World Holdings Llc v. Fed. Republic of Germany

• Decision Date: 05 June 2011
• Docket Number: Case No. 08–20198–CIV.
• Citation: 794 F.Supp.2d 1305
• Parties: WORLD HOLDINGS, LLC, Plaintiff,v.FEDERAL REPUBLIC OF GERMANY, Defendant.
• Court: U.S. District Court — Southern District of Florida

794 F.Supp.2d 1305

WORLD HOLDINGS, LLC, Plaintiff,

v.FEDERAL REPUBLIC OF GERMANY, Defendant.

Case No. 08–20198–CIV.

United States District Court, S.D. Florida,Miami Division.

June 5, 2011.

Michael E. Elsner, John M. Eubanks, Vincent I. Parrett, Motley Rice LLC, Mt. Pleasant, SC, Samuel Johnathan Dubbin, Dubbin & Kravetz LLP, Coral Gables, FL, Ingrid L. Moll, Motley Rice LLC, Hartford, CT, William F. Pepper, New York, NY, for Plaintiff.Gerald J. Houlihan, Houlihan & Partners PA, Miami, FL, Jeffrey Harris, Max Riederer Von Paar, Rubin Winston Diercks Harris & Cooke LLP, Washington, DC, for Defendant.

ORDER

CECILIA M. ALTONAGA, District Judge.

THIS CAUSE came before the Court for a hearing on February 15, 2011 [ECF Nos. 195, 196] on Defendant, the Federal Republic of Germany's (“Germany['s]”) Motion for Partial Summary Judgment [ECF No. 176], filed on January 14, 2011. The Court has carefully considered the parties' written submissions, arguments, and the applicable law.

I. BACKGROUND

A. Historical Background

Following World War I, there began a period of “vast credit extension to Germany.” Message from President to Senate, Hearings before the Committee on Foreign Relations, 83rd Congress, 1st Session, 6 (Apr. 10, 1953) (hereinafter “President's Message”) [ECF No. 189–2]. The lion's share of this credit originated in the United States from banks, from commercial and industrial enterprises, and from German dollar bonds. See id. at 6. One loan extended to Germany was the Dawes loan of 1924. See id. This loan was issued with the cooperation of eight countries, including the United States. See id. Upon receiving this loan, Germany offered for subscription in the United States $110 million worth of bearer bonds ¹ known as Dawes Bonds, which were listed on the New York Stock Exchange and negotiated and sold through a placement agent in New York City. ( See Amended Verified Complaint (“Am. Compl.”) ¶¶ 16–17 [ECF No. 12] ). Principal and interest on the Dawes Bonds were payable in U.S. gold dollars in New York City at the offering fiscal agent in the United States. ( See id. ¶ 19). Issuance of the Dawes loan followed a period of great inflation that caused the “mark” to cease existing as Germany's currency. See President's Message 6. In 1924, backed by the gold proceeds of the Dawes loan, Germany issued its new currency—the reichsmark. See id. Germany's economy then took off. See id.

Six years later, the Young loan of 1930 was issued. See id. This was an “attempt to reverse the deteriorating financial position of Germany.” Id. “Tranches ² of this loan” were issued in nine countries. Id. Upon receiving this loan, Germany offered for subscription in the United States $98.25 million of a second bearer bond, the Young Bonds ( see Am. Compl. ¶¶ 23–24), which were also listed on the New York Stock Exchange and negotiated, sold, and payable in New York City. ( See id. ¶ 26). The Dawes and Young Bonds were backed by the full faith and credit of Germany and required Germany to maintain sinking funds ³ paid by various revenue sources. ( See id. ¶¶ 20, 26).

Between the time the Dawes and Young loans were issued, Germany also entered into several other loans and received substantial short-term credit. See President's Message 6. This amounted to $6 billion in external obligations for Germany by the end of 1930. See id. The United States and U.S. investors extended a “substantial part of this credit.” Id. U.S. investors floated 55 percent of the long-term loans, totaling more than $2.1 billion. See id. Of that amount, $350 million were from the Dawes and Young loans. See id.

Eventually credit stopped flowing to Germany. In the early 1930s, “there was a complete cessation of further foreign credit to Germany.” Id. at 7. A banking moratorium was declared in Germany in 1931. See id. Then an agreement was reached—the standstill agreement—“whereby the banks of nine countries agreed not to reduce their credits to German banks and industry except pari passu ⁴ and in a gradual, orderly manner.” Id. The standstill agreement continued until the hostilities that would escalate into World War II (“WWII”) began. See id.

On July 1, 1933, Germany “established a transfer moratorium restricting foreign exchange transfers for non-Reich debt service and required the debtors to deposit reichsmarks for full debt service in a Conversion Office for Foreign Debts (known as the Konversionksasse).” Id. “This arrangement inaugurated a period of currency manipulation by the Nazi regime.” Id.

In 1934, following the rise of the Nazi regime, Germany defaulted on many of its external loans, and payments in foreign currencies ceased in part on Dawes and Young loans. See id.; Message from President to Senate, Enclosure 7(d) annexed to Hearings before the Committee on Foreign Relations, 83rd Congress, 1st Session, 230 (Apr. 10, 1953) (hereinafter “Enclosure 7(d)”) [ECF No. 190–1]. Payment was subject to “arrangements negotiated country by country.” President's Message 7. American bondholders held a weak negotiating position and were offered unfavorable payment terms. See id.

After defaulting on the loans and driving the bonds' prices down, the Germans repurchased many bonds “on a large scale at default prices” and reduced the volume of outstanding German bonds. Id.; see also Enclosure 7(d), 230. These bonds were “physically returned to Germany without being presented for cancellation and were to a large extent held by German Government banks in Berlin.” Enclosure 7(d), 230.

Following the outbreak of WWII, the U.S. Securities and Exchange Commission (“SEC”) requested “brokers and dealers to refrain from effecting transactions” in German securities. Trading in West German Bonds, 18 Fed. Reg. 7570 (proposed Nov. 30, 1953) (codified at 17 C.F.R. § 240.15c2–3). Following the cessation of hostilities, trading was restored on the other Axis countries' securities before German securities; trading in Italian securities resumed in 1947, and trading in Japanese securities resumed in November 1950. Trading in German Securities, 19 Fed. Reg. 313 (Jan. 19, 1954) (codified at 17 C.F.R. § 240.15c2–3). The SEC, however, maintained its request for brokers and dealers to refrain from trading in German securities. See id. In 1951, September 1952, and April 1953, the SEC continued its request that trading be stayed. See id. Before trading resumed, the SEC sought “full assurances” for investors “through validation proceedings, that only securities which constitute ‘good delivery’ would be afforded a market in the United States.” Id.

Following the end of WWII, “the German economy was in a state of ruin and stagnation,” and the economies of the formerly German-occupied countries were “ravaged” and “enfeebled.” President's Message 7. Once freed from German occupation, these countries began to make enormous demands on Germany for reparations and compensation. See id. at 7–8. An agreement was then reached between the United States, the United Kingdom, and the Soviet Union that reparation payments should be curtailed to leave enough resources to allow the German people to “subsist without external assistance.” Id. (quoting House Foreign Affairs Committee print, 83d Cong., 1st sess., Potsdam agreement, pt. III, sec. 19, p. 70).

As Europe continued its recovery from the War, so too did Germany. See id. To help establish “normal commercial relationships between the Federal Republic [of Germany] and the rest of the free world,” German debt settlements were negotiated. Id. at 8–9. After WWII, Germany committed to paying its prewar liabilities in order to restore confidence in its economy and normalize economic and financial relations with other countries. ( See Am. Compl. ¶¶ 46–48). To that end, Germany, the United States, and fifteen other countries signed the Agreement on German External Debts (“London Debt Agreement” or “LDA”) in 1953,⁵ which resulted in a proposed settlement of most of Germany's prewar debts, including the bonds.⁶ ( See Am. Compl. ¶¶ 51–52).

In 1953, a series of other measures were also enacted.⁷ One of those measures was the Agreement Between the United States of America and the Federal Republic of Germany Regarding Certain Matters Arising from the Validation of German Dollar Bonds, U.S.—F.R.G., 4 U.S.T. 885, Apr. 1, 1953 (hereinafter “1953 Treaty”). Thereunder, the United States and Germany “agreed that it is in their common interest to provide for the determination of the validity of German dollar bonds in view of the possibility that a large number of such bonds may have been unlawfully acquired during hostilities in Germany or soon thereafter.” Id. pmbl. The 1953 Treaty incorporated by reference Germany's Validation Law. See Abrey v. Reusch, 153 F.Supp. 337, 339 (S.D.N.Y.1957). Germany's Validation Law was enacted on August 25, 1952 by West Germany—Bundesgesetzblatt 1952 (BGBl.II) (“Validation Law”). See Validation Law, BGBl.II, at 305 [ECF No. 46–1]. This law required the validation of all foreign currency bonds and other securities. See Trading in German Securities, 19 Fed. Reg. 313.

Validation was required because purportedly a “large volume of German foreign currency bonds, purchased for redemption by the Germans and held in negotiable form in Berlin, ... found their way into unauthorized hands after the occupation of Berlin in 1945.” Trading in West German Bonds, 18 Fed. Reg. 7570. In March 1951, after West Germany announced it would recognize prewar external debts, the SEC consulted with the U.S. Department of State and announced it “did not intend to withdraw its request that brokers and dealers refrain from effecting transactions in German securities until full assurances could be given to investors, through validation proceedings, that only securities which constitute ‘good delivery’ would be afforded a market in the United States.” Trading in German Securities, 19 Fed. Reg. 313. The SEC said validation was “necessary” because of the large...