[Protest of Air Force Contract Award for Saltwater Pump]

B-229258, Apr 14, 1988

MISCELLANEOUS TOPICS - National Security/International Affairs - Executive powers - National emergencies - Private property - Use DIGEST: Section 1242(a) of Title 46 provides the Secretary of Transportation with the authority, under specified conditions to requisition vessels "owned by citizens of the United States." This term is defined in the Merchant Marine Act of 1936, as amended, 46 U.S.C. Sec. 1244(c), to include a corporation only if the corporation meets the requirements of Section 802 of Title 46. Among other things, Section 802 states that to qualify as a citizen, a corporation "must be organized under the laws of the United States or of a State, Territory, District, or possession thereof. ..." Accordingly, a vessel is within the scope of the requisitioning authority only if it owned by a corporation meeting all the requirements of Section 802 of Title 46.

The Honorable Ernest F. Hollings Chairman, Committee on Commerce, Science and Transportation, United States Senate:

This responds to your October 20, 1987, letter requesting a legal opinion on the scope of 46 U.S.C. Sec. 1242(a) of the Merchant Marine Act of 1936, as amended. Section 1242(a) provides the Secretary of Transportation with the authority, under specified conditions to requisition vessels "owned by citizens of the United States." Specifically, you have asked us to determine whether, assuming a proper Presidential proclamation of emergency pursuant to section 1242(a), the Secretary of Transportation has the authority to requisition a vessel owned by a corporation that does not meet all the requirements of section 802 of title 46, in particular, the requirement that the corporation be "organized under the laws of the United States or of a State, Territory, District, or possession thereof." In further conversations with your staff, we have also been asked whether a vessel owned or controlled by an American corporation's foreign subsidiary would be within the reach of the requisitioning provision.

We requested and received the views of the Department of Transportation's Maritime Administration and also considered the position of the National Maritime Union, as expressed in litigation materials included in the submission and provided to us by the Maritime Administration. The Maritime Administration contends that the authority of section 1242(a) is not restricted by section 802. Informally we were advised that the Maritime Administration views a vessel as available for requisitioning as long as it is owned by a corporation that is in turn owned or controlled by a United States citizen. The National Maritime Union disagrees.

As explained more fully below, the Merchant Marine Act of 1936, as amended, 46 U.S.C. Sec. 1101 et seq., provides a statutory definition for "citizen of the United States" that must be applied. Under this definition only a corporation that meets all of the requirements of section 802, including that it be organized under the laws of the United States or its states, territories, districts, or possessions, qualifies as a citizen. Accordingly, we conclude that if the foreign subsidiary of an American parent corporation owns a vessel, that vessel would not come within the scope of section 1242(a) unless there was a specific contractual arrangement to that effect.

BACKGROUND

The concerns you raise stem from the Maritime Administration's determination that the number of merchant vessels now available to the government is adequate to serve as a naval and military auxiliary in time of war or national emergency. It appears that this assertion is based on the Maritime Administration's reliance on what is termed the "Effective United States Control" (HUSC) fleet. The HUSC fleet is comprised of those ships that according to the Maritime Administration would be available for requisitioning in times of national emergency. We understand that a large number of ships included in the EUSC fleet are owned indirectly by American corporations through foreign subsidiaries. Since the vessels are owned by foreign subsidiaries, the ability of the Maritime Administration to requisition these vessels based solely on the authority of section 1242(a) has been questioned. In view of these questions, you have asked that we determine: (1) whether section 1242(a) must be read with reference to section 802, and (2) if so, whether the requirements of section 802 apply to the American parent corporation or its foreign subsidiary. will address each of these issues in turn.

DOES THE REACH OF SECTION 1242(a) EXTEND TO VESSELS OWNED BY CORPORATIONS THAT DO NOT SATISFY THE REQUIREMENTS OF SECTION 802?

Section 1242(a) provides that only vessels which are owned by citizens of the United States may be requisitioned in times of declared national emergencies. /1/

The Chief Counsel of the Maritime Administration contends that a corporation does not have to satisfy the definition of "citizen oF the United States" contained in section 802 for the vessel(s) to be within the reach of the requisitioning provision. /2/ Specifically the Chief Counsel states:

"There is no explicit reference to or adoption of the definitional terms found in Section 802 upon the face of 46 App. U.S.C. Sec. 1242(a)."

We disagree. In general, an agency's interpretation of a statute it is charged with implementing is entitled to deference and should be upheld unless irrational, arbitrary, or capricious. Udall v. Tallman, 380 U.S. 1 (1965); 63 Comp.Gen. 285, 287 (1984). time Administration's interpretation is not consistent with the statute and cannot be supported. It appears to us, from the plain language of the statute, that even if the corporation owning the vessel is owned and controlled by a United States citizen, it must also be organized in accordance with the requirements of section 802. Section 1244(c) defines "citizen of the United States" For purposes of section 1242(a). Section 1244(c) expressly incorporates 46 U.S.C. Sec. 802 by reference.

It is a commonly accepted rule of statutory construction that a statutory definition establishes the meaning for a term as it is used in the same act. 2A Sutherland, Statutory Construction, Sec. 47.07 (4th Ed., rev. 1985). Usually the statutory meaning will be given controlling effect unless the definition would create obvious incongruities in the statute or would defeat or destroy a major Purpose of the legislation. Sutherland, supra, at Sec. 27.02. We find no such problem in reading the statutory definition of "citizen of the United States" into the requisitioning provision.

As originally enacted, section 1242(a) provided for the requisitioning of vessels "documented under the laws of the United States." Pub. L. No. 74-835, Sec. 902, 49 Stat. 2015 (1936). In recognition that many vessels owned by United States citizens were under foreign registry, this was amended in 1939 to "owned by citizens of the United States." Pub. L. No. 76-328, S 3, 53 Stat. 1255 (1939); See, also, H.R. Rep. No. 660, 76th Cong., 1st Sess. 3 (1939).

At the time of the amendment, "citizen of the United States" was defined for corporations with reference to section 802 of title 46. See 46 U.S.C Sec. 1244(c). Section 802 included the current requirement that the corporation be organized under the laws of the United States, or its states, territories, districts, or possessions. It must be presumed that when the Congress amended the requisitioning authority provision to require that the vessel in question be owned by a United States citizen, it did so in light of and with knowledge of the defined terms.

There is no indication in the legislative history of the 1939 amendment that the Congress sought to create a different meaning for the term. See H.R. Rep. No. 660, supra. The purpose of the amendment to broaden the scope of the requisitioning authority is not defeated by reading the statutory definition of "citizen of the United States" into the provision. The reach of the provision was extended to include foreign registered vessels, but only if they are owned by a corporation meeting all the requirements of section 802. This would include the requirement that the corporation must be organized under the laws of the United States, or its states, territories, districts, or possessions.

DO THE SECTION 802 REQUIREMENTS APPLY TO THE AMERICAN PARENT CORPORATION THAT OWNS OR CONTROLS THE FOREIGN SUBSIDIARY OR DO THE REQUIREMENTS APPLY TO THE FOREIGN SUBSIDIARY THAT HAS TITLE TO THE VESSEL?

From the discussion above, it is clear that under the requisitioning provision, the section 802 requirements apply to vessels owned by United States citizens. The more difficult issue is the factual question of who is an owner of a vessel. Is it the foreign subsidiary who has title to the vessel or the American parent corporation who in turn owns or controls the foreign subsidiary? This issue has grown in importance because of the change in the composition of the "EUSC" fleet.

We understand that in the 1960's a majority of the ships in the "EUSC" fleet were covered under the War Risk Insurance Program or had, subject to the control by the Maritime Administration, transferred from US-flag to foreign registry. In both these situations, the owner of the vessels had to contractually agree to make the vessels available to the United States in times of national emergency on the same conditions and terms as a vessel requisitioned under section 1242(a). See 46 C.F.R Sec. 308.5 and Appendix to 46 C.F.R. Part 221. According to the National Maritime Union, a majority of the ships on the "EUSC" fleet list in 1986 were under no contractual obligation with the Maritime Administration. Rather, the vessels were included as part of the "HUSC" fleet because they were titled to corporations that were in turn at least 50 percent owned or controlled by American corporations.

It appears that this Maritime ownership condition, standing alone, is at odds with section 802 if the corporation directly owning the vessel is a foreign corporation. As we have seen, section 802 requires not only that the corporation owning the vessel be "owned and controlled" by American citizens but also that the corporation be organized under the laws of the United States or its states, territories, districts, or possessions.

In general, a ship's documentation of title is considered prima facie evidence of ownership. However, it is not conclusive. Also, true ownership is not dependent upon a ship's registry. See St. Paul Fire & Marine Insurance Co., Inc. v. Vest Transportation Co., Inc., 666 F.2d 932, 938 (5th Cir. 1982). According to the Maritime Administration, it is possible for an American corporation to directly own a ship and register it under the flags of countries recognized for purposes of the "EUSC" fleet (i.e.; Panama, Honduras, Liberia or the Bahamas), although this is not the common practice. As we understand it, the common practice is and has been to form a subsidiary corporation and to vest the title to one ship in that corporation. The purpose of these one-ship corporations is to protect the parent company from potential liability.

We have been advised that the Maritime Administration views these subsidiaries that are set up to shield the parent corporation from potential liability as mere conduits or "dummy" corporations. Accordingly, it does not consider these corporations for purposes of the requisitioning provision to be the owner of the vessel. The Maritime Administration looks through the foreign subsidiary to the parent corporation as the ultimate owner of the vessel. Under general corporate law, however, there is difficulty with this position. Even where a corporation is a wholly owned subsidiary, it is generally regarded as a separate and distinct entity from the parent corporation. 1 W Fletcher, Cyclopedia of the Law of Private Corporations, Sec. 31 (rev. Perm Ed., 1983). Moreover, the property of a corporation is its property and not that of its stockholders, as owners. Id. This is so even where the stockholder is another corporation. Id.

We recognize that there are situations where courts have disregarded the corporate form. According to the often cited general rule, for the doctrine traditionally known as "piercing the corporate veil" to apply, two dominant requirements must be met-- there must be such unity of interest and ownership that the separate personalities of the parent and subsidiary no longer exist, and circumstances must indicate that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. The factors most commonly considered by courts to justify disregarding a corporate entity have been under capitalization, failure to observe the formalities of the corporate form, nonpayment of dividends, siphoning of corporate funds by dominant stockholders, nonfunctioning of other officers or directors, absence of corporate records, use of the corporation as a facade for the operations of the dominant stockbolder, and use of the corporate entity in promoting injustice or fraud. 1 Fletcher, supra Sec. 41.30. Additionally, under a growing body of federal law, the corporate veil has been pierced in the interest of public convenience, fairness and equity. See, e.l ., Town of Brookline v. Gorsuch, 667 F.2d 215,221 (1st Cir. 1981).

Although an argument can be made in support of the Maritime Administration's view that it could disregard the corporate entity in the case of a wholly owned dummy corporation whose only asset is a single ship, it is uncertain whether the courts would agree. The application of "piercing the corporate veil" depends upon the facts of each case in which it is sought to be applied. If you wish to eliminate this uncertainty, we would suggest that either the requisitioning authority be amended to make clear whether ships owned through foreign subsidiaries are covered or that the Maritime Administration enter into contractual agreements providing for requisitioning in accordance with section 1242(a) with the owners of the vessels not specifically covered by the requisition provision. Unless otherwise notified by your staff, this letter will be released 30 days from today.

/1/ Section 1242(a) states in relevant part:

"Whenever the President shall proclaim that the security of the national defense makes it advisable or during any national emergency declared by proclamation of the President, it shall be lawful for the Secretary of Transportation to requisition or purchase any vessel or other watercraft owned by citizens of the United States, or under construction within the United States, or for any period during such emergency, to requisition or charter the use of any such property. ..."

/2/ For a corporation to be a citizen of the United States under section 802 of title 46, at least the following four conditions must be met:

1. The controlling interest in the corporation must be owned by citizens of the United States,

2. Its president or other chief executive officer and the chairman of its board of directors must be citizens of the United States,

3. No more of its directors than a minority of the number necessary to constitute a quorum may be noncitizen, and

4. The corporation must be organized under the laws of the United States or of a state, territory, district, or possession thereof. 46 U.S.C. Sec. 802(a).