The opinion of the court was delivered by: MCLEAN
This is a suit in equity begun in July 1960 pursuant to Section 9(a) of the Trading with the Enemy Act ("the Act") (50 U.S.C. App. § 9(a)) to recover certain property, or the proceeds thereof, vested in the Alien Property Custodian under Section 5(b) of the Act (50 U.S.C. App. § 5(b)) by Vesting Orders No. 354 dated November 11, 1942, and 4754 and 4755 dated March 14, 1945. Vesting Orders No. 4754 and 4755 were subsequently amended on June 18, 1948. Section 9(a) of the Act authorizes the institution of such an action, which therefore arises under the laws of the United States. Jurisdiction is thus based upon 28 U.S.C. § 1331.
Although in form an action against the Attorney General as successor to the Custodian, the suit in substance is one against the United States. Banco Mexicano de Commercio e Industria v. Deutsche Bank, 263 U.S. 591, 44 S. Ct. 209, 68 L. Ed. 465 (1924).
The property vested consisted of (a) 95 shares, constituting all the outstanding stock, of Pioneer Import Corporation ("Pioneer"), a New York corporation, (b) 6 packages of diamonds, and (c) 270 packages of synthetic and semi-precious stones. The diamonds and the stones were sold by the Alien Property Custodian subsequent to the vesting for $350,129.45 and $941,866.72 respectively. Plaintiff von Clemm claims to be the owner of all the stock of Pioneer, of which he was president and general manager, and thus he claims to be entitled to its return. He also claims that Pioneer was the owner of the diamonds and of seven packages of the stones and that Pioneer is entitled to their proceeds. He further claims that Bridge Import Company ("Bridge"), a co-partnership of which he was the only general partner,
was the owner of the remaining 263 packages of stones and is entitled to their proceeds.
Pioneer was originally a plaintiff in this action. By order of this court dated January 11, 1961, Pioneer was stricken as a party plaintiff on the theory that the Alien Property Custodian, who had been in control of the corporation since its vesting, had not authorized it to begin this suit. Pioneer was made a party defendant. Pioneer Import Corporation v. Rogers, 190 F. Supp. 529 (S.D.N.Y.1960).
The Alien Property Custodian has filed an answer on its behalf seeking dismissal of the complaint.
The parties agree that if this court holds that von Clemm has established his right to the Pioneer stock and if this court directs that the stock be returned to him, then Pioneer should be reinstated as a party plaintiff, in which event the court must pass upon Pioneer's claim to the proceeds of the diamonds and of the seven packages of stones, a claim which von Clemm has asserted on its behalf.
The intervenors are two different groups of stockholders of International Mortgage and Investment Company ("IMC"), a Maryland corporation. They assert that IMC owned the stock of Pioneer and that it also owned the diamonds and the stones. These parties were permitted to intervene for defensive purposes only, i.e., they may defend against plaintiff's claim, but they may not secure an affirmative determination in favor of their own claim. International Mortgage & Investment Corp. v. Von Clemm, 301 F.2d 857 (2d Cir. 1962).
Section 9(a) of the Act provides that:
"Any person not an enemy or ally of enemy claiming any interest, right, or title in any money or other property which may have been conveyed * * * or paid to the Alien Property Custodian or seized by him hereunder and held by him * * * may file with the said custodian a notice of his claim under oath * * * and the President * * * may order the payment * * * or delivery to said claimant of the money or other property so held by the Alien Property Custodian * * *. If the President shall not so order * * * said claimant may institute a suit in equity * * * in the district court of the United States * * * to establish the interest, right, title, or debt so claimed, and if so established the court shall order the payment * * * or delivery to said claimant of the money or other property so held by the Alien Property Custodian * * *."
It is conceded that plaintiff von Clemm made timely application for the return of the property which he claims and that the application was not granted.
There are two issues in this case, which are manifest from the language of the statute itself: (1) were plaintiffs an "enemy" or an "ally of enemy" within the meaning of the statute? (2) if not, were they the beneficial owners of the vested property at the time of its vesting?
Plaintiffs have the burden of proof on both issues. Societe Internationale, etc. v. Rogers, 357 U.S. 197, 78 S. Ct. 1087, 2 L. Ed. 2d 1255 (1958); Manufacturers Trust Company v. Kennedy, 291 F.2d 460 (2d Cir. 1961).
The Issue of Enemy Status
This issue comes down to whether or not von Clemm, individually, was an enemy or an ally of an enemy, for if he was, then he cannot recover the stock of Pioneer, and in that case Pioneer cannot be considered to be a plaintiff, and hence cannot recover the proceeds of the diamonds and the seven packages of stones. Similarly, if von Clemm was an enemy or an ally of an enemy, Bridge cannot recover the proceeds of the 263 packages of stones, for under such circumstances von Clemm could not assert a claim for the proceeds as general partner of Bridge, and Alley, a limited partner, does not have a property interest in Bridge's assets sufficient to entitle him to prosecute this action under Section 9(a). Alley v. Clark, 71 F. Supp. 521 (E.D.N.Y.1947).
Section 2 of the Act (50 U.S.C. App. § 2) provides as follows:
"The word 'enemy,' as used herein, shall be deemed to mean, for the purposes of such trading and of this Act -
(b) The government of any nation with which the United States is at war, or any political or municipal subdivision thereof, or any officer, official, agent, or agency thereof."
The government contends that von Clemm was an agent of Germany, a country with which the United States was at war after December 11, 1941. It concedes that to come within the statute, von Clemm must have been such an agent after war was declared. The government also contends that even if von Clemm was not an agent of the German government, he was "enemy tainted," a more elusive concept which has its origin in certain cases hereinafter discussed. Von Clemm, on the other hand, contends that at no time was he an agent of Germany. He says that he was merely an American citizen engaged in the import business. He contends further that in any event he did nothing after war was declared on December 11, 1941, and hence could not be an agent of an enemy, whatever he might have done for Germany before the war. He contends that the doctrine of enemy taint is wholly inapplicable to this case.
The testimony in this action was voluminous and the exhibits were numerous. Much of this material turns out to be irrelevant to the critical issues which determine the case. Upon the basis of all this evidence, I find the essential facts to be as follows.
Werner C. von Clemm, whose name at birth was Werner Clemm von Hohenberg, was born in Mainz, Germany, in 1898. He lived in Germany until 1922. After serving in the German Army in World War I, he had various employment in Germany, including a job with Hardy & Co., a firm of private bankers in Berlin, the senior partner of which von Clemm knew socially. His contact with this firm was to prove useful to him in later years.
Von Clemm's family was well established in Germany. One of his sisters was married to a general in the German Army. Another was married to a general in the German Air Force. A cousin was the wife of von Ribbentrop, ultimately Hitler's foreign minister. Another cousin was a "right-hand man" of Admiral Canaris, a high official in German intelligence under Hitler. Leising and Hoepfner, two business associates who figure prominently in the events hereinafter related, were members of the Nazi party. Von Clemm's twin brother, Carl von Clemm, who figures even more prominently in these events, was obviously on good terms with Hitler's government, whether or not he was a member of the Nazi party, for during the early years of the war, he was an official in the German Embassy in Rome. The relation between von Clemm and his twin brother was at all times very close.
In 1922, von Clemm emigrated to the United States. When he did so, he dropped the "von Hohenberg" from his name. He has lived in the United States ever since. He married an American wife. Their children were born and educated here. He became a naturalized American citizen on September 8, 1932.
Carl von Clemm came to the United States with Werner in 1922 but stayed only a few years. In 1929 he returned to Germany where he has since lived.
Between 1922 and 1938 von Clemm had a number of different jobs in New York, at first a bank clerk, then a bond salesman, and later a customer's man in various brokerage houses. Thereafter he worked for a few years in an importing firm. In 1935 he went to work for Davis & Co., importers of oil equipment from Germany, a contact which was useful to him, as will hereinafter appear.
Von Clemm left Davis & Co. in the spring of 1938, to "lay the groundwork" for the organization of Pioneer, which was organized later that year. This "groundwork" consisted of a study of certain Treasury Department rulings, followed by a visit to Germany in the summer of 1938.
A Treasury Department ruling issued on December 23, 1936 dealt with the payment for goods imported from Germany. It had to do with Section 303 of the Tariff Act of 1930 (19 U.S.C. § 1303) which in substance provided that if any "bounty or grant" were paid with respect to any foreign merchandise, then upon the importation of such merchandise into the United States, additional duty would be assessed. The ruling of December 23, 1936 provided in substance that this statute would not be violated and that no bounty or grant would be involved if payment of the purchase price of the imported goods was made in whole or in part with the use of "controlled mark credits," i.e., marks on deposit in Germany, the free transfer of which had been blocked by German foreign exchange regulations. The ruling provided that the credits so used must have been "from the time they became subject to German governmental control, continuously owned by the person for whose actual account the merchandise is purchased for direct or indirect shipment to the United States."
Von Clemm conceived the idea of organizing a company to import goods from Germany to be paid for in part by such "continuously owned blocked marks." These marks could be purchased in various European financial centers, such as Amsterdam, at a substantial discount from the rate of exchange applicable to freely transferable marks. Von Clemm did not own any "continuously owned blocked marks." He went to Germany in the summer of 1938 to find some.
Von Clemm's twin brother Carl was then employed in Germany by a firm known as Eurotank Handelsgesellschaft, m.b.H. ("Eurohandel"), a company apparently controlled by Davis & Co., the company which, as heretofore noted, von Clemm had recently worked for in New York. Herman Leising and Carlos Hoepfner were associates of Carl von Clemm in Eurohandel.
Von Clemm conferred with Carl and Leising in the summer of 1938 in Germany. He sought to discover an owner of "continuously owned blocked marks." Leising suggested IMC. This company had been organized by Hardy & Co., for whom von Clemm had worked in Germany years before. Indeed, von Clemm himself had for a time been a director of IMC, although he had not been active in that capacity.
IMC was a Maryland corporation, but apparently many, if not all, of its stockholders were Germans. It had done an extensive business in Germany investing in mortgages, which it was able to buy at a discount. Through a subsidiary, Gesellschaft fur Hypothekenankauf ("GFHA, Berlin"), it held substantial quantities of marks on deposit in German banks, the free transfer of which was blocked by the German regulations. These qualified as "continuously owned blocked marks." A Dr. van Meer, a Dutch banker in Amsterdam, was a director of IMC and was thought by Leising to be interested in selling these blocked marks at a discount. Leising believed that, presumably by working through Hardy & Co., he could arrange for such sales to a company to be organized by von Clemm. A permit from the German foreign exchange control authorities was necessary for the transfer of blocked marks. Carl von Clemm and Leising believed that such a permit could be obtained.
The exact nature and extent of von Clemm's activities while in Germany in 1938 was never fully explained. It is at least clear that von Clemm received assurances which were sufficient to induce him to go ahead with his plan. He returned to New York and in November 1938 incorporated Pioneer under the laws of New York. It had an authorized capital of 100 shares of no par value stock.
The issuance of the stock of this corporation is a somewhat complicated subject. For present purposes, it is enough to say that five shares were issued in the name of Banque Commerciale of Luxembourg. Von Clemm instructed Banque Commerciale to hold this stock as trustee for IMC. The consideration for these five shares was $500. Von Clemm himself provided the $500, but instead of paying it in to Pioneer, he sent it to Banque Commerciale, instructing Banque Commerciale to pay this sum to Pioneer for the five shares. Banque Commerciale complied.
The reason for the employment of this somewhat devious method was eventually explained. Von Clemm wanted it to appear that Banque Commerciale, as trustee for IMC, had purchased the stock. The reason that he wanted it so to appear was that under the Treasury Department ruling of December 23, 1936, as previously noted, the purchase price of goods imported from Germany could be paid for in blocked marks only if those marks, from the time when they had first been blocked by the German foreign exchange control, had been "continuously owned" by the person for whose account the merchandise was purchased for import. Pioneer, which was not organized until November 1938, obviously had not owned any blocked marks continuously since the German foreign exchange regulations went into effect. These regulations antedated 1938 by several years. Von Clemm individually had not continuously owned any blocked marks either. But IMC had. Therefore, it was necessary to make it appear that IMC owned the stock of Pioneer, so that Pioneer could use the blocked marks continuously owned by IMC in payment of the price of the imported goods.
On several different occasions subsequent to Pioneer's incorporation, von Clemm represented to the United States Treasury authorities that Pioneer was a wholly owned subsidiary of IMC. Pioneer's federal income tax returns for 1939 and 1940 also contained such a representation.
Having thus set up Pioneer to engage in the import business within the framework of the Treasury regulations, von Clemm in late 1938 or early 1939 began operations on a wide scale. Whether or not he was the actual owner of Pioneer, there is no doubt that he was its sole manager and in complete control of its operations. Hoepfner, Carl von Clemm's associate, was made a vice president of Pioneer, a position which he held at least until May 1941.
Pioneer proceeded to purchase various goods from Eurohandel, paying for them in part with blocked marks. Carl and Hoepfner on behalf of Eurohandel did the exporting of the goods from Germany, and von Clemm, as manager of Pioneer, did the importing into the United States. They dealt at first in a variety of goods - toys, vacuum bottles, lily pips, for example - goods which are not involved in this case.
Von Clemm's procedure in paying for these goods was informal. Whether or not such methods were or are customary in the import business, as von Clemm testified, they manifest at least the closeness of von Clemm's relation with his brother and with Leising. The method consisted of the transmission by Pioneer of dollars from time to time to Banque Commerciale in Luxembourg, and apparently also to banks in Holland, to be disbursed by those banks in accordance with instructions to be given them by Carl and Leising. Von Clemm gave Carl and Leising complete authority to act on behalf of Pioneer in handling these payments.
Carl or Leising used these funds in part to purchase blocked marks from IMC's subsidiary GFHA, and in part to purchase free marks at the regular rate of exchange of 40 cents per mark. Carl and Leising arranged for the payment to Eurohandel of the purchase price of the merchandise. Part of the price was paid in blocked marks and part in free marks, usually 50 per cent in each. Of course, in Germany a mark was a mark, so to speak, and it made no difference to Eurohandel as long as it received the right number of marks how its customer had acquired those marks.
An account was opened in a German bank, the Deutsche Bau und Boden Bank ("DBB"), and later in Reichskreditgesellschaft ("RKG"). The name of the account was "IMC-subaccount Pioneer." The blocked marks which had been purchased from GFHA were deposited in this account. Payments were made out of this account upon the instructions of Carl or Leising to Eurohandel to pay the portion of the purchase price payable in blocked marks. The bank from time to time sent debit advices, addressed to IMC, c/o Pioneer, evidencing these payments.
Permission of the German foreign exchange control authorities for payment out of this blocked mark account was obtained by Carl or his associates.
It is suggested by the intervenors that actually there were no blocked mark sales by IMC at all. The evidence does not support this contention. I find that IMC, through its subsidiary GFHA Berlin, did in fact sell blocked marks to Pioneer.
The transmission of funds by Pioneer to banks in Luxembourg and Holland was possible only up to May 10, 1940, when those countries were overrun by the German Army. The procedure I have described is the procedure which was followed up to that time. Thereafter, Pioneer transmitted funds to Switzerland. As far as appears, little or none of these funds transmitted to Switzerland was used to purchase blocked marks. The German foreign exchange control authorities declined to permit blocked mark transactions after mid-1940. The semiprecious stones with which we are directly concerned in this action were not purchased with blocked marks, but with dollars. As to the diamonds, as will subsequently appear, only one purchase of diamonds was completed by von Clemm. This was also paid for in dollars.
In September 1939, the war began with the German invasion of Poland.
Von Clemm's troubles then began as well. The British set up a blockade of Germany and established censorship of mail to and from Germany. In approximately April 1940, von Clemm began a series of practices which he continued to the end and which gave a marked conspiratorial cast to all his dealings. He invented an elaborate private code in which he couched his correspondence. He invented aliases for his correspondents, Carl and Leising and Hoepfner, often several different aliases for the same man. He invented addresses for these fictitious personalities in various neutral countries. For example, "De Jager" in Switzerland, "Jao da Conceicao" and "Miguel Loanda & Cie" in Lisbon were each in reality Carlos Hoepfner in Germany. Francesco Da Vinci, whose address varied from one Italian city to another, was in reality Carl von Clemm in Germany. Swiss aliases in abundance appear in the later years. Von Clemm sent letters addressed to these "figments of his imagination" to forwarders in neutral countries, who sent them on to the true addressees in Germany.
Carl and Hoepfner on their end also used code in their letters to von Clemm. They used many aliases for von Clemm, individually, or for Pioneer. A few examples out of many are "Doyle & Co." for Pioneer and "Bill Reck" for von Clemm.
Von Clemm's stock explanation of this mysterious behavior was that he and his German correspondents were trying to fool the British censors. The inference is hard to avoid that he had at least in later years another purpose, i.e., to deceive the investigating officials of the United States Treasury Department.
In October 1939 Carl resigned from Eurohandel, after what von Clemm described as a " palace revolution," i.e., apparently a controversy with Davis. Leising and Hoepfner resigned shortly thereafter. The three of them then organized a German firm known as International Mortgage Handelsgesellschaft m.b.H. ("IMICO"). Thereafter all Pioneer's purchases were from Imico. Imico enjoyed a highly favorable position vis-a-vis the German government, as events about to be related will demonstrate.
Von Clemm went to Germany for a visit in 1939, shortly before the outbreak of the war. He conferred there with Carl and Leising and Hoepfner. He also called on the German Economic Ministry and talked with an official named Cremer, later to assume importance in the diamond transactions. Just what von Clemm did in Germany on this visit was never adequately explained. I have no doubt that he realized that war was imminent and that he tried to prepare for that eventuality. For one thing, he must have discussed setting up the codes and the false names. He also appears to have discussed plans for transmitting funds to Switzerland. Perhaps he anticipated that Luxembourg and the Netherlands might eventually cease to be available. It seems highly probable that Carl's forthcoming resignation from Eurohandel and the organization of Imico was also under consideration at that time.
Von Clemm's testimony on the subject of his 1939 conversations in Germany is far from lucid. Leising, who testified by deposition, was not very communicative. Carl von Clemm's testimony was not taken by deposition nor was he called as a witness at the trial.
Before I turn to the transactions which are directly involved here, the diamonds and the semi-precious stones, mention should be made of the fact that in the late fall of 1940, von Clemm in New York began operating the business which he had previously conducted through Pioneer under the name of F.M. Alison & Company ("Alison").
No written instrument embodying any transfer of the assets or liabilities of Pioneer to F. M. Alison & Company was ever executed, as far as appears. Orders placed by Pioneer were filled by shipments to Alison. There is nothing to indicate that these orders were ever assigned by the former to the latter. Apparently all that occurred was that von Clemm, who had previously called himself Pioneer, now called himself Alison. Moreover, he was not entirely consistent in this, for some shipments, notably the diamonds, continued to arrive addressed to Pioneer.
In April 1941 Alison disappears from the scene and Bridge emerges. This entity at least was embodied in a partnership agreement. Von Clemm was the only general partner. Alley, as trustee for von Clemm's children, was a special partner. Georges Lambercier of Switzerland was a special partner. Lambercier authorized an employee in von Clemm's office to sign his name to the partnership agreement. In fact, von Clemm supplied the entire capital, $15,000, for all three. He put up $5,000 for himself, $5,000 for Alley and $5,000 for Lambercier. The $5,000 for Lambercier, ...