Zittman v. McGrath

Background

Private creditors attached the accounts of the Deutsche Reichsbank that were held at the Federal Reserve Bank of New York. Those attachments came after similar levies on Chase Bank accounts in companion cases, and state-court actions produced default judgments that could not be satisfied because the federal government had frozen the funds. The Alien Property Custodian served Vesting Orders and a turnover directive on the Federal Reserve demanding the accounts be turned over to him for holding, administration, and accounting. The Federal Reserve refused to release the attached portions, and lower courts sided with the Custodian.

Reasoning

The central question was whether the Custodian may lawfully take possession of and administer these blocked foreign-owned funds despite preexisting state attachments. The Court relied on the statute that authorizes vesting foreign-owned property in the Custodian to be held and administered “in the interest of and for the benefit of the United States,” explaining that the measure is a liquidation procedure to protect American creditors rather than a confiscation. The statute provides for filing claims and for judicial review in the prescribed forum, and the Court emphasized that transfer of possession does not automatically destroy creditors’ rights. The Court therefore concluded the Custodian has the power to possess and administer the funds and affirmed the lower court’s decision on that question.

Real world impact

The decision allows the federal Custodian to take custody of blocked foreign accounts at the Federal Reserve and run the statutory claims process. It leaves unresolved how that substitution of custody will affect state-court attachment judgments and priority disputes; those issues remain for later proceedings under the statute, and the judgment below is affirmed.