B-141104, DEC. 2, 1959

B-141104, DEC. 2, 1959

TO THE HONORABLE CLARENCE G. MORSE, ADMINISTRATOR, MARITIME ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 26, 1959, RELATIVE TO THE MATTER OF ADVANCING FUNDS TO A MORTGAGOR FOR PAYMENT OF A QUARTERLY INSTALLMENT OF PRINCIPAL ON A SHIP MORTGAGE INSURED BY THE MARITIME ADMINISTRATION UNDER TITLE XI OF THE 1936 ACT IN ORDER TO PREVENT A DEFAULT UNDER THE MORTGAGE.

BRIEFLY STATED, IT APPEARS THAT ON DECEMBER 3, 1957, YOU ENTERED INTO A CONTRACT OF INSURANCE OF MORTGAGE WITH THE BOWERY SAVINGS BANK UNDER WHICH A MORTGAGE IN THE AMOUNT OF $3,909,900, RUNNING FOR A PERIOD OF FIFTEEN YEARS, WAS INSURED AS TO PRINCIPAL AND INTEREST AT THE RATE OF 5 PERCENT PER ANNUM ON A TANKER FOR THE RED HILLS CORPORATION. THE MORTGAGOR PAID THE QUARTERLY INSTALLMENTS ON THE MORTGAGE AS DUE IN THE AGGREGATE AMOUNT OF $275,865, PLUS INTEREST, UNTIL MARCH 24, 1959, AT WHICH TIME, DUE TO LOSSES EXPERIENCED IN THE DEPRESSED TANKER MARKET, THE COMPANY WAS UNABLE TO MEET ITS OBLIGATIONS. AT THAT TIME YOUR ADMINISTRATION AND THE BOWERY SAVINGS BANK AGREED TO DEFER THE MARCH AND JUNE 1959 INSTALLMENTS AGGREGATING $130,330 UNTIL DECEMBER 2, 1972, THE MATURITY DATE OF THE MORTGAGE. HOWEVER, INTEREST DUE ON THE DEFERRED PAYMENTS WAS PAID TO THE BANK BY THE COMPANY.

THE VESSEL HAS BEEN LAID UP, EXCEPT FOR ONE VOYAGE, SINCE MARCH, 1959, AND THE COMPANY WAS UNABLE TO MEET THE SEPTEMBER 24, 1959, MORTGAGE PAYMENT. THE BANK WAS UNWILLING TO AGREE TO A DEFERMENT OF THE SEPTEMBER 24, 1959, MORTGAGE INSTALLMENT UNLESS THE INTEREST RATE ON THE REMAINDER OF THE NOTES SECURED BY THE MORTGAGE WAS INCREASED TO 5 1/2 PERCENT INSURED, OR TO 6 PERCENT WITH THE ADDITIONAL ONE PERCENT UNINSURED AND PAYABLE TO THE EXTENT EARNED BY THE COMPANY. YOUR ADMINISTRATION HAS OPPOSED TO SUCH AN ARRANGEMENT SINCE, IN YOUR OPINION, IT WOULD INCREASE THE GOVERNMENT'S LIABILITY OR WOULD PLACE AN ADDITIONAL BURDEN ON THE COMPANY. ON OCTOBER 26, 1959, THERE WAS DUE THE AMOUNT OF $65,165 REPRESENTING PRINCIPAL AND INTEREST AMOUNTING TO APPROXIMATELY $45,425. THE COMPANY, NOTWITHSTANDING OPERATING LOSSES WHICH HAD DEPLETED ITS WORKING CAPITAL WAS ABLE TO PAY THE INTEREST BUT HAD INSUFFICIENT FUNDS TO MAKE THIS PRINCIPAL PAYMENT AND APPEALED TO THE BOARD FOR ASSISTANCE TO PREVENT A DEFAULT WHICH WOULD RESULT IN THE ASSIGNMENT OF THE MORTGAGE TO YOU WITH THE CONSEQUENT IMMEDIATE PAYMENT BY THE GOVERNMENT TO THE BOWERY SAVINGS BANK OF THE AMOUNT OF $3,634,035, UNDER THE OUTSTANDING MORTGAGE, PLUS ACCRUED INTEREST.

IN VIEW OF THE FOREGOING, YOU PROPOSED TO ADVANCE AN AMOUNT EQUAL TO THE MORTGAGE PRINCIPAL PAYMENT OF $65,165 TO THE MORTGAGOR FOR PAYMENT TO THE BANK TO PREVENT A DEFAULT, THUS OBVIATING THE ACCEPTANCE OF AN ASSIGNMENT OF THE MORTGAGE AND THE PAYMENT OF $3,634,035, PLUS ACCRUED INTEREST TO THE BANK. IN SO DOING, YOU PROPOSED TO OBTAIN A NOTE FROM THE COMPANY IN THE AMOUNT OF THE ADVANCE, SECURED BY A SECOND MORTGAGE ON THE VESSEL, SUCH NOTE TO BEAR 6 PERCENT INTEREST AND TO MATURE NO LATER THAN THE MATURITY OF THE FIRST MORTGAGE. IT IS OUR UNDERSTANDING THAT THIS HAS BEEN DONE. IN YOUR OPINION, THIS PROPOSAL AFFORDS THE COMPANY AN OPPORTUNITY TO RETAIN AND OPERATE THE VESSEL WITH THE HOPE THAT MARKET CONDITIONS WILL IMPROVE TO THE EXTENT THAT ITS INDEBTEDNESS SECURED BY THE VESSEL CAN BE LIQUIDATED. THE PROPOSAL WILL NOT INCREASE THE GOVERNMENT'S LIABILITY AS THE PRINCIPAL OF THE TWO MORTGAGES WILL EQUAL THAT OF THE PRESENT MORTGAGE. FURTHERMORE, YOU STATE THAT THE GOVERNMENT'S LIABILITY WILL BE REDUCED TO THE EXTENT OF THE INTEREST ON THE AMOUNT OF THE ADVANCED FUNDS WHICH OTHERWISE WOULD BE AN OBLIGATION TO THE BANK IN THE EVENT THERE WERE A DEFAULT. THIS PROPOSAL, IN EFFECT, RESULTS IN PAYING AN INSTALLMENT OF MORTGAGE INSURANCE RATHER THAN PAYING THE FULL AMOUNT THEREOF AT THIS TIME. YOU ALSO STATE THAT THE ALTERNATIVE TO THIS PROPOSAL IS ACCEPTANCE OF THE ASSIGNMENT OF THE MORTGAGE AND PAYMENT IN FULL OF THE AMOUNT OF THE ASSIGNMENT OF THE OF THE AMOUNT OF THE TITLE XI INSURANCE, IN WHICH EVENT IT IS EXTREMELY DOUBTFUL, IN VIEW OF THE DEPRESSED TANKER MARKET, THAT SALE OF THE VESSEL THROUGH FORECLOSURE PROCEEDINGS WOULD RECOVER THE GOVERNMENT'S INTEREST IN THE VESSEL. THEREFORE, IT IS YOUR OPINION THAT THE FOREGOING CIRCUMSTANCES JUSTIFY THE CONCLUSION THAT THE PROPOSED DISBURSEMENT IS PROPER UNDER SECTION 207 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, IN ORDER TO CARRY ON ACTIVITIES AUTHORIZED BY THE 1936 ACT, AND TO PROTECT AND PRESERVE COLLATERAL AND SECURITY HELD TO SECURE INDEBTEDNESS, AND THAT THE FEDERAL SHIP MORTGAGE INSURANCE FUND CAN PROPERLY BE USED FOR THIS PURPOSE. YOU CONCLUDE BY ADVISING THAT THIS PROBLEM WILL BE SUBMITTED TO THE CONGRESS FOR APPROPRIATE LEGISLATION AS SOON AS THE CONGRESS CONVENES.

SECTION 207 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, READS, IN PERTINENT PART, AS FOLLOWS:

"THE COMMISSION MAY ENTER INTO SUCH CONTRACTS, UPON BEHALF OF THE UNITED STATES, AND MAY MAKE SUCH DISBURSEMENTS AS MAY, IN ITS DISCRETION, BE NECESSARY TO CARRY ON THE ACTIVITIES AUTHORIZED BY THIS ACT, OR TO PROTECT, PRESERVE, OR IMPROVE THE COLLATERAL HELD BY THE COMMISSION TO SECURE INDEBTEDNESS, IN THE SAME MANNER THAT A PRIVATE CORPORATION MAY CONTRACT WITHIN THE SCOPE OF THE AUTHORITY CONFERRED BY ITS CHARTER.'

THE UNDERSCORED SECTION WAS ADDED BY AMENDMENT CONTAINED IN PUBLIC LAW 705, 75TH CONGRESS, 3D SESSION, APPROVED JUNE 23, 1938. IN EXPLAINING THE AMENDMENT, THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES, IN ITS REPORT NO. 2168, STATED AS FOLLOWS:

"THIS AMENDS SECTION 207 OF THE MERCHANT MARINE ACT, 1936. SECTION 207 OF THE ACT PROVIDES THAT "THE COMMISSION MAY ENTER INTO SUCH CONTRACTS, UPON BEHALF OF THE UNITED STATES, AS MAY, IN ITS DISCRETION, BE NECESSARY TO CARRY ON THE ACTIVITIES AUTHORIZED BY THIS ACT, IN THE SAME MANNER THAT A PRIVATE CORPORATION MAY CONTRACT WITHIN THE SCOPE OF THE AUTHORITY CONFERRED BY ITS CHARTER.' THE AMENDMENT ADDS THAT IT "MAY MAKE SUCH DISBURSEMENTS" AS MAY, IN ITS DISCRETION, BE NECESSARY "TO PROTECT, PRESERVE, OR IMPROVE THE COLLATERAL HELD BY THE COMMISSION TO SECURE INDEBTEDNESS," IN THE SAME MANNER AS A PRIVATE CORPORATION. THE AMENDMENT IS DESIGNED TO MAKE CLEAR A POWER WHICH IT IS THOUGHT ALREADY EXISTS IN THE COMMISSION BUT ABOUT WHICH SOME DOUBT HAS BEEN EXPRESSED. UNDER THE ACT, THE MARITIME COMMISSION HAS ALL THE GENERAL AND IMPLIED POWERS OF A BUSINESS CORPORATION. THE SPECIFIC REFERENCE TO THE POWER OF PROTECTING AND PRESERVING THE COLLATERAL MORTGAGES, AND SO FORTH, HELD BY THE COMMISSION IS INTENDED TO MAKE CERTAIN THAT THE COMMISSION POSSESSES THE POWER TO ADVANCE OR EXPEND FUNDS FOR THE PRESERVATION OF ITS COLLATERAL WHERE FOUND NECESSARY OR ADVISABLE. SUCH POWER HAS OFTEN BEEN EXERCISED BY OTHER GOVERNMENT LENDING AGENCIES, SUCH AS THE RECONSTRUCTION FINANCE CORPORATION. WITHOUT SUCH AUTHORITY THE COMMISSION MAY FIND IT IMPOSSIBLE TO PROTECT ITS MORTGAGE OR OTHER INTEREST IN VESSELS, THE TITLE TO WHICH IS IN A TRANSITORY STATE, OR WHERE VESSELS ARE OPERATED BY THE COMPANIES WHICH ARE FINANCIALLY EMBARRASSED WHEN SUCH VESSELS, BECAUSE OF ACCIDENT OR OTHERWISE, NEED TO BE REPAIRED OR SALVAGED BEFORE FURTHER OPERATION.'

THE SECTION CONTINUES BY STATING

"* * * IT SHALL BE RECOGNIZED THAT, BECAUSE OF THE BUSINESS ACTIVITIES AUTHORIZED BY THIS ACT, THE ACCOUNTING OFFICERS SHALL ALLOW CREDIT FOR ALL EXPENDITURES SHOWN TO BE NECESSARY BECAUSE OF THE NATURE OF SUCH AUTHORIZED ACTIVITIES, NOTWITHSTANDING ANY EXISTING STATUTORY PROVISION TO THE CONTRARY. * * *"

IN OUR DECISION OF MARCH 27, 1941, A-51647, TO THE THEN CHAIRMAN OF THE UNITED STATES MARITIME COMMISSION, WE RECOGNIZED THAT SECTION 207 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, CONTEMPLATES THAT THE COMMISSION SHALL BE PERMITTED A CONSIDERABLE AMOUNT OF LATITUDE IN CONTRACTUAL MATTERS AND THAT IF A DEPARTURE FROM THE USUAL GOVERNMENT RULES APPLICABLE TO SUCH MATTERS PROVES NECESSARY BECAUSE OF THE UNUSUAL OR BUSINESS NATURE OF THE COMMISSION'S ACTIVITIES, THEN THE COMMISSION IN THE EXERCISE OF THE BROAD DISCRETION VESTED IN IT BY THE ABOVE SECTION MAY AUTHORIZE SUCH DEPARTURE--- PROVIDED, OF COURSE, THAT THERE IS SOME REASONABLE BASIS FOR THE DEPARTURE AND THAT THE DISCRETION IS NOT EXERCISED ARBITRARILY. WAS FURTHER STATED IN THAT DECISION THAT:

"IF A CONTRACT IS MADE BY THE COMMISSION WITHOUT ADHERENCE TO THE USUAL RULES, AND NO SHOWING OF A REASONABLE JUSTIFICATION FOR THE FAILURE TO ADHERE TO THOSE RULES IS MADE, IT IS CONSIDERED TO BE THE DUTY OF THIS OFFICE IN THE AUDIT OF THE ACCOUNTS OF THE DISBURSING OFFICER INVOLVED TO QUESTION THE VALIDITY OF SUCH CONTRACT AND THE EXPENDITURES MADE THEREUNDER. HOWEVER, IF THE COMMISSION IN SUCH A CASE ASSERTS THAT THE FAILURE TO COMPLY WITH THE USUAL STATUTORY REQUIREMENTS WAS CONSIDERED NECESSARY OR EXPEDIENT BECAUSE OF THE BUSINESS NATURE OF THE AUTHORIZED ACTIVITY INVOLVED--- AND A REASONABLE SHOWING IN SUPPORT OF THE ACTION IS MADE--- THEN IT IS CONSIDERED THAT THIS OFFICE IS JUSTIFIED IN ALLOWING CREDIT FOR THE EXPENDITURE INVOLVED. THIS IS UNDERSTOOD TO BE THE MEANING OF THE PROVISION OF SECTION 207 THAT---

" "* * * IT SHALL BE RECOGNIZED THAT, BECAUSE OF THE BUSINESS ACTIVITIES AUTHORIZED BY THIS ACT, THE ACCOUNTING OFFICERS SHALL ALLOW CREDIT FOR ALL EXPENDITURES SHOWN TO BE NECESSARY BECAUSE OF THE NATURE OF SUCH AUTHORIZED ACTIVITIES, NOTWITHSTANDING EXISTING STATUTORY PROVISIONS TO THE CONTRARY. * * *" "

WE AGREE THAT THERE IS NOTHING CONTAINED IN TITLE XI OF THE ACT TO SPECIFICALLY PROVIDE FOR SITUATIONS SUCH AS THE ONE DESCRIBED IN YOUR LETTER, AND WE ALSO ACKNOWLEDGE THAT THE ABOVE REFERRED-TO PROVISIONS OF SECTION 207 AS AMENDED MAY NOT BE AS CLEARLY IN POINT AS DESIRABLE TO COPE WITH THE SITUATION. HOWEVER, WE BELIEVE THAT THE STATEMENTS CONTAINED IN YOUR LETTER ARE SUFFICIENT TO CONSTITUTE A REASONABLE SHOWING THAT THE EXPENDITURES OF THE CHARACTER INVOLVED ARE REASONABLY NECESSARY OR EXPEDIENT BECAUSE OF THE BUSINESS NATURE OF THE AUTHORIZED ACTIVITIES INVOLVED. WE ALSO OBSERVE THAT YOU ALREADY HAVE INFORMED THE LEGISLATIVE COMMITTEES OF BOTH HOUSES OF CONGRESS OF YOUR INTENTION TO RECOMMEND LEGISLATION WHICH WILL PROVIDE EXPLICIT AUTHORITY TO TAKE SUITABLE ACTION TO PROTECT THE GOVERNMENT'S INTERESTS BY PREVENTING DEFAULTS UNDER INSURED MORTGAGES.

ACCORDINGLY, YOU ARE ADVISED THAT WE WILL NOT OBJECT TO THE ACTION TAKEN IN THE INSTANT CASE ..END :