The opinion of the court was delivered by: WEINFELD
The plaintiff, Royal Exchange Assurance, a British corporation, brings this action under the Trading With the Enemy Act
to recover $ 6,184,640.54 vested by the Alien Property Custodian as property of the Deutsches Kalisyndikat (hereafter called 'Syndicate'), a German corporation.
The essence of the plaintiff's claim is that as trustee for bondholders under certain deeds of trust executed by the Syndicate it had an interest, right or title in the funds at the time of vesting and the funds should therefore be paid over to it as trustee for the benefit of the bondholders. The defendant asserts that at the time of vesting the funds were the property of the Syndicate and the plaintiff is merely a general creditor. Thus the hard core of the case is the nature of the plaintiff's interest, if any, in the funds.
The controversy has its origin in a loan made to the Syndicate which had been organized under the Weimer Republic and which had a monopoly of the sale of all potash produced in Germany. All producers of potash were required to be members of the Syndicate which sold the product in domestic and foreign markets. The export sales were made through sales agencies in various countries of the world.
In 1925 representatives of the Syndicate negotiated with a group of English and affiliated bankers headed by J. Henry Schroder & Company of London (hereafter called 'Schroder') for a loan. The negotiations resulted in an agreement dated December 4, 1925 between the bankers and the Syndicate whereby the bankers agreed to underwrite the sale of bonds in the sum of to be issued in three series, designated as Series A, Series B, and Series C. Series A, the first of the series of loans, in the sum of was covered by the agreement of December 4, 1925.
The agreement in general embodied the terms of the loan, the relative rights and obligations of the Syndicate and the bankers, and provisions intended to secure the payment of the bonds. A feature of the loan agreement and the one which is at the heart of this controversy, was the commitment of the Syndicate that, in addition to security consisting of certain mortgages and guarantees executed by Syndicate members, the proceeds of all export sales of potash were to be available in the first instance for the payment of interest and sinking fund requirements. The Syndicate, to effectuate that purpose, agreed to the appointment of a receiving bank to receive the proceeds of exported potash sales and to supervise their disposition in accordance with the terms of the arrangement.
The plaintiff, Royal Exchange Assurance, was not a party to the loan agreement between the bankers and the Syndicate. However, the loan agreement required the Syndicate to enter into an indenture with the Royal Exchange Assurance as trustee; accordingly, on December 6, 1925, a trust deed was executed between the Syndicate and Royal Exchange Assurance which in effect implemented the Syndicate's specific undertakings as set forth in the loan agreement.
The Syndicate conveyed to Royal Exchange Assurance as trustee, mortgages executed by members of the Syndicate on their respective properties as security for the bond issue. The trust deed also contained a provision for the designation of a receiving bank substantially similar, but not identical, to that contained in the loan agreement. Schroder was designated as the receiving bank in both documents; it was also appointed as principal banker or paying agent for the distribution of interest on the bonds and to administer the payment of principal through the operation of a sinking fund.
Series B, the second of the loan series, was in the sum of and was formalized by an agreement dated May 1, 1926. The bonds issued thereunder carried the same interest rate and maturity date as the Series A bonds.
Series C, the balance of the loan in the sum of was covered by an agreement dated June 21, 1929. This series had a different rate of interest and a different maturity date from that of Series A and B.
The loan agreements under which the Series B and C bonds were issued are substantially similar to the original loan agreement. The Syndicate, as required by the second and third agreements, also entered into trust indentures with the plaintiff, Royal Exchange Assurance, as trustee, which are referred to respectively as the first supplementary trust deed and the second supplementary trust deed, each of which incorporates by reference the terms and provisions of the principal trust deed, mutatis mutandi.
The principal trust deed provides for (1) the issuance of the bonds; (2) security for the loan; (3) the receiving bank system; (4) payment of interest and sinking fund requirements; (5) events of default; (6) consequences of default; and (7) the duties of the bankers, receiving bank, Syndicate, and the trustee. Bearing most directly on the controversy are the provisions for the receiving bank system, and for the payment of interest and sinking fund requirements.
A. The Receiving Bank System
The receiving bank system and its operations are provided for as follows:
'Article Fifth. The Receiving Bank
'Section 14. -- The Company shall at all times during the currency of the Loan appoint such person firm or corporation (hereinafter called 'the Receiving Bank') as the Bankers shall from time to time require for the purpose of supervising the disposal of the proceeds of the sale of all potash exported either directly or indirectly to countries outside the German Reich at any time whilst the Bonds or any of them shall be outstanding and all the costs charged and expenses of the Receiving Bank in connection therewith shall be paid by the Company. The Company with the approval of the Bankers hereby appoints J. Henry Schroder & Co. of London England to be the Receiving Bank. The Company undertakes that during the currency of the Loan it will give all such authorities and direction and do all such acts and things as shall be necessary to ensure that all proceeds of the sale of potash to exported shall be received by the Receiving Bank or by its nominees approved by the Company. All such proceeds so received shall be held by the Receiving Bank or by its nominees upon trust firstly to set aside in every calendar month a sum sufficient at the time of each such setting aside to provide one-twelfth of the amount required for the annual service of the bonds and to pay the same in accordance with the provisions of Article Sixth hereof (for which purposes the proceeds of the sale of potash exported to the United States of America and Great Britain shall be utilised in the first place) and secondly to hold the remainder (after making up any sum by which such proceeds in previous months have been insufficient to provide such one-twelfths and after retaining all sums payable under Section 15 clause (c) hereof and deducting all costs charges and expenses then due and payable to the Trustees and the Bankers hereunder) at the disposal of the Company.'
B. Payment of Interest and Sinking Fund Requirements
The payment of semi-annual loan service requirements is provided for as follows:
'Article Sixth. Payment of Interest on and Sinking Fund for 7% Series A Bonds
'(a) At least twenty-eight days before the 1st day of May and the 1st day of November in every year commencing with the 1st day of May 1926 the Company shall procure that the Receiving Bank shall pay for the service of the 7% Series A Bonds the sum of to the English Bankers as paying and sinking fund agents together with any sum then payable under clause (c) of this Section and if on the due date of any such payments the funds in the hands of the Receiving Bank shall be insufficient to make such payment the Company shall within three days of notification by the Receiving Bank pay such deficiency to the Receiving Bank.
'The principal of the Bonds shall immediately become payable if any such payment shall not have been made seven days before the said 1st day of May or 1st day of November as the case may be.'
Section 15(b) requires the English bankers to apply, after payment of interest, the balance of the loan service to a sinking fund operation for the redemption of bonds through purchase in the open market, if available, and if not, by call through drawings.
The semi-annual service requirements for the Series A and B bonds were and for Series C it was -- a total of the monthly service requirements for all three series were $: (British Pound Sterling) 108,148.
The Receiving Bank Arrangement
A. Operation of Receiving Bank System from Inception of Loan to 1931
The Syndicate exported potash principally to the United States, the British Commonwealth, Japan, Denmark, Belgium, Holland, Norway, Sweden and Switzerland. Since Schroder had no established correspondent in some of these countries it was necessary to appoint nominees or sub-receiving banks to receive the proceeds of sales of the exported potash. Nominee banks were appointed pursuant to a procedure which appears to have been followed in all instances. They were chosen by the Syndicate and Schroder. The Syndicate notified the selected bank that it had been designated as a nominee bank and that the Syndicate and instructed its sales agencies to make payment of the proceeds of export sales to it to be held for the Syndicate's account, but at the disposal of Schroder. In turn, Schroder advised the nominee or sub-receiving bank that it was released, for the time being, from its obligation to hold the proceeds at Schroder's disposal and instead was authorized to dispose of the proceeds on instructions from the Syndicate. Schroder, however, specified that it reserved the right to revoke this arrangement and to require the nominee bank to hold the proceeds at its (Schroder's) disposal.
The simultaneous designation and release of the nominee banks was apparently dictated by practical difficulties encountered almost from the inception of the loan by both Schroder and the Syndicate in carrying out the precise letter of the receiving bank provision. The procedure was adopted when it appeared that the sterling and dollar proceeds from sales generally would be sufficient to meet loan service requirements.
The arrangement for the simultaneous designation and release of the nominee banks was known to Royal Exchange Assurance, the plaintiff, which at no time requested the discontinuance of the practice.
In September, 1926 Continentale Handelsbank N.V. of Amsterdam, Holland (hereafter referred to as 'Contibank') was designated as a nominee -- in fact it became the principal nominee bank. Following its appointment, Contibank received export potash proceeds in many currencies, including dollars, which were credited to various accounts maintained by it.
From the inception of the loan in 1926 to 1931 the receiving bank system functioned generally as follows:
Schroder as receiving bank received the sterling proceeds of potash exports from Syndicate sales agencies in the United Kingdom which together with dollar balances furnished by Contibank were sufficient to meet the monthly service requirements of the loan.
As receiving bank, Schroder maintained a Receiving Bank Account, Loan Service Accounts, and a Special Deposit Account. Upon receipt, the cash proceeds were credited to the Receiving Bank Account but each month as soon as that Account contained the monthly requirement for all three series, it was closed and the amounts allocable to each of the series of bonds were transferred to the Loan Service Accounts for the respective series. Any balance remaining in the Receiving Bank Account, together with any further potash proceeds received by Schroder during that month, were then transferred to the Special Deposit Account. When the Loan Service Accounts had six months accumulations in them, then twenty-eight days before the respective due dates of payment to bondholders, the deposits were transferred to Dividend and Redemption Accounts which ...