800.51 Johnson Act/76
Memorandum by the Legal Adviser (Hackworth)16
Issue by Germany of Scrip or Bonds in Payment of Interest on Outstanding Obligations of German States, Municipalities, and Corporations Held by American Nationals
The following is submitted in response to the request in the Attorney General’s letter of May 9, 1934,17 regarding the question presented by Mr. George Rublee, Counsel for the Foreign Bondholders Protective Council, transmitted to the Attorney General by Mr. Moore’s letter of May 8, 1934.17
The situation as I understand it is substantially as follows:
The bonds, the interest coupons of which are to be liquidated, are those of German States, Municipalities, and Corporations. The German [Page 537] Government controls all foreign exchange in Germany. Sufficient exchange to enable the obligors to meet the interest payments on their bonds is said not to be available. The plan, therefore, contemplates payment of the interest by the obligors to the German Government and the issue in turn by the Government of its obligations, scrip or bonds, in satisfaction, in part at least, of the coupons.
The Act approved April 13, 1934, makes it unlawful for any person to purchase or sell “the bonds, securities, or other obligations of, any foreign government or political subdivision thereof or any organization or association acting for or on behalf of a foreign government or political subdivision thereof, issued after the passage of this Act, or to make any loan to such foreign government,…18 except a renewal or adjustment of existing indebtedness while such government, political subdivision,” etc. is in default in the payment of its obligations to the Government of the United States.
If the bonds, the coupons of which are thus to be liquidated, were the bonds of the German Government, there would seem to be no doubt that the transaction would come within the stated exception, and within the Attorney General’s opinion of May 5, 1934. The Attorney General stated:
“… In other words, such ‘scrip’ or ‘funding bonds’ are authorized if issued in the bona fide ‘renewal or adjustment of existing indebtedness.’
“… Thus an adjustment of an existing indebtedness within the meaning of the Act is any lawful arrangement entered into in good faith between the debtor and the creditor which compromises or determines the amount to be paid by the debtor to the creditor and it may include other details of composition or settlement.”
The question then is whether the fact that the interest payments to be adjusted are not payments on obligations of the German Government precludes our regarding the transaction as a renewal or adjustment of “existing indebtedness”. It would appear not unreasonable to conclude that by the term “existing indebtedness” as used in the Act was meant indebtedness of the government making the adjustment,—not the indebtedness of a third party. On this hypothesis it would be at least arguable that acceptance by American bondholders of the obligations of the German Government would be illegal under the Act.
This, however, would probably be a narrow and illiberal interpretation. A broader interpretation which would admit the legality of the transaction would be based on the theory (1) that the purpose of the law is to prevent governments in default on their obligations to the United States from floating additional loans or establishing additional [Page 538] credits in the United States; and (2) that by “adjustment of existing indebtedness” is meant any indebtedness for which the foreign government is liable.
In elaboration of this theory it might be said that the German Government by establishing a control of foreign exchange and undertaking to accept from the German obligors the interest payments in marks, which it has already done, and to settle with the foreign bondholders, has become obligated to pay this indebtedness, and that, therefore, the present proposal to exchange scrip or other obligations for the coupons on the bonds held by American nationals is an adjustment of existing indebtedness within the meaning of the Act.
There would seem to be little doubt that Germany is liable on these obligations under both German law and international law. The German law of June 9, 1933, effective July 1, 1933, provides in Section (1) that—
“[§ 1.] (1) Interest, dividends and regular amortizations, as well as real estate rents, payments under leases and similar regularly recurring payments on accounts, credits, loans, mortgages, land charges, participations and other capital investments of foreigners or Saarlanders must be paid by the debtor at the contractual due date in Reichsmarks, to the credit of the foreign or Saarland creditor, to the Conversion Office for German Foreign Debts (§ 2). The permits necessary under the legal provisions concerning foreign exchange are to be granted when the conditions of sentence 1 are at hand. In case the debtor is required to pay in foreign currency, the amount is to be converted into Reichsmarks at the official Berlin middle rate of the currency in question on the weekday preceding the date of payment. In case the currency is not officially quoted on the Berlin Stock Exchange, the conversion shall be made at the rate determined upon as the middle rate by a Committee of the Berlin ‘Association for Fixing Conditions for the Trade in Securities’ (Bedingungsgemeinschaft für den Wertpapierverkehr) and published in the press. If, in the case of a currency, neither an official quotation on the Berlin Stock Exchange nor a determination of rates by the Berlin Committee on Conditions has been made, the rate of conversion is to be determined on the basis, on the one hand, of the last known rate on a foreign Stock Exchange of the foreign currency in question and on the other hand, of the last known official middle rate of said foreign Stock Exchange quoted on the Berlin Stock Exchange or determined by the Berlin Committee on Conditions; as rates determined in accordance with this provision, the rates determined by the Reichsbank to be such shall govern.
“(2) To the extent to which the debtor makes payment to the Conversion Office for German Foreign Debts, he is freed from his obligation. The Obligation of the Conversion Office for German Foreign Debts toward the creditor is governed by the provisions of § 3.19
. . . . . . . . . . . . . .
[Page 539]“§ 2. (1) A Conversion Office for German Foreign Debts is hereby created. The Conversion Office is a public law corporation; it stands under the supervision of the Reichsbank-Direktorium and carries its account with the Reichsbank. The Reichsbank-Direktorium will elect the Conversion Office’s responsible agencies.
“(2) The other legal relations of the Conversion Office are governed by its statutes which will be fixed by the Reichswirtschaftsminister in agreement with the Reichsbank-Direktorium.
“(3) The Conversion Office is free of the taxes which the Reich, the states and the municipalities (associations of municipalities) levy on income, on property and on business establishments.
“§ 3. The amounts paid in (§ 1 paragraph 1) will be credited to the foreign or Saarland creditors. The claims of the creditors arising from the credit will be determined according to principles which will be laid down in the statutes of the Conversion Office. At what point of time payments may be made out of the accounts, the Reichsbank will determine.”
It will be seen from the foregoing that the German Government has by law prohibited the German obligors on these bonds from making payment to the bondholders; has required those obligors to pay the money over to an agency of the German Government, and has discharged the debtors from further obligation toward the creditors. There is, in effect, a sequestration by the German Government of property or property rights of the foreign creditors for which the German Government is liable under international law.
A situation somewhat analogous to this was presented when certain states during the revolutionary period provided by law for payment to official agencies of those states obligations due British merchants. The British creditors not being able by the “ordinary course of judicial proceedings” to obtain compensation for their debts, the action of those states was made the subject of treaty stipulations between the United States and Great Britain which provided for arbitration of the question (Article VI of the Jay Treaty of 1794), and this having failed, the Government of the United States was required, by the Treaty of January 8, 1802, to pay the British Government £600,000, amounting to $2,664,000, in satisfaction of the obligations due British merchants. (1 Malloy, Treaties, Conventions, etc., (1910) 590, 594, 610, 611; I Moore, International Arbitrations (1898) 271; III Moore, International Adjudications (modern series, 1931) entire volume).
Since American nationals, unless they accept the proposed arrangement, will presumably be unable to collect on their coupons and apparently will be without an adequate remedy, and since the precise meaning of the Act in this respect is not entirely clear, the more liberal interpretation would seem to be warranted. Having in mind these latter considerations, I am inclined to the view that such an interpretation [Page 540] would not do violence to the Act, and might, with reason, be adopted.
- Copy of this memorandum was enclosed with letter of May 17, 1934, from Assistant Secretary of State Moore to the Attorney General (not printed). In his reply dated May 18, the Attorney General stated: “It follows from these considerations that the acceptance by American bondholders of scrip or funding bonds, under the circumstances hereinbefore set forth, is not forbidden by the Act of April 13, 1934.” (37 Op. Atty. Gen. 526.)↩
- Not printed.↩
- Not printed.↩
- Omission indicated in the original memorandum.↩
- The following omission indicated in the original memorandum.↩