Carl Marks & Co., Inc. v. USSR

• Decision Date: 31 July 1987
• Docket Number: No. 82 Civ. 1245 (CLB),82 Civ. 1246 (CLB).,82 Civ. 1245 (CLB)
• Parties: CARL MARKS & CO., INC. et al., Plaintiffs, v. UNION OF SOVIET SOCIALIST REPUBLICS, Defendant (Two Cases).
• Court: U.S. District Court — Southern District of New York

665 F. Supp. 323

CARL MARKS & CO., INC. et al., Plaintiffs, v. UNION OF SOVIET SOCIALIST REPUBLICS, Defendant (Two Cases).

Nos. 82 Civ. 1245 (CLB), 82 Civ. 1246 (CLB).

United States District Court, S.D. New York.

July 31, 1987.

Edward M. Sills, Lawrence Milberg, Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, for plaintiffs.

Robert Davidson, Baker & McKenzie, New York City, Eugene Theroux (pro hac vice), B. Thomas Peele (pro hac vice), Baker & McKenzie, Washington, D.C., for defendant.

Robert Gaffey, Asst. U.S. Atty., White Plains, N.Y., Elizabeth Sarah Gere, Dept. of Justice, Civ. Div., for U.S.

MEMORANDUM AND ORDER

BRIEANT, Chief Judge:

— Yes well there was just one more thing here I, that I think you might ...

— That? My God, haven't seen one in years.

— No this isn't what I ... what is it.

— Russian Imperial Bond.

— You mean it isn't worth any, worth very ...

— Mister Bast, anything is worth whatever some damn fool will pay for it, only reason somebody can make a market in Russian Imperials is because some damn, somebody like your associate will buy them. Happen to know how he, how this associate of yours got into all this?

— By, well, buying and selling at first I think and then he had some stock in a company and was going to bring some kind of legal suit for, for his class, I mean he ...

— A class action?

William Gaddis, JR 201 (1975)¹

In these two related cases, defendant Union of Soviet Socialist Republics ("USSR" or "Soviet Union") moves to vacate default judgments entered against it by this Court on March 31, 1986, and to dismiss plaintiff's Complaints.

The Russian Imperial Bonds

The named plaintiffs are class representatives of holders of debt instruments (collectively "the instruments" or "the bonds") issued by the Imperial Russian Government in 1916. Apart from the fact that different instruments are involved in each, these cases are essentially identical.

On December 1, 1916, the Imperial Russian Government issued $25 million in five-year external gold dollar bearer bonds at 5½% interest ("the bearer bonds"). The interest was payable semiannually, each June 1 and December 1 starting June 1, 1917, until the bonds themselves came due on December 1, 1921. These bearer bonds are the subject of No. 82 Civ. 1245.

The second issue, in the amount of $50 million, was assembled by a consortium of United States banks consisting of J.P. Morgan & Co., the National City Bank of New York, Guaranty Trust Company of New York, Lee, Higginson & Co., and Kidder, Peabody & Co., and offered to the public in the form of three-year credit participation certificates at 6½% interest ("the credit participation certificates" or "the certificates"). The contract establishing the credit was executed on June 18, 1916, and the certificates were issued on July 10, 1916. The certificates were due on June 18, 1919, with interest payable semiannually, beginning January 10, 1917, each January 10 and July 10. They are the subject of No. 82 Civ. 1246.

The Fall of the Russian Empire

The Imperial Russian Government did not long survive these debt issues. The first or so-called February Revolution began in Russia on February 24 (Old Style)/March 8 (New Style), 1917, at a time when that nation was locked in combat on the Eastern front of World War I. The success of the February Revolution was assured by March 12 when the police and military, who at first had fired on the crowds, joined forces with them. On March 14 the ministers of a Provisional Government were named: the following day Czar Nicholas II, last of the Romanovs, abdicated, and the Imperial Russian Government ceased to exist. On March 17, 1917, the United States was the first nation to recognize the new Provisional Government. B. Lincoln, Passage Through Armageddon 357 (1986).

The fragile Provisional Government, led at first by Prince Georgi Lvov and later by Lvov's Minister of Justice, a lawyer named Alexander Kerensky, was unable to withstand the pressures of the continuing world war from without, and of revolutionary opposition, particularly that of the Bolsheviks, led by V.I. Ulyanov, known as Lenin, from within. Significant evidence suggests that the two types of opposition were related, in that the Germans financed the Bolsheviks, knowing that Lenin would promptly sue for peace and eliminate the need for Germany to maintain its Eastern Front. Lenin received safe conduct in April 1917 through the combat lines of the Central Powers, sent in a sealed boxcar, as if his ideas were contagious. See, e.g., H. Shukman, Lenin and the Russian Revolution 168-70 (1966). Within six months the Bolsheviks had seized power in the October Revolution, October 24-26 (O.S.)/November 6-8 (N.S.). The fall of the Provisional or Kerensky Government was announced on November 7, and the last pockets of resistance at the Kremlin were wiped out on November 14. See generally B. Dmytryshyn, A History of Russia (1977); B. Lincoln, supra; B. Pares, A History of Russia (rev. ed. 1972). Peace with the Central Powers came with the signing of the Treaty of Brest-Litovsk on March 3, 1918.²

The Bolsheviks had promised to carry out the Provisional Government's plan to hold free elections for a Constituent Assembly, and did so on November 25/December 8, 1917. The Bolsheviks apparently did not interfere significantly with the election, and finished a respectable but distant second to the Socialist Revolutionary Party. Consequently, on January 19/February 1, 1918, after a stormy one-day session, Lenin dissolved the Constituent Assembly and took the power of Government in Russia to himself. On January 21/February 3, the Bolshevik Government issued a decree regarding the annulment of state loans, which proclaimed among other things that "All foreign loans are annulled unconditionally and without exception." Findings of Fact and Conclusions of Law in Support of Judgment by Default Pursuant to 28 U.S.C. § 1608(e) ¶ 5. Notwithstanding this decree, interest was paid on the remaining three installments of the certificates, on July 10, 1918, January 10, 1919, and July 10, 1920. Interest was also paid on the bearer bond coupons due on June 1, 1918, December 1, 1918 and June 1, 1918. Thus, what is at issue in this litigation is the Soviet Union's obligation to pay the principal on both instruments and the interest represented by the last five bearer bond coupons.

On July 10, 1918, the Bolshevik regime promulgated the first Soviet Constitution, under which the nation became the Russian Soviet Federated Socialist Republics (R.S.F. S.R.). After a period of intense social, cultural, and economic ferment, the R.S.F. S.R. was succeeded by the present Union of Soviet Socialist Republics upon the promulgation of the second Soviet Constitution on January 31, 1924.

Thus, the decree that gives rise to this case, in which Russia "annulled" all foreign debt obligations including payment on the bearer bonds and the credit participation certificates, was issued by the Bolshevik Government, which was the immediate successor of the Kerensky Government and immediate predecessor of the R.S.F. S.R.

The Litvinov Assignment and United States Recognition of the Soviet Union

When the decree was issued, the United States did not recognize the Bolshevik Government: it continued to recognize the Kerensky Government in exile until November 16, 1933, when it recognized the Government of the USSR. Simultaneously, an exchange of letters between President Franklin D. Roosevelt and the People's Commissar for Foreign Affairs of the Soviet Union, Mr. Maxim Litvinov, established what has come to be known as the Litvinov Assignment. See United States v. Pink, 315 U.S. 203, 212-13, 62 S.Ct. 552, 556-57, 86 L.Ed. 796 (1942) (reproducing texts of letters); United States v. Belmont, 301 U.S. 324, 57 S.Ct. 758, 81 L.Ed. 1134 (1937) (holding the Litvinov Assignment lawful under President's power to recognize foreign governments). Under the Litvinov Assignment, "preparatory to a final settlement of the claims and counter claims between the respective governments and their nationals," Pink, 315 U.S. at 212, 62 S.Ct. at 556, the Soviet Union assigned its claims, including those "due it, as the successor of prior Governments of Russia," id., to the United States on condition that it be notified of any recovery by the United States on such claims.

The United States collected $9 million in pre-inflation money as a result of the Litvinov Assignment. First National City Bank v. Gillilland, 257 F.2d 223, 225 (D.C. Cir.), cert. denied, 358 U.S. 837, 79 S.Ct. 61, 3 L.Ed.2d 73 (1958). In 1955, Congress enacted the Foreign Claims Settlement Act, ch. 645, 69 Stat. 562 (codified as amended at 22 U.S.C. §§ 1621-1641q (1986)). Under this Act, the proceeds of claims collected pursuant to the Litvinov Assignment were deposited into a Soviet Claims Fund. 22 U.S.C. § 1641a(a) (1982). Section 1641d empowered the Foreign Claims Settlement Commission to adjudicate the validity of, and disburse awards for, two kinds of claims. Section 1641d(a)(1) dealt with claims against Russian nationals by United States nationals who had secured prerecognition liens on Russian property located within American jurisdiction that later passed to the United States under the Litvinov Assignment. More importantly, § 1641d(a)(2) empowered the Commission to determine the validity and amounts of "claims, arising prior to November 16, 1933, of nationals of the United States against the Soviet Government." Under § 1641l, an award by the Commission for less than the full amount of the claim does not extinguish any rights of the claimant against the Soviet Government.

There is authority for the view that the instruments sued on here were among the "claims" referred to in the Litvinov Assignment. Memorandum of Andrew T. McGuire, General Counsel, Foreign Claims Settlement Commission, May 17, 1956 "McGuire Memo", at 5 n. 21 (citing Sack, Diplomatic Claims Against the Soviets (19...