After promulgation, in the earlier years of the World War, of a
Russian
ukase forbidding, under penalties, all Russian
subjects to enter into any agreement or commercial relations with
citizens of enemy countries and proclaiming all contracts with
enemy firms at an end, an arrangement was made between a Russian
insurance corporation, a German firm of Hamburg, which was its
general agent for reinsurance business including that originating
in this country, and a New York corporation, which was the German
firm's sub-agent here and shared the commissions on the American
business, whereby, in form, the New York corporation was
substituted as general agent and entitled to the full commissions
on the net premiums it collected. Thereafter, and before.the United
States entered the war, the American agent collected premiums on
old business, but, instead of appropriating the full commissions to
which it was thus nominally entitled, retained only the percentage
which it would have had under the old arrangement and deposited the
rest in a special account in its name. Later, it turned over the
fund to the insurance company's trustee under the New York law. The
fund was seized by the Alien Property Custodian as belonging to the
German firm. Two courts below having found from the evidence that
the change of agency was colorable only, made to evade the
ukase, and that the deposit was intended by all parties
for the German enemies.
Held, adopting that finding,
(1) That the agreement by which the commissions were set apart
for the German firm was valid by the law of the United States, as
it was also proven to be by the law of Germany. P.
268 U. S.
558.
(2) That the insurance company, having consented that the German
firm should have the commissions and they having been actually set
apart accordingly, retained no legal interest entitling it to
reclaim them from the Alien Property Custodian. P.
268 U. S.
559.
(3)
Semble, that comity does not require that
extraterritorial effect be given to the Russian
ukase so
as to make illegal transactions had in the United States between
the insurance company and the
Page 268 U. S. 553
New York corporation respecting their dealings with the German
firm. P.
268 U. S.
559.
(4) Assuming that the payment was forbidden by the
ukase, no principle of comity would entitle the Russian
company to recover it back; the rule denying relief when both
parties to an illegal executed contract are in
pari
delicto would apply. P.
268 U. S.
561.
(5) A right to a fund in the hands of a depositary is not
divested by the act of the latter in merely turning it over without
consideration to a trustee holding other funds and securities for
an adverse claimant. P.
268 U. S.
562.
297 F. 404 affirmed.
Appeal from a decree of the circuit court of appeals affirming a
decree of the district court which dismissed the appellant's bill,
brought under the Trading with the Enemy Act to recover money
seized by the Alien Property Custodian, and held by the Treasurer
of the United States, as the property of a German firm.
MR. JUSTICE STONE delivered the opinion of the Court.
Appeal from a judgment of the United States Circuit Court of
Appeal for the Second Circuit affirming a judgment of the United
States District Court for the Southern District of New York,
dismissing a bill in equity brought by the appellant, complainant
below, under § 9 of the Trading with the Enemy Act (Act of October
6, 1917, 40 Stat. 419), to recover money seized and held by the
Alien Property Custodian. 297 F. 404.
The appellant, a Russian corporation, in 1913 established an
office in the State of New York for the conduct of an American
reinsurance business in that state. In order to comply with the law
of the state and to qualify it to do business there, appellant
deposited with the New York Life Insurance & Trust Company, as
trustee under a trust
Page 268 U. S. 554
deed, money and securities subject to the provisions of the New
York Insurance Law and appointed Meinel & Wemple, Inc., a New
York corporation (referred to as Meinel in this opinion) its
statutory agent and attorney in fact in New York. In January, 1919,
the Alien Property Custodian served upon the New York Life
Insurance & Trust Company and Meinel a demand that they pay
over to him money in a specified amount held by them for the
account and benefit of H. Mutzenbecher, Jr., a copartnership of
Hamburg, Germany, alien enemies not holding a license granted by
the President under the Trading with the Enemy Act. The money was
paid to the Alien Property Custodian pursuant to the demand. and
now constitutes the subject matter of this suit. The Mutzenbecher
firm filed an answer making claim to the money seized as
commissions earned by them under an agency contract with appellant
and praying that it be decreed to be their property and be retained
by the Alien Property Custodian in accordance with the provisions
of the Trading with the Enemy Act.
The firm of Mutzenbecher was engaged in business as managers of
a reinsurance "pool" in Hamburg, Germany, and as such managers
represented a number of fire insurance companies, including the
appellant, as members of the pool which was formed for the purpose
of sharing and redistributing reinsurance business contributed to
the pool by its various members. They were in complete control of
the pool, and received as compensation for their services a fixed
commission based on the annual net premium upon reinsurance or
retrocession contracts (that is, contracts reinsuring reinsurers)
plus a stipulated percentage of the annual net profit of the total
business conducted by the pool.
For a considerable period before the outbreak of the World War,
Meinel acted as subagent for the Mutzenbechers in the negotiation
of the reinsurance business of
Page 268 U. S. 555
the appellant and of several other insurance companies for whom
they acted in effecting the distribution and allotment of
reinsurance risks. In the ordinary course of business, Meinel,
acting for the appellant, entered into treaties with companies
writing direct insurance in the United States whereby appellant
undertook the reinsurance of risks insured by those companies.
Premiums for this reinsurance were collected by Meinel from the
companies which had thus ceded insurance to appellant, and, after
depositing the required reserve for unearned premiums with the
trustee of appellant pursuant to the New York statute, the balance,
together with documents giving particulars of all reinsurance to be
effected by the Mutzenbechers for account of appellant, was
transmitted to them in Hamburg. From the premiums thus received,
the Mutzenbechers paid the expenses of their business, including
their own commissions amounting to 3 1/2 percent, and remitted to
Meinel in New York out of their own commission, certain expenses
and 3/4 of 1 percent of the premiums thus transmitted, as
commissions to Meinel for doing the business in New York. This
continued to be the method of doing business after the outbreak of
the World War until January 1, 1915, when the remittances from
Meinel to the Mutzenbecher firm ceased because of war conditions.
During the calendar year 1916, until November, Meinel paid to the
Mutzenbechers from premiums received 2 1/2 percent commission
payable to them and retained its own commissions and expenses.
In October, 1916, the Russian government promulgated a
ukase by the terms of which all Russian subjects were
forbidden to enter into any agreement or commercial relations
whatever with citizens of enemy countries, and which proclaimed
that all existing relations, by virtue of contracts, with enemy
firms must be considered as at an end from the date of
promulgation. Violation of the decree was punishable by
imprisonment and fine. The appellant,
Page 268 U. S. 556
which up to that time had continued its ordinary business
relations with the Mutzenbechers, then found it necessary to
terminate its relations with them, which it did, in form at least,
by the appointment of Meinel, as its general agent, to effect
reinsurance and to carry on the business which had previously been
carried on by the Mutzenbechers at Hamburg. By the terms of this
appointment, Meinel was appointed general agent for the appellant,
authorized to effect reinsurance for appellant's account and to
retain for itself, as compensation for handling the business,
commissions at the rate of 3 1/2 percent of the net premiums
received.
The principal question of fact presented for consideration by
the courts below was whether this transfer of the general
reinsurance agency from the Mutzenbechers to Meinel was made in
good faith, or whether it was formal only, and a mere cover under
which the business was intended to be conducted by the
Mutzenbechers as it had been previously conducted. On that question
of fact, both the district court and the circuit court of appeals
found for the Alien Property Custodian and against the appellant.
That finding we adopt. The evidence was sufficient to support it,
and will not be discussed here except insofar as it may be
necessary to indicate what the legal relationship of Meinel to the
Mutzenbechers was, so that the question of law presented here may
be adequately dealt with.
No further remittances were made by Meinel to the Mutzenbechers
after November 22, 1916, but it deducted from all net premiums
received 3 1/2 percent commission as stipulated by its agency
appointment. Of the commission thus deducted, it retained for
itself a commission of 3/4 of 1 percent plus its expenses, and the
balance was deposited in a special bank account in its name and
carried on its books as a "suspense reserve account." The account
remained undisturbed until July 26, 1918, when, the Alien
Page 268 U. S. 557
Property Custodian having begun an investigation of the books
and records of Meinel, the fund which is the subject of this suit
was then turned over by it to the New York Life Insurance &
Trust Company, the trustee for appellant, and was by it later paid
over to the Alien Property Custodian.
The inference drawn by the courts below from these facts, and
from voluminous testimony which need not be here reviewed, was that
the transfer of the agency from the Mutzenbechers to Meinel was
merely colorable; that the commissions segregated in the suspense
reserve account which were commissions from old business -- that
is, premiums earned under reinsurance treaties effected before the
transfer of the agency, notwithstanding the formal terms of the
written appointment of Meinel, were commissioners to which
Mutzenbecher was entitled under the contract or arrangement
existing between Mutzenbecher, Meinel, and appellant before the
transfer of the agency, and that Meinel had in fact received and
set them apart as the property of the Mutzenbechers. These
findings, so far as they relate to what the parties did in these
somewhat complicated transactions, and the purpose and intent with
which they acted, deal with questions of fact, and, as they are
supported by the evidence, they are controlling here.
The proposition of law which is presented, and on the basis of
which we are asked to reverse the judgment below, rests upon the
asserted illegality of appellant's own conduct. It is argued that
the effect of the Russian
ukase of October 29, 1916, was
to make unlawful the agency of the Mutzenbecher firm for appellant
and all further relations between them; that the Mutzenbechers were
accordingly not entitled to earn or receive further commissions
even from "old business;" that the fund segregated in the suspense
reserve account by Meinel was therefore at all times property of
appellant, and not subject to seizure by the Alien Property
Custodian, since the illegal conduct of appellant
Page 268 U. S. 558
had prevented the acquisition of any rights in the fund or
against the appellant by the German firm.
To sustain this proposition, it is necessary for the appellant
to maintain: (1) that it has retained some form of legal interest
in the 3 1/2 percent commission deducted by Meinel under the terms
of its agency appointment of November, 1916, and (2) that the
Russian
ukase should be given an extraterritorial effect
such as to render the acts of the appellant within the United
States, which were otherwise lawful and proper according to the
laws of the United States, unlawful and void, and thus prevent the
Mutzenbecher firm from acquiring any interest in the segregated
fund.
We think appellant does not succeed in establishing either
proposition. Although Meinel was the statutory agent of appellant
in the State of New York and transacted there certain business for
the appellant, it was also, and had been for many years before the
outbreak of the war, the subagent of the Mutzenbechers in handling
the business which was transmitted to the German firm to be
distributed in the reinsurance pool. The commissions for this
service were paid to Meinel by the Mutzenbechers. After the
outbreak of the war, it became their agent to receive and remit to
them commissions for carrying on the reinsurance business for
appellant. When the colorable transfer of the Mutzenbechers' agency
was made to Meinel, it was accepted by Meinel only after it was
authorized to do so by the Mutzenbechers. Appellant having formally
authorized Meinel to deduct and retain 3 1/2 percent commission for
conducting the business, and Meinel having actually deducted and
retained it, and the court having found that that portion of the
commissions placed in the suspense account was placed there by
Meinel for the benefit of the Mutzenbechers, with the knowledge and
consent of the appellant, and they having formally claimed the
segregated fund, we are unable to see that the appellant
Page 268 U. S. 559
is in any different situation with respect to this fund than it
would have been if it had paid over the commissions directly to the
Mutzenbechers or to their authorized agent.
At the time the agency was transferred to Meinel, the United
States was at peace with Germany. The action of Meinel, an American
corporation controlled by American stockholders, in taking over the
German agency did not violate any law or policy of the United
States. It was not unlawful for it to stipulate that it should
receive commissions for doing the business or to agree to receive
them for the Mutzenbechers, and, having received them, it was not
unlawful for it to hold the commissions as the agent of the German
firm for its account and benefit. Whatever view we take of the
arrangement entered into by the appellant with Meinel, appellant
can claim under it no ownership in the deducted commissions. By
appellant's formal agreement with Meinel, it relinquished all
claims to the commissions. By the secret understanding between
appellant, Meinel, and the Mutzenbechers, the segregated fund was
received and held for account of the Mutzenbechers. Until the
declaration of war by the United States against Germany, the
Mutzenbechers in this state of facts could have maintained a suit
against Meinel for an accounting and payment over of the segregated
fund.
Hilton v. Guyot, 159 U. S. 113;
Taylor v.
Benham, 5 How. 233;
National Bank v. Insurance
Co., 104 U. S. 54;
Coler v. Board of Commissioners, 89 F. 257, 260;
Pennsylvania Steel Co. v. N.Y. Central R. Co., 206 F. 663,
665;
In re Interborough Corporation, 288 F. 334, 347.
In view of the legal relationship existing between Meinel and
the Mutzenbechers and the legal consequences which flow from it, we
find it unnecessary to speculate as to the precise meaning and
effect of the Russian
ukase. The circuit court of appeals
below rejected the contention
Page 268 U. S. 560
that it should be given extraterritorial effect so as to make
illegal the transactions had in New York between appellant and
Meinel with respect to their dealings with the German firm.
Certainly such an application of foreign law to acts done within
the territorial jurisdiction of the forum carries the principle of
the adoption of foreign law by comity much beyond its limits as at
present defined, the more so as the contract between a Russian and
a German which we are asked to hold illegal on the basis of Russian
law is shown by the expert testimony in the case to be valid
according to the German law. The contention runs counter to the
reasoning of such cases as
Bank of Augusta v.
Earle, 13 Pet. 519,
38 U. S. 598;
Hilton v. Guyot, 159 U. S. 113;
Hervey v. R.I. Locomotive Works, 93 U. S.
664;
Rose v. Himely,
4 Cranch 241;
Polydore v. Plince, 19 Fed.Cas. No. 11,257;
Dyke v. Erie R. Co., 45 N.Y. 113. Nor does
Canada
Southern Ry. Co. v. Gebhardt, 109 U.
S. 527, relied upon by appellant, support the
contention. That case only laid down the doctrine recently affirmed
by this Court (
Modern Woodmen of America v. Mixer,
267 U. S. 544)
that the legal relations of the members of a corporation to the
corporation and to each other must be regulated and controlled by
the law of the jurisdiction in which the corporation is organized,
and it extended the doctrine so as to make it applicable to
mortgage security holders having a common interest in the corporate
property. The Russian
ukase, however, did not purport to
regulate the internal relations of the corporation to its members
or lienholders. By its terms, it is applicable indiscriminately to
individuals and all classes of associations and corporations, and
apparently undertakes to deal with contracts of every kind. It
cannot be brought within the purview of the rule established in
Canada Southern Railway Co. v. Gebhardt and
Modern
Woodmen of America v. Mixer, supra.
If, however, it be assumed that its true meaning and purpose was
to control, extraterritorially, Russian subjects,
Page 268 U. S. 561
and that it not only imposed penalties on Russian nationals for
its violation, but rendered unlawful and void all contracts and
commercial intercourse within our own territory, between Russian
nationals and Russian enemies, we still do not find in that
assumption any basis for the reversal of the judgment below. Had
the obligation of appellant to pay the commissions in question
remained executory, the assumption that our courts should give an
extraterritorial effect to the Russian
ukase, and
disregard the German law affecting the rights of the Mutzenbechers
upon their contract with appellant to be performed in German
territory, might have been of some avail to it. But, as we have
seen, the findings of the court below establish that payment of the
commissions was made as effectually as if the payment had been by
cash in hand. When Meinel set apart the fund for the Mutzenbechers,
nothing further remained to be done by appellant with respect to
the payment. It had relinquished all claim to the fund, and Meinel
held it for the Mutzenbechers. When the United States declared war,
the fund was one held by an American national for the benefit of an
alien enemy, and, on passage of the Trading with the Enemy Act
(October 6, 1917), it became its duty to report the fund to the
Alien Property Custodian (Trading with the Enemy Act, § 7-a, 40
Stat. 416) and to surrender it to the Custodian on demand (Section
7-c, 40 Stat. 418).
To hold that money thus situated was not subject to the seizure
and retention under the provisions of the Trading with the Enemy
Act would be going very far, but, quite apart from the operation of
that Act, we find no basis for the contention that the principle of
comity would require us to recognize any right in appellant to
recover back the money thus paid because the payment of it was
forbidden by the Russian
ukase. No foundation
Page 268 U. S. 562
for it in the Russian law is suggested. By our own law, payments
made under contracts which are illegal where the parties are
in
pari delicto may not ordinarily be recovered. The law leaves
the parties where it finds them, and gives no relief.
Thomas v. City of
Richmond, 12 Wall. 349;
Higgins v. McCrea,
116 U. S. 671,
116 U. S. 684;
White v. Barber, 123 U. S. 392,
123 U. S. 423;
Dent v. Ferguson, 132 U. S. 50;
St. Louis R. Co. v. Terre Haute R. Co., 145 U.
S. 393,
145 U. S. 407;
Harriman v. Northern Securities Co., 197 U.
S. 244,
197 U. S. 294;
Farrington v. Stucky, 165 F. 325, 330;
Levy v. Kansas
City, 168 F. 524. While there are exceptions to this rule,
appellant's case does not fall within any recognized exception, and
the record suggests no special considerations of equity or of our
own public policy which would justify an exception in this
case.
We therefore reach the conclusion that the appellant was not
entitled to recover the fund as against the Mutzenbechers. Such
being the rights of the parties, while the fund remained in the
hands of Meinel, their rights could not be altered to the prejudice
either of the Mutzenbechers or that of the government by payment
over of the fund by Meinel to the trustee for appellant. The
trustee was not a purchaser, and could not take the fund free of
the legal or equitable rights of the Mutzenbechers (
National
Bank v. Insurance Co., supra), although it might and did
discharge itself under the provisions of the Trading with the Enemy
Act by payment of the money over to the Alien Property Custodian
(Trading with the Enemy Act, § 7-e, 40 Stat. 418).
The appellant establishes no right in the fund which is the
subject of litigation; we find no error in the record.
The judgment of the circuit court of appeals is
Affirmed.