Mr. FOSTER. What you are attempting to do by these words is to permit the legislation to be retroactive in terms of the types of financing arrangements that have been made in the past, except for those financing arrangements that have come into question in the litigation that is pending in court proceedings at the time the bill would become law.

Mr. STOKES. That is correct. It might, of course, be argued that this would be unconstitutional if it were retroactive in any respect, but we don't see that as a serious problem because until there are foreclosure proceedings, the rights of the creditors in the proceeds of any particular sale—the rights of the creditors in any particular fund-have not accrued and we feel that the real objection to this bill is that it steps into a pending court case and seeks to change the law which the court has already applied and to alter the rights of creditors which matured, accrued, became vested, or whatever you want to call it. I realize these are all words that different people attach different meanings to, and I am not using them in the technical sense, but that it is objectionable both as a matter of sound Government administration, and on constitutional grounds, for legislation to upset the outcome of pending litigation in this type of a situation where the rights of the parties have already been determined by the law as in effect when these foreclosure proceedings began.

Mr. FOSTER. Do you know whether any State, or whether there are very many States, that have what is usually referred to as general saving clauses as a part of their code or statutes which, as a general rule, save rights pending in litigation in all cases in which legislation is passed unless there is a specific provision otherwise?

Mr. STOKES. No, sir; I don't remember seeing such a provision, but it would not surprise me at all if there were such.

Mr. FOSTER. You are familiar with the fact that the United States Code includes provisions which, for example, saves any actions or rights for the securing of penalties or forfeitures unless the legislation specifically provides otherwise?

Mr. STOKES. I realize that there are such general provisions and in the limited time we have had to work on this matter, we have been concentrating on the questions of the policy involved and our study of the various legal and constitutional features has not been completed. I do remember seeing such provisions. I think it would be very difficult to determine exactly how they would apply in any particular case of this kind.

You mentioned penalty or forfeiture. We are not concerned here with a penalty in the sense of a criminal penalty. It was argued in a brief submitted to the court of appeals in the Westhampton case, that the trustees' position was meaningless because if the mortgage was void, the vessel would be forfeited to the United States and since it had been sold, the proceeds would be forfeited.

There is a provision for forfeiture of the vessel in the event that the mortgage is executed in violation of the law. However, we believe that the forfeiture provision is inapplicable to the proceeds of sale of the vessel and there is a decision of the Circuit Court of Appeals for the Second Circuit which holds expressly that a very similar forfeiture provision was inapplicable to the proceeds of the sale of the vessel as distinct from the vessel itself.

Mr. FOSTER. This legal brief or memorandum will be available very shortly?

If you

Mr. STOKES. I will get it to you just as soon as we can. have any particular deadline by which you would like it, we willSenator BARTLETT. We will try to reach an estimate on that before we conclude today.

Mr. FOSTER. I have no further questions.

Senator BARTLETT. Do you have any?

Mr. KENNEY. No.

Mr. STOKES. Mr. Chairman, I don't know whether the decision in the Westhampton case is in the record of this hearing or whether you wanted it to be.

Senator BARTLETT. It ought to be.

Mr. STOKES. I will be glad to give counsel a copy.

Senator BARTLETT. All right. It will be placed in the record. (The Westhampton case follows:)

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Nos. 9637 & 9638.

Chemical Bank New York Trust Company, Trustee, Mortgagee, Appellant,

versus

Steamship WESTHAMPTON (formerly Steamship MONTAUK POINT), her engines, boilers, etc., Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND, AT BALTIMORE. ROZEL C. THOMSEN, DISTRICT JUDGE.

(Argued November 12, 1964. Decided April 5, 1965.)

Before SOBELOFF, Chief Judge, and HAYNSWORTH and J. SPENCER BELL, Circuit Judges.

William A. Grimes (Ober, Williams & Grimes; Thatcher, Proffitt, Prizer, Crawley & Wood; Edward C. Kalaidjian; Cravath, Swaine & Moore; John W. Barnum; Robert Rosenman; and John C. Hancock on brief) for Appellant; William R. Dorsey, III, (Foley & Grainger; John J. Foley; David R. Owen; Semmes, Bowen & Semmes; Beal, McQuade & Fitzpatrick, and Arthur M. Beal, Jr., on brief) for Appellee Caltex, etc.; Solomon Kaplan (Sol C. Berenholtz on brief) for Appellee Seafarers Vacation Plan; and Isaac N. P. Stokes for Trustees in Bankruptcy.

SOBELOFF, Chief Judge:

These appeals are from a decree that the first preferred mortgage and indenture dated August 6, 1962, from Seatrade Corporation to Chemical Bank New York Trust Company, is not a preferred mortgage under section 922 of the Ship Mortgage Act of 1920. 41 Stat. 1000 (1920), as amended, 46 U.S.C.A. § 922 (Supp. V, 1964).

Seatrade contracted with Struelcken Shipyard of Hamburg, Germany, during 1961, to convert an aged T-2 tanker into a modern bulk cargo carrier. The tanker involved was the SS. WESTHAMPTON, a vessel documented under the laws of the United States at all times relevant to this case. Seatrade paid the shipyard 30% of the conversion cost and sought to borrow the remainder from the Hamburgische Landesbank Girozentrale, a Hamburg bank. The loan was to be secured by a first preferred mortgage on the WESTHAMPTON. American counsel advised Landesbank that such a mortgage to an alien would be valid only if approved by the American Maritime Administration as required by the Shipping Act, 46 U.S.C.A. §§ 808, 835. Furthermore, the bank's counsel pointed out that, even if approved by the Commission, the mortgage would still not be preferred under the terms of the Ship Mortgage Act, 46 U.S.C.A. §§ 911 984, because the proposed mortgagee was an alien. An alternative course w> therefore suggested-the debt be secured by a first mortgage in favor of

United States citizen trustee, with a bond for the amount of the loan to be issued to Landesbank. Pursuant to this advice Landesbank requested Chemical Bank New York Trust Company to act as mortgagee and trustee under the trust indenture.

Accordingly, the indenture was executed and the bond issued in New York City on August 6, 1962, the terms of the transaction having been agreed on between Landesbank and Seatrade. The mortgage and indenture were prepared by Landesbank, which does not appear as a party on the face of the papers. The proceeds of the loan, $960,000 (DM 3,836,000), passed directly from the German bank to the German shipyard. It is conceded that Chemical, the American mortgagee-trustee, undertook no more than nominal duties.

A single bond in the full amount of the indenture was executed and delivered to Landesbank. The president of Seatrade, Manuel Kulukundis, gave Landesbank his personal written guarantee of payment of the bond, and Seatrade gave the bondholder ten promissory notes, each in the amount of an installment of principal and interest.

Landesbank has been at all times the owner of the bond. At the closing it gave Chemical a written warranty that the bond was being purchased as an investment with the intention of holding it until maturity. Landesbank then agreed not to dispose of the bond without the consent of Chemical.

Six months later, on January 2, 1963, chemical informed Landesbank that Seatrade had defaulted in payments due December 31, 1962. Upon failure of Seatrade to remedy the default, Landesbank instructed Chemical to declare the loan due and to take all steps necessary for the protection of Landesbank's interests. On January 14, 1963, Chemical was instructed by the German bank to file the libel which has given rise to this case.

The SS. WESTHAMPTON was sold on March 28, 1963, by order of the District Court to a United States citizen. The sale was confirmed and the net proceeds, $2,551,104.41, were paid into the Registry of the District Court. Chemical's claim to a priority in the proceeds was challenged by objecting creditors on the ground that the indenture did not create a "preferred mortgage" under the Ship Mortgage Act because the holder of the bond secured by the indenture was not a citizen of the United States. The District Court agreed, basing its decision on the finding that Landesbank was the real mortgagee since it had a considerable measure of potential control over the mortgaged property, the SS. WESTHAMPTON. The exception set out in 46 U.S.C.A. § 911 (5), that:

"The term 'mortgagee,' in the case of a mortgage involving a trust deed and a bond issue thereunder, means the trustee designated in such deed," was held to be inapplicable, the phrase "bond issue" being read by the court to mean a "public bond issue."

We agree with the District Court's conclusion that the mortgage in question is not entitled to the claimed preference, but we arrive at this result by a somewhat different course of reasoning.

I

The debate below revolved around the meaning of the phrase "bond issue" as used in the Ship Mortgage Act, 46 U.S.C.A. § 911 (5). Chemical contended that this phrase referred to the issue of bonds, whether to a single investor or to a larger number. Such a reading would make the citizenship of the bondholder irrelevant under the Ship Mortgage Act. The objectors answered that the meaning of "bond issue" is unclear since it could reasonably be understood to refer only to the distribution of bonds to the general public. To clear up the alleged uncertainty, it has been argued below and in this court that an interpretation should be given the term consistent with the statutory purpose of the Ship Mortgage Act. That purpose is then stated by the objecting creditors to be to permit an American trustee to act for a heterogeneous group of bondholders, some of whom might be aliens, but not to permit evasion of the general policy against foreign control. They therefore would limit the reading of section 911 (5) to apply to "public" bond issues, with the result that while the Ship Mortgage Act expressly grants a preference to a mortgage held by an American trustee, the objecting creditors read into the statute a qualificationnamely, that the bonds issued under such a mortgage shall be held by not less than some unspecified number of holders. This approach was adopted by the District Court.

We do not share the court's view that the meaning of the phrase "bond issue" was ambiguous when adopted by Congress in 1920. The minimal ambiguity that allegedly exists today is attributable to events occurring since the passage of the Act. No evidence was offered to show that the phrase had any meaning in 1920 other than its literal one, the issue of a bond or bonds. The supposed ambiguity was imported into the statute by the objectors' contention that the phrase might refer to public issues only. The record affords no support for the proposed distinction between public and private issues. The only testimony as to the meaning of "bond issue" in 1920 was that of several bankers called by the appellants. They all testified that "bond issue" was always understood by the financial community to mean the issue of a single or any number of bonds. While the cogency of this testimony may be arguable,' the fact remains that it was the only evidence offered on this point.

The District Court nevertheless found an ambiguity by referring to three post-1920 sources, none of which was addressed to the distinction the objectors are urging in this case. The first authority relied on is the Encyclopedic Dictionary of Business Finance published by Prentice-Hall in 1960. On page 23 that volume defines "bond issue" as "a class of bonds offered to the public at the same time." The second reference is to the testimony of a witness before the Merchant Marine and Fisheries Subcommittee in 1954 when that committee had under consideration a proposed amendment to Title XI of the Merchant Marine Act, which provides for government insurance of ship mortgages. The witness, Rudolph Hecht, chairman of the shipowner's committee that proposed the amendment, seemed to assume that a bond issue would involve the interests of a large number of persons. House Hearing on H.R. 8637, p. 18, 83d Cong., 2d Sess. (1954). Thirdly, the following dictum was cited:

"In placing ship mortgages upon a stronger basis as securities, the Congress had in mind, and expressly included, trust deeds securing issues of bonds to the public." Detroit Trust Co. v. The Barlum, 293 U.S. 21, 40 (1934).

None of the authorities cited makes a distinction between "public" and "private" issues and all of them can be read to embrace the issue of a single bond to a single member of the "public."

Much of the apparent difficulty in this case is caused by the artificiality of the distinction between "public" and "private" bond issues. The record shows no instance where precisely such a distinction has been drawn. The objectors meet this deficiency by making the distinction themselves, then arguing that the evidence does not clearly show that Congress did not adopt such a distinction. A public-private dichotomy did not exist until Congress made reference to public and nonpublic offerings in section 4(1) of the Securities Act of 1933. 48 Stat. 77 (1933), 15 U.S.C.A. § 77(d) (1958). Congress used the word "issue" to distinguish classes of securities and not the number of purchasers. See Loss, Securities Regulation 577, 591 (1961). Thus we fail to find an ambiguity justifying abandonment of the literal meaning of "bond issue"-the issue of a bond or bonds.

As the District Court points out, however, a literal meaning may be rejected if its adoption would frustrate the statutory purpose giving rise to the Ship Mortgage Act. Review of the ends attempted to be accomplished reveals just the opposite, that acceptance of any construction other than the literal one will undercut the congressional purpose. The 1920 Act cannot be understood without reference to earlier history.

At the beginning of the First World War the American ocean-going merchant marine was almost nonexistent. Congress, concerned with the scarcity of domestic shipping, the withdrawal of ships by aliens and inflated freight rates, adopted the Shipping Act of 1916. 39 Stat. 728 (1916), now codified with amendments in 46 U.S.C.A. §§ 801-42 (1958). Congress hoped that the small private merchant marine that did exist could be preserved by insuring that control over American ships would remain in domestic hands. To achieve this end section 9 was adopted, the predecessor of 46 U.S.C.A. § 808. Paragraph 2 of that section provided that no ship purchased from the Maritime Board could be leased, sold or chartered to "any person not a citizen of the United States." without first obtaining the approval of the Secretary of Commerce. Paragraph

1 Not only were these bankers just at the beginning of their careers in 1920, but there is no indication that any factual situation ever arose which required a decision to be made as to the meaning of the phrase "bond issue."

* See House Rep. No. 659, 64th Cong., 1st Sess., 50 (1916).

3 added that such approval would similarly have to be obtained for the transfer during a war or national emergency of any ship registered under our laws. The Shipping Act of 1916 was thus enacted to preserve what merchant marine we did have.

In the year following the passage of this Act German submarines began to decimate allied shipping. Foreign capital made systematic attempts to replenish their losses by gaining control of American vessels. To thwart such raiding activities Congress added section 37 to the Shipping Act, 40 Stat. 901 (1918), 46 U.S.C.A. § 835 (1958). This section enlarged on paragraph 3 of section 9 by providing that it shall be unlawful during a war or national emergency to do the following without first obtaining the approval of the Secretary of Commerce:

"(b) To sell, mortgage, lease, charter, deliver, or in any manner transfer *** to any person not a citizen of the United States, (1) any such vessel or any interest therein ***"

"Mortgages" were added to the list of restrictions because they had "proved to be a common device by which foreign capital has sought to obtain control of American vessels." 56 Cong. Rec. 8026 (1918). Then in 1920 section 9 of the Shipping Act was amended to extend the added restrictions of section 37 to peacetime transfers of interests in ships documented under the laws of the United States. 41 Stat. 994 (1920). 46 U.S.C.A. § 808 (1958). The Shipping Act, as amended, thus had a positive end and a negative means-it was hoped that our merchant marine might be built up and preserved by preventing its slipping into foreign hands.

At the close of the First World War a new situation arose which gave rise to pressures eventually resulting in the Ship Mortgage Act of 1920. When the war in Europe ended the United States Government owned 1,280 oceangoing flag ships. Gilmore and Black, The Law of Admiralty 570 (1957). Promptly Congress authorized the dismantling of this fleet and its sale to privately owned shipping lines. H.R. Rep. No. 443, 66th Cong., 1st Sess., 4, 9 (1919). It was soon realized, however, that this result could not be accomplished unless considerable new capital could be attracted to the private shipping industry. To this end the Ship Mortgage Act of 1920 was enacted.

Investment in shipping has been frustrated over the years by the absence of an effective security device. The common law mortgage was of little use in the shipping industry because it was not considered by admiralty courts to be a maritime contract. This meant that it would be subordinate to all maritime liens whenever they attached. Bogart v. The Steamboat John Jay, 58 U.S. 399 (1854); see Gyory, Security at Sea: A Review of the Preferred Ship Mortgage, 31 Ford. L. Rev. 231 (1962). The Ship Mortgage Act breathed new life into ship mortgages by according them a preference over most subsequently attaching maritime liens. 41 Stat. 1004 (1920), 46 U.S.C.A. § 953 (1958). However, a mortgage was not eligible for this preferred treatment unless the mortgagee was a citizen of the United States, and the term "mortgagee, in the case of a mortgage involving a trust deed and a bond issue thereunder," was defined as "the trustee designated in such deed." 41 Stat. 1000 (1920). 46 U.S.C.A. §§ 922 (a) (5), 911(5) (1958). This citizenship requirement, unlike that of the Shipping Act, was absolute and could not be waived by the Secretary of Commerce. The essential purpose of Congress in enacting the Ship Mortgage Act was to promote ship financing by affording substantial security to investors. Merchants & Marine Bank v. The T. E. Welles, 289 F. 2d 188, 193 (5th Cir. 1961). Unquestionably the attractiveness of any investment is diminished when there is uncertainty as to its validity. The Ship Mortgage Act thus speaks in absolutes. Mortgages to noncitizens are put wholly outside the preferential benefits of the Act, but in the case of a bond issue the citizenship of the trustee is made controlling. A reading of the phrase "bond issue" that incorporates an uncertainty into the Ship Mortgage Act and seriously impairs marketability should not be favored unless the statutory language makes it unavoidable.

The District Judge was rightly troubled by the many casual references in the legislative history to issues of bonds to large numbers of investors. It must be conceded that bond issues and trust indentures were originally devised to avoid the necessity of issuing a security document to each member of a large group of creditors. One mortgage was executed to a trustee and he held it in trust for all the creditors. Butler v. Bahm, 46 Md. 541, 546 (1877).

See House Rept. No. 568, 65th Cong., 2d Sess. (1918).