text:
    Harriet P. Duport et al., Respondents, v. First National Bank of Glens Falls, Appellant, and Emerson National Bank of Warrensburg, as Trustee, Respondent.

      Argued April 16, 1942;
    decided June 4, 1942.

      Frederick G. Bascom, James McPhillips, E. C. Fitzgerald and A. P. Robertson for appellant.
    The bank took the trust bonds as a bona fide purchaser for value, without notice of the breach of trust, and without knowingly taking part in an illegal transaction; therefore the bank held the bonds free of the trust and was under no liability to the beneficiaries on the ground of negligence; nor had plaintiffs any rights against the bank except to require a sale of the rest of the collateral at its full value and that any excess above the amount of the debt be returned to the trusts; since no question is raised as to the bona fides of the sale of 1935, when the other collateral was sold, and a deficiency resulted therefrom greater than the amount of any note as to payment of which it is claimed the trust bonds were discharged, there can be no recovery. (Willets v. Hatch, 132 N. Y. 41; Smith v. Savin, 141 N. Y. 315; Melkon v. Am. Ex. Irving Trust Co., 251 N. Y. 566; Strassburger v. Irving

      Trust Co., 261 App. Div. 210; Newcomb v. Hale, 90 N. Y. 326; Sehon-Stevenson & Co. v. Union Trust Co., 113 Fed. Rep. [2d] 968; Silverman v. Sterling Nat. Bank, 272 N. Y. 469; Turnbull v. Longacre Nat. Bank, 249 N. Y. 159; Levy v. Leonard, 231 App. Div. 763; Gouert v. Mechanics & Metals Nat. Bank, 176 App. Div. 507; Costello v. Costello, 209 N. Y. 252.) Notice to the bank that the bonds belonged to the trust did not deprive the bank of the right it acquired by the terms of the pledge to apply the proceeds of sale of the collateral to the items of the indebtedness as it elected or to become the purchaser of the collateral. (Silverman v. Sterling Nat. Bank, 272 N. Y. 469; Thompson v. St. Nicholas Nat. Bank, 113 N. Y. 325; Farwell v. Importers Nat. Bank, 90 N. Y. 483; Commercial Nat. Bank v. National Surety Co., 259 N. Y. 181; Smith v. Savin, 141 N. Y. 315; Thompson v. St. Nicholas Nat. Bank, 113 N. Y. 325; Fall River Nat. Bank v. Slade, 153 Mass. 415; Tolerton & Stetson Co. v. Roberts, 115 Iowa, 474; Advance Thresher Co. v. Hogan, 74 Ohio St. 307; Livermore Falls Trust & Banking Co. v. Richmond Mfg. Co., 108 Me. 206; Kissire v. Plunkett-Jarrell Grocer Co., 103 Ark. 473.)

      John A. Slade for plaintiffs-respondents.
    The Appellate Division properly directed judgment against the defendant-appellant bank. (McNeil v. Tenth Nat. Bank, 46 N. Y. 325; Grow v. Garlock, 97 N. Y. 81; Colgrove v. Tallman, 67 N. Y. 95; Farwell v. Importers Nat. Bank, 90 N. Y. 483; Smith v. Savin, 141 N. Y. 315; LeMarchant v. Moore, 150 N. Y. 209; King v. Milford Nat. Bank, 168 Misc. Rep. 571; Mullen v. Quinlan & Co., 195 N. Y. 109; National Park Bank v. Koehler, 204 N. Y. 174; Burnap v. National Bank of Potsdam, 96 N. Y. 125; Rutherford Nat. Bank v. Manniello, 240 App. Div. 506; 266 N. Y. 568; Breed v. National Bank of Auburn, 57 App. Div. 468; 171 N. Y. 648; Schuylkill Fuel Corp. v. Nieberg Realty Corp., 250 N. Y. 304; Grace v. Corn Exchange Bank Trust Co., 287 N. Y. 94.). The right of the bank acquired by the terms of the original pledge to apply the proceeds of sale of the collateral to the indebtedness as it elected was conditioned by the notice of the trust ownership. (Hidden v. Bishop, 5 R. I. 29; Neimcewicz v. Gahn, 3 Paige, 614; Wheelwright v. DePeyster, 4 Edw. Ch. 242; Vartic v. Underwood, 18 Barb. 561; Smith v. First Nat. Bank, 151 App. Div. 317.) The judgments obtained by the bank against the trustee are not res judicata as to any of the issues determined in this action. (First Nat. Bank v. Parks, 245 App. Div. 776; Bedford Ice Palace, Inc., v. Brooklyn Trust Co., 246 App. Div. 734; Brennan v. Hall, 131 N. Y. 160; Matter of Straut, 126 N. Y. 201; Western R. R. Co. v. Nolan, 48 N. Y. 513; DeGraaf v. Wyckoff, 118 N. Y. 1; Williams v. Barkley, 165 N. Y. 48; Municipal Serv. R. E. Co. v. D. B. & M. Holding Corp., 257 N. Y. 423; Hartford Acc. & Ind. Co. v. First Nat. Bank, 281 N. Y. 162.)
   Lehman, Ch. J.

The plaintiffs are beneficiaries of two trusts established under the will of their father, George H. Parks, who died on July 1,1917. The testator named his wife, Grace M. Parks, as trustee. She appropriated bonds in which the trust funds were invested and pledged them, together with securities which were her personal property, as collateral security for loans made to her by the defendant First National Bank of Glens Falls, N. Y. In February, 1935, long after the bank had notice that part of the securities pledged with it as collateral had been wrongfully appropriated by the trustee to her own use, the bank sold the collateral it held. The proceeds both of the securities which were the personal property of the trustee and of the securities which had been taken from the trust fund were insufficient to pay the indebtedness of the pledgor.

The plaintiffs then brought this action to recover damages which they claim arose from the failure of the bank to marshal the said collateral held by it, part of which belonged to said Grace M. Parks and part of which belonged to said trust and was illegally pledged by her, and to use due diligence to exonerate the said trust securities and to apply all of the collateral belonging to said Grace M. Parks to her indebtedness before resorting to the trust securities.” The bank denies that it has been derelict in any duty it owed to the plaintiffs and urges that many of the issues which the plaintiffs seek to raise have been conclusively adjudicated in its favor in previous litigation.

The case was tried by the court without a jury. The court found, among other things, that the 20th day of December, 1932, was a reasonable time within which said First National Bank of Glens Falls, N. Y., should have liquidated said collateral pledged with it to secure payment of the said indebtedness of Grace M. Parks,” but the court also found that even if all of said collateral had been liquidated on said 20th day of December, 1932, and the proceeds applied upon the indebtedness of said Grace M. Parks, a deficiency would have resulted. From these findings the conclusion followed that even though the bank may have been derelict in failing to liquidate its indebtedness in 1932, no damage to the plaintiffs resulted from that dereliction. The complaint was, therefore, dismissed on the merits. The Appellate Division reversed the judgment on the law and the facts and directed judgment in favor of the plaintiffs against the defendant First National Bank of Glens Falls, N. Y., for the sum of $14,810 damages, with interest from December 20, 1932.

There is little if any conflict of testimony on any issue except perhaps upon the disputed question of the value on December 20, 1932, of 1,384 shares of stock of Glens Falls Portland Cement Company, the personal property of Mrs. Parks, which she had pledged as part of the collateral for the loan to her. The trial court has found that the value of the stock in 1932 was twenty dollars a share. The Appellate Division has found that its value at that time was thirty dollars. The trial court pointed out that even if the stock had been sold in 1932 for much more than thirty dollars, the proceeds of the sale of all the collateral held by the bank would have been insufficient to satisfy in full the indebtedness due to the bank. The value of the collateral in 1932 as found by the Appellate Division was $58,457.80. The indebtedness of Mrs. Parks to the bank in December, 1932, was $68,647.06 — more than $10,000 in excess of the value of the collateral so found by the Appellate Division. Included in this indebtedness there was, however, an unpaid note of Mrs. Parks, which the bank had renewed for six months in March, 1932, after it had notice that Mrs. Parks had wrongfully pledged securities belonging to the trust estate. The Appellate Division concluded that by such renewal and extension the bank lost the right to apply upon that note for $25,000 the proceeds of the collateral which had been pledged. We need examine no other question if that conclusion is unsound.

In 1930 by decree of the Surrogate’s Court, Mrs. Parks, the unfaithful trustee, was removed and in March, 1931, the Emerson National Bank of Warrensburg was substituted as sole trustee. To establish its right as a bona fide holder for value to the collateral which the unfaithful trustee had pledged as security for loans, First National Bank of Glens Falls, N. Y., brought an action in February, 1932, against the substituted trustee. In that action judgment was entered on April 13,1932, by which it was “ Adjudged, that the plaintiff is a bona fide holder for value and in good faith and in due course of all bonds held by it pursuant to the terms of any notes signed by Grace M. Parks pledging the same and particularly of $22,000 Baltimore & Ohio Railroad Company 4|% bonds and $11,000 419 Fourth Avenue Bowker Building bonds now held by it.”

Among the “ notes signed by Grace M. Parks ” was the note for $25,000 which had been extended for six months on September 1, 1931. In March, 1932, while the action for a declaratory judgment was pending, the bank again extended the time of payment by accepting in renewal of the note a new note payable six months thereafter. It is said that at that time the trust estate stood as the mere surety for the debt, which was secured by bonds belonging to the estate as well as by stock belonging to the debtor personally.

Doubtless, upon equitable principles, the trustee could have demanded that the bank should resort to the bonds of the estate which had been wrongfully pledged as collateral for the loan only if the bank failed to obtain satisfaction of the loan from the debtor or out of property belonging to the debtor. (Smith v. Savin, 141 N. Y. 315.) A court of equity might direct that upon the sale of the collateral the bank should marshal the securities which it held. The relationship of the trustee to the bank was analogous to that of a surety. (Farwell v. Importers & Traders’ Nat. Bank, 90 N. Y. 483.) There may be question whether the analogy is so complete that by extension of the time for the payment of a note long past due, the lien of the bank upon the collateral belonging to the trustee was automatically canceled, though it is not shown that by such extension the trust estate was injured. We do not decide that question now. It is not presented upon this record.

It is true that in their complaint the plaintiffs allege not only that the bank was derelict in the performance of the duty it owed to the trust estate by its failure to marshal the collateral which it held and to collect the indebtedness of Grace M. Parks within a reasonable time from the proceeds of the collateral which was the personal property of the debtor, but they allege also that the bank extended the payment of a large amount if not all of the said indebtedness of said Grace M. Parks and accepted renewal notes therefor without notice to these plaintiffs or to the defendant substituted trustee which said extensions released said trust securities or a large portion thereof from said indebtedness.” The bank sold some of the trust estate bonds in 1932 with the consent of the substituted trustee and applied the proceeds upon the indebtedness of Mrs. Parks. The remainder of the collateral which the bank held for the indebtedness of Grace M. Parks was sold by a referee pursuant to a judgment entered in February, 1935, in an action brought by the bank for the foreclosure of the lien of the bank upon the collateral pledged with it. The substituted trustee was named as the defendant in that action. Tho beneficiaries of the trust who are the plaintiffs here sought to intervene in that action. Their motion was denied on the ground that they were not necessary parties. The complaint in that action set forth the amounts due on the unpaid notes and asked that the collateral be sold, and that the proceeds be applied in payment of the amount due. The judgment recites that the plaintiff having given proof of the amount due on the notes mentioned in the complaint,” the court finds in detail the amount due and directs that the collateral be sold in the order therein specified, and “ that from the moneys arising from said sale there be paid to the plaintiff the amount then due as aforesaid.” There can be no doubt that the judgment against the trustee is binding upon those interested in the trust estate, including the plaintiffs who, nevertheless, have been awarded judgment against the bank based upon a finding that the moneys arising from the sale could be used to pay, not the amount then due to the bank as found by the court in the foreclosure action, but a lesser amount.

We need not pause to examine the arguments now presented to sustain the plaintiffs’ contention that the judgment in the foreclosure action does not constitute a conclusive adjudication binding upon these plaintiffs, which precludes them from now urging that by extension of the time of payment of a note for $25,000 the bank released the bonds belonging to the trust estate which had been wrongfully pledged by the trustee as collateral security for that note. We assume for the purposes of this appeal that upon this record the Appellate Division correctly decided that the extension had that effect. The release of the bonds as collateral security for the payment of part of the indebtedness for which they had been pledged can be of no benefit to the trust estate if, even after such release, the pledged bonds belonging to the estate are insufficient security for the remainder of the indebtedness.

The lien of the bank upon the stock of the Glens Falls Cement Company which was the personal property of the pledgor would, of course, not be discharged by the extension of the time of payment of part of the pledgor’s indebtedness. It would still be security for the entire indebtedness, though the pledged bonds belonging to the trust estate would be security for only a part of the indebtedness. Though, as we have said, the bank, upon equitable principles, was bound to marshal the collateral belonging to the trust estate if the indebtedness due to the bank could be satisfied out of the proceeds of the collateral belonging to the debtor, yet the doctrine of equitable marshalling of assets and equitable subrogation is applicable, * * * only where ‘ it will not trench upon the rights or operate to the prejudice of the party entitled to the double fund ’ (1 Story’s Equity Jurisprudence [10th ed.], § 633).” (Womans Hospital v. 67th St. Realty Co., 265 N. Y. 226, 235.) By extending the note for $25,000 for six months, the bank had not sought an unfair advantage from the trust estate or caused any injury to it. The conclusion that the extension of part of the indebtedness discharged pro tanto the lien of the bank upon the property of the trust estate which it held as collateral, is based upon very technical considerations. Such discharge would leave the bank in the position of holding two funds as collateral security for part of the indebtedness due to it, while one of those funds was collateral security also for the remainder of the indebtedness. The bank was under no duty to marshal the collateral in manner which would leave any part of the indebtedness unpaid. It might apply the proceeds of the collateral which alone was security for part of the indebtednessupon that part, and it might apply the proceeds of all the remaining collateral upon the other indebtedness. (See 4 Bogert on the Law of Trusts and Trustees, p. 2700 et seq; Farmers Loan & Trust Co. v. Kip, 192 N. Y. 266, 283; Sowell v. Federal Reserve Bank, 268 U. S. 449, at pp. 456, 457.)

The bonds belonging to the trust estate were, it is undisputed, insufficient in value in 1932 and thereafter to satisfy the part of the indebtedness for which they remained collateral security, even assuming that by extension of the note for $25,000 they were released from any lien as collateral for that note. The stock of the Glens Falls Cement Company, even if it had been sold in December, 1932, at the value fixed by the Appellate Division, would have been insufficient to satisfy the indebtedness for which it stood as security. Thus, even though every contention of the plaintiffs be sustained they have failed to show any wrongful conduct on the part of the bank which injured them.

The judgment of the Appellate Division should be reversed and that of the Trial Term affirmed, with costs in this court and in the Appellate Division.

Loughran, Finch, Rippey, Lewis, Conway and Desmond, JJ., concur.

Judgment accordingly.


source: Caselaw Access Project

author: Lehman, Ch. J. Desmond, J.

license: Public Domain

text:
    In the Matter of Bond and Mortgage Guarantee Company. Paragon Land Corporation et al., Appellants; Joseph P. Day et al., as Trustees, Respondents.

      Argued February 25, 1942;
    decided June 4, 1942.

      Samuel Okin, appearing specially, for appellants.
    The proceedings taken wherein a justice at Special Term made an order to show cause directed to the appellants and another justice at Special Term made the order dated August 6, 1940, against the appellants, are null and void in that the justices had no jurisdiction over the appellants and the subject-matter, and said proceedings and orders violated the due process clauses contained in the State and Federal Constitutions. (Matter of Lawyers Mortgage Co. [40 Lincoln Road], 284 N. Y. 325; Matter of People [Title & Mtge. Guar. Co.], 264 N. Y. 69; Weil v. President of Manhattan Co., 275 N. Y. 238; Matter of Home Title Ins. Co., 256 App. Div. 999; Matter of Lawyers Mortgage Co., 277 N. Y. 244; Matter of Culver Contracting Corp. v. Humphrey, 268 N. Y. 26.) The issuance and service of the order to show cause dated May 23, 1940, and the proceedings thereafter with respect to same resulting in the order dated August 6,1940, were in violation of the appellants’ constitutional rights and in violation of the due process clauses contained in the Constitution of the State of New York and the United States. (Rosenberg v. Rosenberg, 259 N. Y. 338; Matter of Delaney, 256 N. Y. 315; Matter of City of New York [Pell Estate, Inc.], 262 App. Div. 487; Valz v. Sheepshead Bay Bungalow Corp., 249 N. Y. 122.

      Fred L. Gross for respondents.
    The salé in this proceeding was a judicial sale. (Matter of Denison, 114 N. Y. 621; Matter of Superintendent of Banks, 207 N. Y. 11; Delaplaine v. Lawrence, 3 N. Y. 301; Matter of Lynch, 33 Hun, 309; Brasher v. Cortland, 2 Johns. Ch. 505; Matter of Marino, 215 App. Div. 841; People v. N. Y. Building-Loan Banking Co., 189 N. Y. 233; Morrow v. Renniere Process, Inc., 222 App. Div. 100; Matter of Benedict, 239 N. Y. 440; Evans v. 2168 Broadway Corp., 281 N. Y. 34; Cazet v. Hubbell, 36 N. Y. 677; Hale v. Clauson, 60 N. Y. 339; Archer v. Archer, 155 N. Y. 415.) The individual appellants were the real parties who made the offer of purchase and were, therefore, amenable to the order of the court as much as the appellant corporation through which the individual appellants operated. (State Bank v. Wilchinsky, 128 App. Div. 485; Cahill v. Cahill, 131 Misc. Rep. 99; Przewozniczek v. Machowicz, 123 Misc. Rep. 376; Archer v. Archer, 155 N. Y. 415; Hale v. Clauson, 60 N. Y. 339; Havey v. Hoffman, 121 N. J. Eq. 523; New Colonial Ice Co. v. Helvering, 292 U. S. 435; Garrigues Co. v. International Agricultural Corp., 159 App. Div. 877; Goss & Co. v. Goss, 147 App. Div. 698; Floral Park Lawns, Inc., v. O’Connell, 250 App. Div. 464; Beards v. Wheeler, 76 N. Y. 213.) The individual appellants were properly before the court. (Iowa Central Ry. Co. v. Iowa, 160 U. S. 389; Dennerlein v. Dennerlein, 111 N. Y. 518; Matter of Baer v. Hendricks, 147 N. Y. 348; Cracker v. Gollner, 135 N. Y. 662; Parish v. Parish, 175 N. Y. 181; Cahill v. Cahill, 131 Misc. Rep. 99.)
   Lehman, Ch. J.

The owner of property at East Meadow, Nassau county, Long Island, executed and delivered to Title Guarantee and Trust Company a mortgage for the principal amount of $600,000. Certificates of participation were issued by Title Guarantee and Trust Company and sold to investors. These certificates were guaranteed by Bond and Mortgage Guarantee Company. Defaults occurred in payment of interest and the Mortgage Commission of the State of New York, pursuant to the provisions of chapter 745 of the Laws of 1933, as thereafter amended (commonly known as the Schackno Act), and chapter 19 of the Laws of 1935 as amended (commonly known as the Mortgage Commission Act), promulgated a plan for the readjustment and reorganization of the rights of the holders of the guaranteed certificates of participation in the mortgage. The plan for readjustment and reorganization was approved by the court and trustees were appointed in accordance therewith in 1936.

Foreclosure proceedings were thereafter brought by the trustees and, pursuant to a judgment of foreclosure and sale, the property was sold to the trustees, and the referee in the foreclosure action executed and delivered a deed of the mortgaged premises to the trustees on June 24, 1938.

Prior to the appointment of the trustees the mortgaged property had been sold for non-payment of taxes. Deeds to the property, under the tax sale, had not been delivered and the owner of the property still had a right of redemption. There was some controversy between the trustees and the county of Nassau concerning the extent of the rights of the trustees. To determine these rights the trustees began an action against the county of Nassau. While that action was pending the tax deeds were delivered. The trustees initiated negotiations with representatives of the county for the settlement of the controversy, with the expectation that the county would cooperate with the trustees in a sale of the mortgaged property for the benefit of the owners of the participation certificates.

In November, 1939, the trustees received a written proposal or offer for the purchase of the mortgaged premises. It was addressed to a broker and signed by a lawyer as “ attorney representing syndicate of purchasers,” and it stated that the broker was authorized to offer to purchase the mortgaged property for $300,000 “ on behalf of a syndicate represented by me.” Though the letter does not disclose the names of the members of the syndicate of purchasers,” there can be no doubt that the lawyer, in writing this letter, represented the individual appellants, Morris Walzer, Louis Weinstock and Harold J. Weinstock, and the proposal was accompanied by a check for $2,000 signed by Louis Weinstock.

The trustees had also received another offer for part of the mortgaged premises. After some negotiations the offer was submitted for approval to the court at Special Term and in January, 1940, the court informally approved the offer and directed the trustees to enter into a contract and submit the same to the court for formal approval. As a result of negotiations between the trustees, representatives of the syndicate ” in whose behalf the offer had been made, and representatives of the county of Nassau, agreement was reached upon the terms of a contract for sale by the trustees of the mortgaged property and the conditions upon which the county would cooperate with the trustees. The proposed contract was entered into on March 18, 1938, between the trustees, described in the contract as seller,” and “ Paragon Land Corp., a domestic corporation with offices at No. 16 Court Street, Borough of Brooklyn, City and State of New York, hereinafter described as the Purchaser.” The purchase price under the contract was $300,000, payable as follows: $15,000 on the signing of the contract; $75,000 in cash or by certified check on the delivery of the deed; and $210,000 by the execution of mortgages for that amount. Before the contract was made, the trustees and representatives of the county of Nassau and the holders of tax deeds on the mortgaged premises had entered into a stipulation which, however, was subject to ratification by the Board of Supervisors of the county, by which the pending litigation was settled and the county of Nassau agreed that upon payment of a stipulated amount the county of Nassau would execute and deliver to the trustees a bargain and sale deed of the property. This stipulation was incorporated in the contract of sale made with the Paragon Land Corporation, and a copy was annexed to that contract. The court at Special Term thereafter, on March 21, 1940, made a formal order approving the contract and authorizing the trustees to carry it out. The trustees returned the check for $2,000 which had accompanied the original offer and thereafter acknowledged receipt of $15,000 as the initial payment under the contract of sale.

The contract provided that the deed should be delivered on April 15, 1940, or sooner at the option of the purchaser. On the date set for the closing the parties met, but the Board of Supervisors of the county had not at that time met to ratify the stipulation and in. consequence the trustees could not then convey a marketable title. Exactly what occurred at that time and whether at that time the purchaser would have been ready and able to complete the purchase, if a marketable title had been tendered, are matters in dispute. When the parties separated no date was set for closing. On May 2nd the trustees notified the attorneys for. the purchaser that they would be ready to deliver the deeds on May 6th. The purchaser refused to proceed further with the contract, claiming that its obligations were at an end because of default by the trustees on the day set for the closing of the contract.

The trustees then procured an order directing the appellants, the Paragon Land Corporation, Morris Walzer, Louis Weinstock and Harold J. Weinstock, to show cause “ Why an order should not be made requiring Paragon Land Corp. to carry out and perform the contract, a copy of which is annexed to said affidavits, and to complete the purchase thereunder, and why it should not be decreed that Paragon Land Corp. was organized solely for the purpose of acting as a mere agency or instrumentality of Morris Walzer, Louis Weinstock and Harold J. Weinstock, or either of them, that the corporate identity of Paragon Land Corp. be disregarded in order to prevent loss to the certificate holders mentioned in the annexed affidavits and so that the rights and interests of such certificate holders may be protected, and in the interests of justice, and why it should not be decreed that Morris Walzer, Louis Weinstock and Harold J. Weinstock, or any of them, are the real parties in making the aforesaid purchase, that they, and each of them, be required to furnish the consideration necessary to consummate the aforesaid contract, and why such other or further order or decree should not be made as may be proper in the premises.”

A motion of the appellants for an order of prohibition on the ground that the justice at Special Term had no jurisdiction to grant the order to show cause or to hear and determine the application of the trustees, was denied by the Appellate Division in the exercise of its discretion. Then the appellants, appearing specially, moved at Special Term to vacate the order on the ground that the justice issuing it had no jurisdiction to make the order. That motion was denied and the order denying the motion was affirmed by the Appellate Division. Upon the hearing of the order to show cause the appellants again appeared specially and objected to the jurisdiction of the court. The court overruled the objection and granted the relief sought by the trustees. The order was unanimously affirmed. The appellants now appeal from the order of affirmance by leave granted by this court. In their notice of appeal they seek to bring up for review the intermediate orders overruling the appellants’ objection to the jurisdiction of the court at Special Term.

We need not now determine whether the appellants can, upon this appeal, question the decision of Special Term upon the merits, if the. court had jurisdiction of the subject matter of the application and of the persons of the appellants. We assume that not only the jurisdiction of Special Term, but the correctness of the determination there made, are properly challenged in this court. Without analyzing in detail the contention of the appellants that the trustees, not the Paragon Land Corporation, are in default, we state our conclusion that the affidavits in behalf of the trustees show sufficiently that the fault lies with Paragon Land Corporation, and that it is in default. Two questions remain: First, did the court have jurisdiction to grant in this proceeding an order directing the Paragon Land Corporation to complete its purchase, and, second, if the' court had power to grant a summary order directing Paragon Land Corporation to complete its purchase, did it also have power to issue a summary order requiring the individual defendants to furnish the consideration necessary to consummate the purchase?

The appellants were not originally parties to the proceedings brought pursuant to the statute for the formulation and approval of the plan and for the appointment of the trustees. In the statutory proceeding the court at Special Term has no jurisdiction over the subject matter of any application for relief which the statute does not expressly or impliedly authorize the court to grant, nor does the court have jurisdiction of the person of any corporation or individual who is not a party to the proceeding. Under the provisions of the statute and the plan formulated and approved pursuant to those provisions, the trustees appointed by the court were empowered to sell the trust property only with the approval of the court. Paragon Land Corporation agreed to purchase the property subject to the approval of the court. By entering into that agreement Paragon Land Corporation submitted itself, at least to that extent, to the jurisdiction of the court and became a party to the proceeding.

There can be no doubt that the purchaser upon a judicial sale made under the direction of the court and subject to the approval of the court, becomes subject to the jurisdiction of the court to compel the purchaser to complete the contract of purchase. (Executors of Brasher v. Cortlandt, 2 Johns. Ch. 505, Kent, Ch.; Matter of Denison, 114 N. Y. 621.) It may be that the trustees in this case are not to be regarded in all respects as officers of the court and that the trust property is not, in full sense, in the custody of the court. The property, nonetheless, is brought into the protective arm of the law and the trustees are subject to directions of the court. (Matter of People [Title & Mortgage Guarantee Co.], 264 N. Y. 69.) Under these circumstances the court should draw no fine distinctions. The statute by necessary implication confers upon the court at Special Term jurisdiction over sales made by the trustees from inception to completion, and Paragon Land Corporation, having voluntarily entered into such a sale, subject to the approval of the court, has submitted itself to the jurisdiction of the court to give summary directions compelling it to complete its purchase. We find support for this conclusion in analogy between the trustees and receivers in bankruptcy. (See Mason v. Wolkowich, 150 Fed. Rep. 699; Matter of Atlas Cabinet Works, Inc., 8 Fed. Supp. 609; Matter of Dallek Bros., Inc., 8 Fed. Supp. 610.)

These considerations require that the order of the Appellate Division and the order of Special Term should be affirmed in so far as they direct the corporation to complete its purchase, but lead to a reversal of the order of Special Term in so far as it directs the individual appellants to furnish the consideration required for such completion. It is said that these individuals used the corporation merely as a means or agency for a purchase by which they alone would benefit and that they induced the trustees to believo that the corporation acting as their agent would have ample financial means to carry out its contract. We do not pause to consider whether the allegations contained in the affidavits submitted by the respondents are sufficient to sustain the findings of the court in respect to these matters. Perhaps in an action brought by the trustees, the trustees may be able to show that the individual appellants have been guilty of fraud or that for other reason the court should look behind the corporate entity and hold those in control of the corporation to account for dereliction or default by the corporation. The court cannot in this proceeding summarily pass upon such questions. The defendants are not being charged with contempt of court or fraud upon the court. They are being charged with responsibility for the acts of a corporation which made a contract approved by the court. In no manner have they become parties to the proceeding in which the court at Special Term is granted jurisdiction by the statutes.

The orders should be affirmed, without costs, in so far as they grant the application to compel the corporate appellant to complete its purchase. The orders should be reversed, without costs, in so far as relief is granted against the individual defendants, and the application for such relief denied without prejudice to any action which the trustees may hereafter see fit to take. A question under the Constitution of the United States was presented and necessarily passed upon. The appellants argued that the orders made by the Special Term of the Supreme Court, affirmed by the Appellate Division, are violative of, and repugnant to, the Fourteenth Amendment of the Constitution of the United States. This court held that said orders of the Special Term of the Supreme Court, affirmed by the Appellate Division, are not violative of, or repugnant to, the Fourteenth Amendment of the Constitution of the United States, in so far as Paragon Land Corporation was concerned.

Desmond, J.

(dissenting). The individual appellants made the offer to purchase. The individual appellants appeared by their attorney at the hearing and there urged upon the court and the certificate holders that their offer should be accepted because of their financial standing and proven competence in the business of subdividing and selling such properties. These arguments found favor with the court and the court directed the trustees to enter into a contract which was later to be submitted to the court for approval. The court did not order the trustees to search out some new bidder, or make some new deal. The formal contract was necessary in order to set forth the detailed steps whereby the offer of the individual appellants, already made and tentatively approved, should result in a completed sale. It was not until after this hearing in open court and after the court had, tentatively at least, approved the offer of the individual appellants, that the latter nominated their newly-organized instrumentality, Paragon Land Corporation, to appear as purchaser in the contract and as grantee in the deed thereafter to be delivered. At no time did the individual appellants ask to be allowed to assign their bid to this Paragon Land Corporation, or otherwise to be relieved from the obligation they, as individuals, had assumed in open court to purchase the property. Surely it could not have been intended, when for their own convenience the individual appellants were permitted to insert the name of their corporation in the contract, that they were thus putting themselves in a position completely to escape the obligations they had assumed in open court. The offer which the court accepted was the offer of individuals. The later proceedings on the offer should not be so construed as meaning that these individuals had, later on, a choice, either to complete the purchase through their corporation, if they found it to their advantage so to complete, or to bow themselves out of the situation, leaving obligated only a corporation with no assets. The determination of the Special Term justice, who supervised this whole matter, that the individual defendants were the real contracting parties, was amply justified by the evidence before him, and it follows that his summary jurisdiction ran against the individual defendants, as well as against the corporation. The order should be affirmed, with costs.

Loughran, Finch, Rippey and Lewis, JJ., concur with Lehman, Ch. J.; Desmond, J., dissents and votes to affirm in an opinion ir which Conway, J., concurs.

Ordered accordingly.


author: Conway, J.

text:
    C. Walter Randall, as Trustee of Bush Terminal Company, Appellant, v. Frank Bailey et al., Respondents, Impleaded with Others.
    Argued April 22, 1942;
    decided June 4, 1942.

      John M. Harlan, James E. Nickerson and Ray I. Hardin for appellant.
    The payment of cash dividends on the basis of unrealized appreciation in fixed assets is indefensible. (LaBelle Iron Works v. United States, 256 U. S. 377; Matter of Dowling, 219 N. Y. 44.) The determination below is erroneous. (Cons. Laws, ch. 59, § 58; Lowry v. Farmers’ Loan & Trust Co., 172 N. Y. 137; Roberts v. Roberts-Wicks Co., 184 N. Y. 257; McGill Co. v. Underwood, 161 App. Div. 30; Hill v. International Products Co., 129 Misc. Rep. 25; 226 App. Div. 730; Hutchinson v. Curtiss, 45 Misc. Rep. 484; Kingston v. Home Life Ins. Co., 11 Del. Ch. 258; Southern California Home Builders v. Young, 45 Cal. App. 679; Vogtman v. Merchants’ Mortgage & Credit Co., 20 Del. Ch. 364.)

      Spencer Pinkham, Henry F. Holthusen and Charles E. Oberle for Frank Bailey et al., respondents.
    Surplus or impairment under section 58 of the Stock Corporation Law (Cons. Laws, ch. 59) is determined by comparing the actual value of the assets of a corporation with the amount of its liabilities including capital stock. (Edwards v. Douglas, 269 U. S. 204; Strong v. Brooklyn Cross-Town R. R. Co., 93 N. Y. 426; Williams v. Western Union Tel. Co., 93 N. Y. 162; Equitable L. A. Society v. U. P. R. R. Co., 212 N. Y. 360; People ex rel. Astoria Light, Heat & Power Co. v. Cantor, 236 N. Y. 417; Small v. Sullivan, 245 N. Y. 343; People ex rel. Wedgewood Realty Co. v. Lynch, 262 N. Y. 202; 262 N. Y. 644.) The appellant has failed to prove any loss within the meaning of section 58 of the Stock Corporation Law. (Greene v. Boardman, 143 Misc. Rep. 201; Stratton v. Bentles, 238 App. Div. 87.)

      David Paine and George Koegler for Title Guarantee and Trust Company, as ancillary executor of Edward T. Bedford, deceased, respondent.
    The sole purpose of section 58 is to insure that a corporation always has assets sufficient in value to meet its debts and its capital liability to- shareholders. (Pollitz v. Wabash R. R. Co., 207 N. Y. 113; Bourne v. Bourne, 240 N. Y. 172; Equitable

      L. A. Society v. U. P. R. R. Co., 212 N. Y. 360; Williams v. Western Union Tel. Co., 93 N. Y. 162; Ithaca Trust Co. v. United States, 279 U. S. 151; Strong v. Brooklyn Cross-Town R. R. Co., 93 N. Y. 426; Roberts v. Roberts-Wicks Co., 184 N. Y. 257; People ex rel. Astoria L., H. & P. Co. v. Cantor, 236 N. Y. 417; Small v. Sullivan, 245 N. Y. 343; People ex rel. Wedgewood Realty Co. v, Lynch, 262 N. Y. 202; 263 N. Y. 669; Edwards v. Douglas, 269 U. S. 204.) Value is the test under section 58. (McCannon v. Lusk-Mitchell Newspapers, 292 N. W. Rep. 82; People ex rel. Wedgewood Realty Co. v. Lynch, 262 N. Y. 202; 262 N. Y. 644; 263 N. Y. 669; People ex rel. Eastern Building Corp. v. Lynch, 245 App. Div. 787; Williams v. Western Union Tel. Co., 93 N. Y. 162; Strong v. Brooklyn Cross-Town R. R. Co., 93 N. Y. 426; Roberts v. Roberts-Wicks Co., 184 N. Y. 257; People ex rel. Astoria Light, Heat & Power Co. v. Cantor, 236 N. Y. 417; Small v. Sullivan, 245 N. Y. 343; Gallagher v. New York Dock Co., 263 App. Div. 878; Hyams v. Old Dominion Copper Mining Co., 82 N. J. Eq. 507; 83 N. J. Eq. 705; Siegman v. Electric Vehicle Co., 140 Fed. Rep. 117; Cannon v. Wiscassett Mills Co., 195 N. C. 119.)
   Conway, J.

The plaintiff, as trustee, seeks in this action to recover from directors and executors of deceased directors dividends declared and paid between 1928 and 1932, alleging that they were paid from capital in violation of section 58 of the Stock Corporation Law (Cons. Laws, ch. 59;.

The corporation involved is the Bush Terminal Company, hereinafter called Terminal, which was organized in 1902. It owns and operates a great ocean terminal. The land in Brooklyn which it and its wholly owned subsidiary, Bush Terminal Buildings Company, hereinafter called Buildings, purchased between 1902 and 1905, increased in value with the passing years. Until 1915 Terminal and Buildings carried that land at its original cost. In 1915 and again in 1919 they committed to their books a portion of the increase in value of that land. It has not since been increased. The trial court found that its value during the years 1928 to 1932 was greater than the value to which it had been increased upon the corporate books. Those findings have been unanimously affirmed. Even apart from that affirmance, which concludes us, there is no claim that the findings are not correct. Moreover, there is no allegation in the complaint that any director acted fraudulently, in bad faith or negligently in valuing the land or in voting the dividends. The question presented, therefore, is solely one of law and involves the construction of section 58 of the Stock Corporation Law. We are concerned only with the legislative prohibition as evidenced in section 58 as enacted in 1923 (L. 1923, ch. 787). If the directors of Terminal were permitted to include among the corporate assets the value of the land at the amount at which it was valued on the books from 1919 onward there was a surplus for the payment of dividends and no recovery may be had in this action. If it must be carried at cost then the directors unjustifiably declared and paid the dividends which plaintiff seeks to recover. The question presented, therefore, is: may unrealized appreciation in value of fixed assets held for use in carrying on a corporate enterprise be taken into consideration bv directors in determining whether a corporate surplus exists from which ca.sh dividends may be paid to stockholders, f

The original forerunner of section 58 was section 2 of chapter 325 of the Laws of 1825. It will be helpful in ascertaining the legislative intent if we examine that section and the sections which followed, either by way of amendment or substitution, down to the enactment of section 58 in 1923. The accompanying footnote contains the applicable changes from 1825 through the enactment of section 58 in 1923.

The appellant contends that the first sentence of section 58 of the Stock Corporation Law should be divided into two parts; that the first twenty-six words should be applicable to the payment of what he térms regular or ordinary dividends and that the remaining portion of the sentence should be applicable to such dividend as may be declared in connection with a reduction of capital. That construction makes the clause commencing unless the value of its assets ” modify only the second portion.

The appellant points out that in 1912 the Legislature authorized the issuance of stock without par value and provided in section 20 of the Stock Corporation Law, with reference to such a corporation, “ No such corporation shall declare any dividend which shall reduce the amount of its capital below the amount stated in the certificate as the amount of capital with which the corporation will carry on business ” (L. 1912, ch. 351, § 20); and that in 1921 that section was amended to read, “ No such corporation shall declare or pay any dividend which shall reduce the amount of its stated capital” (L. 1921, ch. 694, § 20). Thus immediately prior to 1923, corporations having only par value stock were governed by the “ surplus profits ” language (Stock Corp. Law, § 28; see footnote on preceding page) while those having stock without par value were governed by the amount of stated capital ” language. Appellant then contends that the Legislature intended to eliminate the variation of terminology and the overlapping provisions contained in sections 20 and 28 and accomplished that ehmination by.the enactment of the first twenty- six words in the first sentence of the new section (§ 58) by simply providing that no business stock corporation should distribute dividends which should “ impair its capital or capital stock,” although the Legislature was in reality continuing the surplus profits ” test of former section 28; that the terminology “ surplus profits ” and “ impairment of capital ” were used to express the same test. He contends that the surplus from which cash dividends may be distributed must be based upon actual profits and realized gains, over and above the capital investment, after provision has been made in respect of all losses, which, however, must be treated as realized or accrued, although conceding that dividends may properly be paid from paid-in surplus.

We shall first consider appellant’s division of the first sentence of section 58 into two parts. Assuming that there may be some justification for that construction as a matter of syntax and statutory history, it seems to us that an equally strong argument may be made to the contrary. The words any dividend are contained in both portions of the sentence. Any is an all-exclusive word. When repeated in the same sentence one would reasonably assume that the two words bore the same meaning each time. Those two words tie together by repetition the first and second portions of the sentence or so it might well be urged. They must mean a dividend of any kind or character and both portions of the sentence must be read in that light. They must mean that no dividend may be declared or paid which shall impair capital or capital stock nor unless the value of the corporate assets “ remaining after the payment of such dividend, or after such distribution of assets,,as, the case may be, shall be at least equal to the aggregate amount bTTts" debts' and liabilities including capital or capital stock as the case may be.”

That reasonable men may differ upon the syntax of the sentence under discussion is made apparent by an allegation contained in each of the causes of action in the plaintiff’s complaint. It reads as follows: “ The declaration and payment of said dividends impaired the capital and capital stock of Terminal; and the value of the assets of Terminal remaining after said payment was less, by an amount in excess of such payment, than the aggregate amount of the debts and liabilities of Terminal including its capital or capital stock; and, both at the time such dividends were declared and at the time they were paid, the capital and capital stock of Terminal was impaired and the declaration and payment of said dividends further impaired said capital and capital stock * *

There is other evidence, well nigh conclusive, that the Legislature intended to drop the surplus profits ” test, apart from the internal evidence contained in section 58 itself. In 1924 two subdivisions of section 664 of the Penal Law were amended. Prior to that year the Penal Law provided that a director was guilty of a misdemeanor who concurred in any vote:

“ 1. To make a dividend, except from the surplus profits arising from the business of the corporation, and in- the cases and manner allowed by law * * In 1924 that subdivision was amended to read: “ 1. To make a dividend, except from surplus, and in the cases and manner allowed by law * * (L. 1924, ch. 221.)

Subdivision 5 of the same section had read: “ To apply any portion of the funds of such corporation, except surplus profits, directly or indirectly, to the purchase of shares of its own stock.” That subdivision was amended in 1924 to read: To apply any portion of the funds of such corporation, except surplus, directly or indirectly, to the purchase of shares of its own stock.” (L. 1924, ch. 221.)

Again, we are concerned with the legislative will as written in the statute. We should construe the statutory language as the average business man would read and understand it. He is the one who must bear the burden civilly and criminally. , If the Legis- 1 lature had intended to continue the surplus profits ” test it would have said so clearly and unmistakably rather than by using; the words “ impair its capital or capital stock.” While it is true that punctuation is no part of a writing, it also may not be amiss to point out that there is no semi-colon separating the two portions of the sentence in question.! We think that a fair reading of the sentence is that the valuation of assets test is applicable to both portions and that it applies to the declaration and payment of regular or ordinary dividends, so termed by appellant.

Finally, as some indication of how the Legislature viewed its own language in section 58, as enacted in 1923, it is interesting to note an amendment of section 58 in 1939 (L. 1939, ch. 364, §§ 1, 2). The amendment was not retroactive by express provision of the amending act (§ 2). It provided, however, in substance, that directors should have an affirmative defense if able to show that they had “ reasonable grounds to believe, and did believe, that such dividend or distribution would not impair the capital of such corporation.” Quite clearly, in 1939 the Legislature believed that in the enactment of 1923 it had used impairment of capital terminology and the “ value of its assets ” terminology interchangeably.

Let us now consider section 58 with the applicable sections which preceded it. We are concerned primarily with the meaning of the words “ impair its capital or capital stock.” In the statute of 1825 neither the word value nor the word impair was used. In the statute of 1890 there was a definition of impairment of capital stock. It read: “ The capital stock of a stock corporation shall be deemed impaired when the value of its property and assets after deducting the amount of its debts and liabilities, shall be less than the amount of its paid up capital stock. No dividends shall be declared or paid by any stock corporation, except from the surplus profits of its business, nor when its capital stock is or will be impaired thereby, * * That was a clear definition of impairment in terms of value. The “ surplus profits ” terminology was retained from the act of 1825. In 1892 the statute was amended. It retained the surplus- profits ” provision but omitted the word “ impair.” Instead it returned to the “ reduce its capital stock ” terminology. Having omitted the word impair the Legislature naturally omitted the definition of impairment. The Legislature did not necessarily, as appellant contends,- reject ” the definition of impairment as contained in the 1890 statute. There was no need for it since the word impair ” was not used. The Legislature continued its use of the surplus profits ” and “ reduce its capital stock ” terminology down to 1923.

When the Legislature in 1923 wrote into the first sentence the words “ impair its capital or capital stock, nor while its capital or capital stock is impaired,” and in the same sentence used words almost identical with those in the definition of impairment contained in the 1890 statute,jut is more reasonable than not to assume that the Legislature was returning to its former definition of impairment of capital and at the same time abandoning the surplus profits-test. The courts had consistently applied the value of assets rule in determining surplus, surplus profits or impairment of capital without distinction (Strong v. Brooklyn Cross-Town R. R. Co., 93 N. Y. 426, 434; Williams v. Western Union Telegraph Co., 93 N. Y. 162, 191; Equitable Life Assur. Soc. v. Union Pacific R. R. Co., 212 N. Y. 360, 372; People ex rel. Astoria Light, Heat & Power Co. v. Cantor, 236 N. Y. 417, 424; Small v. Sullivan, 245 N. Y. 343), and the Legislature clarified the language of the statute so as to remove any doubt as to the fact that value was the test. In fact appellant concedes that the determination of the courts below is correct if in drafting the provisions of section 58 in 1923 the Legislature changed the then existing law as to illegal dividends and reinstated the definition of impairment of capital, which it had omitted when enacting the statute of' 1892. It seems to us that a fair reading of the statute in the light of its language and historical development clearly indicates that that is exactly what the Legislature intended to accomplish. To say that in the one sentence there were different tests of liability for directors of business corporations, one involving “ surplus profits,” although those words were not there, and the other involving value of assets, regardless of.surplus profits, would be to depart from the authorities, the plain words of the statute and its historical implications. It has always been the rule that where an act amends an existing statute so as to read as follows,” thereupon enacting a new and substituted provision, all of the former statute omitted from the act as amended is repealed. (Moore v. Mausert, 49 N. Y. 332; People ex rel. Sears v. Board of Assessors, 84 N. Y. 610.) In reality, therefore, appellant is basing his construction of the statute upon the continuance therein of a provision repealed by the act of 1923. (See L. 1923, ch. 787.)

In any event our holding in People ex rel. Wedgewood Realty Co. v. Lynch (262 N. Y. 202; 262 N. Y. 644 [1933]) is decisive upon the issue here presented. That was a certiorari proceeding to review a determination of the State Tax Commission upon the relator’s application for a revision and resettlement of its assessment of an annual franchise tax under section 182 of the Tax Law (Cons. Laws, ch. 60). The statute read in part: “ But if the dividends made or declared on the par value of any kind of capital stock during any year * * * amount to six or more than six per centum, the tax upon such kind of capital stock shall be at the rate of one quarter of a mill for each one per centum of dividends made or declared * * The Wedgewood Realty Co., Inc., the old company prior to the organization of relator, had accumulated a substantial surplus consisting largely of “ unrealized appreciation ” in the value of its land in excess of cost. The stockholders organized a corporation bearing the name H. F. K. Inc. The old Wedgewood Realty Co. transferred to H. F. K. Inc. all of its outstanding stock and thereupon became a subsidiary of H. F. K. Inc; In exchange for that stock, H. F. K. Inc. issued and delivered to the stockholders of the old Wedgewood Realty Co. 475 shares of its own capital stock without par value and $600,000 in amount of its own debenture bonds. Two days later H. F. K. Inc. merged with the old Wedgewood Realty Co. and, by the certificate of merger, assumed the" latter’s name. H. F. K. Inc., under the name so assumed, was' the relator in the certiorari proceeding and was referred to in the opinion as the,new Wedgewood Realty Co. The Tax Commission contended that the transaction was but a subterfuge and that the delivery of the $600,000 of bonds to the stockholders of the old company was in fact a dividend out of surplus and therefore taxable. This court so held saying (p. 207): “ This was more than a mere splitting of the evidences of stock ownership. The amount which might have been distributed to stockholders in annual dividends was by this scheme of reorganization distributed all at one time.”

It appeared, however, that the surplus, including the unrealized appreciation, was less than $600,000. Therefore, the opinion contained the following (p. 208): “ The bond issue was not, however, in its entirety a distribution of earnings. So far as it represented a distribution of capital it was not a taxable dividend. The record on this point is not as complete as it should be. The amount of the surplus is not directly shown by the record. Unquestionably it was less than $600,000, the amount of the bond issue. The Tax Commission should restate the financial condition of the old Wedge-wood Company at the time of the merger and restate the tax accordingly.”

Thereupon the relator made a motion to amend the remittitur, “ by adding after the words * in accordance with the opinion of Pound, Ch. J./ the following: £ and that upon said further hearing the tax commission, in determining the amount of the earnings distributed, omit from surplus any appreciation in excess of cost in the value of the real estate of the old Wedgewood Company not realized by sale ***.’”

In deciding that motion we said (262 N. Y. 644): “ The point is that the opinion (262 N. Y. 202) does not clarify the meaning of earnings/ and that the tax commission insists in including therein appreciation in excess of cost in the value of the real estate of the old Wedgewood Company not realized by sale prior to December SI, 1927. The opinion indicates that the reorganization resulted in a division of profits by the corporation. The appreciation in value of the real estate was included in profits. Motion to amend remittitur denied * * * »

The Legislature having declared that dividends may be paid when there is no impairment of capital or capital stock caused thereby and when the value of the corporate assets remaining after the payment of such dividends is at least equal to the aggregate amount of its debts and liabilities including capital or capital stock as the case may be (Stock Corp. Law, § 58), in other words from its surplus, our inquiry turns to the question whether surplus may consist of increases resulting from a revaluation of fixed assets. Surplus has been well defined as follows in Edwards v. Douglas ([Brandeis, J.] 269 U. S. 204, 214): “ The word ' surplus ’ is a term commonly employed in corporate finance and accounting to designate an account on corporate books. * * * The surplus account represents the net assets of a corporation in excess of all liabilities including its capital stock. This surplus may be ' paid-in surplus,’ as where the stock is issued at a price above par. It may be 'earned surplus,’ as where it was derived wholly from undistributed profits. Or it may, among other things, represent the increase in valuation of land or other assets made upon a revaluation of the company’s fixed property. See La Belle Iron Works v. United States 256 U. S. 377, 385.”

The decision below was correct and the judgment should be affirmed, with costs.

Lehman, Ch. J., Loughran, Finch, Rippey, Lewis and Desmond, JJ., concur.

Judgment affirmed.

       Chapter 325 of the Laws of 1825, § II:

        “And be it further enacted, That it shall not be lawful .for the directors or managers of any incorporated company in this state to make dividends, excepting from the surplus profits arising from théYjusiñe^s 'ci'f suchiYórporatron; and it shall not be Iawfünor the directorsYiF any such company to divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of said company, or to reduce the said capital stock, without the consent of the legislature; * * * )i

      Section II of title IV of chapter 18 of part 1 of the Revised Statutes of 1828, 1836 and 1851:
      “ It shall not be lawful for the directors or managers of any incorporated company in this state to make dividends, excepting from the surplus profits arising from the business of such corporation; and it shall not be lawful for the directors of any such company to divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of such company, or to reduce the said capital stock, without the consent of the legislature; * *

        Section 23 of the Stock Corporation Law (L. 1890, eh. 564):
      “ § 23. Liability of directors for dividends not made from surplus profits.

        “ The capital stock of a stock corporation shall be deemed impaired when the value of its property and assets after deducting the amount of its debts and liabilities, shall be less than the amount of its paid up capital stock. No dividends shall be declared or paid by any stock corporation, except from the surplus profits of its business,, nor when its capital stock is or will be impaired thereby, and no such corporation shall divide or withdraw or in any way pay to its stockholders, or any of them, any, part of its property and assets, so as to reduce the value thereof after deducting the amount of its debts below the amount of its capital stock, or reduce its capital toe sexcept in the manner prescribed by law. * * ”
      Chapter 688 of the Laws of 1892. An act to amend, the Stock Corporation Law:
      “ § 23. Liability of directors for making unauthorized dividends.
      “ The directors of->a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation; nor divide; withdraw or in any way pay to the stockholders, or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.”
      Chapter 354 of the Laws of 1901. An act to amend chapter 36 of the General Laws,- known as the Stock Corporation Law:
      “ § 23. Liability of directors for making unauthorized dividends. The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, - nor divide, withdraw or in any way pay to the stockholders or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.”
      Section 28 of article III of chapter 59 of the Consolidated Laws (Stock Corporation Law, L. 1909, ch. 61):
      “ § 28. Liability of directors for making unauthorized dividends.
      “ The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, with-' draw or in any way pay to the stockholders or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.”
      Chapter 787 of the Laws of 1923 (An Act to amend the Stock Corporation Law, generally), article VI, section 58:
      “ § 58. Dividends. No stock corporation shall declare or pay any dividend which \ shall impair its capital or capital stock, nor while its capital or capital stock is \mpaired,' nor shall any such corporation declare or pay any dividend ■ or make any distribution of assets to any of its stockholders,-whether upon a reduction of the number of its shares or of its capital or capital stock, unless the value of its assets remaining after the payment of such dividend, or after such distribution of assets,' as the case may be, shall be at least equal to the aggregate amount of its debts and liabilities including capital or capital stock as the case may be.”


text:
    Hoopeston Canning Company, Inc., et al., Respondents, v. Louis H. Pink, as Superintendent of Insurance of the State of New York, et al., Appellants. (Consolidated Actions.)

      Argued January 16, 1942:
    decided June 4, 1942.

      John J. Bennett, Jr., Attorney-General {Henry Epstein, Vincent Kiebala and Milton Kaplan of counsel), for appellants. '
    The statutes referred to in the complaints are valid with respect to the business of insurance done by the plaintiffs in the State of New York. (People v. Roschli, 275 N. Y. 26; Thomas Canning Co. v. Canners Exchange Subscribers, 219 Mich. 214; German Alliance

      Co. v. Lewis, 233 U. S. 389; Compania de Tabacos v. Collector, 275 U. S. 87; O’Gorman & Young v. Hartford Ins. Co., 282 U. S. 251; Green v. Chicago, B. & Q. Ry. Co., 205 U. S. 530; General Ry. Signal Co. v. Virginia, 246 U. S. 500; International Harvester v. Kentucky, 234 U. S. 579; Commercial Mutual Accident Co. v. Davis, 213 U. S. 245; Warner v. Livingston, 243 Mich. 561; Tauza v. Susquehanna Coal Co., 220 N. Y. 259; Lumbermen’s Ins. Co. v. Meyer, 197 U. S. 407.) The statutes do not extend in their effect beyond the borders of the State of New York. (Osborn v. Ozlin, 310 U. S. 53; Equitable Life Assur. Soc. v. Penn., 238 U. S. 143; Compania de Tabacos v. Collector, 275 U. S. 87.) The statutes are a reasonable exercise of the police power of the State with respect to the business done by the plaintiffs in the State. (German Alliance Ins. Co. v. Lewis, 233 U. S. 389; Springfield Fire & Marine Ins. Co. v. Holmes, 32 Fed. Supp. 964; La Tourette v. McMaster, 248 U. S. 465; O’Gorman & Young v. Hartford Ins. Co., 282 U. S. 251; Osborn v. Ozlin, 310 U. S. 53.)

      Franklin D. Trueblood and Carl O. Olson for respondents.
    The State has no jurisdiction over plaintiffs’ contracts of inter-insurance. (Westchester Mortgage Co. v. G. R. & I. R. R. Co., 246 N. Y. 194; Micca v. Wisconsin Nat. Life Ins. Co., 75 Fed. Rep. [2d] 710; Stone v. Penn Yan, K. P. & B. Ry. Co., 197 N. Y. 279; Huntington v. Sheehan, 206 N. Y. 486; Van Voorhis v. Brintnall, 86 N. Y. 18; Pennsylvania Lumbermen’s Ins. Co. v. Meyer, 197 U. S. 407; International Text Book Co. v. Tone, 220 N. Y. 313; Bouker Contracting Co. v. Scribner, 52 App. Div. 505.) The acts of the trained insurance engineers in New York State form no basis for jurisdiction in that State to regulate plaintiffs’ Illinois contracts. (Allgeyer v. Louisiana, 165 U. S. 578; Crandall v. Nevada, 73 U. S. 35; Hyde v. Goodnow, 3 N. Y. 266; Western v. Genesee Mutual Ins. Co., 12 N. Y. 258; Green v. C., B. & Q. Ry. Co., 205 U. S. 530; Palmetto Fire Ins. Co. v. Beha, 13 Fed. Rep. [2d] 500; Connecticut Fire Ins. Co. v. Way, 62 N. H. 622; Minnesota Commercial Men’s Assn. v. Benn, 261 U. S. 140; People ex rel. McCall v. Gilbert, 44 Hun, 522.) Since all contracts of inter-insurance are entered into in Illinois the plaintiffs do no business in New York State in the sense of conferring jurisdiction to regulate. (People ex rel. Sea Ins. Co. v. Graves,
      274 N. Y. 312; People ex rel. Kirkman v. Van Amringe, 266 N. Y. 277; Huntington v. Sheehan, 206 N. Y. 486; Boston Mfrs. M. F. Ins. Co. v. Hendricks, 41 Misc. Rep. 479; Knights Templars’ & Masons’ Life Indemnity Co. v. Jarman, 187 U. S. 197; Rybasack v. Travelers Ins. Co., 15 N. J. Misc. Rep. 266.) The New York licenses afford no basis for the exercise of jurisdiction by that State to regulate plaintiffs’ contracts. (International Text Book Co. v. Tone, 220 N. Y. 313; U. S. Mortgage & Trust Co. v. Ruggles, 258 N. Y. 32; People ex rel. Provident Life Assur. Society v. Miller, 179 N. Y. 227; New York Life Ins. Co. v. Head, 234 U. S. 149.) Neither the location of the property nor the residence of the subscriber in New York State can serve as a basis for the exercise of jurisdiction by that State to regulate plaintiffs’ Illinois contracts. (Hyde v. Goodnow, 3 N. Y. 266; People ex rel. Kirkman v. Van Amringe, 266 N. Y. 277; People v. Imlay, 20 Barb. 68; Western v. Genesee Mut. Ins. Co., 12 N. Y. 258; U. S. Mortgage & Trust Co. v. Ruggles, 258 N. Y. 32; Clay Fire Ins. Co. v. Huron Salt Co., 31 Mich. 345; Palmetto Fire Ins. Co. v. Beha, 13 Fed. Rep. [2d] 500; Equitable Life Assur. Soc. v. Pennsylvania, 238 U. S. 143; Jones v. Metropolitan Life Ins. Co., 158 Misc. Rep. 466.) The statutes are inapplicable or invalid on the ground of unreasonable regulation. (Nebbia v. New York, 291 U. S. 502; McLean v. Arkansas, 211 U. S. 539; C., B. & Q. R. R. Co. v. McGuire, 219 U. S. 549; Hauser v. North British & Mercantile Ins. Co., 206 N. Y. 455; Northwestern Nat. Ins. Co. v. Lee, 49 Fed. Rep. [2d] 274.)
   Conway, J.

This is an action seeking a declaratory judgment that certain sections, or portions thereof, of the Insurance Law (Cons. Laws, ch. 28), as amended in 1939, relating to the regulation of foreign reciprocal insurers authorized to transact the business of insurance within New York State, are illegal and invalid in so far as they purport to affect two licensed foreign reciprocal insurers or inter-insurers. The two groups are known as the Canners Exchange Subscribers at Warner Inter-Insurance Bureau, hereinafter called Canners, and Warner Reciprocal Insurers, hereinafter called Warner.

In 1930 Canners was authorized to transact within this State the business of fire, lightning, hail, windstorm, use and occupancy and sprinkler leakage insurance, pursuant to the then existing provisions of section 305 (now §422) of the Insurance Law. It has continued to be so authorized to date. There are approximately line hundred seventy-six persons, firms and corporations engaged in the canning industry who are subscribers and approximately ninety-three of them are located in New York State. This action was brought by plaintiffs in a representative capacity on behalf of all the subscribers in Canners. Under the plan each subscriber insures all other insurers and in turn is insured by them. There is an exchange of indemnity among the subscribers evidenced by insurance policies. The exchange of so many policies with the necessity of affixing signatures thereto would be impracticable. Each of the subscribers, therefore, appoints an attorney-in-fact by executing a power of attorney. The attorney-in-fact is Lansing B. Warner, Inc., which has its only office in Chicago, Illinois. The appointment authorizes the attorney-in-fact to execute the reciprocal insurance policies, to exchange the contracts of inter-insurance, to receive deposits, to give and receive notices and adjust claims, to bring, defend, compromise or adjust suits at law or in equity and to appoint an agent or representative in any state upon whom process may be served and to perform such other acts as may be necessary. It is a continuing power of attorney and under it subsequent reciprocal insurance contracts are executed. The consideration for the contracts of reciprocal insurance is the exchange of indemnity among subscribers. The obligation of the subscriber is several, separate and individual. To secure his liability in the exchange of contracts, the subscriber agrees to deposit with the attorney-in-fact a sum of money to be designated “ Expensé and Guarantee Fund,” together with a further sum of ten dollars to be designated Beserve Fund ” which may be increased to an average amount of two dollars for each $1,000 of insurance carried by the subscriber. The liability of the subscriber is only such proportionate share of the insurance granted under his policy as the reserve fund deposit of the subscriber bears to the aggregate reserve fund deposits of all subscribers. The power of attorney further provides for the creation of an advisory committee of five members prominent in the canning industry. Their duties are supervisory and they have custody of the funds deposited and are consulted before any new subscriber is admitted. The compensation of the attorney-in-fact is twenty per cent of the expense and guarantee fund due from each subscriber. In return the attorney-in-fact agrees to pay all expenses except certain enumerated ones.

Ordinarily, a canner in this State who wishes to become a subscriber writes to Lansing B. Warner, Inc., at its office in Chicago, Illinois, inquiring about the plan. Usually this is done after one of the subscribers in this State has recommended the plan to him. Sometimes the subscriber himself writes, asking the attorney-in-fact to explain the plan to a prospective applicant. Thereupon an inspector or engineer of Canners from Chicago calls upon the prospective applicant at his place of business in New York to explain the plan and its operation and for the purpose of investigating his properties and determining whether in that respect he is eligible to be a subscriber. At the same time the attorney-in-fact also consults with subscribers to determine the standing of the applicant in his community, his reputation for honesty, his “ general housekeeping ability and carefulness ” and his credit, a report upon which is also obtained from the prospective subscriber’s bank. The engineer reports back to the Chicago office and makes a recommendation as to whether an application blank should or should not be sent to the prospective applicant. The attorney-in-fact makes the decision. The application blank when forwarded is accompanied by a power of attorney both of which are to be signed by the prospective applicant and returned by mail to Chicago, together with a deposit in the amount requested. . The amount of the deposit is determined by the attorney-in-fact and is based on the amount of indemnity desired and the physical characteristics and hazards of the subscriber’s property. After the acceptance of the application, the engineers of the exchange “ service the risk ” so as to minimize the risk of loss. A fire insurance policy written on a standard form, approved by the Superintendent of Insurance of this State, is signed by the attorney-in-fact and mailed from Chicago to the subscriber.

The exchange employs twenty-five or twenty-six trained insurance engineers specializing in fire insurance hazards. They inspect physical properties, investigate the moral hazard of a prospective subscriber and explain the plan of reciprocal insurance to him. These men travel out from Chicago and consult with subscribers as to methods for reducing fire hazards on properties insured, such as by building fire walls, putting in wire glass windows and by other methods familiar to insurance engineers. In the event of a large loss an inspector or engineer is sent from Chicago to examine the property affected and to report back. Upon the basis of his findings the loss is paid from Chicago by the attorney-in-fact. The inspector or engineer has authority to investigate the cause of the fire so that steps may be taken to prevent a similar future loss.

Prior to 1936 no taxes were paid to the State of New York. In 1935, the Insurance Law was»amended (L. 1935, ch. 651) so as to provide for the payment of a premium tax for the privilege of doing business in this State (Cons. Laws, ch. 28, § 34.) The Superintendent of Insurance of the State determined that the statute, as amended, was applicable to inter-insurers. A report on premium income so taxable was filed for the year 1935 and taxes for that year were paid under protest. Reports for succeeding years have been filed and taxes paid without protest. The total of the taxes paid by Canners and Warner for the years 1935 to 1938 is $16,026.39.

The annual statements filed .with the Superintendent of Insurance of the State by Canners for the years 1931-1938, inclusive, show that, except for the years 1932 and 1933, the gross risks written in this State have increased progressively from approximately $23,000,000 to $81,000,000; the net risks from approximately $8,000,000 to $32,000,000.

The second group consists of wholesale grocers who are reciprocal insurers under the name of Warner Reciprocal Insurers and they operate under substantially the same plan as do the subscribers of Canners. The principals in this group, however, execute a document known as “ Appointment of Agent ” instead of a power of attorney. The same corporation which is attorney-in-fact for the subscribers of Canners is agent for the principals of Warner. The appointment of agent provides that the principals shall deposit with the agent at Chicago a sum designated “ Guaranty Deposit,” the amount of which is to be determined by the agent in accordance with the risk, amount and term of insurance. The liability of the principal is “ several, separate and not joint.” Provision is made for “ Advisors,” similar to those on the advisory committee of Canners and for compensation of the agent. The risks are serviced by the underwriting and engineering department of the agent.

The plaintiffs represent approximately 2,100 persons, firms and corporations constituting the principals in Warner of whom approximately 230 are located in this State. The gross risks of Warner in this State were approximately $7,000,000 in 1931 and $38,000,000 in 1938.

Plaintiffs allege that although Insurance Law (L. 1939, ch. 882), section 414, subdivision 2, allows to every authorized foreign reciprocal insurer one year after the effective date of the chapter, January 1, 1940, to revise its subscribers’ agreement and its articles of association, if any, so as to conform to the regulations applicable to reciprocal insurers thereafter to be organized under Insurance Law, article 12, that many' provisions of the chapter including portions of sections 130,168, subdivision 2,410, subdivision 1,412, subdivision 1, 413, subdivision 2,415, subdivision 1,417, subdivision 1,418, subdivision 1, 418, subdivision 3,420,421,422, subdivision 1, and 422, subdivision 2, will become prima facie applicable to the two insurers and their subscribers and principals and will “ dislocate ” their present plan of insurance so as to cause irreparable injury. Therefore, they pray that those sections or subdivisions of sections be declared invalid, unconstitutional and void as against the plaintiffs and the subscribers and principals of the respective insurers.

Special Term found facts from which it concluded that Canners and Warner were doing business in this State. The Appellate Division reversed three and a portion of a fourth finding of fact. The three findings reversed are the following:

“ 16. All the subscribers in both groups are associated in the common aim or purpose of receiving and giving indemnity in case of loss. The liability of each Subscriber is to pay his part of the losses and expanses in the ratio that his deposit bears to all the deposits.”
26. The insurance engineers carry blank forms of appointment of agent and power of attorney. These are furnished to prospective subscribers by the insurance engineers upon request. The power of attorney or appointment of agent is fully executed, in the State of New York. It is complete when the prospective subscriber affixes his signature in this state, oftentimes in the presence of the insurance engineer.”
“ 28. In ease of loss, particularly a large one, the insurance engineers investigate the cause of the loss and the extent thereof. The investigation with respect of the loss is made in the State of New York.”

There was a reversal of the following sentence in finding 27: “ The premiums or deposits are paid with checks drawn on New York State banks.”

The weight of the evidence was clearly with Special Term as to findings 16' and 28. As to finding 27, it is unimportant whether the premiums or deposits were paid by checks drawn on New York State banks. As to finding 26, the weight of the evidence as to the findings in the first two sentences is with the Appellate Division but the findings are unimportant. As to the remaining two sentences, they constitute mixed findings of fact and conclusions of law. In so far as it was found that the power of attorney or appointment of agent was signed in this State by the prospective subscriber and principals, the weight of the evidence is with Special Term.

Taking the unreversed findings of Special Term and those which were reversed but which are supported by the weight of the evidence, the conclusion of law of Special Term numbered 3 that The plaintiffs are doing the business of insurance in the State of New York ” follows of necessity. Each subscriber and each principal is an insurer and initiates within this State his contract of inter-insurance. This is not a situation where the applicant for insurance to be issued to him solely as an insured mails an application for that insurance to a foreign company in a foreign State. In this instance the insurer, resident here, signs a power of attorney or appointment of agent within this State and confers thereby power upon the attorney or agent to execute for him a policy of insurance so that he, our resident, may become the insurer reciprocally of hundreds of risks throughout this country and in Canada. Our resident is an insurer and it matters not where his attorney or agent executes the contract of insurance by which he is bound. Thus Insurance Law, section 41, subdivision 3, now provides: “ The term doing an insurance business,’ within the meaning of this chapter, shall be deemed to include (a) the making, as insurer, or proposing to make, as insurer, of any insurance contract * * *.” The two reciprocal insurers are but the aggregations of the subscribers and principals. (Ins. Law, § 410.)

Apart entirely from the findings of Special Term and the resultant necessary conclusion of law that the two insurers are transacting the business of insurance in this State, there is another reason why plaintiffs may not have the declaratory judgment they seek.

The contention of the plaintiffs is this: That the two insurers have been authorized by the Superintendent of Insurance of the State to transact insurance business here but, despite such authorization, are not transacting any business in this State; that although so authorized and licensed, since they are not transacting business here, they are not subject to our statutory regulation of authorized reciprocals but must be treated as though foreign unauthorized reciprocal insurers; that as such foreign reciprocal insurers not doing business here, New York State may not regulate their insurance contracts or conduct here because such attempted regulation would run counter to the rule announced in Allgeyer v. Louisiana (165 U. S. 578) and subsequent authorities holding similarly.

Plaintiffs concede that the two insurers sought authorization to transact business within this State for two reasons: First, each subscriber and principal within this State is enabled to serve process upon the Superintendent of Insurance and thus sue the two insurers in our courts upon losses suffered here, and second, the licenses enable the insurers to file with and to have audited by the New York Superintendent, annual statements which are available for examination by resident subscribers and principals. In addition subscribers and principals know that the minimum capital and the assets of the insurers, since they have been licensed here, must be substantially the same as those of domestic insurers. (Ins. Law, §§ 42, 90.) These considerations are helpful competitively in obtaining insurance business. That much the two insurers desire. The position they seek to maintain, however, is that since, although authorized, they transact no business here, they may not be held subject to our statutes applicable to authorized reciprocal insurers in other respects but must be treated as though unauthorized.

We must bear in mind in considering the contention of Canners and Warner that the Legislature imposed only the same conditions upon them as foreign insurers as were imposed upon domestic insurers, in so far as obtaining a license to do business within this State is concerned. We make no distinction. Thus Insurance Law, section 414, subdivision 2, reads as follows: “ Every such existing reciprocal insurer and every authorized foreign reciprocal insurer, shall, within one year after the effective date of this chapter, have so revised its subscribers agreement and its articles of association, if any, as to conform to the requirements applicable to reciprocal insurers hereafter to be organized under the provisions of this article.” Domestic reciprocal insurers are organized under section 411 of the article. Insurance Law, section 422, is entitled Foreign or alien reciprocal insurers and provides for the licensing of a reciprocal insurer of another State or of the Dominion of Canada. The section, subdivision 1, then provides: “ * * *. Such foreign or alien reciprocal insurer shall comply with substantially the same requirements of this chapter which are applicable to domestic reciprocal insurers hereafter to be organized and authorized to do the same kind or kinds of insurance business * * *.”

Requirements such as these are not attempts to control the operations of foreign insurers outside the State of New York and thus to exercise extra-territorial power. (Firemen’s Ins. Co. v. Beha, 30 Fed. Rep. [2d] 539; affd., 278 U. S. 580.) There the court said (at p. 542):

“ The second constitutional ground is that the statute, if it requires, as a condition upon the grant of the plaintiff's license, that it conform its investments in New Jersey to the provisions of the New York law respecting domestic corporations, attempts to control its operations outside New York, and thus to exercise an extraterritorial power. If so, then any other New York statute which subjected foreign insurance companies to the same regulations as domestic in respect of their solvency would be unconstitutional, unless it could be complied with by conduct taking place only in New York, which it seldom could. For example, a state might not prescribe the necessary proportion between the assets and liabilities of a foreign insurance company, or the amount of its cash capital, as a condition to its doing business within its borders. * * *
Perhaps the power may be limited by the purpose and the fitness of the measure to accomplish it; but, whether that be true or not, when so limited it is not further circumscribed by the indirect effects of its operation. As we have said, scarcely any condition can be imposed touching the financial stability of a foreign corporation, which will not involve some results elsewhere; it is enough that these be ancillary to the accomplishment of genuinely local purposes connected with the company’s prospective business. Otherwise each state could set the standard of security for the rest of the Union, an intolerable limitation upon the autonomy of each community.”

Let us now consider the sections of which complaint is made by the plaintiffs. Section 412, subdivision 1, provides that no authorized reciprocal insurer shall make any new agreement for insurance with any person, firm or private corporation who or which does not have assets in an amount not less than $10,000 in excess of liabilities. This applies to domestic and foreign reciprocals. Our Legislature has determined that this provision is advisable for the protection of our residents. If Canners or Warner is not authorized or licensed here, and transacted no insurance business here, the statute is not applicable. If an insurer be authorized in this State, it is clear that it must comply with the statute. Section 415, subdivision 1, provides that every subscriber of an authorized reciprocal insurer shall have executed a subscriber’s agreement,” and every subscriber shall execute and duly, acknowledge the same in a manner sufficient for the acknowledgment of conveyances of real property to be recorded in the state of the subscriber’s domicile and that each agreement shall contain certain designated provisions. This applies to domestic and foreign reciprocals. Since the two insurers are licensed, this section is applicable. So it is as to sections 168, subdivision 2, 410, 413, subdivision 2, 417, subdivision 1, 418, subdivisions 1 and 3, 420, 421 and 422, subdivision 2.

As to section 130 a different problem is presented. That section provides, in substance, that “ no licensed foreign ” insurer shall in this State issue, deliver or otherwise effectuate any contract of insurance covering certain persons, properties or risks “ unless such contract of insurance is issued or effectuated through, or countersigned by, a resident licensed insurance agent of this state.” Canners and Warner contend that they have never issued, delivered or otherwise effectuated a contract of insurance in this State. If that were so, section 130 would be inapplicable to them. It is, however, applicable because, as indicated above, they are doing business here.

The judgments should be reversed and the complaint dismissed, with costs in all courts.

Lehman, Ch. J., Loughran, Finch, Rippey, Lewis and Desmond, JJ., concur.

Judgments reversed, etc.


author: Per Curiam.

text:
    The People of the State of New York, Appellant, v. Raymond Casey, Respondent.
    Argued April 30, 1942;
    decided June 4, 1942.

      William O’Dwyer, District Attorney (Henry J. Walsh of counsel), for appellant.
    The appellant’s guilt was proved beyond a reasonable doubt. (Boyd v. Boyd, 252 N. Y. 422; Smith v. Smith, 273 N. Y. 380; People v. Rodawald, 177 N. Y. 408.) The rule was formulated pursuant to a lawful delegation of power. (Darweger v. Staats, 267 N. Y. 290.)

      Irving Brawer, Alvin I. Perlmutter and Joseph O. Rose for respondent.
    The adoption of rule 15a is pursuant to an unlawful delegation of authority and is void. (Matter of Lyons v. Prince, 281 N. Y. 557.)
   Per Curiam.

The defendant was convicted of a violation of subdivision 2 of rule 15a of the Rules and Regulations of the Transit Commission. These rules were promulgated pursuant to subdivision 14 of section 61 of the Public Service Law (Cons. Laws, ch. 48; amd. L. 1934, ch. 900). The arresting officer testified that he stopped an omnibus which was used exclusively for the transportation of school children. He testified that he could not make actual count of the standing passengers due to the congestion but that thére were more than the ten permitted by law. The omnibus was then carrying fifty-three passengers, consisting of fifty children, two adult teachers and the defendant driver. The omnibus was rated to carry twenty adults or thirty-four children and in addition ten standing passengers. Subdivision 2 of rule 15a reads as follows: “ Standing passengers shall not be permitted in any omnibus when used exclusively for the transportation of school children in excess of 50% of the rated adult seating capacity of the omnibus whether engaged on franchise routes or otherwise.” In an omnibus used exclusively for the transportation of school children, the seating capacity is based on an allowance of thirteen inches per child. (Rule 15.) We are told that the Legislature delegated the power to the' Transit Commission to make the rules in question, of which rule 15a is one, following a special message of the Governor subsequent to an omnibus catastrophe in 1934 which resulted in the loss of a number of lives due in part to overcrowding. The rule in question was manifestly intended to prevent the carrier, in this instance, from carrying more than forty-four school children. ' The testimony disclosed that the defendant was carrying more than that number and that more than ten were standing. His guilt was established beyond a reasonable doubt.

The order of the Appellate Division should be reversed and the judgment of the Court of Special Sessions affirmed.

Lehman, Ch. J., Loughran, Finch, Rippey, Lewis, Conway and Desmond, JJ., concur.

Ordered accordingly.


text:
    The People of the State of New York, Respondent, v. Dry Dock Corlears Properties, Inc., Appellant.
    Argued March 11, 1942;
    decided June 4, 1942.

      Grover C. Sniffen for appellant.
    The Fire Commissioner’s order does not come within the purview of section C19-161.0 of the Administrative Code (L. 1937, ch. 929). (Matter of Bonnaffe, 23 N. Y. 169; People ex rel. Emerick v. Board of Fire Comrs., 86 N. Y. 149; Bristor v. Smith, 158 N. Y. 157; People v. Kaye, 212 N. Y. 407.) The order of the Fire Commissioner is void inasmuch as each item therein contained is now under the exclusive jurisdiction of the Superintendent of the Department of Housing and Buildings. (N. Y. City Charter, § 643, effective January 1, 1938.) Chapter 26 of the Administrative Code outlines in detail the provisions of section 643 of the Charter. Under chapter 26 of the Code, the Department of Housing and Buildings is given the express power to order the installation. (Administrative Code, §§ C26-1381.0, C26-1382.0, C26-1383.0, C26-1384.0, C26-1385.0.)

      William C. Chanler, Corporation Counsel {James Hall Prothero, Paxton Blair and David P. McKean of counsel), for respondent,
    The Fire Commissioner’s order to repair the standpipe system was within the purview and intendment of section C19-161.0 of the Administrative Code and section 491 of the Charter. (People v. Kaye, 212 N. Y. 407; 213 N. Y. 648; People v. 131 Boerum Street Co., 233 N. Y. 268; United States Trust Co. v. Blake, 234 N. Y. 273; Matter of Baerenklau v. Thatcher, 269 N. Y. 494.) The Fire Commissioner had the duty and authority to issue the order here involved. The jurisdiction of the Superintendent of the Department of Housing and Buildings relative to original construction does not conflict with the Fire Commissioner’s jurisdiction to issue violation notices requiring an owner to refit and make usable an existing standpipe. (Matter of Baerenklau v. Thatcher, 269 N. Y. 494.)
   Per Curiam.

Under New York City Charter (effective Jan. 1, 1938), section 488, subdivision 3, and section 491, the Fire Commissioner has jurisdiction, when an existing standpipe system no longer functions because certain parts or appurtenances have been broken or are missing, to order the repair or restoration of such parts or appurtenances provided no reconstruction of the building itself be required.

The judgment should be affirmed.

Lehman, Ch. J., Loughran, Finch, Rippey, Lewis, Conway and Desmond, JJ., concur.

Judgment affirmed.


text:
    Milton Epstein, Appellant, v. Harry L. Cohen, Respondent.
    Submitted March 12, 1942;
    decided June 4, 1942.

      Alvin C. Cass and Jacques W. Bacal for appellant.
    The Appellate Division improperly affirmed the judgment for defendant. (Tortora v. State, 269 N. Y. 167; Matter of Jordan v. Decorative Co., 230 N. Y. 522; Allen v. Ennis, 253 App. Div. 769; 279 N. Y. 578; Spreen v. McCann, 264 N. Y. 546; Haddix v. Tomich, 245 App. Div. 727; DiCarlo v. Feldman, 246 App. Div. 682; Marinan v. Kronberger, 280 N. Y. 640.) The trial court erroneously refused to charge the jury as to the effect of defendant’s subsequent admission to plaintiff. (Gangi v. Fradus, 227 N. Y. 452; Koester v. Rochester Candy Works, 194 N. Y. 92; Hildebrand v. Hempstead Machine Works, Inc., 246 App. Div. 756; Nelson v. Nygren, 233 App. Div. 573; 259 N. Y. 71; People v. Odell, 230 N. Y. 481; Matter of Taylor, 197 App. Div. 865.)

      James J. McLoughlin, Robert F. White and John J. Kirwan for respondent.
    The verdict of the jury was a proper one and requires affirmance. (Galbraith v. Busch, 267 N. Y. 230; Lahr v. Tirrill, 274 N. Y. 112; Hammond v. Hammond, 227 App. Div. 336.) The trial court’s refusal to charge the jury as requested by plaintiff’s counsel was proper. (Rhinelander v. Rhinelander, 219 App. Div. 189; Polachek v. New York Life Ins. Co., 147 Misc. Rep. 16; Perlman v. Schank, 192 App. Div. 179; Milio v. Railway Motor Trucking Co., 257 App. Div. 640; Galbraith v. Busch, 267 N. Y. 230; Garbaczewski v. Third Ave. R. R. Co., 5 App. Div. 186; Williamson v. Atlas Powder Co., 241 N. Y. 557; Schoenherr v. Hartfield, 172 App. Div. 294; Studner v. H. & N. Carburetor Co., 185 App. Div. 131.)
   Per Curiam.

The case of Galbraith v. Busch (267 N. Y. 230) would be determinative of the instant action were it not for the statement claimed to have been made by defendant to plaintiff. The jury could have found that it constituted an admission of negligence and thus, with the other evidence, established plaintiff’s cause of action. The court in its charge made no reference to the statement and when requests to charge were made, declined to permit it to be considered by the jury in determining the question of defendant’s negligence. That was error requiring reversal. (Gangi v. Fradus, 227 N. Y. 452, 456; Koester v. Rochester Candy Works, 194 N. Y. 92, 97.)

The judgments should be reversed and a new trial granted, with costs in all courts to abide the event.

Lehman, Ch. J., Loughran, Finch, Rippey, Lewis, Conway and Desmond, JJ., concur.

Judgments reversed, etc.