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BROWNELL v. SCHERING CORP.

March 21, 1955

Herbert BROWNELL, Jr., Attorney General of the United States, as Successor to the Alien Property Custodian, Plaintiff,
v.
SCHERING CORPORATION, Defendant



The opinion of the court was delivered by: HARTSHORNE

The prime issue here is whether plaintiff's Directive and the written instrument, which was signed in January 1952 by defendant Schering Corporation ('Schering') and by the then Assistant Attorney General as Director of the Office of Alien Property ('Alien Property Custodian'), are lawful and binding. The above instruments, in addition to other matters here immaterial, (1) transfer to the Alien Property Custodian, subject to a license to Schering, a series of patents owned by Schering as of April 18, 1942, as listed in Schedule A attached to such signed agreement, such patents to be administered accordingly for the benefit of this Government and United States citizens generally, and (2) similarly make a series of patents, and applications therefor, acquired or developed by Schering after April 18, 1942, available for licensing to all applicants, qualified under the London Patent Accord, on a non-discriminatory, non-exclusive, reasonable royalty basis, such royalty to be determined by arbitration. These instruments were executed, to the knowledge of both parties, as part of a plan whereby such patents were to be held for the benefit of this Government and the public generally, but whereby the balance of the property of Schering, as represented by its common stock, was thereafter to be sold by the Alien Property Custodian to private investment houses as underwriters, and thereafter sold by them to the public. Some time previously the Alien Property Custodian had vested all Schering's outstanding corporate stock, under the Trading With the Enemy Act, *fn1" as the property of German citizens. A written prospectus was prepared, printed and distributed, referring to the above facts, and warning of their possible effect on the value of the stock to be sold, as a 'registration statement', as required by the Securities and Exchange Commission. This registration statement was known to Schering and the underwriters, the purchasers of the stock from the Alien Property Custodian. The Schering stock was thereafter purchased by these underwriters, who thereafter sold their shares to the public under such registration statement and prospectus at prices running into the millions.

 The Alien Property Custodian admits the compulsion in fact, but insists that such compulsion was lawful. But this prime issue as to the binding effect of the above Directive and signed instrument raises a series of subordinate issues, all treated at length in no less than thirteen briefs filed seriatim by the two parties.

 The purpose of the above instruments, in opening up the above patents to qualified members of the public, subject to the needs of the Government itself, is admitted by Schering to be in accord with the settled policy of the Government for the benefit of this country and its citizens, and thus to be valid. But while Schering admits that the United States Government had to right to effectuate this purpose as to the so-called 'old patents', i.e., those issued to it before January 1, 1947, the date referred to in the Joint Congressional Resolution ending the state of hostilities between the United States and Germany, adopted October 1., 1951, *fn2" it denies that the means taken therefor were valid and effectual. Further, Schering denies that the President, and his admitted delegee in this respect -- the Attorney General, acting as the Alien Property Custodian -- the right to apply this otherwise lawful purpose by any method whatever, to the patents and applications effective after January 1, 1947 -- the so-called 'new patents' -- because of the terms of such Joint Congressional Resolution. This raises another issue of law, specifically as to the legal effect of such Resolution. As to the illegality of the method used by the Alien Property Custodian for such purposes Schering claims that it violated the corporation law of New Jersey, where defendant Schering was incorporated, in that the admitted compulsion of the Alien Property Custodian upon Schering's directors, in forcing them to execute the resolution authorizing and directing Schering's President to execute the agreement, deprived these directors of their freedom of judgment, ordinarily requisite under State law. The Alien Property Custodian, on the other hand, contends this compulsion was lawful, since he claims (1) corporate directors, where no rights of creditors are involved, are under a duty to follow the instructions of the sole stockholder, here the Alien Property Custodian, and (2) the Trading With the Enemy Act being Federal, controls, and gives him that power, even if the State corporation law did not. Specifically, the Alien Property Custodian says (1) The Trading With the Enemy Act authorized him to have both the 'old' and the 'new' patents used for the benefit of the United States Government and its citizens, (2) the Alien Property Custodian Directive *fn3" makes this 'determination', and this 'determination' is to be 'accomplished' by Schering's 'execution and performance of an agreement' to that effect, (3) that Schering obeyed this Directive by having its directors pass a resolution for its President to sign that agreement, and that he did so, (4) that Schering must carry out this Directive and agreement. In turn, Schering denies that the Alien Property Custodian's power under the Trading With the Enemy Act was intended to override the above provisions of the State corporation law, so as to validate this command of the Alien Property Custodian. In fact, Schering contends the Trading With the Enemy Act is unconstitutional. Further, Schering contends that such agreement is a nullity in that the Alien Property Custodian did not adopt lawful administrative procedures in exercising his powers in the above regard.

 The several issues before the Court are thus solely of law. Since those (1) as to the New Jersey corporation law and (2) the effect of the Trading With the Enemy Act thereon and its validity, cover both the 'old' and 'new' patents, they will be first discussed, and separately. The third issue as to the effect of the Joint Congressional Resolution terminating hostilities with Germany will be discussed thereafter, since it affects the 'new' patents only. Next, certain contractual contentions of the parties will be dealt with. Finally, the situation will be considered from the standpoint of its validity as administrative procedure.

 Parenthetically, it will aid in clarifying the issues, if it be noted that no corporate directors or officers of Schering, or any underwriters, or purchasers of Schering stock from them, are parties to this suit. Thus, even if we assume arguendo that a director has a legally protectable right under New Jersey corporation law to exercise an independent judgment in opposition to the will of his sole stockholder, this right exists either (a) for the benefit of the director individually, in order to relieve him from liability for ultra vires or grossly negligent acts which he would not personally have authorized, or (b) for the benefit of the corporation. But since the directors are not parties to this suit, we cannot consider their rights to such protection as individuals, but only as the corporation is affected thereby. Not only so, but the Trading With the Enemy Act itself expressly exculpates them from any civil liability caused by their acts, in compliance with a directive of the Alien Property Custodian, *fn4" admittedly the case here. Nor are the rights of the underwriters, or of the members of the public who purchased the Schering stock from them, to be considered as directly involved here, since (1) they are not parties, (2) the underwriters were clearly on notice through the registration statement and prospectus, of the agreement before they purchased their stock, and (3) the purchasers from them are but assignees, privy to the underwriters in such regard, whose rights can rise no higher than their source, irrespective of notice to these purchasers themselves, through the registration statement and prospectus itself.

 It should further be noted that Schering substantially admits that the purpose the Alien Property Custodian sought to achieve was valid, in having the above instruments executed, so as to give the benefit of the above patents, to this Government and the general public. Further, Schering admitted on the argument that the action of the Alien Property Custodian would have been unassailable, had he, in order to achieve this valid purpose, done so either (1) by liquidating Schering, taking its assets, and then handling them himself as outlined in the directive and the agreement, or (2) by electing a new board of directors, who would have willingly carried out his will, by executing the very corporate resolution and agreement now questioned.

 In the last analysis, then, Schering's objection is that, though the purpose of the Alien Property Custodian was lawful, and though this purpose was carried out in corporate form, this action should be nullified by this Court, because the directors were not permitted by him, the sole corporate stockholder, to refuse to do, what the sole corporate stockholder wanted done. And this is claimed to follow in the absence of all rights of creditors, and despite the fact that Schering admits that it could no object, had the Alien Property Custodian, as sole stockholder, used other methods to achieve the same lawful purpose. Further, this claim of Schering is quite without regard to the effect of the Trading With the Enemy Act, which the Alien Property Custodian claims, and Schering denies, authorized him specifically to force Schering to do what he wanted in the national interest. It is also without regard to the further question as to the effect of the above Joint Congressional Resolution on the Custodian's power to control the so-called new patents under the above directive and agreement.

 The New Jersey Corporation Law

 We turn to the first question, i.e., the right of the corporation to nullify its corporate act, because its corporate directors were compelled to comply with the will of its sole stockholder. Admittedly, however, these directors had three alternatives: (1) to sign, (2) to resign, (3) to be removed for failure to do either. Considering this without regard to the effect thereon of the Trading With the Enemy Act, we are faced with a question of New Jersey corporation law.

 But the principle is there settled that in the absence of the rights of third parties such as creditors -- the situation here -- it is the obligation of the directors, as corporate officers, and of the corporation, to do what the sole stockholder asks them to do. In Whitfield v. Kern, E. & A.1937, 122 N.J.Eq. 332, at pages 340, 347, 192 A. 48, at pages 53, 56, in an opinion dealing at length with New Jesey corporation law, the highest State Court says:

 'At common law, and by the modern current of authority in this country and in England, the directors of a private corporation, while not regarded as trustees in the strict, technical sense (for title to the corporate property is in the corporation itself and not in its directors), are considered in equity as bearing a fiduciary relation to the corporation and its stockholders. * * * They are quasi trustees for the stockholders at least until insolvency occurs. The latter alone comprise the cestuis que trust. * * * the directors are trustees for the stockholders.'

 'Where one man completely controls a corporation * * * the one man achieving unrestrained control is held prima facie to have power to do all acts which the Board of Directors could have authorized * * *.'

 A case further illustrating this principle is Fidelity Union Trust Co. v. Vander Roest, Ch.1933, 113 N.J.Eq. 368, 166 A. 918, 921. There deceased was the sole stockholder of a corporation which held title to certain property. This property deceased inadvertently willed, as his own, to his son. The Court nevertheless held it was the duty of the corporation to do what its sole stockholder, the testator, wanted, saying:

 'It (the corporation) has not only the power to comply, but it is its obligation to adjust itself to meet the plainly given directives of its creator. Let it (the trustee) dissolve the corporation and as trustees convey, or have the corporation resolve to convey, if that be more convenient.'

 In the case at bar the corporation has 'resolved to convey'. Nay more, it has executed a formal instrument through its President, to carry out this resolution. The Alien Property Custodian has thus complied with the requirements of corporate form. It only remains necessary for the corporation to comply with the directive of its sole stockholder, and obey the command of such stockholder, to which it has already acceded in writing. Schering has, though unwillingly, done just what it should have done. No court will aid it to undo what it has done, and should have done, simply in order to compel it to comply with that obligation all over again. Nor are Jackson v. Hooper, E. & A.1910, 76 N.J.Eq. 592, 75 A. 568, 27 L.R.A.,N.S., 658, Hackensack Trust Co. v. City of Hackensack, 116 N.J.L. 343, 184 A. 408 (Sup.Ct.1936), and certain other cases cited by Schering, to the contrary. These all point to the well settled distinction between a corporation and its stockholders, which no one questions, but none of them deal with the right of a one-man stockholder to control corporate action, in corporate form, and in the absence of the rights of third parties such as creditors, which is the question here. In addition, Whitfield was decided by the highest New Jersey court after Jackson, and thus controls. Indeed, long prior to Jackson, and after it, as well, it had been the law in New Jersey that

 'When the rights of the state, the public, and creditors are eliminated (as in the case at bar), and only the rights of stockholders are involved, the form of the fictional body termed a corporation does not hamper the court in the least in dealing with the rights of the parties. And that which the individuals composing the corporation might do, and will be held to have done among themselves, will be dealt with without regard to the immaterial fact they were members of a fictional body.' (Parenthesis this Court's). Perkins v. Trinity Realty Co., 1904, 69 N.J.Eq. 723, 731, 61 A. 167, 170, affirmed 71 N.J.Eq. 304, 71 A. 1135.

 To the same effect are Breslin v. Fries-Breslin Co., E. & A.1903, 70 N.J.L. 274, 282, 58 A. 313; Feld v. Joseph Feld & Co., E. & A.1940, 126 N.J.L. 153, 18 A.2d 26; Murtland Holding Co. v. Egg Harbor Commercial Bank, Ch.1938, 123 N.J.Eq. 117, 196 A. 230; Computing Scale Co. v. Toledo Computing Scale Co., 7 Cir., 1921, 279 F. 648, 674, certiorari denied 257 U.S. 657, 42 S. Ct. 184, 66 L. Ed. 420. In the latter case the Court says:

 'An assignment (of a patent) in the name of and on behalf of a corporation by all of its stockholders would convey at least a full equitable title.'

 That the above principle, as to piercing the corporate veil with regard to matters concerning only the rights of corporate stockholders and officers inter sese, has particular applicability to 'one-man corporations', see 'One-Man Corporations', 51 Harv.L.Rev., 1373, 1405, which speaks of '* * * 'one man company law', (as) a law within the law of corporations' and adds, on page 1388:

 '* * * Where a sole shareholder purports to act in behalf of the company, there is no other person concerned: he acts in his own interest and for himself alone. The justification existing in the ordinary corporation situation for treating the corporation as a separate person, i.e., a principal, is entirely lacking. * * *'

 It is thus clear that any sole stockholder of a corporation, in the absence of creditors, as here, has the right to insist on the corporation's doing what he wants. Such being the case, the Alien Property Custodian did what he had a right to do, and in a formal corporate way, in compelling Schering to comply with his Directive, in both the 'execution and performance' of the agreement. Thus his compulsion was rightful, not wrongful. If not wrongful, it was not duress. 'Acts or threats cannot constitute duress unless they are wrongful * * *.' Restatement of Contracts, Sec. 492, comment g. Miller v. Eisele, E. & A.1933, 111 N.J.L. 268, 168 A. 426; Automatic Radio Manufacturing Co. v. Hazeltine Research, 1 Cir., 1949, 176 F.2d 799, 804-805, affirmed 1950, 339 U.S. 827, 834, 70 S. Ct. 894, 94 L. Ed. 1312, rehearing denied 1950, 340 U.S. 846, 71 S. Ct. 13, 95 L. Ed. 620. It therefore follows that when the corporation has formally carried out the wishes of the Alien property Custodian, even though some of its functionaries have done so unwillingly, the courts will not declare void, what has been lawfully and formally done in the corporate manner. In further support of the lawfulness of the Directive of the Alien Property Custodian and its annexed agreement, we turn to the effect thereon of the Trading With the Enemy Act.

 The Trading With the Enemy Act

 No time need be wasted on the lawfulness of the action of Congress, under its constitutional war power, in crippling the war-making resources of the enemy by seizing property of its nationals, and this without any constitutional requirement to make compensation to an enemy owner therefor. Though, of course, compensation must be made to citizens for any mistake in seizure of their property. Hence, the validity of the purpose of the Trading With the Enemy Act, with its provisions for the protection of citizens, is beyond question. *fn6" Under this act the Alien Property Custodian is specifically authorized to treat property acquired by him 'as though he were the absolute owner thereof'. *fn7" However, while this act, as originally enacted to meet the needs of this country in World War I, permitted the Government to 'prevent' transactions as to enemy property, it did not authorize the Government to 'compel the use' of foreign property in the interest of the United States. Thus, in proposing the 1941 amendment to the Trading With the Enemy Act, the Senate Committee on the Judiciary called attention to the fact that 'it is now necessary for the Government to be able to affirmatively compel the use and application of foreign property in a manner consistent with the interests of the United States'. Such report continued, alluding to the provisions of what is now Section 5(b), as amended, 'It gives the President Flexible powers, operating through such agency as he might choose, to deal comprehensively with the many problems that surround alien property or its ownership or control in the manner most effective in each particular case. In this respect the bill avoids the rigidity and inflexibility which characterized the Alien Property Custodian law enacted during the last war * * *.' *fn8"

 Accordingly, the 1941 amendment greatly broadened the powers of the Alien Property Custodian, as designated by the President, by providing that, among other things, he might 'regulate, direct and compel * * * any * * * use, transfer * * * of * * * any property in which any foreign country or a national thereof has any interest.' *fn9" (Italics this Court's) In this same section it is further provided that 'any property or interest of any foreign country or national thereof shall vest * * * and upon such terms and conditions as the President may prescribe such interest or property shall be held, used, administered, * * * or otherwise dealt with in the interest of and for the benefit of the United States * * *.' (Italics this Court's.) *fn10" Theseare indeed 'broad powers', as stated by Judge McLaughlin, of the Third Circuit, specially sitting the Halbach, supra. Not only are these powers stated in broad language, but the terms of the act are to be liberally construed to effectuate their purpose in enabling the Alien Property Custodian to seize the property of any enemy nationals and to devote it to the best interests of the United States. United States v. Chemical Foundation, 1926, 272 U.S. 1, 10, 47 S. Ct. 1, 71 L. Ed. 131.

 This broad controlling, vesting and supervisory power was specifically delegated by the President to the Alien Property Custodian's discretion. *fn11"

 Schering was German owned originally. The corporation, its stock and its property therefore were 'property in which any foreign country or a national thereof has any interest', which the Alien Property Custodian accordingly could vest, control or supervise, as above. Vesting orders covering the Schering stock were issued as soon as the Alien Property Custodian Office was organized in April 1942. *fn12" In addition, it is stipulated ...


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