Virginia, a member of the House committee that had considered the amend ment, expressed the sense of the committee:

"We have sought to make the language used so sweeping and compresensive that no lawyer, however ingenious, would be able to work out any device under this section to keep the letter, while breaking the spirit of the law." 56 Cong. Rec. 8029 (1918).

Concern was expressed on the floor of the House that the bill as reported out was too restrictive. It was noted that the broad language would restrict a sale to an alien of a single share of stock in a corporation owning an American ship, thus severely damaging the negotiability of such stock. Congressman Saunders, unmoved by the suggestion as to the consequences to negotiability, explicitly answered that the legislation was intended to cover such minority stock holdings. 56 Cong. Rec. 8037 (1918).

The legislative history of the 1918 amendment pointedly demonstrates the extent to which Congress was prepared to go in preventing or at least controlling the degree of any alien interest in American shipping. It also shows the congressional purpose that a share of stock should be considered an “interest" in the property owned by the issuing corporation. No reference was made, however, to bonds covered by a deed of trust secured by a mortgage on an American ship.

The term "interest" can have a variety of meanings. The most precise is the real property usage, an estate in land, that was developed by the English common law. Ladd v. Ladd, 49 U.S. 9 (1850). The term has also been used to indicate any claim in or upon property. Ormsby v. Ottman, 85 Fed. 492, 497 (8th Cir. 1898). As we are construing a penal provision we adopt the narrower definition though it is far from clear that Congress employed the term “interest" in a technical sense.

In a mortgage-trust indenture the property securing the debt is conveyed to a mortgagee-trustee." Chemical thus holds the legal title to the mortgaged property, the SS Westhampton. When the bond was issued by the trustee the relation of trustee and cestui que trust arose between it and the bondholder, Landesbank. York v. Guaranty Trust Co. of New York, 143 F. 2d 503 (2d Cir. 1944), rev'd on other grounds, 326 U.S. 99 (1945); Land Title Bank & Trust Co. v. Baron, 341 Pa. 241, 19 A. 2d 62 (1941); Sprigg v. Commonwealth Title Ins. & Trust Co., 206 Pa. 548, 56 Atl. 33 (1903). Landesbank's "interest" in the ship is the interest of a trust beneficiary in the property legally held by the trustee. See O'Beirne v. Alleghany & Kingua R.R. Co., 151 N.Y. 372, 45 N.E. 873, 875 (1897).

Scholars have long debated whether the beneficiary of a trust has a property interest in the trust res or merely a personal right against the trustee. See €.g., Scott, The Nature and the Rights of the Cestui Que Trust, 1917 Col. L. Rev. 269 (1917); Stone, The Nature and the Rights of the Cestui Que Trust, 1917 Col. L. Rev. 467 (1917). The courts have had less trouble with this question. The Supreme Court has held that beneficiaries of a trust have an interest in the property to which the trustee holds legal title. Senior v. Braden, 295 U.S. 422 (1935); Brown v. Fletcher, 235 U.S. 589 (1915).

A bondholder is not a general creditor, but has specific rights with respect to the mortgaged property. He is entitled to protection against the unlawful acts of the trustee or others resulting in waste or destruction of his security. Ikelheimer v. Consolidated Tobacco Co., 59 Atl. 363 (N.J. Eq. 1904). He may sue to prevent the impairment of his security without reference to the maturity of his bonds. Whitmore v. International Fruit & Sugar Co., 214 Mass. 525, 102, N.E. 59 (1913).

Although a bondholder has less control over the secured property than a direct mortgagee he still possesses a considerable degree of control. The negotiations leading to this mortgage were carried on between the investor and the debtor. here Landesbank and Seatrade. As a general proposition, the trustee must do as he is told by the bondholder unless the instructions are illegal or immoral. The convenience of mortgaging the ship to a trustee should not obscure the fact that the debt secured is that owed to the bondholder.

"Although the mortgage and its agreements are made to and with the [trustee] yet the promise of the [debtor] is for the payment of money to the holder of the bonds, and it was to furnish security for the performance of that promise that

The mortgage-trust indenture from Seatrade to Chemical provides as follows: "[B]y these presents does hereby grant, bargain. sell, remise, release, convey, assign, transfer, mortgage, deliver and pledge, or cause to be granted" the SS Westhampton.

the mortgage instrument was executed and delivered. The bondholders are the beneficiaries of the mortgage or deed of trust, and that instrument contains, in effect, a contract made for their benefit through a trustee as a convenient intermediary." O'Beirne v. Allegheny & Kingua R.R. Co., 151 N.Y. 372, 383, 45 N.E. 873, 875 (1897).

In the early years following the enactment of the Ship Mortgage Act the administrative officials seem to have had no doubt that Congress was concerned with alien ownership of bonds. A few years after the First World War the predecessor of the Maritime Administration, the Shipping Board, was asked to rule whether the assignment of a bond to an alien would violate section 961(d) of the Ship Mortgage Act.' The Board, refusing to approve such a transfer, stated:

"Is it not therefore clear that Congress had in view the prohibition against an interest and a right under a mortgage being assigned either directly or as incidental to the assignment of the debt? It is easy to imagine that a person not a citizen of the United States might acquire all of the bonds secured by a mortgage. It would thus become the owner of the entire interests under the mortgage and obviously such a transaction is the very one which Congress sought to prohibit."

We are led to the conclusion therefore that, both as a general principle and in the contemplation of Congress, a ship mortgage bond is an interest in the ship mortgaged.

The Maritime Administration, however, in several recent opinion letters, has ruled that a bond is not an "interest" in the mortgaged ship and that it will therefore not exercise its discretion in determining whether the particular bond issue is permissible." This position has been taken without any apparent consideration of the legislative history of the Shipping Act or the Shipping Board's earlier rulings under 46 U.S.C. §961(d). Complete reliance was placed on the definitional section of the Ship Mortgage Act, 46 U.S.C.A. § 911(5), which, as we have seen, defined "mortgagee" as the trustee where there is a deed of trust and a bond issue. Such an analysis is fallacious and completely unwarranted.

First, the definitions found in 46 U.S.C.A. § 911 (5) refer only to terms used in the Ship Mortgage Act. Second, the term defined by 46 U.S.C.A. § 911 (5) is "mortgagee"; the disputed word in the Shipping Act is "interest." Third, the definition of "mortgagee" in the Ship Mortgage Act was adopted two years after the insertion of the term "interest" into the Shipping Act. Fourth, the Shipping Board, when construing section 961 (d) of the Ship Mortgage Act, did not indicate that section 911 (5) affected in any way its exercise of discretion in determining whether to permit the assignment of bonds to noncitizens. See supra at p. 21.

The only possible explanation for the later policy of the Maritime Administration is its unconscious assumption that 46 U.S.C.A. § 911 (5) of the Ship Mortgage Act impliedly amended the Shipping Act to delete the interest of a bondholder from those interests requiring approval. There is no indication in the legislative history that such a result was intended. Implied amendment is not favored if two pieces of legislation can be reconciled. We have already seen that such a reconciliation is both possible and rational: Transfers of bonds to aliens must first be approved by the Maritime Administration. If approval is given and there is an American "mortgagee" the mortgage is eligible for preferred status under the Ship Mortgage Act. In adopting the Ship Mortgage Act in 1920 the endeavor of Congress was to avert foreign control while encouraging private investment, whatever the nationality of the investor. Mortgages to aliens were not encouraged because they were thought to involve too much potential control. Yet it was believed that in selected cases some mortgages in alien hands might safely be permitted to take an unpreferred status. Bond

7 "No rights under a mortgage of a vessel of the United States shall be assigned to any person not a citizen of the United States without the approval of the Secretary of Commerce" 46 U S.C.A. § 961(d).

Letter of January 2. 1964, from Chauncey G. Parker. General Counsel, addressed to Messrs. Squire, Sanders & Dempsey. The Leader-News Building, Cleveland, Ohio. A similar ruling was made in a letter of April 6. 1927, from Chauncey G. Parker. General Counsel, addressed to Messrs. Denegre, Leovy & Chaffe, 724 Whitney Central Building, New Orleans, Louisiana.

* See. e.g.. Letter from E. Robert Scaver, General Counsel to Charles S. Cunningham. One Twenty Broadway. New York 5. New York, May 11, 1959: Letter from James L. Pimper, General Counsel, to Robert E. Kline, Jr., Munsey Building, Washington 4, D.C., October 19, 1960.

issues, however, presented more variables than mortgages. There might be one bondholder or the holdings might be diffused among a thousand, the control exercised by each bondholder varying accordingly. If the Maritime Administration approved the bond issue then the mortgage securing it was eligible for a preference if the mortgagee was an American citizen.

The effect of an unapproved, hence illegal, bond issue on the mortgage to the trustee is a less troublesome question. The debt is represented by the bond; the trustee only holds the mortgage for the protection of the bondholder. Chemical has no personal interest in the mortgage. The mortgage and the bond represent one loan. If one falls, so does the other.

Chemical argues that great weight should be given to the recent attitude of the Maritime Administration that bonds are not interests in the ship mortgaged. While it is true that courts, as a general rule, pay great deference to administrative decisions they do so only for certain compelling reasons." Many of those reasons are not present in this case. The recent rulings were not an exercise of quasi-legislative discretion vested by statute in the Administration. They were interpretations of statutory language. Manhattan Co. v. Commissioner, 297 U.S. 129, 134-35 (1936). They were not substantially contemporaneous with the passage of the Act, see United States v. American Trucking Ass'ns, Inc., 310 U.S. 534, 549 (1940), nor are they representative of a long standing agency practice. See United States v. Shreveport Grain & Elevator Co., 287 U.S. 77, 84 (1932). The overruling of decisions facing in the opposite direction, made during the 1920's, was not based upon a re-examination of the underlying facts and policies that should be considered a part of the legislation construed. National Labor Rel. Bd. v. Globe Automatic Sprinkler Co., 199 F. 2d 64, 68 (3d Cir. 1952). In any event, the alien lender in this case did not ask the Maritime Administration to approve the issuance of the bond.

We recognize the resulting embarrassment when an administrative body, misinterpreting a statute, declines to exercise its lawful jurisdiction. A court. however, for the reasons above stated, may not, in the present circumstances, ignore the statute's command. Being invalid the mortgage is not entitled to the claimed preference.

The order of the District Court is

Affirmed.

Hon. THOMAS N. DOWNING,

WASHINGTON, D.C., September 27, 1965.

Acting Chairman, Subcommittee on Merchant Marine,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: Enclosed herewith is a written statement on behalf of H. C. Stuelcken Sohn, Hamburg, Germany, for receipt into the record before your committee with respect to H.R. 10883. H.R. 9494, and H.R. 9581, as to which testimony was taken before you on September 22, 1965. The enclosed statement is in response to permission granted in your telegram of September 23, 1965, and such opportunity is deeply appreciated.

As mentioned in your telegram and also dealt with in the enclosed statement, Stuelcken Sohn can be criticized for being tardy in appearing before the appropriate committees of our Congress. On the other hand, Stuelcken Sohn is a family-owned concern without regular counsel or advisers in the United States and frankly, it made the mistake of relying on others to present the situation with respect to Stuelcken, which I do not feel was done with any completeness. The time, however, should not be too late. The ends of justice and fairness can easily be met by striking one sentence from the bill pending and I am certain that it would be both relatively simple to strike the last sentence from section 4 and to clear that change with the Senate. Furthermore, I do not think it would consume more than a few days.

Throughout the enclosed memorandum reference is made to the last sentence in section 4 of H.R. 10883 on the assumption, as stated at the hearing on September 22, 1965, that H.R. 10883 is identical with S. 2118 as amended. We have

10 The weight given a decision of an administrative agency "will depend upon the theroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade if lacking power to control." Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (Jackson, J.).

not, however, seen a printed copy of H.R. 10883 and if there is any variation between the two prints, I am sure that our references to the last sentence in section 4 can be appropriately modified.

Respectfully yours,

H. STRUVE HENSEL.

[Memorandum submitted as permitted by Subcommittee on Merchant Marine]

THE EFFECT OF H.R. 10883 ON H. C. STUELCKEN SOHN, HAMBURG, GERMANY

(a) The nature of the plea

H.R. 10883 (also H.R. 9494, H.R. 9581, and S. 2118) is designed to validate ship mortgages which are threatened with invalidity under the Court's decision in Chemical Bank v. SS Westhampton. As originally introduced, the bill applied to all existing mortgages and, for practical purposes, confirmed a 27-yearold administrative practice of the Maritime Administration, an agency of the United States. In the Senate, however, and as now carried into H.R. 10883, a last sentence in section 4 was added excluding from the bill all ship mortgages in process of foreclosure.

This is a plea to strike that sentence on behalf of H. C. Stuelcken Sohn of Hamburg, Germany, a prospective sufferer under that arbitrary and unfair exclusion to the tune of about $1,250,000. It is a plea for justice and fairness, a plea that Stuelcken's indebtedness be treated the same as the other outstanding Ship mortgages amounting to approximately $295 million, which do not happen to be in foreclosure. It is a plea that no difference should be made between mortgage liens under the same 27-year-old administrative procedure just because one mortgage happens to be in foreclosure and another has not reached that stage of misfortune.

This memorandum, through the deeply appreciated courtesy of the subcommittee, sets forth new facts and new considerations not previously presented to the Congress.

It shows the true nature of the Stuelcken transaction. It shows that it was Stuelcken's work which raised the value of the SS Westhampton from about $90,000 to $2,602,000 and produced a ship under the U.S. flag which provided and continues to provide work for American seamen.

It shows that Stuelcken's case for help is far more appealing than the unknown equities applying to the other $295 million of outstanding mortgages. (b) The defect in section 4 of H.R. 10883

Briefly, the court's decision in the Westhampton case overturns administrative procedures of 27 years standing by the Maritime Administration (Department of Commerce) and the Bureau of Customs (Department of the Treasury) and invalidates a ship mortgage in favor of a U.S. bank trustee for failure to have such mortgage formally approved in advance by the Maritime Administration. Legislation is now being considered to set aside the Westhampton decision and to permit all existing mortgages to be validated by seeking current approval from the Maritime Administration. That is sensible and fair.

But the last sentence in section 4 of S. 2118 (and picked up in H.R. 10883) excludes from such good sense and fairness three ship mortgages (of which Stuelcken's is one) now in process of foreclosure. In other words, justice is to be provided for all those not needing help but denied to the mortgages in foreclosure which are most entitled to that help, as will be subsequently shown. Once it is understood that the wrong to be righted is the administrative ruling of the Maritime Administration, an arm of the U.S. Government, the limitation in the last sentence of section 4 has little appeal to the American sense of fairness and justice. It remains only for the situation to be understood which was patently not the case with respect to S. 2118 in the Senate.

(c) The injury to Stuelcken

Stuelcken did not appear before the Senate committee. If Stueleken had not been permitted to file this memorandum, no one in the Congress would have known the true facts with respect to Stuelcken's interests and the threatened injustice thereto.

In all previous testimony and reports, the issuance of the Westhampton mort gage bonds are described as if a German bank, seeking an investment, purchased such bonds in the open market and thus voluntarily took the normal risks of a security purchaser. Nothing could be further from the truth.

The SS Westhampton was an antiquated T-2 tanker with the value of about $90,000 owned by Seatrade Corp. (a U.S. citizen), which did not have the funds required to make the ship usable in modern commerce. The Westhampton hulk was transformed by Stuelcken for an agreed price of $1,300,000 (actual cost to Stuelcken of about $1,850,000) into a real modern ship which not only gave but continues to give employment to American seamen. Furthermore. the transformed Westhampton sold in the open market in March 1963 for $2.602,000. Such funds are now held by the court. So Stuelcken changed $90,000 into $2,602,000 for an agreed price of $1,300,000.

But Stuelcken was not paid the agreed price in full. Stuelcken received $300,000 from Seatrade and had to borrow the $1 million balance from a Hamburg bank, which took as additional security (Stuelcken had fully guaranteed and secured the bank) the bonds issued under the mortgage on the Westhampton. It is the lien of those bonds which was invalidated by the court and it is Stueleken which will be forced to pay the Hamburg bank. So Stuelcken alone, unless the present bill is changed, will be the big loser.

Conversely, the other creditors of Seatrade will receive a windfall of approximately $1,250,000 or more without having made any contribution to the realized value of the Westhampton.

(d) The responsibility of the Maritime Administration

Why did this unfair result come to pass? Did Stuelcken do something stupid for which it deserves no sympathy? Was some actual harm to the interests of the United States attempted? Not a bit of it, Stuelcken acted most fairly and even generously.

In this connection, this committee should give serious consideration to a matter of German law and business which has never been previously disclosed. At the time of the completion of the Westhampton, Stuelcken became concerned about the financial weakness of Seatrade. Under German law, Stuelcken as a shipyard had at that time the privilege of selling the ship on the open market (foreign-flag registration) and recovering the costs for the transformation. If that had been done, the Westhampton could have been lost to the American flag and American seamen. Instead, Stuelcken did not exercise its German law rights but relied on the validity of the U.S. ship mortgage backed by long years of consistent Maritime Administration procedures.

Stuelcken thought, and had good reason to think, such was a safe course. When the Westhampton mortgage was issued, there was outstanding a 27-yearold ruling of the Maritime Administration that such mortgages in favor of a U.S. bank trustee did not need any Maritime Administration approval even if the bonds were sold to foreigners. Consequently, if Stuelcken had asked the Maritime Administration for formal approval, it would not have been granted. It was deemed unnecessary.

Stuelcken did everything possible and obviously the Maritime Administration knew all the facts. Stuelcken is advised that the Maritime Administration knew in advance all about the Westhampton mortgage and had informally ap proved it. It is also well known that the provision in the bonds, making them payable in German marks rather than dollars, had been cleared with the Maritime Administration. Furthermore, the mortgage was publicly recorded with. and thus accepted by, the Bureau of Customs (Department of the Treasury). But this 27-year-old administrative procedure was rudely shattered and held invalid by the circuit court of appeals in the Westhampton case. A motion for reargument en banc was made this spring but has not yet been acted upon.

Realizing its responsibility, the Maritime Administration caused to be introduced bills to provide means to validate all ship mortgages-existing and future mortgages; those not yet in foreclosure and those in foreclosure. The unfair last sentence of section 4 did not appear in the bill as proposed by the Maritime Administration.

Without any explanation of the true Stuelcken situation and with no real discussion, counsel for the trustee in bankruptcy of Seatrade suggested to the Senate that mortgages in process of foreclosure be excluded from the bill. pointing out that there were only three of such cases and all were involved in the Seatrade bankruptcy. No reason was given for thus arbitrarly making a distinction among existing mortgages, a distinction based on whether foreclosure had or had not started, a distinction obviously without a difference. Furthermore, no one was told that one Seatrade mortgage issued under similar circumstances as the Westhampton mortgage had already been foreclosed in a U.S.