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Manufacturers Trust Co. v. Kennedy

June 14, 1961


Before Friendly and Smith, Circuit Judges, and Watkins, District Judge.*fn*

Author: Watkins

WATKINS, District Judge.

This is an appeal by plaintiffs-appellants from a final judgment on the merits, as well as from the action of the District Court in granting defendant's motion for summary judgment as to plaintiff, Manufacturers Trust Company, as trustee. The action was brought by plaintiffs under section 9(a) of the Trading with the Enemy Act,*fn1 seeking the recovery of a fund amounting to $328,653.20, which was vested (i.e. seized) by the Attorney General*fn2 on November 25, 1947, as property of an enemy, the German Reichsbank (Vesting Order 10261.)

The complaint contains three causes of action. The first two consist of claims to the fund by Manufacturers Trust Company as an alleged trustee for certain "American Creditor Banks," and the third cause of action is for return of the vested funds to the Trust Company as depository, or, in the alternative, for return on a pro rata basis to the five individual plaintiffs (creditor banks) the respective parts of the $328,653.20 claimed on their behalf by the Trust Company.

Plaintiffs claim that the Trust Company was named trustee of these funds for the benefit of American creditor banks pursuant to regulations issued by the German Reichsbank under authority granted in an international credit agreement, known as the German-American Standstill Agreement of 1941. They further claim that since neither the Trust Company, nor the American creditor banks are enemies as defined in the Act, the Trust Company is entitled to a return of the funds under section 9(a) of the Act, in order that it might distribute the funds to the beneficiary banks. Five banks are named plaintiffs in their individual capacities as beneficiaries of the alleged trust, and say that their portion of the funds amounts to $172,884.25. The other 16 alleged beneficiary creditor banks are not named as individual plaintiffs. The answer of the Attorney General does not deny the non-enemy status of the plaintiffs, but does deny that any of the plaintiffs ever acquired any interest in the seized property in any capacity.

Both sides moved for summary judgment, and submitted affidavits, exhibits and oral argument in support of their respective motions. The trial judge denied plaintiff's motion, granted the motion of defendant as to the first and second causes of action in which the Trust Company sued as trustee, and denied defendant's motion as to third cause of action in which the individual banks were named as plaintiffs. See Manufacturers Trust Co. v. Rogers, D.C.S.D.N.Y. 1960, 181 F.Supp. 116. The only issue left remaining for trial was the ownership interests, if any, of the five individual plaintiff banks in the seized funds under the third count of the complaint.

The trial court pointed out in his opinion that the papers filed in support of the motions for summary judgment were primarily directed to rights under the 1941 agreement and to legal principles, and that more evidence was desired as to the alleged individual interests of the five creditor banks. No further evidence was offered by either side when this issue was tried on the merits before the court without a jury, and the court was asked to determine the ownership of the vested funds on the basis of the same exhibits which were before the court on the summary judgment motions. On January 30, 1961, final judgment in favor of the defendant was entered. It is from this judgment, as well as from the decision upon the cross-motions for summary judgment that this appeal is taken by plaintiffs.

The issue on appeal has been limited by agreement of the parties. Section 9(a) of the Act requires one claiming property vested by the Alien Property Custodian, to show, first, that he is "not an enemy or an ally of enemy," and second, that he has an "interest, right or title" in the vested property in order to secure its return. As to the first requirement, it is agreed by the defendant that plaintiffs satisfy the statute. Concerning the second requirement, the trial court found, on motions to dismiss with regard to the claims of the Trust Company as trustee, and, after a trial on the merits with regard to the claim of the five individual plaintiffs, that none of the plaintiffs proved the requisite interest in the property to allow recovery. We feel that the issue was decided correctly, both as to the Trust Company as trustee and the individual plaintiffs, and affirm.

I. General Background

In the autumn of 1930, when a general election was held in Germany, only 12 members in the previous Reichstag were returned to office, whereas 107 members of the National Socialist (Nazi) Party were elected. Subsequent to this election, German foreign creditors began to withdraw credits previously extended to German nationals. These withdrawals became so greatly accelerated that it was evident that Germany was in serious trouble with respect to its foreign exchange reserves. To meet this danger the German Government instituted a system of foreign exchange controls which were administered by the German Reichsbank and the German Golddiskontbank. An International Conference was held in London in 1930, and another in Basel, Switzerland, in 1931, attended by representatives of the two German banks, German debtors and their foreign creditors to work out an arrangement looking toward the maintenance of the volume of credit already extended to Germany in order to prevent the complete collapse of her foreign exchange position and her foreign trade. This latter meeting resulted in the German Credit Agreement of 1931, the signatories thereto including representatives of European and American creditors, who agreed to a six months' extension of German short-term indebtedness in the amounts and on the terms then existing, in return for which interest payments on the indebtedness and payments to cover maturing debts were exempted from Germany's foreign exchange controls. These exemptions from the foreign exchange moratorium were in recognition of the intended preferential position of these foreign banking credits as compared to obligations of a different nature. Upon the expiration of the 1931 agreement, similar one-year agreements were entered into each year up to and including 1939.

War broke out in Europe in September, 1939, and the 1939 agreement was promptly abrogated. Thereupon, a new agreement was negotiated by a committee representing German debtors, and the German Reichsbank and the Golddiskontbank, relating only to short term credit lines extended by American creditor banks. This agreement, called the 1939 German-American Standstill Agreement, expired on May 31, 1940, and was succeeded by the 1940 German-American Standstill Agreement which extended the arrangement for six months from June 1, 1940, and was then extended until May 31, 1941.

In consideration for maintaining these short term credit lines with their German debtors, the foreign creditor banks acquired, under Clause 10(1) of the 1933-1940 Agreements, the right to call upon their respective debtors to repay their indebtedness in German currency, i.e. reichsmarks, which were deposited in accounts in the Reichsbank, which maintained a register showing the amount of reichsmarks held for the account of the particular foreign bank. These payments so deposited were called "registered credit balances," and the foreign creditor banks for whom such registered creditor balances were maintained were called "registered holders."

The 1936 Agreement and subsequent agreements [Clause 10(7) (a)] gave creditor banks the right to transfer their registered credit balances into travel mark accounts, which travel mark accounts could be used, under terms of the agreement and regulations established by the Reichsbank, by persons residing outside Germany, to pay for travel expenses while in Germany. Another provision gave the Reichsbank the right to modify or cancel all provisions relating to the holding of travel mark accounts and the right to withdraw from any particular creditor the privilege of holding such travel mark accounts in case of abuse [Clause 10(7) (a)].*fn3

The 1940 Standstill Agreement gave the American creditor banks the right to sell reichsmarks from their registered credit balances for benevolent remittances to German nationals by persons outside Germany [Clause 4(7) (c)]. All this was of great benefit to the foreign creditor banks because it enabled them to sell travel marks, make benevolent remittances, collect in dollars, and thereby secure debt repayments previously made in reichsmarks. It permitted American creditors to convert reichsmark registered credit balances into dollars, subject, of course, to the overriding control of the Reichsbank.

II. Creation of License Fees

Before 1937, the German Reichsbank, under its regulations, assessed and collected a fee in reichsmarks on all drafts drawn against travel mark accounts when such drafts were presented for payment in Germany. This was done independent of the terms and provisions of the various agreements. In 1937 these Reichsbank regulations were cancelled, and new regulations, independent of any requirement imposed by the agreements, became effective, whereby the Reichsbank levied a license fee upon the transfer of funds from a registered mark account to a travel mark account.*fn4 A similar regulation required a license fee for transfer of registered balances for benevolent remittances. When an American creditor transferred a part of his registered balance into a travel mark account, he was required to pay into a special account in the Manufacturers Trust Company a certain amount of American dollars per 100 marks. Those fees were $4.50 per 100 marks for travel transactions and $3.35 per 100 marks for benevolent remittance transactions during the period here involved. These license fees, collected after May 31, 1941, constituted the corpus of the two accounts, vested by the Attorney General in 1947, which the plaintiffs seek to recover in this action.

The Reichsbank regulations also required the registered holder to collect the fee from any subsequent holder of the travel mark account, and the latter, in turn, was required to collect the fee from the ultimate user of the travel marks. Such regulations also provided: (1) the license fee had to be passed on to and paid by the ultimate purchaser of the travel marks as part of the "global" price at which such marks were sold; (2) the license fees had to be remitted to the "Reichsbank Standstill Account" of the depository agency (Manufacturers Trust Company in the United States); and (3) the regulations were to remain in effect unless cancelled or amended by the Reichsbank. The holder of the travel mark account, or his agents, in some situations could forward the license fee collected directly to the Trust Company instead of forwarding it ...

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