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ZWACK v. KRAUS BROS. & CO.

July 29, 1955

John ZWACK, Bela Zwack and Dora Zwack, as co-partners doing business under the firm name of J. Zwack & Co., Plaintiff,
v.
KRAUS BROS. & CO., Inc., Defendant



The opinion of the court was delivered by: PALMIERI

This action for an accounting, for damages, and for injunctive relief stems from the nationalization of the plaintiff's enterprise in Hungary by the Hungarian Government. The plaintiff, a Hungarian partnership organized in 1840, has been engaged in the manufacture and distribution of liqueurs and cordials in Hungary and throughout the world. Its principal office has been in Budapest and throughout its history it has been a family enterprise. It has developed an extensive reputation for the excellent quality of its products. They have been marketed both in this country and abroad in bottles of distinctive shape to which were attached labels bearing the inscription 'Zwack,' 'J. Zwack & Co.,' 'J. Zwack,' and 'Zwack, J.' All of these marks are registered in the United States Patent Office. Other trade names have been used and registered both in the United States Patent Office and in certain states of the United States.

The defendant, a New York corporation, became the plaintiff's exclusive distributing agent for the United States in 1934. The agency agreement was last extended in 1947 for a period expiring in 1960. Subsequent to the events which occurred in Hungary in 1948, and to which reference will be made, the defendant chose to recognize the Hungarian Government as the owner of the plaintiff's enterprise and has continued the importation and sale in the United States of liqueurs and cordials in the same bottles of distinctive shape as before and bearing labels with the plaintiff's trade names.

At an early stage of this litigation, the defendant moved to dismiss the complaint pursuant to the provisions of Rules 12(b)(7) and 19, Federal Rules of Civil Procedure, 28 U.S.C., on the ground that indispensable parties were not joined. The allegedly indispensable parties were Bela Zwack, the owner of a 25% interest and a co-partner, and his wife, Dora (also a co-partner and the owner of a 25% interest), the Hungarian Government, and the 'presently existing firm of J. Zwack & Company of Budapest, Hungary.' This motion was denied, with an opinion, by Judge Medina, D.C.S.D.N.Y.1950, 93 F.Supp. 963. The remaining co-partner and owner of a 50% interest in the enterprise, John Zwack, appeared upon the trial and testified at length. The allegedly indispensable parties were not, of course, subject to the jurisdiction of the Court, and, as Judge Medina ventured to predict, they have not voluntarily appeared. 93 F.Supp. 963, at page 965. The defendant has, in effect, become the distributing agent for the Hungarian Government; and has vigorously contended for the validity, and recognition by this Court, of all the acts of the Hungarian Government resulting in the nationalization of the plaintiff's enterprise -- including those purporting to affect property within the United States. The defendant has relied largely upon documentary evidence and legal argument. Its only witness upon the trial was an expert in Hungarian law.

 A brief statement of the factual background of this litigation would seem necessary for a better understanding of the issues involved. The activities of the plaintiff and, at times, its relationship to the defendant, have been frequently affected by the course of political events in Europe since 1938 -- by the fear of an embargo on Hungarian goods, by the imminence of war, by the fear of the application of the racist laws of the Nazi Government of Germany, and, finally, by the establishment of the Communist Government of Hungary. Thus, the defendant's attorney in 1939, acting also as attorney for the plaintiff, prepared three agreements between the parties which contemplated the possible boycott of Hungarian products in the United States and the cessation of plaintiff's business activities in Hungary due to war. By these agreements, Tocibra, S.A., a Swiss corporation, organized by Messrs. John and Bela Zwack, then sole partners of plaintiff, was to act for the plaintiff as its agent for distribution of its products in the United States pending stoppage of Hungarian production. The defendant agreed to pay Tocibra, S.A., a commission amounting to 10% of the amounts due from it to plaintiff. Between 1939 and the cessation of shipments after the outbreak of World War II in 1940, the sum of $ 3,170.12 was set aside by the defendant for the account of Tocibra, S.A., under this arrangement. Tocibra, S.A., having been dissolved in 1948, the amount is now claimed by the plaintiff in this litigation. A larger sum, amounting to $ 14,514.74, was held by defendant for the account of plaintiff and blocked by the Department of Justice. This, too, having been unblocked on application of Mr. John Zwack in behalf of plaintiff, is also claimed by it.

 The admission of Dora Zwack to the partnership by the acquisition of one-half of her husband, Bela Zwack's interest, was motivated by the fear of the occupation of Hungary by the military forces of Germany and of the consequent promulgation of racist laws by an eventual Nazi Government regime. The Messrs. Zwack had good cause to be apprehensive of a repetition of the same consequences that followed the so-called 'Anschluss' in neighboring Austria, when that country was incorporated into the German Reich. They believed that the membership of Dora Zwack would afford them some measure of defense against the racist laws which the messrs. Zwack believed would apply to them. In 1944 and 1945 Budapest was occupied by the military forces first of Germany and then of Soviet Russia. During this period the plaintiff's business ceased, its factory was largely destroyed and John Zwack went into hiding. Early in 1945 the plaintiff rebuilt the factory, at least in part, and resumed business. As already indicated, the agency contract with the defendant was renewed in 1947. The first shipment to the defendant after the war period occurred in 1948.

 It was in that year that a series of events occurred which led to the nationalization of plaintiff's factory and business by the Hungarian Government, without compensation, and under circumstances amounting to coercion and duress. On May 11, 1948, the Hungarian Government adopted a statute nationalizing every industrial enterprise employing more than 100 employees. The plaintiff's enterprise did not come within this classification since it employed less than the stated number of employees. However, the statute was a portent of things to come. The members of the plaintiff partnership were understandably concerned. The Hungarian Government was then dominated by a Communist regime. By December 1949 it was to publish a decree nationalizing all businesses of Hungary with more than ten employees; and this included the plaintiff partnership. Though both the statute of 1948 and the decree of 1949 provided that a statute or decree would subsequently be adopted affording compensation to the nationalized industries, no such statute has ever been passed.

 Almost immediately after the passage of the nationalization statute in the early part of 1948, the members of plaintiff partnership were subjected to the fear of political denunciation and possible imprisonment. Mr. John Zwack managed to preserve an uneasy safety by submitting to blackmail and extortion, first at the hands of a Communist Party official and then at the hands of a uniformed excise tax collector. The latter offered to make a favorable report on the company with a view to delaying nationalization on condition that he be paid for it. Finally, and in October 1948, Mr. Bela Zwack and Mr. Armenius Gordon, a manager of the plaintiff, were summoned to the office of the Alcoholic State Control Monopoly. They were thereupon informed by the head of that office, an official named Grosz, that the Government of Hungary would not tolerate the plaintiff's 'known sympathy with industrialists.' Strong disapproval was expressed of the plaintiff's allegedly having sent money and formulae out of the country. Grosz ended the meeting by stating that the Hungarian Government would 'buy' the plaintiff's factory for between 50,000 to 100,000 forints -- the equivalent of $ 4,500 to $ 9,000. The factory was worth in its partially repaired condition more than 35 times the price suggested by Grosz as the limit which the Hungarian Government would 'pay.' The co-partners of the plaintiff were also accused by Grosz of friendship with the family of former Regent Horthy; and Mr. John Zwack was accused of being a representative of the family of Baron Weiss, a prominent businessman. The Messrs. Zwack were considered by Grosz as 'politically undesirable.' Mr. John Zwack urged his brother, Bela Zwack, and his sister-in-law to adopt an urgent solution. He believed that there was no longer any possibility of saving the enterprise from confiscation and that unless some drastic measures were adopted they faced probable arrest and imprisonment. Mr. John Zwack urged a flight from Hungary as the only possible solution but his brother and sister-in-law were unwilling and warned him of the possible serious consequences not only to themselves but to their employees. Being unable to persuade the others to flee, Mr. John Zwack, torn between the desire to take flight himself and yet to protect those who remained behind, decided to transfer his substantial interest in the enterprise in exchange for a passport. Accordingly, the Zwacks initialed and transmitted to the Hungarian Government an offer to cede their business in return for a job and a used Citroen automobile for Bela Zwack; and a passport for John Zwack. It soon became apparent that the passport would not be issued. When inquiry was made concerning action on the offer the response consisted largely of dilatory excuses. During this period Mr. John Zwack was being warned by a number of persons, including members of the underground, that he was in grave personal danger and that he should flee. Besides, his prior experiences with party and Government officials gave him good cause for alarm. In consequence, on November 18, 1948, Mr. John Zwack fled to Vienna. Thereafter, on november 24, 1948, the Hungarian Government purported to accept the 'offer,' but it did not tender a passport. Indeed, there can be no question that the purported acceptance of the offer by the Hungarian Government was sham and had no valid consequences. *fn1"

 On December 7, 1948, Mr. John Zwack cabled the defendant from Vienna advising it of his departure from Hungary. On December 23, 1948, he addressed a registered letter to the defendant advising it of the seizure of plaintiff's plant and business and warning the defendant against doing further business with the nationalized Hungarian firm. Almost a year was consumed before Mr. John Zwack was able to procure a visa to enter the United States where he arrived in November 1949. He made immediate demand upon the defendant to turn over to him his firm's frozen assets. The plaintiff obtained a license for payment of the funds in defendant's hands in June 1950, amounting to $ 17,685.56, but defendant persisted in its refusal to pay. It also demanded that the defendant discontinue the importation of the plaintiff's liqueurs bearing the Zwack name from Hungary. The defendant refused to accede to any of these demands. Moreover, this refusal has been the direct cause of the plaintiff's inability to arrange for the manufacture of Zwack liqueurs and cordials in this country since those who would otherwise be prepared to furnish financial backing are unwilling to do so because of the probability of 'buying a lawsuit' as long as the defendant continued his importation of Zwack liqueurs under a claim of right. Shortly after the defendant's refusal and in May 1950 plaintiff initiated this suit in the New York State courts. It was thereafter removed to this court by the defendant on the ground of diversity of citizenship.

 Much is made by the defendant of the plaintiff's lack of right to maintain the present action. I do not agree. Judge Medina has already stated that under the Hungarian law Mr. John Zwack is empowered to bring this action on the partnership's behalf to enforce its contractual rights, and the defendant cannot challenge that right. See Zwack v. Kraus Bros. & Co., supra. The proof at the trial before me has amply substantiated this conclusion. The plaintiff's expert witness on Hungarian law testified that under the Hungarian Commercial Code of 1875, the express provisions of the partnership agreement, and in accordance with views expressed by Hungarian text writers and judicial decisions, Mr. John Zwack could maintain the present action on behalf of the plaintiff partnership.

 The defendant has stated, 'The defendant's position has been that it is under no legal obligation to prove that the Hungarian State carried out its part of the transaction by which it acquired the shares of the partners in the partnership, the firm, J. Zwack & Company, or that the transaction is free of challenge for any reason in Hungary.'

 This raises the essential issue in the case. The basic defense offered in this case can be stated as follows: Since the Hungarian State has acquired ownership of the partners' shares in the firm J. Zwack & Co., this Court cannot pass upon and determine the validity, propriety or legality of the acts of the sovereign by which ownership was acquired. I agree that I must accept as valid the basic premise that the conduct of a foreign sovereign is a political question which can only be examined by the Executive branch of our Government. This has been established doctrine at least since the often quoted opinion of the Supreme Court in Underhill v. Hernandez, 1897, 168 U.S. 250, at page 252, 18 S. Ct. 83, at page 84, 42 L. Ed. 456, wherein Mr. Justice Fuller stated:

 'Every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory. * * *'

 See also Earn Line S.S. Co. v. Sutherland S.S. Co., Ltd., D.C.S.D.N.Y.1918, 254 F. 126, 129, affirmed sub nom The Claveresk, 2 Cir., 1920, 264 F. 276. The English courts have applied the same doctrine in cases involving title to property confiscated by the Russian Government. A. M. Luther v. James Sagor & Co., (1921) 3 K.B. 532, 555-557, cited with approval in United States v. Belmont, 1937, 301 U.S. 324, 328, 57 S. Ct. 758, 81 L. Ed. 1134, and Guaranty Trust Co. of New York v. United States, 1938, 304 U.S. 126, 140, 58 S. Ct. 785, 82 L. Ed. 1224; Princess Paley Olga v. Weisz, (1929) 1 K.B. 718. Cf. Anglo-Iranian Oil Co., Ltd. v. Jaffrate, (1953) 1 W.L.R. 246. Regardless of any limitations which may exist with respect to this doctrine, it still is true, under the weight of binding decisions, that foreign confiscation decrees will not be reviewed by our courts with respect to property located within the confiscating country. Bernstein v. Van Heyghen Freres S.A., 2 Cir., 163 F.2d 246, 249, certiorari denied, 1947, 332 U.S. 772, 68 S. Ct. 88, 92 L. Ed. 357; Kuerschner & Rauchwarenfabrik, A.G., v. New York Trust Co., D.C.S.D.N.Y.1954, 126 F.Supp. 684, 689; Vladikavkazsky Railway Co. v. New York Trust Co., 1934, 263 N.Y. 369, 189 N.E. 456, 91 A.L.R. 1426; Frazier v. Foreign Bondholders Protective Council, Inc., 1st Dept. 1953, 283 App.Div. 44, 125 N.Y.S.2d 900.

 I am well aware that the immunity from judicial review upon which the defendant so strenuously relies in this case and which has been often referred to as the 'Rule of Decision' principle or 'Act of State' doctrine, pursuant to which the courts of one country are bound to abstain from sitting in judgment on the acts of another government done within its own territory, is a firmly entrenched principle, *fn2" and has often resulted in sheltering foreign acts of confiscation, where the confiscated property at the time of the litigation was in the territory of the forum; see Oetjen v. Central Leather Co., 1918, 246 U.S. 297, 38 S. Ct. 309, 62 L. Ed. 726; and where the victim of the confiscation was a national of the forum, see Ricaud v. American Metal Co., Ltd., 1918, 246 U.S. 304, 38 S. Ct. 312, 62 L. Ed. 733. One careful scholar has come to the conclusion that the 'Rule of Decision' principle, even when limited to its proper sphere, has earned a well deserved rest. See Re, Foreign Confiscations in Anglo-American Law 170 (1951). This principle, however, does not apply to the confiscatory acts of foreign governments when those acts purport to affect property which was not within the territorial jurisdiction of that government, unless a national policy of the United States Government requires that extraterritorial effect be given. United States v. Pinck, 1942, 315 U.S. 203, 62 S. Ct. 552, 86 L. Ed. 796; see, also Anderson v. N. V. Transandane Handelmaatschappij, N.Y.Sup.Ct.1941, 28 N.Y.S.2d 547, affirmed 1st Dept. 1941, 263 App.Div. 705, 31 N.Y.S.2d 194, affirmed 1942, 289 N.Y. 9, 43 N.E.2d 502. That is the situation presented here. Since the property here involved was at all times within the United States and no ...


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