Defeat Looms for Alleged German Bond Holders

(CN) - German banks can refuse to honor pre-World War II German bonds that are allegedly worth more than $7 billion with interest, a federal judge ruled.

Mortimer Off Shore Services and Ronnie Fulwood have been fighting in U.S. federal courts since 2005 for payment on 1,694 agricultural bonds they claim to hold.

Cyprus-based Mortimer claims to hold 1,611 bonds, and Fulwood is a Florida resident who allegedly holds 83 bonds. They estimate the aggregate face value of the bonds at $25 million, but say interest puts the value at more than $7 billion.

In 1928, several German banks issued bonds titled German Provincial & Communal Bank Consolidated Agricultural Loan US $1000 Secured Sinking Fund Gold Bond Series A 6 1/2 %-Due June 1958. The bonds were intended to raise money to rebuild Germany's agricultural infrastructure after World War I.

In 1933, however, the Third Reich suspended payments on the agricultural bonds and began repurchasing them. Mortimer and Fulwood say Germany issued a written guarantee of payment on all principal and interest of the bonds in 1938.

When millions of dollars worth of bonds were looted after World War II, West Germany worried that invalid holders would try and redeem them. It passed a law requiring that the bonds must be registered and validated before payment would be issued. This validation law did not extend to East Germany, however, until the unification of the two countries in 1990.

Of the 14 banks that issued the bonds in 1928, 35.5 percent were located in West Germany, and 64.5 percent were in East Germany.

Both Motimer and Fulwood lost previous lawsuits over the bonds, filed in the Southern District of New York and the Middle District of Florida, respectively. They brought their latest attempt together against Germany and five German banks in the District of Massachusetts.

U.S. District Judge Rya Zobel dismissed Mortimer's case entirely after finding that it bore too much similarity to the concluded New York case in violation of the res judicata doctrine.

Mortimer had argued that its recent discovery of the 1938 guarantee "changes the landscape of the claim, as it is exactly the type of document that allows the court to assert subject matter jurisdiction," but Zobel was unsympathetic.

"Even assuming that the 1938 guaranty itself could not have been located before July 2010, Mortimer cannot plausibly claim that the 1959 memo and other FBPC papers referencing the guaranty were similarly unavailable," he wrote, abbreviating the Foreign Bondholders Protection Council. "Any attempt by Mortimer to argue as much is simply not credible given Mortimer's prior discovery of and reliance on the FBPC's papers. That Mortimer did not find the memo earlier is not evidence that it could not have done so. Mortimer may not now introduce the 1938 guaranty to defeat the application of res judicata here."

Res judicata does not bar Fulwood's claims because he withdrew the Florida case before the court issued a judgment on the merits. But he nevertheless cannot pursue claims over the West German bonds "because he has not complied with the requisite validation procedures," Zobel wrote.

There is still hope, however, for Fulwood's claims as to the East German bonds. Zobel reserved judgment on this issue until the parties brief the court on issues such as Germany's potential for immunity. Fulwood must also show that the 1938 guaranty established an affirmative act by Germany to bring it within the commercial activity exception of the Foreign Sovereign Immunities Act.

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