[Federal Register Volume 66, Number 37 (Friday, February 23, 2001)]
[Notices]
[Pages 11375-11383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4468]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

[Docket No. MARAD-2001-8930]


MORNING STAR--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.

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SUMMARY: The Maritime Administration (MARAD, we, our, or us) is 
soliciting public comments on a petition from the owners and mortgagees 
of the vessel MORNING STAR--Official No. 610393 (hereinafter the 
``Vessel''). The petition requests that MARAD issue a decision that the 
American Fisheries Act of 1998 (``AFA''), Division C, Title II, 
Subtitle I, Public Law 105-277, and our regulations at 46 CFR Part 356 
(65 FR 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 
section 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 March 26, 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., SW., 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., SW., Washington, D.C. 20590-0001 or you may send 
e-mail to [email protected].

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

[[Page 11376]]

(greater than 50%) of section 2(b) of Shipping Act, 1916 (``1916 
Act''), as amended, 46 App. U.S.C. 802(b), to the standard contained in 
section 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, Public Law 100-239, section 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 section 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 section 
2(c) of the 1916 Act or utilize an approved U.S.-Citizen Mortgage 
Trustee that meets the 75% ownership and control requirements to hold 
the 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

    Alyeska Seafoods, Inc. (``Alyeska''), Wards Cove Packing Company 
(``Wards Cove''), Maruha Corporation (``Maruha'') and Western Alaska 
Fisheries, Inc. (``WAF''), are the owners of direct or indirect 
interests in Morning Star, L.P. (the ``Vessel Owner'') and indirect 
interests in the Vessel. Alyeska is the mortgagee under a preferred 
mortgage on the Vessel. (Alyeska, Maruha, Wards Cove and WAF are 
referred to hereinafter as a ``Petitioner'' and, collectively, as the 
``Petitioners.'')

Ownership and Mortgage Structure of the Vessel

    The ownership and mortgage structure for the Vessel is as follows:

A. Ownership Structure

    Morning Star, L.P., a Washington limited partnership (the ``Vessel 
Owner''), is the owner of the Vessel. The Vessel Owner was formed in 
1997 for the purpose of allowing Alyeska to acquire an interest in the 
Vessel. The sole general partner of Morning Star, L.P. is Morning Star 
Management, LLC, a Washington limited liability company which is owned 
entirely by individual U.S. Citizens and which owns 75% of the interest 
in Morning Star, L.P. Alyeska is the limited partner of Morning Star, 
L.P. and owns the remaining 25% interest in the limited partnership.
    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 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(o).

B. Mortgage Structure

    Alyeska provided a loan to the Vessel Owner that is secured by a 
preferred mortgage on the Vessel. This loan remains outstanding and 
continues to be secured by this preferred mortgage.

C. Exclusive Marketing Agreement

    Alyeska agreed to invest in the Vessel Owner and to provide a loan 
to that entity 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. The Limited 
Partnership Agreement of Morning Star, L.P. provides that the Vessel 
will sell its products primarily to Alyeska Seafoods, Inc. and that 
Alyeska will pay competitive prices for all such products. The only 
exceptions to the Partnership's obligation to deliver to Alyeska are 
where Alyeska lacks capacity to process a delivery and where Alyeska 
and Morning Star Management agree that the Vessel may sell into other 
markets.

Requested Action

    The Petitioners seek a determination from MARAD under section 
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 CFR 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 Owner;
    (2) the existing exclusive marketing agreement and other contract 
rights and interests ancillary to Alyeska's ownership interest in and 
financing arrangements with the Vessel Owner; and
    (3) future loans, financing and other contract arrangements between 
the Petitioners and the Vessel Owner with respect to the Vessel the 
existing preferred mortgage interests in the Vessel held by Alyeska.

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

[[Page 11377]]

Petitioners with respect to the Vessels. 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.
    ``1. The AFA's Restrictions on Foreign Financing and Foreign 
``Control'' of Fishing Vessels Violate Article VII.
    ``a. The AFA's Restrictions on Foreign Financing and Foreign 
``Control'' of Fishing Vessels Impair Petitioners' Rights and Interests 
With Respect to Existing Financing and Other Contractual Arraignments.
    ``The AFA will nullify the preferred mortgage interest in the 
Vessel currently held by Alyeska, impair Alyeska's rights and interests 
under existing financing documents, impair Alyeska's rights and 
interests under the exclusive marketing provision of the limited 
partnership agreement governing the Vessel Owner and prevent Alyeska 
and its Japanese shareholders from protecting their established 
businesses and interests by entering into future financing and 
contractual arrangements with the Vessel Owner.
    ``Current law permits wholly or partly Japanese-owned entities, 
including Alyeska, Maruha and WAF, to finance U.S. fishing vessels and 
to hold preferred mortgage interests in U.S. fishing vessels to secure 
their loans. \7\ 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.\8\ 46 U.S.C. 
31326(b)(1) gives the preferred mortgage lien priority over all liens 
arising after filing of the mortgage except a limited number of 
``preferred maritime liens'' listed at 46 U.S.C. 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 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 mortgage which Alyeska holds in the Vessel 
is a valuable property interest in the Vessel.
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    \7\ Compare 46 U.S.C. 31322(a), as now in effect, with 46 U.S.C. 
Sec. 31322(a)(4), as amended by Section 202(b) of the AFA.
    \8\ See, generally, 46 U.S.C. Chapter 313.
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    ``The AFA will prohibit Alyeska from continuing to hold its 
existing preferred mortgage on the Vessel. Section 202(b) of the AFA 
amends 46 U.S.C. 31322(a) to disqualify Non-Citizens, such as Alyeska, 
from holding preferred mortgages on fishing vessels over 100 feet in 
registered length.
    ``Further, The AFA contains a new definition of impermissible Non-
Citizen ``control'' \9\ and requires transfers of ``control'' of 
fishing vessels to be ``rigorously scrutinized'' by MARAD under this 
new standard.\10\ 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, including loans and exclusive marketing 
agreements.\11\ Unless MARAD reviews and approves the terms of the 
preferred mortgage and other financing documents previously executed by 
the Vessel Owner in favor of Alyeska prior to October 1, 2001 under 
these new standards, the Vessel will lose its fishery endorsement and 
the Vessel Owner will no longer be permitted to own or operate the 
Vessel in the U.S. fisheries.\12\ This, in turn, will destroy the value 
of the Vessels as security under the mortgage held by Alyeska and 
destroy the ability of the Vessel Owner to repay the debt which the 
mortgage secures. By prohibiting Alyeska from continuing to hold its 
existing preferred mortgage on the Vessel and imposing new conditions 
and restrictions on the terms of Alyeska's existing financing 
documents, including a new requirement of administrative review and 
approval of those financing documents under the AFA's new ``control'' 
standards, the AFA and MARAD's implementing regulations impair the 
contract rights and mortgage interests of Alyeska.
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    \9\ AFA Section 202(a), codified at 46 U.S.C. 12102(c)(2).
    \10\ AFA Section 203(c)(2).
    \11\ See, generally, 46 CFR 356.11, 356.13-15, 356.21-25, 
356.39-45.
    \12\ See 46 CFR 356.15(d), 356.21(d).
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    ``In addition, however, MARAD has made clear that there is no way 
that Alyeska can preserve its mortgage interest 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.\13\ Thus, the AFA's requirements will 
nullify Alyeska's existing preferred mortgage interest in the Vessel. 
If Alyeska's mortgage is not released, the Vessel will lose its fishery 
endorsement, destroying the value of the Vessel as collateral for 
Alyeska's loan and destroying the Vessel Owner's ability to pay its 
debts.\14\
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    \13\ 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'').
    \14\ While Alyeska's 25% limited partnership interest in the 
Vessel Owner is permissible under the AFA's new Non-Citizen 
ownership restriction, it is uncertain whether MARAD would approve a 
preferred mortgage held by a 25% Non-Citizen limited partner, even 
where the Non-Citizen limited partner is not a fish processor with 
which the Vessel Owner has entered into an exclusive marketing 
agreement.
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    ``Alyeska's rights and interests under the exclusive marketing 
provision of the limited partnership agreement governing the Vessel 
Owner are also impaired by the AFA. Because of the injunction of 
Section 202(c)(2) of the AFA to ``rigorously scrutinize'' exclusive 
marketing agreements with Non-Citizens, 46 CFR 356.43(c) requires a 
fishing vessel owner to obtain prior MARAD approval before entering 
into such an agreement ``if the agreement * * *  contains provisions 
that in any way convey to the [Non-Citizen] purchaser * * *  control 
over the operation, management or harvesting activities of the vessel, 
[or] vessel owner * * *  other than as provided for in paragraph (b)'' 
of that section. Since the Agreement of Limited Partnership of Morning 
Star, L.P. contains a variety of provisions related to the rights and 
obligations of Alyeska and Morning Star Management, LLC with respect to 
the management of the partnership, none of which are referenced in 
Section 356.43(b), it could be argued that the agreement ``contains 
provisions that in [some] way convey to [Alyeska] control over * * *  
the vessel owner.'' Accordingly, the AFA and Section 356.43(c) render 
the permissibility of the exclusive marketing provision of the limited 
partnership agreement and, accordingly, the Vessel Owner's continued 
eligibility for a fishery endorsement, uncertain.
    ``Further, even if Alyeska's existing mortgage interest and 
contract rights were found to be exempt from the requirements of the 
AFA and MARAD's implementing rules, the AFA's restrictions on future 
financing

[[Page 11378]]

transactions and contractual arrangements between Alyeska or its 
Japanese shareholders and the Vessel Owner 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 
and foreign ``control'' of fishing vessels will prevent Alyeska and its 
Japanese shareholders from protecting their investments in Alyeska's 
Dutch Harbor processing facility and their existing investment in and 
loan to the Vessel Owner by offering the Vessel Owner financing for 
operating funds or for vessel repairs or improvements which may become 
necessary to permit the Vessel Owner to operate profitably--or at all. 
If alternative financing from a financial institution is unavailable to 
the Vessel Owner, the ability of Alyeska to make loans to support the 
Vessel's continuing operations may be the only means available to 
protect the Vessel Owner from insolvency and default on its existing 
loan from Alyeska. Thus, the AFA's restrictions on the ability of 
Alyeska and its Japanese shareholders to make new loans to the Vessel 
Owner, to take security in the Vessel or to enter into contracts with 
the Vessel Owner jeopardize the existing investment and other financial 
interests of Alyeska and its Japanese shareholders in the Vessel Owner 
and the Vessel.
    ``Finally, the new restrictions imposed by the AFA and MARAD's 
regulations on the ability of Alyeska to make loans to and to enter 
into exclusive marketing arrangements with 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 
operation, construction, acquisition, repair 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 to 
qualified 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 operation, 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 operation, acquisition, 
repair or improvement of fishing vessels in return for fish deliveries. 
Just as their existing ownership and mortgage interests are protected 
by the Treaty, Alyeska and its Japanese shareholders must also be able 
to modify and restructure their loans and related security arrangements 
with the Vessel Owner and make new loans to the Vessel Owner with 
respect to the Vessel in order to further and protect Alyeska's 
existing investment, mortgage and business interests in the Vessel, as 
circumstances may require.
    ``b. The Restrictions on Foreign Financing and Foreign ``Control'' 
of Fishing Vessels Imposed by the AFA and MARAD's Implementing Rules 
Violate Article VII.1.
    ``The new restrictions on foreign financing and foreign ``control'' 
of fishing vessels imposed by the AFA and MARAD's implementing 
regulations violate Article VII.1's national treatment guaranty by (1) 
depriving Alyeska of its existing preferred mortgage interest, securing 
its existing loan; (2) subjecting the terms of Alyeska's existing loan 
documents and exclusive marketing agreement with the Vessel Owner 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 of the value of its collateral and the 
income stream from operations on which Alyeska relied in making its 
loan; and (4) preventing Alyeska or its shareholders from refinancing 
its existing loan, making new loans to the Vessel Owner, taking a new 
mortgage on the Vessel or entering into other contractual arrangements 
with respect to the Vessel or the Vessel Owner necessary to further or 
protect their existing financial and business interests in the Vessel.
    ``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.\15\ 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.
    ``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.'' \16\ 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 that the exception would 
extend to ``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.
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    \15\ Annex, Attachment 2, Memorandum of Conversation held March 
4, 1952, pp. 2-3.
    \16\ Annex, Attachment 3, Dept. of State Outgoing Telegram dated 
March 10, 1952, p. 1. See also Attachment 5 at p. 3, noting that the 
``* * * first paragraph of Article VI can be considered the heart of 
the treaty; it is the basic `establishment' provision, prescribing 
the fundamental principle governing the doing of business and the 
making of investments, in a treaty which is, above all, a treaty of 
establishment.''
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    ``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.\17\ 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.'' \18\ 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 government eventually agreed to 
withdraw its proposed change.\19\
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    \17\ Annex, Attachment 4, Dept. of State Outgoing Telegram dated 
May 21, 1952, p. 3.
    \18\ Id.
    \19\ Annex, Attachment 5, Memorandum of Conversation concerning 
discussions on the draft FCN held between October 15, 1952 and March 
11, 1953, p. 15.

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[[Page 11379]]

    ``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).'' \20\ 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.
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    \20\ Charles H. Sullivan, ``State Department Standard Draft 
Treaty of Friendship, Commerce and Navigation'' (undated) 
(hereinafter ``Sullivan Study'') at 144.
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    ``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 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.\21\
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    \21\ 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 and its shareholders with 
respect to their existing rights and interests, as the holders of 
ownership and debt interests in the Vessel Owner and mortgage 
interests in the Vessel, and with respect to future financing 
activities undertaken to further or protect those interests. Alyeska 
and its Japanese shareholders clearly ``acquired interests'' in the 
Vessel Owner and the Vessel prior to enactment of the AFA and are 
thus entitled to national treatment in future dealings with the 
Vessel Owners.
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    ``The provisions of the AFA and MARAD's implementing rules which 
restrict the right of Japanese-owned entities to make loans secured by 
preferred mortgages on U.S. vessels or to make loans or enter into 
other commercial contracts with a vessel owner without prior MARAD 
approval of the loan or contract 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 commercial * * * financial and other business activities.'' 
Under Article VII.1, neither State Party may restrict loans by foreign-
owned entities to the owners of fishing vessels of their national flag 
or commercial contract arrangements between them.
    ``The AFA and MARAD's implementing rules impose new restrictions on 
the ability of Alyeska and its shareholders, going forward, to protect 
their existing financial interests in the Vessel Owner and the Vessel 
by, e.g., re-financing existing loans, advancing new loans for 
operation, repair or improvement of the Vessel or entering into other 
financing or contractual arrangements with the Vessel Owner. These 
restrictions are not permitted by Article VII.1 of the Treaty. Article 
VII.1 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 or its shareholders involving the Vessel or the Vessel Owner.
    ``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.\22\ 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 
Owner to ensure a stable supply of fish to Alyeska's Dutch Harbor 
processing facility clearly violate Article VII.1.
---------------------------------------------------------------------------

    \22\ Annex, Attachment 6, Letter to the Chairman of the House of 
Representatives Committee on Merchant Marine and Fisheries from 
Robert Lee, August 17, 1964, as published in Ronny E. Jones, ``State 
Department Practices Under U.S. Treaties of Friendship, Commerce, 
and Navigation'' (1981) (hereinafter ``Jones Study'') at p. 80.
---------------------------------------------------------------------------

    ``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) Alyeska's 
existing preferred mortgage and associated loan documents previously 
executed by the Vessel Owner in favor of Alyeska; (b) the exclusive 
marketing agreement contained in the Morning Star Limited Partnership 
Agreement; or (c) future financing and ancillary contractual 
arrangements between Alyeska or its Japanese shareholders and the 
Vessel Owner, including exclusive marketing agreements.
    ``2. 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 Alyeska from holding its existing contract rights and 
preferred mortgage interest in the Vessel would deprive Alyeska of its 
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.''\23\ As the United States delegates made clear during the 
negotiation of the Treaty, the phrase ``interests held directly or 
indirectly''
---------------------------------------------------------------------------

    \23\ Protocol, para. 2 (emphasis added).

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.\24\
---------------------------------------------------------------------------

    \24\ Annex, Attachment 7, Memorandum of Conversation dated April 
15, 1952 at p. 3.

    In short, ``all property interests are contemplated by the 
provision.''\25\ This necessarily includes the preferred mortgage 
interest which Alyeska has in the Vessel, together with ancillary 
contract rights granted to Alyeska in the

[[Page 11380]]

loan documents and related agreements executed by the Partnership in 
conjunction with that loan.
---------------------------------------------------------------------------

    \25\ 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.'' \26\ Here, the AFA's new restrictions on 
foreign investment and foreign financing will prohibit the Vessel Owner 
from employing the Vessel in the U.S. fisheries. In effect, the AFA 
will either deprive the Petitioners of the economic value of their 
interests in the Vessel by prohibiting its productive use, force 
divestiture by Alyeska of its loan and preferred mortgage interests in 
the Vessel or force complete divestiture by the Vessel Owner of its 
interests in the Vessel. The impairment of the presently existing right 
of the Vessel Owner to employ the Vessel in the U.S. fisheries--and the 
right of Alyeska to hold its loan and preferred mortgage interests in 
the Vessel--is a sufficient impairment of those rights and interests as 
to constitute a violation of Article VI.3.
---------------------------------------------------------------------------

    \26\ Sullivan Study at 116 (emphasis added).
---------------------------------------------------------------------------

    ``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 Owner so as to force a divestiture 
of Alyeska's loan and preferred mortgage interests or complete 
divestiture of the Vessel 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,'' as required by Article VI.3--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.
    ``3. 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.'' \27\ Herman Walker 
observed that this language is designed ``to account for the 
possibility of injurious governmental harassments short of 
expropriation or sequestration.'' \28\ 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.'' 
\29\
---------------------------------------------------------------------------

    \27\ Id. at 115.
    \28\ Herman Walker, Jr., ``Treaties for the Encouragement and 
Protection of Foreign Investment: Present United States Practice,'' 
5 Am. J. Comp. Law 229 at 236 (1956).
    \29\ Annex, Attachment 8, 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.\30\
---------------------------------------------------------------------------

    \30\ Id. See also, Annex, Attachment 9, Department of State 
Division of Communications & Records Outgoing Airgram dated October 
28, 1952, p. 2. The latter indicates that, among other reasons, the 
State Department opposed the proposed Japanese language because it 
was concerned that the language ``could be construed (but 
tortuously) as allowing each party latitude with respect to 
discharging its full obligations under Articles VII and VIII to 
accord national treatment to the introduction of investment capital 
and the initiation and development of investment enterprises.''
---------------------------------------------------------------------------

    ``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.\31\ 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 among themselves related to the 
Vessel.
---------------------------------------------------------------------------

    \31\ Sullivan Study at 115.
---------------------------------------------------------------------------

    ``The intrusive and discriminatory restrictions imposed by the AFA 
and MARAD's implementing rules on transactions between Non-Citizen 
lenders, such as Alyeska, 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, repairs 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 
loan to the Vessel Owner would no longer be permitted and Alyeska will 
not be permitted to make future loans to the Vessel Owner to protect 
its existing interests. Further, the requirement of MARAD review and 
approval is itself an unreasonable and discriminatory

[[Page 11381]]

burden, particularly in the absence of coherent published standards. 
The AFA and MARAD's rules thus impose ``unreasonable or discriminatory 
measures'' on Non-Citizen fish processors, such as Alyeska, 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.
    ``4. 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,\32\ 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.'' \33\ 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.
---------------------------------------------------------------------------

    \32\ Article XIX.7 defines ``vessel'' to exclude ``fishing 
vessels'' for purposes of Article XIX.6.
    \33\ Annex, Attachment 6, Letter to the Chairman of the House of 
Representatives Committee on Merchant Marine and Fisheries from 
Robert Lee, August 17, 1964. See fn. 22.
---------------------------------------------------------------------------

    ``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.'' \34\ The State Department 
understood the Japanese suggestion as an attempt to obtain a blanket 
exception from the entire Treaty for national fisheries.\35\ 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.
---------------------------------------------------------------------------

    \34\ Annex, Attachment 10, Memorandum of Conversation held April 
3, 1952, at p. 5.
    \35\ Annex, Attachment 11, Department of State Outgoing Airgram 
dated June 1952, at pp. 1-2 (nothing 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'').
---------------------------------------------------------------------------

    ``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.\36\
---------------------------------------------------------------------------

    \36\ See fn. 22. 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.'' \37\
---------------------------------------------------------------------------

    \37\ 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.
    ``5. A 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.\38\ 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 CFR Part 
356.
---------------------------------------------------------------------------

    \38\ See, generally, Jones Study.
---------------------------------------------------------------------------

    ``6. The Government of Japan has Determined that Section 202 of the 
AFA is Inconsistent with the U.S.-Japan FCN.
    ``The United States has agreed in Article XXIV of the Treaty to 
give ``sympathetic consideration to, and shall afford adequate 
opportunity for consultation regarding, such representations as the 
[Government of Japan] may make with respect to any matter affecting the 
operation of the present Treaty.'' The Government of Japan has strongly 
objected to the application of the AFA's new limitations and 
restrictions on foreign ownership, foreign financing and foreign 
control of U.S. fishing vessels to Japanese nationals and companies 
that have invested in the U.S. fisheries prior to the effective date of 
the Act on the ground that such application would violate the U.S.-
Japan FCN. In a letter to Jo Brooks of the Office of Legal Adviser, 
U.S. Department of State, dated August 30, 1999, the Minister for 
Economic Affairs of the Embassy of Japan stated that the AFA's ``new 
U.S. citizen ownership and control requirements'' ``if applied without 
exception, would impair the legally acquired rights or interests of 
Japanese nationals and corporations in the United States of

[[Page 11382]]

America.'' \39\ The Minister for Economic Affairs noted section 213(g) 
of the AFA and stated the position of the Government of Japan as 
follows:
---------------------------------------------------------------------------

    \39\ Annex, Attachment 12 (August 30, 1999 letter from the 
Minister for Economic Affairs, Embassy of Japan, to Jo Brooks, 
Attorney-Adviser, Office of Legal Adviser, U.S. Dep't. of State) at 
1.

    As an existing international agreement relating to foreign 
investment, we would like to refer to the Treaty of Friendship, 
Commerce and Navigation between Japan and the United States of 
America, hereinafter referred to as ``the Treaty.'' Paragraph two of 
Article VII of the Treaty states that ``* * * 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.'' The Government of 
Japan is of the view that since the new requirements under the 
provisions of Subsection 202(c) \40\ of the AFA would be recognized 
as new limitations imposed by the United States, such new 
requirements would be inconsistent with paragraph two of Article VII 
of the Treaty if applied to entities that are engaged in fishing 
activities and owned or controlled by Japanese nationals and 
corporations at the time the AFA comes into force.
---------------------------------------------------------------------------

    \40\ There is no Subsection 202(c) of the AFA. The reference 
intended is clearly subsection 202(a), amending 46 U.S.C. 
Sec. 12102(c).
---------------------------------------------------------------------------

    Moreover, paragraph one of Article V of the Treaty states that 
``Neither 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, in their capital, in the 
skills, arts or technology which they have supplied;--.'' This 
provision indicates that any U.S. government measure that impairs 
the legally acquired rights or interests of Japanese nationals and 
companies should not be permitted under this Treaty. Therefore, the 
Japanese nationals and companies that have already invested in 
fisheries in the United States should be exempted from the 
application of the new requirements under Subparagraph 202(c) of the 
AFA.
    Accordingly, the Government of Japan is of the view that the 
entities that are engaged in fishing activities and owned or 
controlled by Japanese nationals and corporations should be exempted 
from the new requirements set forth in the Section 202(c). * * * 
\41\
---------------------------------------------------------------------------

    \41\ Annex, Attachment 12 at 1-2.

    ``In a subsequent letter to the Department of State, dated January 
24, 2000, the Embassy of Japan expressed the ``concern'' of the 
Government of Japan about regulations proposed by MARAD to implement 
the AFA.\42\ In its January 24, 2000 letter, the Embassy of Japan 
reiterated the view of the Government of Japan that Section 202 of the 
AFA is ``inconsistent with paragraph two of Article VII and paragraph 
one of Article V of the Treaty of Friendship, Commerce and Navigation 
between Japan and the United States of America'' and therefore ``in 
accordance with the provision of Section 213(g) of the Act'' ``will not 
apply to entities that are engaged in fishery activities and owned or 
controlled by Japanese nationals or corporations.'' With respect to 
MARAD's proposed regulations, the Embassy of Japan noted that the 
regulations ``would require the procedure of an annual petition from 
Japanese companies that are engaged in fishery activities even before 
October 1, 2001, in order for the continuation of their activities. To 
impose such a new burden would be inconsistent with the aforementioned 
obligations of the United States as stipulated by the Treaty.'' \43\ 
The Embassy of Japan noted further:
---------------------------------------------------------------------------

    \42\ Annex, Attachment 13 (January 24, 2000 Letter from the 
Embassy of Japan to the U.S. Dep't. of State at 1.
    \43\ Id.

    The proposed regulations would require a private company to 
provide interpretations of the Treaty and the AFA as an attached 
document to the petition for exemption from the AFA, as prescribed 
in Section 356.53(b)(3). It is rather the obligation of the 
Government of the United States as party to the Treaty to do so.\44\
---------------------------------------------------------------------------

    \44\ Id. at 2.

    The Government of Japan requested ``that the Government of the 
United States fully ensure * * * that all Japanese companies at present 
engaged in fishery activities be exempted from the new requirements 
prescribed in Section 202 of the AFA.'' \45\
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

    ``Thus, the Government of Japan has strongly expressed its view 
that the AFA's new restrictions on foreign investment, foreign 
financing and foreign control of U.S. fishing vessels are inconsistent 
with the U.S.-Japan FCN as applied to companies with existing Japanese 
investment. In light of the obligation of the United States under 
Article XXIV of the Treaty to give ``sympathetic consideration'' to the 
representations of the Government of Japan concerning the conflict 
between Section 202 of the AFA and the Treaty and the interest of the 
United States in the protection of its own enterprises and investors 
abroad, MARAD should acknowledge the conflict between the AFA and the 
U.S.-Japan FCN and issue an order holding that Petitioners are exempt 
from the requirements of Section 202 of the AFA and the implementing 
provisions of Section 203 and 46 CFR Part 356 with respect to the 
Vessels.
    ``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 CFR 
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 of valuable existing 
preferred mortgage interests and contract rights 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 Owner, 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 their 
existing rights and interests and to carry on their existing lawful 
businesses 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

[[Page 11383]]

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 
U.S.-Japan FCN is a self-executing treaty which is binding on MARAD as 
a matter of federal domestic law.\46\ Under ordinary principles of 
statutory construction, the AFA and the Treaty should be construed to 
avoid conflict and to give effect to each. The federal courts have 
recognized that federal statutes should be construed in a manner to 
avoid conflict with international treaties. Thus, federal statutes 
``ought never to be construed to violate the law of nations if any 
other possible construction remains.'' \47\ Only where Congress has 
expressed the clear intent to depart from the obligations of a treaty 
will the provisions of later federal legislation be found to conflict 
with and supersede U.S. treaty obligations.\48\ Here, it is apparent 
from the terms of Section 213(g) that Congress affirmatively intended 
to avoid conflict with international treaties such as the U.S.-Japan 
FCN by exempting ``owners'' and ``mortgagees'' from provisions of the 
AFA which would otherwise be inconsistent with U.S. treaty obligations. 
The inconsistency between Sections 202 and 203 of the AFA and the 
requirements of the U.S.-Japan FCN is demonstrated above with respect 
to Petitioners. Accordingly, under Section 213(g) of the Act, the 
provisions of Sections 202 and 203 ``shall not apply'' to Petitioners 
``to the extent of * * * such inconsistency.''
---------------------------------------------------------------------------

    \46\ See, e.g., Zenith Radio Corp. v. Matsushita Electric 
Industrial Co., Ltd., 494 F. Supp 1263, 1266 (E.D.Pa. 1980).
    \47\ McCulloch v. Sociedad Nacional de Marineros de Honduras, 
370 U.S. 10, 21 (1963).
    \48\ Id. See, also, Sumitomo Shoji America, Inc. v. Avagliano, 
et al., 457 U.S. 176 (1982).
---------------------------------------------------------------------------

    ``The exemption provided by Section 213(g) is not limited to 
ownership or mortgage interests in existence on October 1, 2001, but 
rather applies to an ``owner'' or ``mortgagee'' on October 1, 2001 and 
extends the exemption ``to the extent of the inconsistency'' between 
the Act and the Treaty ``with respect to'' the vessel in which the 
``owner'' or ``mortgagee'' holds an interest. 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 preferred mortgage interests 
of Petitioners in the Vessel and related contract rights (including the 
exclusive marketing agreement) which the AFA would impair, prohibit or 
restrict; and (2) the Treaty protects future transactions between 
Alyeska or its Japanese shareholders and the Vessel Owner, 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 Vessel and the Vessel 
Owner. Thus, Section 213(g) exempts Petitioners entirely from the 
restrictions and limitations of Sections 202, 203 and 204 of the AFA 
and MARAD's implementing rules with respect to the Vessel.''
    This concludes the analysis submitted by Petitioner for 
consideration.

    Dated: February 16, 2001.

    By order of the Maritime Administrator.
Joel Richard,
Secretary, Maritime Administration.
[FR Doc. 01-4468 Filed 2-22-01; 8:45 am]
BILLING CODE 4910-81-P