MAYER v. GARVAN, Alien Property Custodian, et al.; GARVAN, Alien Property Custodian, et al. v. MAYER, 278 F. 27

JOHNSON, Circuit Judge. These are appeals from a final decree in equity of the District Court of Massachusetts upon a bill brought under

section 9 of

chapter 106, Act of October 6, 1917, 40 Statutes at Large A11 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 3115%0)> known as the Trading with the Enemy Act. By

section 7 (

c) of the act, as amended (Comp. St. Ann.

Supp. 1919, § 3115-t/ijd), it is provided : “If the President shall so require any money or other property * * * dioses in action, and rights and claims of every character and description owing or belonging to or held for, by, on account of, or on behalf of, or for the benefit of, an enemy or ally of enemy not holding a license granted by the President hereunder, which tile President after investigation shall determine is so owing or so belongs or is so held, shall be conveyed, transferred, assigned, delivered, or paid over to the Alien Property Custodian, or the same may be seized by the Alien Property Custodian.” At the end of the war with Germany any claim of an enemy or ally of an enemy to said property is to be settled as Congress may direct.

The only action taken by Congress in regard to such property was that contained in its joint resolution of July 2, 1921, terminating the state of war, in which it is provided in substance that all enemy property which had been seized should be retained by the United States until the governments with which the United States had been at war shall have made suitable provision for the satisfaction of all claims of citizens of the United States against them growing out of the war or otherwise.

Section 9 of the act authorizes one not an enemy or an ally of an enemy, who claims any interest in the property transferred or seized under the act, to institute a suit in equity in the Disrict Court of the United States for the district in which he resides to establish his claim.

Section 2 (

a) of the act defines the word “enemy” as an individual partnership or other body of individuals of any nationality resident within the territory, including that occupied by the military and naval forces of any nation with which the United States is at war.

By executive order of February 26, 1918, the title and interest of the enemy property which may be seized is defined to include “such as might or would exist if the existing state of war had not occurred.” On May 18 and September 20, 1918, the Alien Property Custodian, after due investigation and determination, took possession in the district of Massachusetts of the capital stock of two Massachusetts corporations and also of certain securities and notes receivable, as the property of Reis & Co., a partnership, whose address was Heidelburg, Germany. The book value of all of this property approximates $910,000.

The firm of Reis & Co., prior to 1913, consisted of Edwin Reis and Ludwig Reis, residents of Germany, and Karl B. Strauss, a naturalized citizen of Great Britain, but a German by birth. This firm had succeeded to the business of importing cotton waste from America into Germany, formerly conducted by Wilhelm Reis, fathér of Edwin and Ludwig Reis. Richard Mayer was bom in Germany, but took out naturalization papers in the United States in 1912.

In 1898 he was sent to Boston by the firm of Reis & Co. to take the place of an agent there and continued in its employ until 1907 or 1908, having a bonus interest in profits. After leaving the employ of this firm he organized a similar business which he conducted on his own account.

In 1913 he went •to Germany and entered the firm of Reis & Co. as an “additional, personal, liable partner.” In the articles of partnership executed at that time the following introductory statement appears: “Under the firm name of Reis & Co., with the main seat at Friedriehsfeld, branch at Heidelburg, there exists a partnership.” The names of the personal, liable partners are then given, and also that of a special partner, Mrs. Wilhelm Reis. In its first paragraph it is provided that Mr. Mayer shall take his domicile in Boston and conduct the American business of the partnership.

The articles of partnership also provided that Mr. Mayer should bring into the partnership his firm business which he had conducted in Boston, with all its assets and liabilities, appraised at 200,000 marks; that Edwin Reis should contribute to the capital of the firm 1,179,845.03 marks, Ludwig Reis, 1,136,867.26 marks, and Karl B. Strauss 348,313.24 marks. The amount contributed by Mrs. Wilhelm Reis as a special partner did not appear; but it was provided that she was to have interest on her investment, whatever it was, at 4% per cent., but should not participate in gain or loss.

Each of the partners was to receive interest at 4% per cent, upon the capital he furnished and a fixed salary, and was entitled to draw in the course of each partnership year from the firm an' amount equal to his salary and the interest due him on his investment. The participation in gain or loss was to be as follows: Edwin Reis, 27% per cent.; Ludwig Reis, 27% per cent.; Karl B. Strauss, 25 per cent.; and Richard Mayer, 20 per cent.

Shares of profit, as well as any amount due for compensation not drawn by any partner during the partnership year, and interest, were to be credited to the capital account of the partners. In October, 1914, the complainant caused the Richard Mayer Company, one of the corporations whose stock was transferred to the Alien Property Custodian, to be organized as a Massachusetts corporation, and paid in all the capital stock of that company from the assets of Reis & Co. in his hands.

In 1915 he caused the organization, under the laws of Massachusetts, of the Anglo-American Cotton Company, the other corporation, and paid in all the capital stock of that company from the assets of Reis & Co. During the latter part of the year 1914 and the early part of 1915 the German partners remitted to the complainant at Boston about $2,500,000, for the purchase of cotton waste for export.

With this money some cargoes of cotton waste were; purchased and shipped to Europe, and the balance was used in paying for the capital stock of the corporations that were organized and in the purchase of the securities that were seized. At the death of Mrs. Wilhelm Reis, in 1916, it became necessary under German law to secure the signatures of the surviving partners to a declaration that she was no longer a member of the firm, and, as it was not possible at that time to reach Richard Mayer, his brother, Karl Mayer, a resident of Germany, was appointed his “absence trustee” under German law.

February 3, 1917, diplomatic relations with Germany were broken off by the United States. On February 7, 1917, members, in Germany, of the firm of Reis & Co. and the “absence trustee,” appreciating that war between Germany and the United States was imminent, signed the following document": “Friedriehsfeld, February 7, 1917. “Reis & Co. Friedriehsfeld (Baden): “In consideration of the present disturbed condition and the possibility of a warlike entanglement with the United States of America the undersigned reached to-day the following agreement: “In case of a war between the United States and Germany, Mr.

Richard Mayer separates himself from the firm of Reis & Oo. The distribution of the partnership’s assets which then' becomes necessary, is agreed to take place on the following basis: “Mr. Richard Mayer renounces all tof his claims that he may have against the assets of the firm of Reis & Oo. in so far as they are located in Europe, in favor of the remaining partners: Edwin Reis, Xiudwig Reis, and Karl B. Strauss. “On the other hand, the partners, Edwin Beis, Eudwig Reis, and Karl B.

Strauss, renounce any claims they may have against the assets of the firm of Reis & Oo. as far as those assets are located in the United States, in favor of Mr. Richard Mayer. “With the taking over by Mr. Richard Mayer of all of the assets of the linn of Reis & Co., which are located in the United States of America, any and all claims on the part of Mr. Richard Mayer against the complete assets of the firm of Reis <& Co. are once and for all settled. “On the other hand, the partners Edwin Reis, Eudwig Reis, and Karl B.

Strauss declare that, with their taking over of that part of the European assets of the firm which represents Mr. Richard Mayer’s share, they renounced unequivocally all claims against any assets of Reis & Oo. located in the United States of America. “This agreement, has been issued in quadruplicate and a copy handed to each of the contracting parties. •‘Friedriehsfeld, February 7, 1917. “Edwin Reis. “Eudwig Reis. “Karl B.

Strauss, “Karl Mayer, “As Eegal Absence Trustee for Richard Mayer of Boston.” Richard Mayer did not learn of the existence of this document until the spring of 1919, and it does not appear that he had any knowledge until then that an “absence trustee” had been appointed for him.

War was declared by the United States against Germany April 6, 1917, and after that date the German partners treated the German assets as their own and conducted the business in Europe as if Richard Mayer had no interest in it. • The District Court has ruled that war dissolves a partnership under the law of England and the United States, and this ruling is fully supported by the authorities cited, among which are Griswold v. Waddington, 16 Johns. (N. Y.) 438; The William Bagaley, 5 Wall. 377, 18 L. Ed. 583; Hanger v. Abbott, 6 Wall. 532, 18 L. Ed. 939; The Anglo-Mexican, 118 L. T. N.

S. 260 (Privy Council); Hugh Stevenson & Sons, Ltd., v. Aktiengesellschaft Für Cartonnagen Industrie, [1918] A. C. 239, 118 L. T. N. S. 126 (House of Lords), 115 L. T. N. S. 594.(C. of A.).

The District Court further ruled that the contract of partnership, so far as it related to the American partner and the business conducted here, was in case of war to be governed by the law of the United States, which “does not sanction continuation of business relations between its citizens and citizens of a nation with which it is at war”; that the agreement of February 7, 1917, was invalid under German law, because it lacked judicial or notarial authentication; and that, as Richard Mayer was not a subject of Germany, the German court was without authority to appoint an “absence trustee” for him.

We are satisfied with these rulings and the reasoning by which they are supported; but, for additional reasons, we think the agreement, if valid under German law, was ineffective to transfer the interest of the German partners in the American assets to Richard Mayer. It was executory, and made, as stated therein, in contemplation of war, and to take effect only in the event that war was declared. Mr.

Strauss, one of the partners, testified that it was made for the purpose of preventing the confiscation of partnership assets by Germany, and it is so obvious that, if valid, it would defeat the right of the United States as a belligerent to seize the interests of German partners in American assets, that this also seems to have been its purpose. After the declaration of war, and before the passage of the act, all trading or commercial intercourse between the American and German partners was unlawful and opposed to the public policy of the United States. The Rapid, 8 Cranch, 155, 3 L.

Ed. 520; The Julia, 8 Cranch, 181, 193, 3 L. Ed. 528; United States v. Grossmayer, 9, Wall. 72, 19 L. Ed. 627; Insurance Co. v. Davis, 95 U. S. 425, 429, 24 L. Ed. 453, in which Justice Bradley said: “That war suspends all commercial intercourse between the citizens of two belligerent countries or states, except so far as may be allowed by the sovereign authority, has been so often asserted and explained in this court within the last 15 years, that any further discussion of, that proposition' would be out of place.

As a consequence of this fundamental proposition, it must follow that no active business can be maintained, either personally or by correspondence, or through an agent, by the citizens of one belligerent with the citizens of the other. The only exception to the rule recognized in the books, if we lay out of view contracts for ransom and other matters of absolute necessity, is that of allowing the payment of debts to an agent of an alien enemy, where such agent resides in the same state with the debtor. Bnt this indulgence is subject to restrictions.

In the first place, it must not be done with the view of transmitting the funds to the principal during ihe continuance of the war, though, if so transmitted without the debtor’s connivance, he will not bo responsible for it.” It is evident from the act itself that Congress realized that, without the passage of the act and at common law, trading with the enemy was illegal, for it provided in

section 7 (

b) that nothing in the act shall be taken “to recognize as valid or legal” trade with the enemy before passage of the act and after the beginning of the war, and it further expressly provides that contracts made in contemplation of war shall not be included among those which, though executed before the war, but to he performed after its declaration, are recognized as legal. in order to make certain that the title of enemy property which might be seized should not be affected by the declaration of war, the President, by executive order of February 26, 1918, defined the title and interest of enemy property which may be seized to include “such as might or would exist if the existing state of war had not occurred.” The German’ partners could make no agreement wilh the complainant after a declaration of war that would be recognized as valid in our courts, and therefore no executory agreement entered into before the war, and in contemplation of it, could be effective to transfer their interest to him in the American assets after war had been declared.

This case is distinguishable from Wilson v. Ragosine & Co., [1915, K. B.] 113 L. T. N. S. 47, because in that case the agreement for dissolution of the partnership was made on the day before the declaration of war and was completely executed before war was declared.

The fact that the German partners took possession of all of the assets of the firm in Germany, and conducted the business there as if the complainant were no longer a member of the firm, could not transfer their interests in the American assets to him; for, if no contract made by them after war had been declared, to transfer such interests, would receive the sanction of an American court, no such contract or agreement could be implied from their acts after the declaration of war. Thy could not do by acts what they could not do by words.

It is contended that complainant, by filing this bill, ratified the agreement of February 7, 1917; but he was under the same disabilities as his partners in regard to commercial intercourse between them, and there was no time after the declaration of war until Congress declared the state of war to be at an end, July 2, 1921, that he could have, by any communication or negotiation with his former partners, ratified the alleged agreement, and if he could not ratify by communication or negotiation with them, he could not by the act of filing this bill In the Trading with the Enemy Act, Congress, in

section 2 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § SllSi/gaa), defines the words “to trade”: “(

a) Pay, satisfy, compromise, or give security for the payment or satisfaction of any debt or obligation.” “(

c) Enter into, carry on, complete, or perform any contract, agreement, or obligation. “(

d) Buy or sell, loan or extend credit, trade in, deal with, exchange, transmit, transfer, assign, or otherwise dispose of, or receive any form of property. “(

e) To have any form of business or commercial communication or intercourse with.” Ratification of the alleged agreement would certainly be the completion of a “contract, agreement, or obligation.” Whether title to the American assets after the declaration of war was in the partnership as a legal entity, or in the former partners as joint owners, in proportion to the shares to which each might be entitled after liquidation, complainant had an equitable lien upon all the American assets to secure the distributive share which might be due him after liquidation, and also to secure the payment of partnership debts.

Under the partnership articles the complainant is entitled upon distribution to have repaid him out of the assets of the partnership the amount of his capital investment, with interest, and also 20 per cent, of the net profits which had been earned by the partnership, and he is liable for 20 per cent, of all losses.

The District Court has found and decreed: “That, upon the present state of the evidence, this court is unable to state an account as between the parties, or Richard Mayer and the Alien Property Custodian, there being no evidence of the actual value of the American property or of the German or English property, and there being no evidence of the liabilities of the firm.”, We think this finding and decree is fully sustained by the record. Because of complainant’s equitable lien as a partner, he was entitled to possession on April 6, 1917, of all the partnership property under

section 8 (

a) of the act (section SllSVbdd), the material parts of which are as follows: “That any person not an enemy or ally of enemy holding a lawful mortgage, pledge, or lien, or other right in the nature of security in property of an enemy or ally of enemy which, by law or by terms of the instrument creating such mortgage, pledge, or lien, or right, may be disposed of on notice or presentation or demand * * * may continue to hold said property, and after default may dispose of the property in accordance with law * * * under such rules and regulations as the President shall prescribe. * * * Provided further, that if, on any such disposition of property, a surplus shall remain after the satisfaction of the mortgage, pledge, lien, or other right in the nature of security, notice of that fact shall be given to the President pursuant to such rules and regulations as he may prescribe, and such surplus shall be held subject to his further orders.” Under this

section the District Court has decreed : * “That the complainant on the dissolution of the partnership with the outbreak of war had a lien on the American assets and their proceeds for what was due him from the partnership on an accounting of the affairs of the partnership and was'entitled to retain the American assets in his hands until the satisfaction of the amount due him on such accounting.” “That the plaintiff is entitled to the immediate repossession of all property so seized and the net proceeds arising therefrom; that the plaintiff shall hold possession of the money and property so delivered to him under the terms and provisions of

section 8 (

a) of the Trading with the Enemy Act, and of the rights and duties in respect thereof which are set forth in paragraph 30 of this decree.” It was not the purpose of Congress in the passage of the act to deprive an American citizen of his property rights or to so administer the act as to cause him unnecessary financial loss.

It can be easily conceived that the American partner, because of his knowledge of the partnership business and the value of its assets, could realize more from the firm assets upon liquidation than the Alien Property Custodian; and a serious financial loss might be caused him if the liquidation were conducted by one with no experience in the business of the partnership and with less knowledge of the values of the firm assets than that possessed by him. 'The decree of the District Court is amended by striking therefrom paragraphs 12 and 13, and inserting in place thereof the following: “12.

Tliat tlio defendant Francis P. Garvan, as Alien Property Custodian, is entitled, out of the surplus of the money and property in controversy in this canso which may remain after the satisfaction of the distributive share of the plaintiff on accounting, to the allowance of reasonable fees and expenses for services herein rendered by Elias Field, Esq., who appeared as his counsel in this behalf; that the sum of .$10.000 is found to be a reasonable allowance for said Elias Field to cover his services and expenses in this behalf; and that no allowance bo made for the services of George P. Rowell. “18.

It is therefore adjudged, ordered, and decreed as follows: “First. That such allowances shall not be deemed to be an obligation of the said Garvan individually, or as such Custodian, but merely a charge against such credits as he may be entitled to upon an accounting by the plaintiff. “Second. That all of the property in the hands of the said defendants, Alien Property Custodian and Treasurer of the United States, be by them respectively delivered into the possession of the plaintiff. “Third. That the plaintiff shall hold possession of the money and property, so delivered to him, under the terms and provisions of

section 8(

a) of the Trading with the Enemy Act and with the rights and duties in respect thereof which aro set forth in paragraph 10 of this decree.” So modified, the decree of the District Court is affirmed, with costs to neither party, and the case is remanded to that court for further action not inconsistent with this opinion.