Petition for Writ of Certiorari — Clark v. Kind

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CITATIONS

Cases:

American Insurance Co. v. Lucas, 38 F. Supp. 896, appeal

dismissed, 314 U. 8S. 575, affirmed sub nom. American

Insurance Co. v. Scheufler, 129 F. 2d 143, certiorari

denied, 317 U. 8S. 687, rehearing denied, 317 U. 8. 712__---

SERA 0 GE COND OMe By Magoo on onc wcsbnncwanenccsnd

Bement v. National Harrow Co., 186 U.S. 70__...-.-------

Brassert v. Clark, decided July 30, 1947__._._-----------

Carrington v. Merchants’ Insurance Co., 8 Pet. 495_...-----

Causey v. United States, 240 U. 8. 399_____._-----------

Commonwealth Finance Corp. v. McHarg, 282 Fed. 560-- --

Continental Wall Paper Co. v. Voight & Sons Co., 212

Dobbins’ Distillery Co. v. United States, 96 U. S. 395_-----

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Mitchell v. Sherman E. McEwen Associates, Inc., 360 Ill.

Morton Salt Co. v. G. S. Suppiger Co., 314 U. 8. 488_.----

Pan American Co. v. United States, 273 U.S. 456_....-----

Railroad Co. v. Soutter, 13 Wall. 517__--.-..-----------

Robertson v. Miller, 286 Fed. 503, affirmed, 266 U.S. 243- _-

Rock Island, A. & L. R. Co. v. United States, 254 U.S. 141-

St. Nicholas, The, 1 Wheat. 417__.._.--..-.------------

Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173_---

United States v. Trinidad Coal & Coking Co., 137 U.S. 160-

praeees V. Genel, 11 F. Oa 444... ... 2.2 2 eee ee

Worden v. California Fig Syrup Co., 187 U. 8. 516__------

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Statutes: Page

Trading with the Enemy Act, October 6, 1917, c. 106, 40

Stat. 411, as amended, 50 U. 8. C. App. 1, et seq.:

Section 5 (b)..--------------------------------*>- 13

Section 9 (a). ----------------------------------" 7,14

il ce oo eckapnanennoonsenmae 9, 16

Miscellaneous:

Annual Report, Office of the Alien Property Custodian,

June 1004.......\....--- ~~ +2 52-0 52 oo 3-0 25a 5

Elimination of German Resources for War, Hearings

before Senate Subcommittee on Military Affairs, 79th

Cong., Ist sess., 1945- ------------------------------

Executive Order No. 9788, 11 F. R. 11981.--------------

Restatement, Trusts, Sec. 273.--------------------------

Report of the Alien Property Custodian, February 22, 1919.

Vesting Order No. 770, January 27, 1943, 8 F. R. 2453 ---

Vesting Order No. 5225, September 14, 1945, 10 F. R. 11913.

~~ POO He DD

Inthe Supreme Court of the Binited States

OcToBER TERM, 1947

No. —

Tom C. CLARK, ATTORNEY GENERAL, AS SUCCESSOR

TO THE ALIEN PROPERTY CUSTODIAN, PETITIONER

v.

JOHANNA M. Kinp aND HERMANN H. KIND, as

TRUSTEES UNDER THE Last WILL AND TEsTa-

MENT OF HERMANN KIND, DECEASED

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIBCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

The Solicitor General, on behalf of Tom C.

Clark, Attorney General, as successor to the Alien

Property Custodian, prays that a writ of certio-

rari issue to review the judgment of the United

States Circuit Court of Appeals for the Second

Cireuit entered iu this case.

OPINIONS BELOW

The opinion of the Circuit Court of Appeals for

the Second Circuit (R. 426-442) is reported at

161 F. 2d 36. The opinion of the District Court

(R. 404-424) is not reported.

(1)

2

JURISDICTION

The judgment of the Circuit Court of Appeals

for the Second Circuit was entered on April 9,

1947 (R. 442). On July 8, 1947, Mr. Chief Jus-

tice Vinson extended the time for filing a petition

for certiorari until September 6, 1947. The juris-

diction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended by the

Act of February 13, 1925.

QUESTION PRESENTED

Whether, in a suit under Section 9 (a) of the

Trading with the Enemy Act, as amended, a court

of equity should entertain a claim for an interest

in enemy property which has been vested by the

Alien Property Custodian where that interest had

been used to effectuate a scheme to conceal the

enemy’s interest and thereby to defraud the

United States and frustrate its laws.

STATUTES INVOLVED

The relevant provisions of the Trading with the

Enemy Act, as amended, are set forth in the

Appendix, infra, pp. 13-17.

STATEMENT

The plaintiffs, Johanna M. and Hermann H.

Kind, are the trustees and, with two others, the

beneficiaries of the estate of Hermann Kind (R.

184-186). They are citizens and residents of the

United States (R. 28-30, 179). Prior to Septem-

_

3

ber 1939, J. A. Henckels K. G., a German copart-

nership, owed the estate $130,000. Of this sum

$55,000 was owed directly and $75,000 represented

a guarantee of a debt owed the estate by one

Iwersen, a national and resident of Germany and

until 1944 a cotrustee of the estate (R. 428). The

$75,000 debt, and possibly the entire sum, was

secured by a pledge by Henckels K. G. of the

stock of Graef & Schmidt, Inc., the property in

question (R. 428). In the fall of 1939, shortly

after the outbreak of war in Europe, the trustees

of the estate purported to release the indebtedness

of $130,000 in consideration of the transfer by

Henckels K. G. to the estate of all right, title, and

interest in the pledged shares (R. 429-430). The

formal mechanics of this ‘‘release’’ and ‘‘transfer’”’

were an offer by counsel for the trust estate and

an acceptance by Iwersen and another in behalf

of Henckels K. G. (R. 429-432).

In fact, however, Hermann H. Kind and Iwer-

sen (both being trustees and the latter general

manager of Henckels) by correspondence made it

clear that this ostensible transfer was a sham and

that their true intention was to preserve for

Henckels K. G. any amount remaining after sat-

isfaction of the indebtedness (R. 429-436, 440).

Johanna M. Kind, the third trustee, was the set-

tlor’s widow and the mother of Hermann H. Kind

(R. 28-30). While the Cireuit Court of Appeals

“reluctantly”? accepted the District Court’s find-

4

ing that she did not have actual knowledge of the

cloaking agreement between her son and Iwersen

(R. 440), there can be no dispute, from her testi-

mony, that she had accepted Hermann’s word as

to what was being done; that she trusted Her-

mann to “‘take care of everything”’; that, while

he “would explain things in a general way”’ to

her, she “left almost everything to him, the

details’; and that she had heard of Iwersen’s

proposal to hold the surplus for the benefit of

Henckels, but could not remember whether she

had learned of it at the time of the “‘transfer”

(R. 181, 182, 436-437).

In 1948, the Alien Property Custodian,’ having

determined Henckels K. G. to be the beneficial

owner, vested the stock as the property of an

enemy national (Vesting Order No. 770, January

27, 1943, 8 F. R. 2453; R. 12-14). In 1945, the

Alien Property Custodian vested all claims of

Henckels K. G. against the estate, including a

elaim for $63,000 received by the plaintiffs after

the “transfer”? as regular and liquidating divi-

dends on the stock (Vesting Order No. 5225, Sep-

tember 14, 1945, 10 F. R. 11913; R. 24-26, 437).

- The plaintiffs brought this action under Section

9 (a) of the Trading with the Enemy Act, seeking

1 By stipulation and order dated October 29, 1946, the At-

torney General was substituted as defendant, as successor

to the Alien Property Custodian (R. 1), pursuant to Execu-

tive Order No. 9788 (11 F. R. 11981), which transferred to

the Attorney General the property held by the Custodian.

_—_—

5

the return of the stock, or, in the alternative, an

adjudication, and satisfaction by the Custodian,

of a security interest in the stock (R. 1, 11-12).

The Custodian filed a counterclaim for the $63,000

(R. 23-26).

The District Court directed the return of the

stock to the plaintiffs and dismissed the counter-

claim (R. 404, 424). The Cireuit Court of Ap-

peals, finding the purported release and transfer

of the shares a “‘mere form employed to deceive

the United States’’, held that ‘‘no actual purchase

and sale occurred’’, and reversed the judgment

of the District Court insofar as it revested title to

the stock in the plaintiffs (R. 440, 442). But the

court concluded that the estate retained its claim

against Henckels K. G., that it might “‘keep, as

in reduction of that claim, the ‘dividends’ it re-

ceived’”’ and that it might assert its pledgee’s lien

on the stock for the unpaid balance of the claim

(R. 441, 442), thus granting the alternative relief

requested by the plaintiffs.

REASONS FOR GRANTING THE WRIT

1. In this war, as in the last, the enemy has

made determined efforts to cloak its interests in

property, i. e., to conceal enemy ownership be-

hind ostensible American or neutral owners in an

effort to frustrate the enforcement of the Trading

With the Enemy Act. Report of the Alien Prop-

erty Custodian, February 22, 1919, pp. 11-12,

39-41; Annual Report, Office of Alien Property

6

Custodian, June 1944, pp. 28-29. Indeed, in this

war, cloaking was supervised by the German Min-

istry of Economics, which issued secret orders for

the concealment of German property abroad. Ex-

hibit AAA-1, R. 259-262; Brassert v. Clark, de-

cided July 30, 1947 (C. C. A. 2); Elimination of

German Resources for War, Hearings before a

Subcommittee of the Senate Committee on Mili-

tary Affairs, 79th Congress, Ist Sess., 1945, p.

1203 and passim. The Custodian has already

vested some 300 interests on the ground that they

were cloaked for Germans, the property involved

having an estimated value, exclusive of patents,

of $100,000,000. Investigation of suspect transac-

tions is still going forward in Germany and in

this country.

The techniques of cloaking have been varied

and intricate, and the camouflaged situations

thereby created most complex. Elimination of

German Resources for War, supra, pp. 580-583.

But all cloaking has had a common denomina-

tor—the enemy has attempted first to find some-

one who could be trusted and who might reason-

ably be supposed to be the real owner. For this

role a pledgee, and particularly a pledgee whose

interest predated the period of anticipation of the

war, is ideally suited. Protection of his own in-

terests affords a plausible justification for acquir-

ing ownership, and the release of the indebtedness

can be advanced as the consideration for the

transfer. It is not surprising, therefore, that

7

some variant or other of the pledge relationship

should have been found present in many of the

cloaking arrangements thus far uncovered.

In the present case, the first on cloaking to be

decided by an appellate court in this war, the

cloak was an American estate which had a bona

fide, long-existing pledge interest in the property

to be concealed, and these circumstances were

utilized in the attempt to defraud the United

States and frustrate its exercise of a war power.

The fraud having been detected and the cloak

thrust aside, the plaintiffs asked equity to re-

instate them in the position they held before the

fraud. Whether such a claim should be enter-

tained is an important issue, not only because it

bears upon the other cloaking cases, but also

because it raises broad questions of the extent to

which courts of equity should entertain claims

against the Government arising out of transac-

tions which had victimization of the Government

as their objective.

2. A suit under Section 9 (a) is, by the terms

of that Section, a suit “‘in equity’? (Appendix,

infra, pp. 14, 15). One who seeks relief under

Section 9 (a) must, therefore, come with the clean

hands required of all plaintiffs in equity. Robert-

son V. Miller, 286 Fed. 503 (C. C. A. 2), affirmed,

266 U. 8. 243. Cf. Waldes v. Schall, 11 F. 2d 444,

451 (S. D. N. Y.). In the light of the finding of

the Cireuit Court of Appeals that the exthange

758512—47——_2

>

of the pledge interest for title was ‘ta mere form

employed to deceive the United States’’ (R. 440),

a court of equity should not lend its processes to

permit the wrongdoers to salvage their former

interest.

In the course of applying the clean-hands doc-

trine, it has been held, in a variety of situations,

that one who has misused his property in the at-

tempted perpetration of a fraud cannot invoke

the aid of equity to reinstate or enforce his rights

in that property. Cf. Railroad Co. v. Soutter,

13 Wall. 517, 523; Commonwealth Finance Corp.

v. McHarg, 282 Fed. 560, 571 (C. C. A. 2); Bald-

win v. Short, 125 N. Y. 553. The principle is

applied with particular breadth and vigor where

the public—or the United States—is the intended

victim of the misconduct, so that ‘‘the financial

element in the transaction is not the sole or prin-

cipal thing involved.’”’ (Pan American Co. Vv.

United States, 273 U. S. 456, 509.) Worden v.

California Fig Syrup Co., 187 U. S. 516; Morton

Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 493-

494. Cf. United States v. Trinidad Coal & Cok-

ing Co., 187 U. S. 160, 170; Causey v. United

States, 240 U. S. 399, 402. The courts must be

studious to extend no welcome to those who do not

“‘turn square corners when they deal with the

Government’? (Mr. Justice Holmes in Rock Is-

land, A. d& L. R. Co. v. United States, 254 U.S.

141, 148).

8

In prize law there exists the related, equally

applicable doctrine, that one who has misused his

name and property in order to cloak enemy prop-

erty cannot, when the cloak has been uncovered

and the property seized, recover his property em-

ployed in the “‘iniquitous adventure.’’ The St.

Nicholas, 1 Wheat. 417, 419, 431; The Fortuna,

3 Wheat. 236, 245; Carrington v. Merchants’ In-

surance Co., 8 Pet. 495, 520-521. The explicit

provision in the Trading With the Enemy Act for

the forfeiture of all property concerned in a vio-

lation of the Act, as well as for fine and imprison-

ment of the offender (Section 16, Appendix,

infra, p. 16) should not be taken to preclude the

invocation of .the traditional defense of unclean

hands, or the related defense available in the

prize cases, but rather as confirmation that like

results, when compelled by familiar equitable

principles, are consistent with the policy of the

Act. Cf. Bement v. National Harrow Co., 186

U. S. 70, 87-88; Continental Wall Paper Co. v.

Voight & Sons Co., 212 U. 8. 227; The Hampton,

5 Wall. 372, 376. See Sola Electric Co. v. Jeffer-

son Electric Co., 317 U. 8. 173, 177.

These principles are no less germane here be-

cause the fraud in this case was effected by the

use of property in trust. It has long been recog-

nized that property cannot be insulated from the

effects of prize and analogous law by the divorce

of possession and control from ownership. Re-

statement, Trusts, Sec. 273, Comment e; The

10

Hiram, 1 Wheat. 440; The Hampton, 5 Wall. 372;

Dobbins’ Distillery Co. v. United States, 96 U. 8.

395; ef. Mitchell v. Sherman E. McEwen Asso-

ciates, Inc., 360 Ill. 278. On the facts here,

therefore, it is immaterial that one trustee (Jo-

hanna) was not shown to have been explicitly

informed of the cloaking agreement which was

devised by her co-trustees. The considerations of

policy applicable to equitable owners, guilty of

neither fraud nor negligence, apply with greater

force to a sleeping trustee who, in dereliction of

her duty, has abandoned contro] of the property

to co-trustees whom she had at the least strong

reason to suspect of employing it to cloak enemy

property. Cf. American Insurance Co. v. Lucas,

38 F. Supp. 896, 923 (W. D. Mo.), appeal dis-

missed, 314 U. 8. 575, affirmed sub. nom. American

Insurance Co. v. Scheufler, 129 F. 2d 143 (C. C. A.

8), certiorari denied, 317 U. S. 687, rehearing de-

nied, 317 U. S. 712. Johanna was apparently no

more than a straw co-trustee, whose role <% was

to remain inactive so long as things went accord-

ing to plan but to be brought forward in the

robes of innocence if they did not. Cf. The

Hampton, supra.

But even if Johanna’s abdication of her re-

sponsibilities as trustee were insufficient to dis-

qualify her from relief, there could be no justifi-

eation for permitting the facilities of an equity

court to be used by Hermann H. Kind, who, while

both a trustee and beneficiary of the estate, know-

| ee

1l

ingly participated in the cloaking scheme. Cer-

tainly a court of equity should not help him to

recover his substantial share* in the property

which he used to effectuate the fraud.

For the same reasons as apply to the claim for

reinstatement of the pledge, there is error in

the holding of the court below that the plaintiffs

may retain the $63,000 which they received as

dividends while the stock was in their possession

and ostensible ownership pursuant to the sham

transfer. Henckels K. G. has been held to have

been the true owner of the shares in question at

the time the dividends were paid, and the Cus-

todian has vested the claims of Henckels K. G.

against the estate, including this claim for $63,-

000. We believe there is no legal or equitable

ground for treating the $63,000 differently from

the remainder of the plaintiffs’ security interest

in the stock. If, as we maintain, the plaintiffs are

equitab’y cisqualified from asserting this lien, they ~

should not be awarded partial satisfaction in the

amount of the dividends.

* The will of the elder Hermann Kind in substance directs

that the income from the trust estate be paid to Johanna for

life and that upon her death the principal “be divided into as

many equal parts as I shall have left children me surviving,

then living, and children who shall have died, leaving lawful

issue then living,” such equal parts to be transferred and paid

over per stirpes (R. 185, 186). The elder Kind was survived

by Hermann H. and two other children, all of whom are now

living; two of the children have issue, and Johanna is still

alive (R. 29).

12

CONCLUSION

For the reasons stated, it is respectfully sub-

mitted that this petition for a writ of certiorari

should be granted.

Puiuie B. PERLMAN,

Solicitor General.

Avcust 1947.

APPENDIX

Trading with the Enemy Act, ¢. 106, 40 Stat.

411, as amended (50 U. 8S. C. App. 1-31):

Src. 5 (as amended by the First War

Powers Act of 1941, ¢. 593, Sec. 301, 55

Stat. 839, 50 U. S. C. App., Supp. V, 5 (b):

* * * * *

(b) (1) During the time of war or dur-

ing any other period of national emer-

gency declared by the President, the Presi-

dent may, through any agency that he may

designate, or otherwise, and under such

rules and regulations as he may prescribe,

by means of instructions, licenses, or

otherwise—

(A) investigate, regulate, or prohi-

bit, any transactions in foreign ex-

change, transfers of credit or payments

between, by, through, or to any banking

institution, and the importing, export-

ing, hoarding, melting, or earmarking

of gold or silver coin or bullion, cur-

rency or securities, and

(B) investigate, regulate, direct and

compel, nullify, void, prevent or prohi-

bit, any acquisition holding, withhold-

ing; use, transfer, withdrawal, trans-

portation, importation or exportation

of, or dealing in, or exercising any

right, power, or privilege with respect

to, or transactions involving, any prop-

erty in which any foreign country or a

national thereof has any interest,

(13)

14

by any person, or with respect to any prop-

erty, subject to the jurisdiction of the

United States; and any property or in-

terest of any foreign country or national

thereof shall vest, when, as, and upon the

terms, directed by the President, in such

agency or person as may be designated

from time to time by the President, and

upon such terms and conditions as the

President may prescribe such interest or

property shall be held, used, administered,

liquidated, sold, or otherwise dealt with in

the interest of and for the benefit of the

United States, and such designated agency

or person may perform any and all acts

incident to the accomplishment or further-

ance of these purposes; * * * and the

President may, in the manner hereinabove

provided, take other and further measures

not inconsistent herewith for the enforce-

ment of this subdivision.

* * * ~ >

Sec. 9 (as amended by the Act of March

4, 1923, c. 285, 42 Stat. 1511) :

(a) 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, transferred,

assigned, delivered, or paid to the Alien

Property Custodian or seized by him here-

under and held by him or by the Treasurer

of the United States, or to whom any debt

may be owing from an enemy or ally of

enemy whose property or any part thereof

shall have been conveyed, transferred, as-

15

signed, delivered, or paid to the Alien Prop-

erty Custodian or seized by him hereunder

and held by him or by the Treasurer of

the United States may file with the said

custodian a notice of his claim under oath

and in such form and containing such par-

ticulars as the said custodian shall require ;

and the President, if application is made

therefor by the claimant, may order the

payment, conveyance, transfer, assignment,

or delivery to said claimant of the money

or other property so held by the Alien

Property Custodian or by the Treasurer of

the United States, or of the interest therein

to which the President shall determine said

claimant is entitled: Provided, That no

such order by the President shall bar any

‘person from the prosecution of any suit

at law or in equity against the claimant to

establish any right, title, or interest which

he may have in such money or other prop-

erty. If the President shall not so order

within sixty days after the filing of such

application or if the claimant shall have

filed the notice as above required and shall

have made no application to the President,

said claimant may institute a suit in equity

in the Supreme Court of the District of

Columbia or in the district court of the

United States for the district in which

such claimant resides, or, if a corporation,

where it has its principal place of business

(to which suit the Alien Property Custo-

dian or the Treasurer of the United States,

as the case may be, shall be made a

ating —

16

party defendant), to establish the interest,

right, title, or debt so claimed, and if so

established the court shall order the pay-

ment, conveyance, transfer, assignment, or

delivery to said claimant of the money or

other property so held by the Alien Prop-

erty Custodian or by the Treasurer of the

United States or the interest therein to

which the court shall determine said claim-

ant is entitled. If suit shall be so insti-

tuted, then such money or property shall be

retained in the custody of the Alien Prop-

erty Custodian, or in the Treasury of the

United States, as provided in this Act, and

until any final judgment or decree which

shall be entered in favor of the claimant

shall be fully satisfied by payment or con-

veyance, transfer, assignment, or delivery

by the defendant, or by the Alien Property

Custodian, or Treasurer of the United

States on order of the court, or until final

judgment or decree shall be entered against

the claimant or suit otherwise terminated.

* * * * x

Sec. 16. That whoever shall willfully

violate any of the provisions of this

Act or of any license, rule, or regulation

issued thereunder, and whoever shall will-

fully violate, neglect, or refuse to comply

with any order of the President issued in

compliance with the provisions of this Act

shall, upon conviction, be fined not more

than $10,000, or, if a natural person, im-

prisoned for not more than ten years, or

both; and the officer, director, or agent of

17

any corporation who knowingly participates

in such violation shall be punished by a like

fine, imprisonment, or both, and any prop-

erty, funds, securities, papers, or other ar-

ticles or documents, or any vessel, together

with her tackle, apparel, furniture, and

equipment, concerned in such violation shall

be forfeited to the United States.

U. S$. GOVERNMENT PRINTING OFFICE; 1947