Karlovy Vary faces massive claim for bonds issued in 1924

The town of Karlovy Vary faces a massive claim for bonds issued in 1924. The controversial US lawyer Edward Fagan this week asked Karlovy Vary to pay off over 500 million US dollars on the bonds and their interest. While officials in Karlovy Vary and at the Czech Finance Ministry are now studying the case, Mr Fagan said he would wait until the end of the month before taking the matter to court.

Photo: CTK

In 1924, the town of Karlovy Vary, known also by its German name of Carlsbad, needed to boost its budget, and decided to issue 1000 and 500 dollar bonds in the United States, in the total amount of 1.5 million dollars. The bonds were due in 1954; however, the Second World War, the expulsion of nearly all of Karlovy Vary’s German-speaking inhabitants, and the communist takeover of the country pushed them into oblivion.

But now, 87 years later, the town is being asked to. This week, US lawyer Edward Fagan sent a letter to the town demanding 506 million US dollars or 9.2 billion crowns, for the bonds and the interest. The sum, around seven times higher than Karlovy Vary’s annual budget, would financially ruin the town for years to come.

The request, filed by Mr Fagan on his own behalf as well as on behalf of other bonds owners, took officials in Karlovy Vary as well in Prague by surprise. Karlovy Vary Mayor Petr Kulhánek originally agreed to meet with Mr Fagan. But a few days later, Mr Kulhánek cancelled the meeting, confident his town has nothing to worry about.

Edward Fagan, photo: Czech Television

“Bonds held by Czechoslovak citizens were invalidated in the currency reform of 1953. It remains to be seen what happened with bonds that are to this day in possession of foreign nationals. In any case, the town of Karlovy Vary lost its status as a legal entity, and its obligations were taken over by the state. So even if these claims were substantiated, they would go against the state.”

Officials at the Czech Finance Ministry are now studying the relevant archive materials, and say they should know more by the end of the month. Ondřej Jakob is a spokesman for the ministry.

“For the time being, we see no reason why the Czech Republic should pay anything. We are now going through our archives because it has been nearly 90 years since the bonds were issued. We are analyzing the case, but we firmly believe the Czech Republic will not have to pay anything for these bonds.”

But some experts believe the case might not be as clear cut as that. First of all, the Karlovy Vary bonds are unique in that they were not issued here but in the United States. On two occasions, Czechoslovak authorities negotiated with bond holders; in 1946, the bonds’ maturity was prolonged until 1966. And in 1984, the Czechoslovak finance ministry signed a memorandum with the bond holders the contents of which have not been disclosed. Rudolf Píša is a leading Czech expert on the history of bonds, stocks, and other securities.

Karlovy Vary, photo: CzechTourism

“It seems that the memorandum is a key document right now. I don’t know what’s in it but I think that it probably set down some statute of limitation after which the bonds were no longer valid. So I think the likelihood that Mr Fagan could claim money for the bonds is not great. But we really have to wait and see until the documents are found in the archives.”

Mr Fagan wants to meet officials from Karlovy Vary and the Finance Ministry on October 31, and take them to court if his claims are rejected. By then, the authorities should also have all the relevant documents, including the mysterious 1984 memorandum.