[Federal Register Volume 66, Number 37 (Friday, February 23, 2001)]
[Notices]
[Pages 11355-11364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4470]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

[Docket No. MARAD-2001-8929]


Frontier Spirit, Frontier Mariner, and Frontier Explorer--
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'') is soliciting public 
comments on a petition from the owners and mortgagees of the vessels 
FRONTIER SPIRIT--Official Number 951441, FRONTIER MARINER--Official 
Number 951440, and FRONTIER EXPLORER--Official Number 975015 
(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, 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 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, DC 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, DC 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 (greater than 50%) of section 2(b) of Shipping Act, 
1916 (``1916 Act''), as amended, 46 App. U.S.C. Sec. 802(b), to the 
standard contained in section 2(c) of the 1916 Act, 46 App. U.S.C. 
Sec. 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.

[[Page 11356]]

    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 Sec. 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 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

    Spirit Limited Partnership, Mariner Limited Partnership and 
Explorer Limited Partnership (each a ``Vessel Owner'' and collectively, 
the ``Vessel Owners'') are the owners respectively of the Frontier 
Spirit, Frontier Mariner and Frontier Explorer. The Vessel Owners, in 
conjunction with Frontier Spirit Company, Frontier Mariner Company, 
Frontier Explorer Company, Alaska Frontier Company (``AFCO''), North 
American Maritime Corporation (``NAMCO'') and North Japan Maritime 
Corporation (``NOMCO''), the owners of direct or indirect interest in 
the Vessel Owners and indirect interests in the Vessels, are 
hereinafter collectively referred to as ``Petitioner'' or 
``Petitioners.''

Ownership, Mortgage Structure, and Contractual Arrangements for the 
Vessels

    The ownership and financing structures of the Vessels are 
substantially identical. The Petitioner provided the following 
information about the ownership, mortgage structure and other 
contractual obligations of the Vessels:

A. Ownership Structure

    Spirit Limited Partnership, a Washington limited partnership, is 
the owner of the Frontier Spirit. The general partner, Frontier Spirit 
Company, is a Washington corporation that owns 51% of the interest in 
the partnership. Frontier Spirit Company is wholly owned by AFCO. A 
majority of AFCO's stock is owned by U.S. Citizens; however, it does 
not qualify as a U.S. Citizen under the AFA because Japanese entities 
and individuals own more than 25% of AFCO's capital stock.
    The sole limited partner of Spirit Limited Partnership is NAMCO, a 
Washington corporation owned by an individual Japanese citizen and 
NOMCO, a Japanese Corporation. NAMCO owns 49% of the interest in the 
partnership.
    The Frontier Mariner is owned by Mariner Limited Partnership, a 
Washington limited partnership. The general partner, Frontier Mariner 
Company, is a Washington corporation which owns 51% of the partnership 
interest. Frontier Mariner Company is also wholly owned by AFCO. NAMCO 
is the sole limited partner and owns 49% of the partnership interest.
    The Frontier Explorer is owned by Explorer Limited Partnership, a 
Washington limited partnership. The general partner, Frontier Explorer 
Company, is a Washington corporation which owns 51% of the partnership 
interest. Frontier Explorer Company is also wholly owned by AFCO. NAMCO 
is the sole limited partner and owns 49% of the partnership interest.

B. Financing Structure

    The Petitioners set forth certain loan and currency swap agreements 
that the Vessel Owners have entered into with Bank of America, N.A., a 
U.S. financial institution, to finance the remaining obligations of the 
Vessel Owners related to the construction of the Vessels. Under these 
agreements and related loan documents, each of the Vessel Owners is 
jointly and severally obligated to Bank of America. These agreements 
are secured by preferred mortgages on each of the Vessels. The 
Petitioners note that Vessel Owners have also executed security 
agreements granting UCC security interests in the Vessels, their 
appurtenances and fishing rights to Bank of America to secure these 
loans.
    In addition to the above, the Petitioners state that the Vessel 
Owners have entered into a loan agreement with Bank of America pursuant 
to which Bank of America has agreed to provide them jointly a $1 
million line of credit for working capital. Each of the Vessel Owners 
is jointly and severally obligated to Bank of America under this line 
of credit loan agreement and related loan documents. The obligations of 
the Vessel Owners to Bank of America under the line of credit are 
secured by second preferred mortgages on the Vessels. The Vessel Owners 
have also executed security agreements granting security interests in 
the Vessels, their appurtenances and fishing rights to Bank of America 
to secure these obligations.
    Except as described above, Petitioners state that no other 
mortgages, security interests or other consensual liens affect the 
assets of the Vessel Owners.
    Frontier Spirit Company, Frontier Mariner Company, Frontier 
Explorer Company, NAMCO, NOMCO, AFCO and AFCO's U.S. Citizen and Non-
Citizen shareholders have each guaranteed all of the obligations of the 
Vessel Owners to Bank of America pursuant to substantially identical 
Commercial Guaranty agreements in favor of Bank of America.

C. Other Contractual Arrangements

1. Management Agreement
    The Petitioners state that each of the Vessel Owners has entered 
into a Management Agreement with AFCO. Under the agreement, AFCO 
provides an extensive array of vessel management services to the Vessel 
Owners including: identifying and recommending qualified licensed 
officers and other navigational personnel for employment by the Vessel 
Owner; performing accounting services, including maintenance of payroll 
records, preparation of tax returns, keeping the general ledger, 
managing accounts payable and receivable, reconciling bank records and 
preparing financial statements; coordinating and directing the 
victualling, supplying fueling and repairing of the Vessel, including 
the procurement of bait, outfit, equipment and spare or replacement 
parts; arranging for the payment of all expenses incident to the 
Vessel's operation; periodic drydocking of the Vessel; making travel 
arrangements for the licensed officers

[[Page 11357]]

and other navigational personnel, including airfare, transportation and 
lodging incidental to rotation of relevant personnel to and from the 
Vessel; and any other activities incidental to the management of the 
Vessel.
2. Vessel Manning Agreement.
    Petitioners state that each of the Vessel Owners has entered into a 
Vessel Manning Agreement with NAMCO, dated as of January 1, 2001, under 
which NAMCO identifies, hires and employs unlicensed processing 
personnel and quality control technicians for service aboard the 
Vessels and provides certain related services. Licensed officers and 
other navigational personnel are not covered by the Vessel Manning 
Agreement according to the Petitioners, as they are employed directly 
by the Vessel Owner. The Petitioners assert that the Vessel Manning 
Agreement contains no terms giving NAMCO or any other Non-Citizen the 
right to manage, control or direct the Vessel's operations.
3. Marketing Agreement.
    The Petitioners submit that each of the Vessel Owners has entered 
into a marketing Agreement with NOMCO, effective January 1, 2000, 
governing sales and purchases by the parties of Pacific Cod and other 
groundfish sold by the Vessel Owners to NOMCO. Petitioners state that 
these marketing Agreements do not require that any quantity or 
percentage of a Vessel's catch be sold to NOMCO or the Japanese market; 
however, NOMCO has a right of first refusal on all fish products sold 
by the Vessel Owners in the Japanese market. Each of these Agreements 
is for a term of one year, but is renewed annually unless either party 
gives notice of termination to the other in writing at least 60 days 
prior to the end or the term, including any renewal term. The Petitions 
submit that the Agreements contain no terms giving NOMCO or any other 
Non-Citizen the right to manage, control or direct the operations of 
the Vessels.

D. Services Agreement

    The Petitioners note that each of the Vessel Owners has entered 
into a Services Agreement with NOMCO, dated as of January 1, 2001, 
whereby NOMCO has agreed (1) to supply current market information to 
the Vessel Owners concerning market demand, processing and handling 
requirements, prices and trends; and (2) to provide an unsecured, 
subordinated standby line of credit to the Vessel Owners.

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 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;
    (2) the existing exclusive marketing agreements, loan guaranties, 
financing and other contractual arrangements between or among the 
Petitions with respect to the Vessels; and
    (3) future loan, financing and other contractual arrangements 
between or among the Petitioners 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 Sec. 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. 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 Ownership Violate 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 the investment by Japanese nationals and Japanese 
companies in the Vessel Owners exceeds the maximum investment 
permitted by the AFA to be held by Non-Citizens.\3\
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    \3\ As used herein, ``Non-Citizen'' has the meaning specified at 
46 CFR Sec. 356.3(o).
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    ``A vessel cannot be employed lawfully 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 for 
use in the U.S. fisheries and operated in the U.S. fisheries of the 
North Pacific Ocean and Bering Sea. The Vessels have no other 
economically productive uses. 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 FR 44860 et seq., July 19, 2000). 
The aggregate of the ownership interests held, directly or 
indirectly, in the Vessel Owners by Japanese companies and Japanese 
nationals 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.\4\

[[Page 11358]]

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 loan and currency swap 
agreements with Bank of America, triggering the obligations of their 
limited partners, general partners and the direct and indirect 
shareholders of the general partners under their guaranties. 
Alternatively, the Vessel Owners will be forced to sell the Vessels 
or their Japanese Investors \5\ will be forced to sell some or all 
of their direct and indirect interests in the Vessel Owners, 
assuming a buyer for their minority interests can be found.
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    \4\ See 46 U.S.C. 12102(c)(1), as amended. 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 ``a majority'' to 75%; and (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 indirect foreign interests ``in the 
aggregate'' to exceed 50%, so long as majority 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 majority 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 ownered by entities which satisfy the majority U.S. ownership 
standard of current law at each ``tier'' of ownership but which do 
not meet the new 75% U.S. ownership requirements of the AFA.
    \5\ As used herein, the ``Japanese Investors'' are NOMCO, NAMCO, 
their Japanese shareholders and the Japanese shareholders of AFCO.
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    ``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.'' \6\ 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 as an 
investment instrument.'' \7\ In a case involving interpretation of 
the U.S.-Japan FCN, the United States Supreme Court noted that the 
purpose 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.'' \8\ ``[N]ational treatment 
of corporations means equal treatment with domestic corporations.'' 
\9\
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    \6\ Herman Walker, Jr., ``Modern Treaties of Friendship, 
Commerce and Navigation,'' 42 Minn. L. Rev. 805, 806 (1958) 
(hereinafter, ``Modern Treaties'').
    \7\ Herman Walker, Jr., ``The Post-War Commercial Treaty Program 
of the United States,'' 73 Pol. Sci. Q. 57, 67 (1958).
    \8\ Sumitomo Shoji America v. Avagliano, 457 U.S. 176, 187-88 
(1982).
    \9\ Id. at 188 n. 18.
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    ``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 the Japanese Investors in compliance with existing law 
clearly denies national treatment to them, to the Vessel Owners and 
to the other Petitioners. 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. \10\ ``[R]egulations that 
force divestiture of interests already acquired or established prior 
to promulgation of such regulation * * * raise Art. VII questions.'' 
\11\ 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.'' \12\ 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. \13\

    \10\ Ronny E. Jones, ``State Department Practices Under U.S. 
Treaties of Friendship, Commerce, and Navigation'' (1981) 
(hereinafter ``Jones Study'') at 57. Petitioners presume that MARAD 
has access to the Jones Study and to the Sullivan Study referenced 
below. Petitioners will provide copies of these studies to MARAD on 
request.
    \11\ Id. at 107.
    \12\ Modern Treaties at 809.
    \13\ Charles H. Sullivan, ``State Department Standard Draft 
Treaty of Friendship, Commerce and Navigation'' (undated) 
(hereinafter ``Sullivan Study'') at 149 (emphasis added).
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    ``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.'' \14\
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    \14\ Id. at 148.
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    ``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 limitations to companies already engaged in 
relevant business activities.\15\
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    \15\ Annex, Attachment 2, Department of State Incoming Telegram 
dated March 20, 1953, p. 1.
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    ``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

[[Page 11359]]

granting grandfather rights to existing businesses were deleted.\16\ 
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.\17\
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    \16\ Annex, Attachment 3, Memorandum from Frank A. Waring, 
Counselor of U.S. Embassy for Economic Affairs (undated excerpt).
    \17\ Annex, Attachment 2, Department of State Incoming Telegram 
dated March 20, 1953, p. 1, and Attachment 4, Department of State 
Office Memorandum dated March 23, 1953, pp. 1-2.
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    ``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. * * * ``\18\ 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 NAMCO, NOMCO and their Japanese shareholders 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 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 U.S. 
Citizen-owned enterprises.
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    \18\ Sullivan Study at 150.
---------------------------------------------------------------------------

    ``NOMCO and the individual Japanese citizens who have invested 
in the Vessel Owners are clearly entitled to protection as Japanese 
nationals 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. NAMCO, Frontier 
Spirit Company, Frontier Mariner Company, Frontier Explorer Company, 
the Vessel Owners and AFCO 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 the Japanese Investors. 
Thus, the Article VII.2 grandfather provision protects the ownership 
interests of NOMCO and the Japanese Investors in AFCO and NAMCO; the 
ownership interests of AFCO\19\ and NAMCO in the Vessel Owners; and 
the Vessel Owners' right to continue to own and operate their 
respective Vessels in the U.S. fisheries.
---------------------------------------------------------------------------

    \19\ Through its wholly owned subsidiaries, Frontier Spirit 
Company, Frontier Mariner Company and Frontier Explorer Company.
---------------------------------------------------------------------------

    ``However, as noted above, the Article VII.2 grandfather 
provision not only protects pre-existing 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 the Japanese Investors from the new restrictions 
of Section 202 and 203 of the AFA and 46 CFR Part 356 with respect 
to (a) the Japanese Investors' existing direct and indirect 
ownership and financial 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 or 
among the Japanese Investors and the Petitioners to further or 
protect their existing rights and interests in the Vessels and the 
Vessel Owners, such as by extending loans, taking preferred 
mortgages or other security in the Vessels or entering into 
contractual arrangements in furtherance of their existing ownership, 
financial or other business interests with respect to the Vessels.
    ``2. 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' Existing Rights 
and Interests With Respect to the Vessels.
    ``The AFA's restrictions on foreign financing and foreign 
``control'' of fishing vessels imposed by Sections 202 and 203 of 
the AFA impair the existing rights and interests of Frontier Spirit 
Company, Frontier Mariner Company, Frontier Explorer Company, NOMCO, 
NAMCO, AFCO and AFCO's Non-Citizen shareholders (the ``Non-Citizen 
Guarantors'') under their guaranties in favor of Bank of America and 
impair the ability of the Japanese Investors to protect and further 
their existing investment and business interests in the Vessels and 
the Vessel Owners.
    ``The harm to Petitioners caused by the AFA consists of three 
types.
    ``First, the AFA impairs the existing rights and interests of 
Petitioners as guarantors of the obligations of the Vessel Owners to 
Bank of America.
    ``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 and non-maritime liens.\20\ 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 maritime liens in 
favor of suppliers, materialmen, repairmen others arise 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 all liens. Absent ``preferred 
mortgage'' status, a mortgage provides no protection against 
maritime liens and little or no security for the lender. Thus, Bank 
of America's rights under the existing preferred mortgages on the 
Vessels are valuable rights.
---------------------------------------------------------------------------

    \20\ See, generally, 46 U.S.C. Chapter 313.
---------------------------------------------------------------------------

    ``Current law permits wholly or partly Japanese-owned lenders, 
such as the Non-Citizen Guarantors, to hold preferred mortgage 
interests in U.S. fishing vessels directly.\21\ As guarantors of the 
loan and currency swap agreements between the Vessel Owners and Bank 
of America, the Non-Citizen Guarantors may be required to pay off 
the obligations of the Vessel Owners in the event they default on 
repayment of their loans. In this situation, under the law of 
subrogation, the guarantors will step into the shoes of Bank of 
America with respect to its existing loan documents, including the 
preferred mortgages on the Vessels.\22\ While neither the AFA nor 
MARAD's implementing rules expressly address the rights of a 
guarantor in this situation, the AFA prohibits a Non-Citizen, such 
as the Non-Citizen Guarantors, (1) from directly acquiring Bank of 
America's interests in the preferred mortgages;\23\ and (2) from 
holding even a beneficial interest in the mortgages (i.e., as the 
beneficiary under a mortgage trust arrangement) unless MARAD has 
previously reviewed and approved the terms of all related loan 
documents.\24\ Acquisition by the Non-Citizen Guarantors of Bank of 
America's position vis-a-vis the Vessel Owners pursuant to their 
existing rights under the law of subrogation would result in the 
invalidation of the Vessels' fishery endorsements.\25\
---------------------------------------------------------------------------

    \21\ Compare 46 U.S.C. 31322(a), as now in effect, with 46 
U.S.C. 31322(a)(4), as amended by Section 202(b) of the AFA.
    \22\ Restatement, Third, Suretyship and Guaranty Section 27 
(1996); Restatement of Security Section 141 (1941); Dobbs Law of 
Remedies Section 4.3(4) (2d ed. 1993); 73 Am.Jur., 2d Subrogation 
Section 106 (1974); Petro Paint Mfg. Co. v. Freeman, 170 Wash. 390, 
392, 16 P.2d 609 (1932). See also, Mahler v. Szucs, 135 Wn.2d 398, 
412, 957 P.2d 632 (1998); Livingston v. Shelton, 85 Wn.2d 615, 619, 
537 P.2d 774 (1975); Timms v. James, 28 Wn.App. 76, 80, 621 P.2d 798 
(1980); MGIC Financial Corp. v. H.A. Briggs Co., 24 Wn.App. 1, 6, 
600 P. 2d 573 (1979).
    \23\ 46 U.S.C. Sec. 31322(a)(4), as amended by Section 202(b) of 
the AFA, and 46 CFR Sec. 356.19.
    \24\ 46 U.S.C. Sec. 12102(c)(4)(A), as amended by Section 202(a) 
of the AFA, and 46 CFR Secs. 356.15(d) and 356.21(d).
    \25\ 46 U.S.C. 12102(c)(4)(A), as amended by the AFA, and AFA 
Section 203(e). 46 CFR 356.45 would not apply, among other reasons, 
because the Bank's loans are secured by preferred mortgages on the 
Vessels.
---------------------------------------------------------------------------

    ``The AFA contains a new definition of impermissible Non-Citizen 
``control'' \26\ and requires transfers of ``control'' of fishing 
vessels to be ``rigorously scrutinized'' by

[[Page 11360]]

MARAD under this new standard.\27\ 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 financing 
transactions, management agreements and marketing agreements.\28\ 
Unless MARAD reviews and approves the loan agreements, preferred 
mortgages and other financing documents previously executed by the 
Vessel Owners in favor of Bank of America 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, if the Non-Citizen Guarantors succeed to the 
rights and interests of Bank of America--even through a qualified 
Mortgage Trustee.\29\ This, in turn, will destroy the value of the 
Vessels as security under the mortgages and destroy the ability of 
the Vessel Owners to pay the debts which the mortgages secure. By 
prohibiting the Non-Citizen Guarantors from succeeding to the 
interests of Bank of America under the law of subrogation and 
imposing new conditions and restrictions on the terms of their 
existing financing arrangements, including a new requirement of 
administrative review and approval of the loan documents under AFA's 
new ``control'' standards, the AFA and MARAD's implementing 
regulations impair the rights and interests of the Non-Citizen 
Guarantors under their guaranties and under the existing preferred 
mortgages and related loan documents.
---------------------------------------------------------------------------

    \26\ AFA Section 202(a), codified at 46 U.S.C. 12102(c)(2).
    \27\ AFA Section 203(c)(2).
    \28\ See, generally, 46 CFR 356.11, 356.13-15, 356.21-25, 
356.39-45.
    \29\ See 46 U.S.C. 12102(c)(4)(A), 46 CFR 356.15(d), 356.21(d) 
and AFA Section 203(e).
---------------------------------------------------------------------------

    ``The second way in which the AFA's new restrictions on foreign 
``control'' harm the Petitioners is by impairing, prohibiting or 
restricting their existing contractual arrangements with respect to 
the Vessels. The Management Agreements between the Vessel Owners and 
AFCO may be impermissible because of the role played by AFCO, a Non-
Citizen, in managing the Vessels. It is similarly uncertain whether 
the Vessel Manning Agreements between the Vessel Owners and NAMCO 
and the Marketing Agreements and Services Agreements between the 
Vessel Owners and NOMCO are permissible. The standards for 
evaluating such agreements under the AFA and Part 356--individually, 
in combination with one another and in combination with other 
factors--are so vague that the permissibility of Petitioners' 
existing contract arrangements under the AFA cannot be determined 
except by obtaining an ad hoc decision by MARAD. Accordingly, the 
AFA requires Petitioners to seek MARAD approval of all of these 
agreements, unless Petitioners are exempted from the AFA's 
requirements with respect to these agreements.\30\
---------------------------------------------------------------------------

    \30\ Of course, if AFCO and the Vessel Owners are exempt from 
the ownership requirements of the AFA, then they should also be 
exempt with respect to their contractual arrangements.
---------------------------------------------------------------------------

    ``The third way in which the AFA's new restrictions on foreign 
financing and foreign ``control'' harm the Petitioners is by 
restricting the ability of the Japanese Investors and the U.S. 
companies in which they have invested to enter into future financing 
and other contractual arrangements with the Vessel Owners in order 
to protect and further their existing investment and other business 
interests in the Vessel Owners and the Vessels. The AFA's 
restrictions on foreign ``control'' and foreign financing of fishing 
vessels will limit the ability of the Japanese Investors and the 
U.S. companies in which they have invested to protect their 
investments and interests in the Vessels by entering into management 
agreements, exclusive marketing agreements or by offering the Vessel 
Owners financing for vessel operations, repairs or improvements. The 
ability of the Japanese Investors to make loans to support the 
Vessels' continuing operations or necessary repairs or improvements 
may be the only means to protect the Vessel Owners from insolvency 
and default on their loans from Bank of America, potentially 
jeopardizing Petitioners' investments and triggering the obligations 
of the Non-Citizen Guarantors on their guaranties. Thus, the AFA's 
restrictions on the ability of the Japanese Investors to make loans 
to the Vessel Owners, to take security in the Vessels and to enter 
into other contractual arrangements related to the Vessels 
jeopardize the existing financial and business interests of all of 
the Petitioners.
    ``The provisions of 46 CFR 356.45 which approve certain loans by 
Non-Citizens to fishing vessel owners are too restrictive to permit 
the types of loans which may be necessary to permit Petitioners to 
protect their ownership and other business interests in the Vessels. 
Section 356.45(a)(2) permits advances to vessel owners by Non-
Citizens ``[w]here the basis of the advancement is an agreement 
between the Non-Citizen and the vessel owner * * * to sell all or a 
portion of the vessel's catch to the Non-Citizen'' but prohibits the 
lender from taking security in the vessel and limits such loans to 
the annual ``value of the product to be supplied to the [Non-
Citizen].'' These limitations are not found in existing law and 
significantly restrict the ability of the Japanese Investors to make 
loans which business circumstances may require. Section 356.45(b) 
permits certain types of loans but only if the loan is wholly 
unsecured and only if the Non-Citizen lender ``is not affiliated 
with any party with whom [the vessel owner] has entered into a 
mortgage, long-term or exclusive sales or purchase agreement, or 
other similar contract.'' Thus, future financing arrangements 
between the Vessel Owners and the Japanese Investors are severely 
limited and restricted under these provisions.
    ``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) Impairing the existing legal rights and interests of 
the Non-Citizen Guarantors under Bank of America's existing 
preferred mortgages and related loan documents; (2) subjecting the 
rights of the Non-Citizen Guarantors under Bank of America's 
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) impairing the existing 
rights and interests of Petitioners under existing contracts 
ancillary to their ownership and financing arrangements with respect 
to the Vessels; and (4) restricting the ability of Petitioners and 
the Japanese Investors to extend credit to the Vessel Owners, take 
preferred mortgages on the Vessels or enter into other contractual 
arrangements with respect to the Vessels or the Vessel Owners 
necessary to further or protect the existing financial and business 
interests of the Japanese Investors.
    ``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. It follows that the rights and 
interests of Non-Citizen Guarantors who succeed to the rights of the 
lender under existing loan documentation are also protected.
    ``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.\31\ 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.
---------------------------------------------------------------------------

    \31\ Annex, Attachment 5, Memorandum of Conversation held 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.'' \32\ 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

[[Page 11361]]

right to full national treatment under Article VII.1.
---------------------------------------------------------------------------

    \32\ Annex, Attachment 6, 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 VII 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.''
---------------------------------------------------------------------------

    ``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.\33\ 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.'' 
\34\ 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.\35\
---------------------------------------------------------------------------

    \33\ Annex, Attachment 7, Dept. of State Outgoing Telegram dated 
May 21, 1952, p. 3.
    \34\ Id.
    \35\ Annex, Attachment 8, Memorandum of Conversation concerning 
discussions on the draft FCN held between October 15, 1952 and March 
11, 1953, 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).'' \36\ 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 
financing activities of the Non-Citizen Guarantors or the Japanese 
Investors. 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.\37\
---------------------------------------------------------------------------

    \36\ Sullivan Study at 144.
    \37\ To the extent that it could be argued that the first 
sentence of Article VII.2 might permit restrictions on foreign 
financing or ``control'' of fishing vessels, the grandfather 
provision of Article VII.2 would clearly protect the Japanese 
Investors and the Non-Citizen Guarantors with respect to their 
existing rights and interests, as the holders of ownership interests 
and contingent mortgage interests in the Vessels and rights under 
existing contracts--and with respect to future financing and 
contractual arrangements undertaken to further or protect those 
interests. The Japanese Investors and Non-Citizen Guarantors 
``acquired interests'' in the Vessel Owners and the Vessels in 
reliance on existing law and are thus entitled to national treatment 
with respect to both their existing rights and interests and with 
respect to future dealings with the Vessel Owners to further or 
protect those existing rights and interests.
---------------------------------------------------------------------------

    ``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, to enter into contracts with the 
vessel owner or to make loans or enter into 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 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 
Non-Citizen 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 nationals 
of the other to a fishing vessel owner or other contractual 
arrangements between such foreign nationals and vessel owners.
    ``The AFA and MARAD's implementing rules impose new restrictions 
on the ability of the Petitioners and the Japanese Investors, going 
forward, to protect their existing investments, financial interests 
and other business interests in the Vessel Owners and the Vessels 
by, e.g., refinancing existing loans, advancing new loans for 
operation, 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 VII.1 of the Treaty. 
Article VII.1 extends the Treaty's protection both to loans, 
mortgages and other financing or contractual arrangements that are 
now outstanding under the terms of existing financing documents or 
contracts and to future financing and contractual arrangements by 
the Japanese Investors with respect to the Vessels or the Vessel 
Owners.
    ``For these reasons, Petitioners seek a determination by MARAD 
that Sections 202 and 203 of the AFA and MARAD's implementing 
regulations do not apply to Petitioners with respect to (a) existing 
rights and interests of the Non-Citizen Guarantors under preferred 
mortgages on the Vessels and associated loan, guaranty and security 
documents previously executed by the Vessel Owners and the Non-
Citizen Guarantors in favor of Bank of America; (b) contracts 
entered into with respect to the Vessels between or among the 
Petitioners or the Japanese Investors prior to the effective date of 
the AFA; and (c) future financing and contractual arrangements 
between or among the Petitioners or the Japanese Investors with 
respect to the Vessels.
    ``3. The AFA and MARAD's Implementing Rules Impair Petitioners' 
Legally Acquired Rights in Violation of Article V.
    ``The new restrictions imposed by Sections 202 and 203 of 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.'' \38\ Herman Walker observed that this 
language is designed ``to account for the possibility of injurious 
governmental harassments short of expropriation or sequestration.'' 
\39\ 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.'' \40\
---------------------------------------------------------------------------

    \38\ Sullivan Study at 115.
    \39\ Herman Walker, Jr., ``Treaties for the Encouragement and 
Protection of Foreign Investment: Present United States Practice,'' 
5 Am. J. Comp. Law 229, 236 (1956).
    \40\ 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.\41\
---------------------------------------------------------------------------

    \41\ Id. See also, Annex, Attachment 12, Department of State 
Division of Communications & Records Outgoing Airgram dated October 
28, 1952, pp. 2-3. 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

[[Page 11362]]

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, based on 
the Japanese Investors' ownership interests, preferred mortgage 
interests and other contract rights and interests, and on the 
ability of the Japanese Investors 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 financing and other business 
transactions between Non-Citizens, such as the Japanese Investors, 
and U.S. fishing vessel owners place Non-Citizens and vessel owners 
in which they have invested at a significant competitive 
disadvantage. U.S. Citizen investors are free to make loans and to 
enter into contracts with the fishing vessel owners in which they 
have invested without restriction. 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; \42\ 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. * 
* *'' \43\ Under these standards, the Japanese Investors will not be 
permitted to make future loans to the Vessel Owners, secured or 
unsecured, to protect their existing ownership and other financial 
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 the Japanese 
Investors and the companies in which they have invested, 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.
---------------------------------------------------------------------------

    \42\ See Sec. 356.45(a)(2)(i).
    \43\ See Sec. 356.45(b)(1).
---------------------------------------------------------------------------

    ``4. 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 Petitioners from holding their pre-
existing ownership interests, their rights and interests as 
guarantors under the Bank of America mortgages and other loan 
documents and their rights under ancillary contracts with the Vessel 
Owners 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.\44\
---------------------------------------------------------------------------

    \44\ Annex, Attachment 10, Memorandum of Conversation dated 
April 15, 1952 at p. 3.
---------------------------------------------------------------------------

    In short, ``all property interests are contemplated by the 
provision.''\45\ This necessarily includes the direct and indirect 
ownership interests which the Petitioners have in the Vessel Owners 
and in the Vessels and the interests of the Non-Citizen Guarantors, 
as potential subrogees, under Bank of America's preferred mortgages 
and other loan documents, together with ancillary contract rights.
---------------------------------------------------------------------------

    \45\ 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 their 
contingent 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 the Japanese Investors 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.
    ``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,\46\ 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.'' \47\ 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.
---------------------------------------------------------------------------

    \46\ Article XIX.7 defines ``vessel'' to exclude ``fishing 
vessels'' for purposes of Article XIX.6.
    \47\ Annex, Attachment 9, Letter to the chairman of the House of 
Representatives Committee on Merchant Marine and Fisheries from 
Robert Lee, August 17, 1964, as published in the Jones Study, p. 80.
---------------------------------------------------------------------------

    ``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.'' \48\ The State Department understood the Japanese 
suggestion as an attempt to obtain a blanket exception from the 
entire Treaty for national fisheries.\49\ 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

[[Page 11363]]

owning or operating U.S. flag fishing vessels was left to Article 
VII.
---------------------------------------------------------------------------

    \48\ See Annex, Attachment 13, Memorandum of Conversation held 
April 3, 1952, at 5.
    \49\ Annex, Attachment 14, Department of State Outgoing Airgram, 
dated 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'').
---------------------------------------------------------------------------

    ``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.\50\ 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.
---------------------------------------------------------------------------

    \50\ See fn. 45. 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.'' \51\
---------------------------------------------------------------------------

    \51\ Sullivan Study at 284 (emphasis added).
---------------------------------------------------------------------------

    ``6. 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.\52\ 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.
---------------------------------------------------------------------------

    \52\ See, generally, Jones Study.
---------------------------------------------------------------------------

    ``7. 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 America.'' \53\ The Minister for Economic Affairs 
noted section 213(g) of the AFA and stated the position of the 
Government of Japan as follows:

    \53\ Annex, Attachment 15 (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.
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    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) \54\ 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.
---------------------------------------------------------------------------

    \54\ There is no Subsection 202(c) of the AFA. The reference 
intended is clearly subsection 202(a), amending 46 U.S.C. 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). * * * 
\55\
---------------------------------------------------------------------------

    \55\ Annex, Attachment 15 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.\56\ 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.'' \57\ The Embassy of 
Japan noted further:

    \56\ Annex, Attachment 16 (January 24, 2000 Letter from the 
Embassy of Japan to the U.S. Dep't of State at 1.
    \57\ 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. 
\58\
---------------------------------------------------------------------------

    \58\ 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.'' \59\
---------------------------------------------------------------------------

    \59\ 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

[[Page 11364]]

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 and 203 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 ownership, mortgage, contract and other legal 
rights and interests in violation of the U.S.-Japan FCN. Application 
of the new restrictions to bar the Japanese Investors or companies 
in which they have invested from entering into future transactions 
with the Vessel Owners, particularly financing and ancillary 
contractual arrangements, would also violate the U.S.-Japan FCN by 
substantially impairing the ability of the Japanese Investors to 
protect their existing rights and interests and to carry on their 
existing lawful business activities in the United States in 
conformity with existing law 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 and 203 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 U.S.-Japan FCN is a self-executing treaty which is binding 
on MARAD as a matter of federal domestic law.\60\ 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.'' \61\ 
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.\62\ 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.''
---------------------------------------------------------------------------

    \60\ See, e.g., Zenith Radio Corp. v. Matsushita Electric 
Industrial Co., Ltd., 494 F. Supp 1263, 1266 (E.D.Pa. 1980).
    \61\ McCulloch v. Sociedad Nacional de Marineros de Honduras, 
370 U.S. 10, 21 (1963).
    \62\ 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 
existing property rights, mortgage interests or investment interests 
in existence on October 1, 2001, but rather applies to fully exempt 
an ``owner'' or ``mortgagee'' on October 1, 2001 ``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 both ``owners'' and ``mortgagees'' ``with 
respect to [the Vessels].'' \63\ Petitioners are, therefore, exempt 
from the requirements of the AFA ``with respect to [the Vessels]'' 
``to the extent of the inconsistency'' between the AFA and the 
Treaty. As demonstrated above, the ``inconsistency'' between the AFA 
and the Treaty is three-fold: (1) The Treaty protects the 
Petitioners' existing direct and indirect ownership interests in the 
Vessels and the right of the Vessel Owners to continue to own and 
operate the Vessels in the U.S. fisheries under existing ownership 
arrangements--rights and interests which the AFA would impair, 
prohibit or restrict; (2) the Treaty protects the interests of the 
Non-Citizen Guarantors in the Bank of America preferred mortgages 
and other loan documents--interests which the AFA would impair, 
prohibit or restrict; and (3) the Treaty protects the rights of the 
Japanese Investors (NOMCO, NAMCO and their Japanese shareholders), 
the other Petitioners and the Vessel Owners to enter into future 
transactions between or among themselves with respect to the Vessels 
to protect or further their existing ownership, financial and other 
business interests in the Vessels--rights which the AFA would 
impair, prohibit or restrict. Thus, Section 213(g) exempts 
Petitioners entirely from the restrictions and limitations of 
Sections 202 and 203 of the AFA and MARAD's implementing rules with 
respect to the Vessels.''

    \63\ While the Non-Citizen Guarantors do not currently hold the 
mortgages on the Vessels, they have interests in those mortgages by 
virture of their guaranties in favor of Bank of America. Their 
rights to succeed to the Bank's interest in the mortgages is 
impaired by the AFA and MARAD's implementing rules. These rights are 
protected in any event by virtue of status of the Non-Citizen 
Guarantors as ``owners'' within the meaning of Section 213(g).

    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. 01-4470 Filed 2-22-01; 8:45 am]
BILLING CODE 4910-81-P