
of the Treaty.
    Article V provides that ``[n]either Party shall take unreasonable 
or discriminatory measures that would impair the legally acquired 
rights or interests within its territories of nationals and companies 
of the other Party in the enterprises which they have established. * * 
*'' The provision follows the standard FCN treaty language, except that 
the language was moved from Article VI.3 in the standard text to a new 
Article V and certain additional language, not relevant here, was 
added. According to the Sullivan Study, the provision ``offers a basis 
in rather general terms for asserting protection against excessive 
governmental interference in business activities or particular 
activities not specifically covered by the treaty.'' Sullivan Study at 
115. Herman Walker observed that this language is designed ``to account 
for the possibility of injurious governmental harassments short of 
expropriation or sequestration.'' Herman Walker, Jr., ``Treaties for 
the Encouragement and Protection of Foreign Investment: Present United 
States Practice,'' 5 Am. T. Comp. Law at 236 (1956). A State Department 
memorandum to Congress, discussing language very similar to Article V 
in another treaty, noted that the language ``affords one more ground, 
in addition to all the other grounds set forth in the treaty, for 
contesting foreign actions which appear to be injurious to American 
interests.'' \17\
---------------------------------------------------------------------------

    \17\ Annex, Attachment 11, Department of State Instruction dated 
February 15, 1954, p. 2, (discussing the applicability of Article V 
of the U.S.-Japan FCN to American lawyers doing business in Japan, 
and citing May, 1952 memorandum to U.S. Committee on Foreign 
Relations).
---------------------------------------------------------------------------

    The negotiating history confirms that Article V was intended as a 
general provision prohibiting discrimination against foreign-owned 
entities not subject to other provisions of the U.S.-Japan FCN. During 
the negotiations, Japan proposed-adding language prohibiting the denial 
``of opportunities and facilities for the investment of capital.'' The 
proposal was not adopted after the U.S. opposed it on the grounds that 
Article VII fully addressed investment activities and that the 
additional language was not appropriate in Article V, which addresses 
issues not limited to investment.\18\
---------------------------------------------------------------------------

    \18\ Annex, Attachment 12; Department of State Division of 
Communications & Records Outgoing Airgram dated October 28, 1952, p. 
2.
---------------------------------------------------------------------------

    Thus, Article V was intended as a general prohibition of 
discriminatory restrictions not covered by other provisions of the 
U.S.-Japan FCN and of restrictions that do not rise to the level of a 
``taking.'' Article V prohibits deprivations of both most-favored 
nation treatment and national treatment. Sullivan Study at 115. Thus, 
it would apply to the variety of discriminatory prohibitions and 
restrictions that the AFA and MARAD's implementing regulations impose 
on Petitioners' existing ownership and mortgage interests and other 
contract rights and on Petitioners' ongoing ability to protect those 
rights and interests by entering into future transactions with the 
Vessel Owners.
    The intrusive and discriminatory restrictions imposed by the AFA 
and MARAD's implementing rules on transactions between Non-Citizen 
lenders, such as Alyeska and the Japanese Bank Lenders, and U.S. 
fishing vessel owners place the Non-Citizen lenders at a significant 
competitive disadvantage. U.S. Citizen processors and other lenders are 
free to make loans and to enter into contracts with fishing vessel 
owners without restriction. U.S. Citizen processors remain free to 
obtain a reliable supply of fish by financing fishing vessel 
acquisitions, conversions and improvements in return for exclusive 
marketing relationships while Non-Citizen processors are prohibited 
from making similar arrangements. As previously noted, MARAD has stated 
that Non-Citizen processors will be flatly prohibited from taking 
security in fishing vessels to secure loans to vessel owners. Under 46 
CFR 356.45, a Non-Citizen lender is not even permitted to make an 
unsecured loan to a fishing vessel owner, if (a) the loan exceeds the 
annual value of the vessel's catch (where an exclusive marketing 
agreement is involved--see Sec. 356.45(a)(2)(i)); or (b) the lender is 
``affiliated with any party with whom the owner * * * has entered into 
a mortgage, long-term or exclusive sales or purchase agreement, or 
other similar contract * * * '' (see Sec. 356.45(b)(1)). Under these 
standards, Alyeska's existing loans to the Vessel Owners would not have 
been permitted and Alyeska will not be permitted to make future loans 
to the Vessel Owners, secured or unsecured, to protect its existing 
interests. Further, the requirement of MARAD review and approval is 
itself an unreasonable and discriminatory burden, particularly in the 
absence of coherent standards. The AFA and MARAD's rules thus impose 
``unreasonable or discriminatory measures'' on Non-Citizen fish 
processors and other lenders with Japanese ownership, such as Alyeska

[[Page 4067]]

and the Japanese Bank Lenders, impairing their legally acquired rights 
and interests and their ongoing ability to protect those interests in 
violation of Article V of the U.S.-Japan FCN.
5. Article XIX 6 Does Not Authorize the Provisions of the AFA and 
MARAD's Implementing Rules Which Are Otherwise in Violation of the 
U.S.-Japan FCN
    Article XIX.6 provides that notwithstanding any other provision of 
the Treaty, ``each Party may reserve exclusive rights and privileges to 
its own vessels with respect to the * * * national fisheries.* * *'' 
This provision does not authorize the discriminatory limitations on 
Japanese investment and financing contained in the AFA and MARAD's 
implementing rules.
    Even if Article XIX. 6 is interpreted as applying to fishing 
vessels,\19\ it would be irrelevant to the issues presented here with 
respect to the AFA. Consistent with the Treaty text authorizing a Party 
to reserve exclusive rights to ``its own vessels,'' the State 
Department has interpreted Article XIX.6 merely to permit the U.S. to 
reserve the right to catch or land fish in the U.S. national fisheries 
to ``U.S. flag vessels.'' \20\ The text of Article XIX.6 says nothing 
about and certainly does not authorize restrictions on foreign 
ownership or financing of U.S. flag fishing vessels or the ability of 
foreign-owned enterprises to do business with the owners of U.S. flag 
fishing vessels--restrictions that otherwise clearly violate Article 
VII of the Treaty.
---------------------------------------------------------------------------

    \19\ Article XIX.7 defines ``vessel'' to exclude ``fishing 
vessels'' for purposes of Article XIX.6.
    \20\ Annex, Attachment 9, Letter to the Chairman of the House of 
Representatives Committee on Merchant Marine and Fisheries from 
Robert Lee, August 17, 1964.
---------------------------------------------------------------------------

    The historical record of the negotiations provides further evidence 
that Article XIX.6 was not intended to override Article VII's national 
treatment requirements with respect to foreign investment in or 
financing of U.S. flag fishing vessels or other dealings between 
foreign-owned enterprises and fishing vessel owners. At one point, the 
Japanese negotiators proposed rewriting Article XIX.6 to provide that 
the national treatment provisions of the Treaty would not extend to 
``nationals companies and vessels of the other Party any special 
privileges reserved to national fisheries.'' See Memorandum of 
Conversation dated April 3, 1952, at 5.\21\ The State Department 
understood the Japanese suggestion as an attempt to obtain a blanket 
exception from the entire Treaty for national fisheries. See U.S. Dept. 
of State, Outgoing Airgram to U.S. Embassy in Tokyo (June 12, 1952), at 
1-2 (noting that a clearer way to effect the Japanese intent would be 
by adopting a single comprehensive exception stating that ``[t]he 
provisions of the present Treaty shall not apply with respect to the 
national fisheries of either Party, or to the products of such 
fisheries'').\22\ The U.S. rejected the Japanese proposal and the 
language of Article XIX.6 remained unchanged. The issue of Japanese 
investment in and other dealings with enterprises owning or operating 
U.S. flag fishing vessels was left to Article VII.
---------------------------------------------------------------------------

    \21\ Annex, Attachment 13, Memorandum of Conversation dated 
April 3, 1952.
    \22\ Annex, Attachment 14, Department of State Outgoing Airgram 
dated June 12, 1952.
---------------------------------------------------------------------------

    Subsequent practice of the State Department confirms this reading 
of Article XIX.6. In 1964, the State Department reaffirmed the narrow 
scope of Article XIX.6 in a letter to the House Committee on Merchant 
Marine and Fisheries. The letter makes clear that the provision merely 
permits the United States to reserve the right to catch or land fish to 
U.S. flag vessels? \23\
---------------------------------------------------------------------------

    \23\ See fn. 21. See also, Jones Study at 80-81.
---------------------------------------------------------------------------

    This reading of Article XIX.6 in the U.S.-Japan FCN also comports 
with the State Department's reading of this same language in other FCN 
treaties to which the U.S. is a party. The Sullivan Study explicitly 
states that ``[t]he crucial element in Article XIX is that it relates 
to the treatment of vessels and to the treatment of their cargoes. It 
is not concerned with the treatment of the enterprises which own the 
vessels and the cargoes.'' Sullivan Study at 284 (emphasis added).
    Thus, the text, negotiating history and subsequent State Department 
practice and understanding all explicitly confirm that Article XIX.6 is 
irrelevant to laws restricting foreign ownership and control of fishing 
vessel owners and thus does not override the other provisions of the 
U.S.-Japan FCN dealing with foreign investment and business activity. 
Article XIX.6 does not exempt the AFA's foreign ownership, financing 
and control restrictions, from Articles V, VI.3, VII or IX.2, each of 
which bars application of those restrictions to Petitioners with 
respect to the Vessel Owners and the Vessels.
6. Broad Interpretation of the Treaty's Protections is in the U.S. 
Interest
    The terms of the U.S.-Japan FCN and the other FCN treaties which 
share the same language are reciprocal--that is, the principle of 
``national treatment'' applies not only to protect the investments of 
foreign nationals in the United States but also to protect the 
investments of U.S. nationals in Japan and other countries. Thus, any 
interpretation of the U.S.-Japan FCN adopted by MARAD in the present 
context will also define the rights of U.S. nationals doing business in 
Japan and other countries, now and in the future. A narrow 
interpretation of the U.S.-Japan FCN's protections for Japanese 
enterprises and their investments in the present context will 
effectively limit the rights of U.S. investors and U.S. businesses in 
Japan and other countries with which the United States has concluded 
similar FCN treaties.
    For this reason, the State Department has interpreted the national 
treatment requirement of the FCN treaties broadly in the past. See, 
generally, Jones Study. The U.S. interest in protecting U.S. nationals 
doing business abroad, as well as the State Department's historical 
practice in interpreting the FCN treaties, requires an interpretation 
of the U.S.-Japan FCN which will protect the interests of foreign 
enterprises and the U.S. companies in which they have invested from the 
retroactive and discriminatory prohibitions and restrictions of the AFA 
and 46 C.F.R. Part 356.

B. AFA Section 213(g) Exempts Japanese Enterprises and U.S. Enterprises 
With Japanese Investment From The AFA's Limitations and Restrictions on 
Foreign Ownership, Foreign Financing and Foreign ``Control'' of U.S. 
Fishing Vessels

    Sections 202, 203 and 204 of the AFA and the implementing 
regulations published by MARAD on July 19, 2000, codified at 46 C.F.R. 
Part 356, impose a host of new limitations and restrictions on foreign 
ownership of fishing vessels, foreign financing of fishing vessels and 
contractual arrangements between foreign enterprises or U.S. companies 
with substantial foreign ownership and U.S. fishing vessel owners. As 
demonstrated above, if applied to Petitioners, these new limitations 
and restrictions would deprive Petitioners and the Japanese Bank 
Lenders of valuable existing ownership, mortgage and contract rights 
and interests in violation of the U.S.-Japan FCN. Application of the 
new restrictions to bar Petitioner Alyeska or its Japanese shareholders 
from entering into future transactions with the Vessel Owners, 
particularly financing and ancillary contractual arrangements, such as 
exclusive marketing agreements, would also violate the U.S.-Japan-FCN 
by substantially impairing the ability of Alyeska and its shareholders 
to protect

[[Page 4068]]

their existing rights and interests and to carry on their existing 
lawful business in the United States in conformity with past practice 
and on an equal footing with U.S. Citizens.
    To avoid these results, Congress included a provision in the AFA to 
ensure that the Act would not contravene U.S. treaty obligations. 
Section 213(g) provides in pertinent part:

    In the event that any provision of section 12102(c) or section 
31322(a) of title 46, United States Code, as amended by this Act, is 
determined to be inconsistent with an existing international 
agreement relating to foreign investment to which the United States 
is a party with respect to the owner or mortgagee on October 1, 2001 
of a vessel with a fishery endorsement, such provision shall not 
apply to that owner or mortgagee with respect to such vessel to the 
extent of any such inconsistency * * *.

Section 213(g) makes clear that its reach is intended to extend to 
every ``owner'' or ``mortgagee'' holding an ownership or mortgage 
interest on October 1, 2001, when Sections 202, 203 and 204 of the AFA 
become effective. Section 213(g) provides explicitly that the exemption 
does not apply to ``subsequent owners and mortgagees'' who acquire 
their interests after October 1, 2001 or ``to the owner [of the vessel] 
on October 1, 2001 if any ownership interest in that owner is 
transferred to or otherwise acquired by a foreign individual or entity 
after such date (emphasis added).
    Petitioners are ``owners'' and ``mortgagees'' who acquired their 
interests in the Vessels prior to October 1, 2001, and who intend to 
continue to hold those interests on and after October 1, 2001. The 
inconsistency between the provisions of the AFA and MARAD's 
implementing regulations and the requirements of the U.S.-Japan FCN is 
demonstrated above. Accordingly, under Section 213(g) of the Act, the 
provisions of Sections 202, 203 and 204 ``shall not apply'' to 
Petitioners ``to the extent of the inconsistency.''
    The exemption provided by Section 213(g) is not limited to existing 
property rights, mortgage interests or investment interests in 
existence on October 1, 2001, but rather applies to an ``owner'' or 
``mortgagee'' on October 1, 2001 ``to the extent of the inconsistency'' 
between the Act and the Treaty. Petitioners qualify as ``owners'' and 
``mortgagees.'' Petitioners are, therefore, exempt from the 
requirements of the AFA ``to the extent of the inconsistency'' between 
the AFA and the Treaty. As demonstrated above, the ``inconsistency'' 
between the AFA and the Treaty is two-fold: (1) The Treaty protects the 
existing ownership and mortgage interests of Petitioners and the 
Japanese Bank Lenders in the Vessels and related contract rights, which 
the AFA would prohibit or restrict; and (2) the Treaty protects future 
transactions between Alyeska, its Japanese shareholders or the Japanese 
Bank Lenders and the Vessel Owners, which the AFA would prohibit or 
restrict, including future loans, preferred mortgages and other 
financing and contractual arrangements, which Petitioners may deem 
necessary or appropriate to protect their existing businesses and their 
existing interests in the Vessels and the Vessel Owners. Thus, Section 
213(g) exempts Petitioners from the restrictions and limitations of 
Sections 202, 203 and 204 of the AFA and MARAD's implementing rules.

IV. Conclusion

    For the reasons stated above, Sections 202, 203 and 204 of the AFA 
and 46 CFR Part 356 are inconsistent with the U.S.-Japan FCN and 
therefore may not be applied to Petitioners with: respect to the 
Vessels or the Vessel Owners.
    This concludes the analysis submitted by Petitioner for 
consideration.

    Dated: January 11, 2001.
    By Order of the Maritime Administrator.
Joel Richard,
Secretary, Maritime Administration.
[FR Doc. 01-1357 Filed 1-16-01; 8:45 am]
BILLING CODE 4910-81-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>