United States v. National City Bank of New York

• Decision Date: 05 May 1950
• Citation: 90 F. Supp. 448
• Parties: UNITED STATES v. NATIONAL CITY BANK OF NEW YORK et al. STEINGUT et al. v. NATIONAL CITY BANK OF NEW YORK.
• Court: U.S. District Court — Southern District of New York

90 F. Supp. 448

UNITED STATES v. NATIONAL CITY BANK OF NEW YORK et al.

STEINGUT et al. v. NATIONAL CITY BANK OF NEW YORK.

United States District Court S. D. New York.

May 5, 1950.

Irving H. Saypol, United States Attorney, New York City, for the United States. Samuel M. Lane, Special Assistant to the Attorney General, Leanora S. Gruber, New York City, Herman Marcuse, New York City, of counsel.

Halperin, Natanson & Scholer, New York City, for the receivers. Albert R. Connelly, Samuel L. Scholer, Samson Selig, L. D. Simpson, New York City, of counsel.

Shearman & Sterling & Wright, McClellan & Shrewsbury, New York City, for Defendant

National City Bank of New York. Joseph M. Proskauer, Philip A. Carroll, Otey McClellan, J. Alvin Van Bergh, Martin J. Cunningham, New York City, of counsel.

RIFKIND, District Judge.

The first entitled action was commenced on August 1, 1947 and the second, on March 28, 1939. Both were tried to the court together.

In form the first is an action by the assignee of a bank-account against the bank for the balance owing to the depositor, demand having been made and refused. In addition, the complaint seeks a declaration that the Receivers have no interest in the deposit-account.¹ The simplicity of the form of the action, however, is but the deceptive facade behind which hover a host of questions produced by the rupture of normal Russo-American relations after the collapse of the Kerensky regime in 1917.

The action of the Receivers is based upon a complaint which alleges that they were appointed, by a judgment of the Supreme Court of the State of New York, receivers of the assets in New York of Russo-Asiatic Bank, pursuant to Sec. 977-b of New York Civil Practice Act; that they duly demanded the balance of the Russo-Asiatic account from National City Bank and that their demand was refused. Jurisdiction is founded on 12 U.S.C.A. § 632.

I. The Receivers' Action.

What was said with respect to the claim of the Receivers in Steingut v. Guaranty Trust Co., 1944, D.C.S.D.N.Y., 58 F.Supp. 623, affirmed 2 Cir., 1947, 161 F.2d 571, certiorari denied 1947, 332 U.S. 807, 68 S.Ct. 106, 92 L.Ed. 385, is applicable hereto and is dispositive of the issue. The Receivers have advanced a new argument. They urge that a foreign law (the Russian banking decrees) purporting to transfer title to property in New York (from Russo-Asiatic to Soviet Russia) is not self-executing; the property must be actually reduced to possession, with or without intervention of local judicial process, before the transfer of title is perfected.

Clark v. Williard, 1935, 294 U.S. 211, 55 S.Ct. 356, 79 L.Ed. 865, 98 A.L.R. 347. Therefore, argue the Receivers, there was no such barrier to the vesting of title in the Receivers as was suggested in Steingut v. Guaranty Trust Co., supra.

It is unnecessary to repeat what has been said in the Steingut case. A few additional comments will suffice. Section 977-b, though enacted in 1936, after recognition of Soviet Russia, is, in its application to Russo-Asiatic, fore and aft, starboard to port, keel to masthead, built upon the conception of non-recognition. It collides head-on with the national policy embraced in recognition and the Litvinov assignment. This case is not distinguishable from U. S. v. Pink, 1942, 315 U.S. 203, 62 S.Ct. 552, 86 L.Ed. 796, as the Receivers contend, by the circumstance that in the Pink case local creditors had been paid. The local creditors in the Pink case were "creditors whose claims arose out of dealings with the New York branch", 315 U.S. at page 226, 62 S. Ct. at page 564, of the First Russian Insurance Co. Russo-Asiatic never had a branch in New York. Like the Pink case, "The contest here is between the United States and creditors of the Russian Corporation * * * whose claims did not arise out of transactions with the New York branch". 315 U.S. at page 227, 62 S.Ct. at page 564. In such a case, U. S. v. Pink held Clark v. Williard, supra, inapplicable.

Pink was a state-created stakeholder who had possession. The receivers are state-created stakeholders who seek possession. The claim of the former yielded to the superior title of the United States. A fortiori the claim of the latter must yield to that of the United States.

II. The Government Action.

Russo-Asiatic Bank was a large and powerful banking institution organized under the laws of Imperial Russia. Its head office was in Petrograd and it operated branches in many countries. Sometime prior to 1917 it opened an account at the head office of National City Bank in New York City. On December 27, 1917, the amount standing to the credit of Russo-Asiatic on the books of National City Bank was $2,261,981.72.

On November 7, 1917 the Provisional Government of Russia, which had been recognized by the United States following the Czar's abdication, was overthrown by the Bolshevik revolution. The Soviet Government, installed by the revolution, remained unrecognized by our Government until November 16, 1933.

On December 27, 1917, Russo-Asiatic was, by Soviet decree, merged with the State Bank of Russia, a department of the government; and subsequently, on January 19, 1920, the State Bank, whose name had been changed to People's Bank, was abolished and its surviving functions, assets, and liabilities transferred to the Central Budget and Accounting Department of the Soviet Government.

On November 16, 1933, by the Litvinov Assignment, Soviet Russia transferred to the United States whatever claims it had against National City Bank. On January 17, 1936, the United States made a demand for payment, which National City Bank refused.

In its brief, the Government has reduced the principal amount of its claims to $2,010,847.45.²

The Government has established the allegations of its complaint and, on the authority of U. S. v. Pink, 1942, 315 U.S. 203, 62 S.Ct. 552, 86 L.Ed. 796 and Steingut v. Guaranty Trust Co., D.C.S.D.N.Y., 1944, 58 F.Supp. 623, affirmed, 2 Cir., 1947, 161 F.2d 571, certiorari denied 1947, 332 U.S. 807, 68 S.Ct. 106, 92 L.Ed. 385, it is entitled to judgment unless one or more of the affirmative defenses pleaded by National City Bank is sufficient to exonerate it. I have concluded that one of the offsets pleaded has been established in fact and is good at law and deprives plaintiff of its right to recover.

The facts which give rise to this defense are as follows:

On May 1, 1917, the Provisional Government of Russia, recognized by our Government, sold an issue of Russian Treasury Notes. These Notes were made in Washington, and were payable at National City Bank, in New York, in dollars. They bore interest at the rate of 5% per annum and were to mature on May 1, 1918. From time to time, on request of the accredited representatives of the Provisional Government, and with the approval and encouragement of our Government, the holders of the Notes extended their maturity to November 1, 1919. On that day they were defaulted.

These extensions of maturity were so granted by the holders after Soviet Russia, then unrecognized by the United States had, by decree, dated January 21, 1918, repudiated its obligation on the Notes.

At the time of trial National City Bank held such Notes in the principal amount of $4,435,000.³

The question is whether National City Bank may set off these Russian obligations against Soviet Russia's claim to the deposit account, asserted by its assignee, the United States.

I begin with the acceptance of the plaintiff's major premise: that by virtue of the recognition of the Soviet regime in 1933, the validity of the Soviet banking decrees must be retroactively acknowledged. U. S. v. Pink, 1942, 315 U.S. 203, 62 S.Ct. 552, 86 L.Ed. 796; Steingut v. Guaranty Trust Co., D.C.S.D.N.Y., 1944, 58 F.Supp. 623, affirmed 2 Cir., 1947, 161 F. 2d 571, certiorari denied 1947, 332 U.S. 807, 68 S.Ct. 106, 92 L.Ed. 385. It follows that on December 27, 1917, Soviet Russia became the owner of the Russo-Asiatic account at National City Bank. Had National City Bank on that day possessed the necessary prescience it would have altered the name of its depositor from Russo-Asiatic Bank to that of State Bank of Russia or Soviet Government.⁴ The position of Soviet Russia, on this premise, was the same as if it were the assignee of the Russo-Asiatic account. Thenceforth, National City Bank could treat Soviet Russia as a depositor who had to its credit $2,261,981.72. It necessarily follows that the credit balance became available for set-off against Soviet debts to National City Bank, in those instances in which the equitable doctrine of set-off obtains.

I turn now to the second member of the set-off equation — The Russian Treasury Notes. Again accepting the premise that retroactive effect must be given to recognition, it must be acknowledged that on November 7, 1917, the date of the revolution, Soviet Russia became the obligor on Russia's Treasury Notes. Another way of saying it is that the State of Russia was the obligor on the Notes before the revolution and that the State of Russia continued as the obligor after the revolution. The regime in power changed. The state, as a continuing personality, persisted. The Sapphire, 1871, 11 Wall. 164, 20 L.Ed. 127; Guaranty Trust Co. v. U. S., 1938, 304 U.S. 126, 137, 58 S.Ct. 785, 82 L.Ed. 1224; 1 Moore International Law Digest, (1906) 334; 37 Op.Atty.Gen. 505, 513 (1934). That the Soviet Government so understood its obligations is implicit in the decree of repudiation made on January 21, 1918. There would have been no occasion for repudiation were there no obligation.

On November 1, 1919 the Notes fell due. They were payable at National City Bank. They were, therefore, the equivalent of orders "to the bank to pay the same for the account of the principal debtor thereon". N. Y. Negotiable Instruments Law, McK.Consol.Laws, c. 38, § 147; U. S. v. National City Bank, 3 Cir., 1936, 83 F.2d 236, 239, certiorari denied 1936, 299 U.S. 563, 57 S.Ct. 25, 81...