text:
    The People of the State of New York ex rel. Conway Company, Appellant, v. Thomas M. Lynch et al., Constituting the State Tax Commission, Respondents.

      (Argued November 20, 1931,
    decided January 5, 1932.)

      Ralph Royall for appellant.
    The losses of relator were ascertained in the year 1928 upon its investments in Conway Realty Company and Conway Securities Company and should be allowed as deductions in determining the net income of relator for the purpose of a determination of the tax. (People ex rel. Standard Oil Co. v. Law, 237 N. Y. 142; People ex rel. Barcalo Mfg. Co. v. Knapp, 187 App. Div. 89; 227 N. Y. 64; United States v. White Dental Mfg. Co., 274 U. S. 398; Joslyn Mfg. & Supply Co. v. Commissioner, 6 B. T. A. 749 [A]; Sheridan Meat Co. v. Commissioner, 10 B. T. A. 211 [A]; Royal Packing Co. v. Commissioner, 22 Fed. Rep. [2d] 536; Pearsall v. Commissioner, 10 B. T. A. 467 [A]; Conover Co. v. Commissioner, 7 B. T. A. 1234 [A]; State Bank v. Commissioner, 11 B. T. A. 410; DeLoss v. Commissioner, 28 Fed. Rep. [2d] 803; Myers v. Commissioner, 7 B. T. A. 1072; Lee v. Commissioner, 8 B. T. A. 951; American Sav. Bank & Trust Co. v. Burnett, 45 Fed. Rep. [2d] 548; Selden v. Heiner, 12 Fed. Rep. [2d] 474; People ex rel. Studebaker v. Gilchrist, 244 N. Y. 114.)

      John J. Bennett, Jr., Attorney-General (Wendell P. Brown of counsel), for respondents.
    The tax was properly computed upon the basis of the relator’s entire net income, without deduction of losses on account of its investments in stocks of its subsidiaries. The losses were not established in 1928. (United States v. White Dental Mfg. Co., 274 U. S. 398; Weiss v. Wiener, 279 U. S. 333.)
   Lehman, J.

The relator was organized in 1905 under the laws of the State of New Jersey. It has maintained an office in that State in order to comply with the requirements of the New Jersey law. It has never conducted any business in that State. Through wholly owned subsidiary organizations; in the form either of Massachusetts trusts or Massachusetts corporations, it conducted the business of manufacturing and selling pianos, discounting piano paper ” and similar activities, and maintained one or more offices in that State until the year 1926. In 1926 the corporation decided to liquidate the subsidiary corporations through which it conducted its piano business. At the beginning of 1928 the only subsidiary organizations, which had not been liquidated, were the Conway Realty Company and the Conway Securities Company. Then the relator moved its office to the city of New York and obtained a certificate of authority to do business here. From that office it continued the liquidation of its subsidiary organizations and bought and sold investment securities. From sales of these securities, and dividends and interest, it derived in 1928 an income of $1,061,191.67, as reported to the Federal government. None of the income was derived from the subsidiaries in liquidation. Losses sustained by these subsidiaries were shown on the consolidated balance sheet included in the income tax reports and were allowed in assessing the Federal tax on the relator’s income.

The Tax Law of this State (Cons. Laws, ch. 60, § 209) provides in part that “ * * * for the privilege of doing business in this state, every foreign corporation, * * * shall annually pay * * * an annual franchise tax, to be computed * * * upon the basis of its entire net income, as defined in subdivision three of section two hundred and eight * * * which entire net income is presumably the same as the entire net income which such corporation is required to report to the United States * * Section 208, subdivision 3, provides: “ The term (entire net income ’ means the total net income, including all dividends received on stocks and all interest received from federal, state, municipal or othei bonds * * * and without deduction for taxes paid to the government of the United States * * *, but losses sustained by the corporation in other fiscal or calendar years whether deducted by the government of the United States or not shall not be deducted.” The relator claims that during the year 1928 it sustained a loss of $488,865.53 upon its investment in Conway Realty Company, and a loss of $139,350.08 upon its investment in Conway Securities Company and that these losses should be deducted from its total gross income, as reported to the United States, before the tax is assessed. That deduction has been refused. The question here presented is whether such losses or any part of them were sustained during the year 1928. The accuracy of the balance sheet annexed to the report to the United States, as explained and amplified by the relator, has not been attacked, and no evidence has been offered to controvert the evidence produced by the relator.

The Conway Realty Company was organized in 1923. The relator conveyed to it a manufacturing plant at Worcester, Mass., in which the relator had invested $593,169.69, and the relator received all the capital stock of the Realty Company. Thereafter the Realty Company purchased land in Boston and issued bonds secured by .a mortgage in the amount of $600,000 on both the Worcester and Boston real estate. The proceeds of the bond issue were used for the construction of a plant on the Boston real estate. The Realty Corporation during the years 1923-26 made a net profit of $102,434.75. In 1926 it sold the Boston plant for $600,000, $250,000 of which was paid in cash, and the remainder by a purchase-money mortgage of $350,000 which was intended to cover the assumption by the purchaser of a proportionate part of the bonds secured by the mortgage on both the Worcester and Boston plants. Then the Realty Company declared a dividend of $250,000. At least to the extent that this dividend represented a distribution of the proceeds of the assets of the corporation and not a distribution of profits previously earned, it reduced pro tanto the original investment of the relator in its subsidiary corporation.

The $600,000 bond issue of the Realty Corporation was sold at a discount of ten per cent and to offset this discount the relator paid to the Realty Company the sum of $60,000, and this sum was carried on the books of the Realty Corporation as a deferred charge.” The relator also made advances to the Realty Company on “ open account.” At the close of the year 1928 these advances aggregated $35,900.14. Including moneys loaned or advanced, the relator had invested in the Realty Company the sum of $689,069.83, and had received only the dividend of $250,000 either as profits or repayment of its investment.

At the beginning of the year 1928 the liquidation of the Conway Realty Company was not completed. It still owned the plant at Worcester and other assets. If the company sold the plant at its cost price or book value, it would have assets sufficient to pay to the relator the full amount of its investment and loans. In 1928 it sold the plant for the sum of $176,000. Then its remaining assets consisted only of cash items and the amount unpaid upon the second mortgage given on the sale of the Boston property. Under no circumstances could these assets when finally liquidated produce more than their face value, and after the outstanding bonds of the Realty Company and some small debts to others than the relator were paid, at most the sum of $52,639.05 would be available to meet the deferred charge of $60,000 and the loans on open account of $35,900.14, payable to the relator before there could be any distribution on the relator’s capital stock. Thus it had become evident that the relator’s stock was entirely without value and that, in addition, there must be a loss on the moneys it had advanced to its subsidiary.

Deduction of the loss has been denied on the ground that it does not appear that the loss has been sustained during the year 1928. It is urged that the Legislature intended that, when a foreign corporation receives authority to do business here, it must pay a tax based on the net income enjoyed while it is doing business here, and that, even though its net income may be reduced by losses sustained during the same period, the loss on an investment cannot exceed the difference between the value of the investment at the time the corporation began to do business here and its value at the end of the year when it is claimed the loss was sustained. We cannot give to the words net income ” other than the statutory definition, and the statutory definition applies, by express terms of the statute, alike to foreign corporations and to domestic corporations.

The meaning of the statutory definition of net income is clear. The working rule for its application has been authoritatively stated: Take the gross income as defined by the Federal statute. Deduct from it proper business charges except the United States taxes specified and losses of other fiscal years. The result is the entire net income as intended by our statute.” (People ex rel. Standard Oil Co. v. Law, 237 N. Y. 142, 149.) Aside from the specified exceptions, the entire net income ” is presumably the same as the entire net income reported to the United States. Both gross income and net income, except as otherwise provided in our own statute, must be calculated in accordance with the definitions contained in the United States statute. Gains reflected in the gross income must be calculated in the manner authorized by the United States statutes, and losses reflected in the net income ” must be similarly calculated. No loss upon an investment or debt is sustained until that loss is definitely established. At the beginning of 1928 the Conway Realty Company still owned the Worcester plant, and its value in liquidation could not be definitely determined. Perhaps a reasonable estimate of its value would have been much lower than its cost or book value, and not more than was actually received upon its sale. Nevertheless the value of the assets of the Realty Company and consequently the value of the relator’s investment in that company rested solely on estimate. The relator’s ultimate loss might be more or less than the estimate. At that time no deductible loss had been suffered. u While the security remains in esse and its value may fluctuate, it is well settled that only by a sale can gain or loss be established.” (DeLoss v. Commissioner of Internal Revenue, 28 Fed. Rep. [2d] 803, 804.) When the relator began to do business in this State the value of its investment might still fluctuate; the principal factor in its value was still variable; but “ the loss must be actual and present, not merely contemplated as more or less sure to occur in the future.” '! The income tax laws do not profess to embody perfect economic theory. They ignore some things that either a theorist or a business man would take into account in determining the pecuniary condition of the taxpayer.” (Weiss v. Wiener, 279 U. S. 333, 335.) If the Legislature had chosen to provide that the gross income of a foreign corporation shorfid include only gains above the estimated value of its investments at the time the corporation began to do business here; and that losses, deductible from the gross income to arrive at the net income, should include only losses upon the estimated value of the investment, the tax payable would sometimes be higher and sometimes lower than under the present statute. We are governed by the terms of the statute and no economic theories can alter its plain terms. It follows that the relator may deduct from his gross income losses definitely and irretrievably sustained in 1928.

At the end of that period the relator’s stock was valueless and could by no possibility acquire any value. Only by concealment of the true condition of the corporation could the relator have obtained any price for it. A sale for a purely nominal consideration could not fix the loss on the stock more definitely than the liquidation of the assets of the corporation to the point where the corporation had on hand only money or choses in action for money in an amount less than the relator had advanced to the corporation. The rule that only by sale can gain or loss be established is u inapplicable when the security can no longer fluctuate in value, because its value has become finally extinct. In such cases a sale is necessarily fictitious; it establishes nothing, and cannot be intended to do so, for there is no variable to determine.” (DeLoss v. Commissioner of Internal Revenue, supra, at p. 804.)

Though the relator’s investment in the stock of the Conway Realty Company had become worthless on December 31st, 1928, the hquidation of that corporation had not yet proceeded so far that the amount of the loss on moneys advanced by the relator could be definitely fixed. The amount ultimately applicable to the payment of these moneys might depend upon the ability of the corporation to collect obligations due to it; but, in effect, all that is left of the relator’s, claim for repayment of loans and advances is a right to apply upon that claim the moneys which may be collected by the Realty Company. In no event could the loss be less than $43,261.09. To that extent the relator had definitely suffered a loss upon its loans and advances, and that loss cannot be retrieved.

The question still remains to what extent the relator’s original investment in the stock of its subsidiary corporation has been reduced by the dividend of $250,000 received in 1926. The dividend was not a regular dividend paid out of the profits of the corporation. It represents the exact amount received in cash upon the sale of the Boston plant, and, at least in part, is a distribution of capital assets. The Tax Commission was bound to apply the entire dividend in reduction of the relator’s investment unless the relator furnished data which showed what definite part, if any, constituted a distribution of profits earned. (People ex rel. Kohlman & Co. v. Law, 239 N. Y. 346.)

The relator states that the corporation earned profits of $102,434.75 during the years 1923-26. Even if that be true, it does not follow that the dividend included a distribution of these profits. The corporation received for the sale of $600,000 bonds only $540,000. The difference became a deferred charge against the corporation and was advanced by the relator. Eventually that charge must be met out of corporate gains and a distribution of gains without provision for taking care of the deferred charge would leave the corporation without means of meeting the charge except by encroachment upon capital. There are other circumstances which tend to rebut any inference that any part of the dividend came from profits. Certainly we cannot upon the record hold that any definite portion must be ascribed to profits. It follows that the entire dividend must be applied upon the relator’s capital investment. That leaves the investment in the stock at $343,169.69. It sustained a loss of this sum in 1928 and also a loss on moneys advanced of $43,261.09. That loss of $386,430.78 must be deducted from the gross income of the corporation.

In general, the right to deduct the claimed loss upon the relator’s investment in Conway Securities Company, a Massachusetts corporation, is governed by similar considerations. The original investment was $800,000. The company never distributed any profits to the relator as holder of all the certificates of beneficial interest, and any surplus from profits earned prior to 1927 was wiped out by losses in that year. The relator itself conducted the liquidation of the Securities Company. In the course of that liquidation it paid itself the sum of $445,222.39 in 1927. That reduced the relator’s investment to the sum of $354,777.61. By payment in 1928 of the sum of $186,520.76, the relator’s investment was reduced to the sum of $168,256.85. Then liquidation had been so far completed that the company then held only $6,968.48 in cash, and $49,579.38 in fixed obligations payable. Against the amount which might ultimately be collected upon the fixed obligations, the Securities Company owed the sum of $27,368.91. There remains for payment to the relator upon the company’s certificates of beneficial interest at most the sum of $28,906.77. Thus it appears that the relator has lost at least the sum of $139,350.08 upon its investment. The loss may be greater if the remaining obligations due to the Securities Company are not paid in full; it cannot be less. To that extent the loss is realized and not merely reasonably anticipated. The question remains whether it has been sustained during the year 1928.

Ordinarily the loss of an investor in stock or certificates of ownership in a corporation or other artificial entity is sustained only when the loss is definitely and irrevocably fixed, but the “ general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal test.” (Lucas v. American Code Co., 280 U. S. 445, 449.) So long as reasonable possibility remains that an anticipated loss may not be realized, it is not sustained within the meaning of the Tax Law. The difficulty is in determining when such reasonable possibility disappears. A corporation may have incurred losses which reduce its capital; those losses may be reflected in the market value of its stock; yet so long as the corporation continues to do business and there is a market for its«stock, there is possibility that one who has invested in its stock may either by improvement in the corporate business or fluctuations in the market value of the stock recoup in whole or in part any anticipated loss in his investment. Even after a corporation has ceased to do business and is liquidating its assets, as long as it retains any assets whose value in liquidation depends upon the price that can be obtained upon a sale, there is a variable factor which precludes a determination that any definite part of the investment has been irrevocably lost.

True, even with that variable factor taken into consideration, the taxing authority may be able to determine that some loss»is inevitable, yet when the variable factor affects the amount of the inevitable loss, it may be difficult or even impossible to devise a practical test to determine that any definite part of that loss has been sustained till by complete liquidation or sale the loss is definitely established. We are not dealing with such a situation. Here the relator as the sole owner of the corporate entity is directing the liquidation of its assets. No variable factor enters into the determintion of the amount of loss which is inevitable. The amount which is ultimately payable upon the fixed obligations which it holds measures and definitely limits the amount which can in any possible contingency be applied on relator’s investment. An allowance is made in the balance sheet in the form of a reserve of $22,210.44 for uncollectible debts. It is often sound business accountancy to establish a reserve» to provide for contingencies which can be reasonably anticipated. The data furnished the Tax Commission are insufficient to determine whether the reserve set up is reasonable. Even if reasonable, it represents an anticipated rather than a realized loss and the Tax Commission could exercise its discretion in refusing to deduct the reserve from the uncollected obligations, if, indeed, it was not required to do so. (Lucas v. American Code Co., 280 U. S. 445.) Nevertheless the Commission was bound to find that in these circumstances the relator had sustained a definite loss of at least $139,598.84 on its investment in the Securities Company.

In determining whether that loss was sustained in 1928 it must deduct the loss, definitely determinable by the same rules, prior to the beginning of the year.. Without now setting forth the details of the balance sheet as of December 31st, 1927, we find that it fails to show that there was any possibility that more than $313,760.10 could be applied upon the relator’s investment upon final liquidation, even according to the relator’s own estimate, and certainly the Tax Commission might accept that estimate as an admission against interest. The relator has received $186,520.76. Thus the loss sustained in 1928 on the relator’s investment in the Securities Company is the difference between $215,178.77 and $313,760.10, or $98,332.57.

The franchise tax of the relator should be fixed by deducting from the gross income of the relator the loss of $98,332.57 upon its investment in the Securities Company and the loss of $386,430.78 upon its investment in the Realty Company sustained during the year 1928.

The order of the Appellate Division should be reversed, with costs in the Appellate Division and in this court, and the proceedings remitted to the State Tax Commission with directions to fix the franchise tax in accordance with this opinion.

Cardozo, Ch. J., Pound, Crane, Kellogg, O’Brien and Hubbs, JJ., concur.

Ordered accordingly.


source: Caselaw Access Project

author: Lehman, J.

license: Public Domain

text:
    Thea Isaac, Appellant, v. Bernard K. Marcus et al., Defendants, and Bank of United States et al., Respondents.

      (Argued November 23, 1931;
    decided January 5, 1932.)

      Samuel Hoffman for appellant.
    As it was the intent of the Legislature to add to, rather than detract from, the then existing rights of a stockholder, upon a cause of action against officers and directors for malfeasance, sections 57 and 81 of the Banking Law must be interpreted in accordance with such intent. (Hayden v. Pierce, 144 N. Y. 512; Weiler v. Nembach, 114 N. Y. 36; Brinckerhoff v. Bostwick, 88 N. Y. 52; Matter of Union Bank, 204 N. Y. 16; Davis v. Supreme Lodge, 165 N. Y. 159.) Assuming that the statute is restrictive in its nature, it was not the intention of the Legislature to permit the Superintendent of Banks arbitrarily to refrain from instituting any action and thereby deprive a stockholder of a remedy which, otherwise, would have been available to him. (Brinckerhoff v. Bostwick, 88 N. Y. 52.)

      Frank Weinstein and Samuel J. Levinson for Charles Frank, amicus curiœ.

    The rights of the Superintendent as liquidator are purely statutory and are only such as the Banking Law specifies. No right which the Banking Law confers upon him as liquidator can be deemed exclusive unless the Banking Law expressly or by necessary implication makes it exclusive. (Curtis v. Leavitt, 15 N. Y. 9; Nassau Bank v. Jones, 95 N. Y. 115; Matter of Mandel, 224 Fed. Rep. 642; Hagmayer v. Alten, 36 Misc. Rep. 59; Koch v. Missouri-Lincoln Trust Co., 181 S. W. Rep. 44; Matter of Murray Hill Bank, 153 N. Y. 199; Lafayette Trust Co. v. Beggs, 213 N. Y. 280; Mott v. Reeves, 125 Misc. Rep. 511; 217 App. Div. 718; 246 N. Y. 567.) The fact that the Superintendent as liquidator acts principally for the benefit of depositors and other creditors precludes reading into section 81 of the Banking Law any exclusiveness of right of suit in him. The Legislature cannot be deemed, in the absence of express pronouncement to the contrary, to have intended destruction or abridgment of an existing vested right in the stockholders, when the preservation of such existing rights cannot harm the depositors and other creditors, and its destruction or abridgment cannot benefit them while doing grave injustice to the stockholders. (Van Tuyl v.
      Scharmann, 208 N. Y. 53; United States v. Weitzel, 246 U. S. 533; Harris Estate v. West Grove Sav. Bank, 217 N. W. Rep. 477; Korby v. Springfield Inst. for Savings, 245 U. S. 330; Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121; Whalen v. Strong, 230 App. Div. 617.) Nothing in the Banking Law necessitates or justifies an implication of exclusiveness in the Superintendent of right to invoke judicial relief against the incumbent officers, whereas the Banking Law, in its entirety, and even in section 81, shows an affirmative legislative intent to preserve for the stockholders their equities, and particularly their equitable right also to invoke judicial relief against the officers. (Lafayette Trust Co. v. Beggs, 213 N. Y. 280; Mikels v. Courie Cut Stone Co., 34 Ohio App. 442.) There is no basis for restricting the stockholders’ equitable right of representative suit by requiring prior demand upon the Superintendent followed by refusal or failure on his part, or by requiring prior leave of court. (Matter of Casualty Co. of America, 244 N. Y. 443; Matter of Union Bank, 176 App. Div. 477; Yokohama Specie Bank v. Chinese Merchants Bank, 219 App. Div. 256; Matter of Chetwood, 165 U. S. 443; Matter of Lunghino, 176 App. Div. 285; Jackson v. Chemical Nat. Bank, 215 Ala. 538; Port Newark Bank v. Waldron, 46 Fed. Rep. [2d] 296; Cochran v. Bennett, 139 S. E. Rep. 428; Steele v. Randall, 19 Fed. Rep. [2d] 40; Bennett v. Duke, 144 S. E. Rep. 686; Allen v. United States, 285 Fed. Rep. 678; Commonwealth v. Allen, 133 N. E. Rep. 625; Peoples Trust Co. v. United States, 23 Fed. Rep. [2d] 381; Hulse v. Argetsinger, 18 Fed. Rep. [2d] 944; Matter of Bolegh, 185 Fed. Rep. 825; Kinney v. Channel State Bank, 288 S. W. Rep. 509; Koch v. Morsemere Trust Co., 107 N. J. Eq. 516; Chicago T. & T. Co. v. McDowell, 257 Ill. App. 492; Adler v. Seaman, 266 Fed. Rep. 828; Sigwald v. City Bank, 82 S. C. 382; Miller v. Pero, 135 Misc. Rep. 424.)

      Carl J. Austrian, Arthur Ofner and Harold N. Cohen for respondents.
    A stockholder may only maintain or compel the Superintendent of Banks to commence an action under section 81 of the Banking Law by the authority of an order of the court made upon notice to the Superintendent. (Cummings v. Brown, 122 App. Div. 505; Delaware & Hudson Co. v. Albany & Susquehanna R. R. Co., 213 U. S. 435; Grant v. Greene Consol. Copper Co., 169 App. Div. 206; 223 N. Y. 655; Brinckerhoff v. Bostwick, 105 N. Y. 567; Clubb v. Cook, 161 App. Div. 775; Jessup v. Smith, 223 N. Y. 203; Schoenherr v. Van Meter, 215 N. Y. 548; Matter of Murray Hill Bank, 153 N. Y. 199; Dorland v. Fidelity Development Co., 104 Misc. Rep. 97; Matter of City Trust Co., 133 Misc. Rep. 856; Hunter v. Moss, 41 Ga. App. 13; Dawkins v. Mitchell, 162 La. 1085; State ex rel. Short v. Norman, 86 Okla. 36; Ryan v. Ray, 105 Ind. 101; Hulse v. Argetsinger, 12 Fed. Rep. [2d] 933; 18 Fed. Rep. [2d] 944; Abbott v. Morris, 101 W. Va. 127; Northwestern Fuel Co. v. Live Stock State Bank, 182 Minn. 276; Bennett v. Duke, 38 Ga. App. 598; Charter v. Kump, 109 W. Va. 33; Commonwealth ex rel. Denny v. Hargis Bank & Trust Co., 233 Ky. 801; Cartmell v. Commercial Bank & Trust Co., 153 Ky. 798; Matter of Union Bank, 204 N. Y. 313; Lafayette Trust Co. v. Beggs, 213 N. Y. 280; The Bank of Cuba in New York, 198 App. Div. 733; Matter of Casualty Co., 244 N. Y. 443; Swope v. Villard, 61 Fed. Rep. 417; Klein v. Peter, 284 Fed. Rep. 797; Cunningham v. Wechselberg, 105 Wis. 359; Frederick v. McRae, 157 Minn. 366; Matter of Bologh, 185 Fed. Rep. 825; Matter of Jensen Co., 128 N. Y. 550; Stephen v. Merchants Collateral Corp., 256 N. Y. 418; Dushane v. Beall, 161 U. S. 513; Du Pont v. Standard Arms Co., 9 Del. Ch. 324.) The complaint is fatally defective in failing to allege demand by plaintiff and refusal or unreasonable neglect of the Superintendent to commence this action, or any facts showing that such demand would be futile. (Greaves v. Gouge, 69 N. Y. 154; Flyn v. Brooklyn City R. R. Co., 158 N. Y. 493; Matter of Union Bank, 204 N. Y. 313; Lafayette Trust

      Co. v. Beggs, 213 N. Y. 280; Planten v. National Nassau Bank, 174 App. Div. 254; 220 N. Y. 677; Craig v. James, 71 App. Div. 238; Finance Co. v. Railroad Co., 183 Fed. Rep. 830; Fisher v. Andrews, 37 Hun, 176; O’Connor v. Passenger Co., 45 Misc. Rep. 228; Hawes v. Oakland, 104 U. S. 450; Quincy v. Steel, 120 U. S. 241; Doherty v. Mercantile Trust Co., 184 Mass. 590; Saunders v. Bank, 113 Va. 656; McCloskey v. Snowden, 212 Penn. St. 249; Vogeler v. Punch, 205 Mo. 558; Kavanaugh v. Commercial Trust Co., 45 Misc. Rep. 295; 103 App. Div. 95; Richards v. Robin, 86 Misc. Rep. 528; Ward v. Petrie, 157 N. Y. 301; Barnes v. Hirsch, 215 App. Div. 10; Memphis City v. Dean, 8 Wall. [U. S.] 64; Wood v. Building Assn., 63 Wis. 9; Bulkley v. Iron Co., 77 Mo. 105.)
   Lehman, J.

The plaintiff, a stockholder of the Bank of United States, has brought an action in behalf of herself and all other stockholders similarly situated to compel directors of the bank to account for their conduct as such directors in committing alleged acts of waste of the moneys of the bank, by planning and carrying out a merger of the Colonial Bank with the Bank of United States. The Bank of United States, the Superintendent of Banks, who is in possession of that bank for the purpose of liquidation, and certain officers, directors and stockholders of the Colonial Bank are joined with the directors of the Bank of United States as parties defendant. Upon motion of the Superintendent of Banks the complaint has been dismissed “ on the grounds that the complaint does not state facts sufficient to constitute a cause of action, and the plaintiff has no legal capacity to sue.”

The Banking Law (Cons. Laws, ch. 2) provides that in specified contingencies the Superintendent of Banks may forthwith take possession of the business and property of any State bank (§ 57), and except as otherwise provided hold possession until its affairs are finally liquidated (§ 58). Upon him and his deputies rests the duty of liquidating its business and affairs (§ 69). Large powers are granted to him to be exercised in the course of that liquidation, by various sections of the Banking Law, including the power to institute and maintain in his name as superintendent of banks against its directors, trustees, managers or officers, or any of them, any action or proceeding which is vested in such corporation or in the stockholders or creditors thereof.” (§ 81.)

These powers were first conferred upon the Superintendent of Banks by chapter 143 of the Laws of 1908. The Superintendent of Banks is in effect the statutory receiver of the banking corporation while liquidating its affairs. That was the clear intent and result of the statute. (See Report of the Commission on Banks, December, 1907; Report of Superintendent of Banks, Senate Document No. 6,131st Session, page XXIX.) The action vested ” in the corporation or a creditor thereof against officers of the corporation for misconduct is defined and regulated by sections 60 to 62 of the General Corporation Law (Cons. Laws, ch. 23) (formerly sections 1781-1783 of the Code of Civil Procedure). The right of action of a stockholder is the creature of the courts of equity. It is a derivative action brought for the benefit of the corporation. The plaintiff here asserts the right to maintain such an action, though express authority to institute and maintain any such action “ which is vested in such corporation or in the stockholders or creditors thereof ” has been conferred upon the Superintendent of Banks, who is now in control of the corporation.

The development of that form of action, its essential elements and basic principles, have been exhaustively expounded in the opinion in Hawes v. Oakland (104 U. S. 450, 456). There the court quoted with approval the language of Sir W. M. Jambs, L. J., in Macdougall v. Gardiner ([1875] 1 Ch. Div. 13): “ nothing connected with internal disputes between the shareholders is to be made the subject of a bill by some one shareholder on behalf of himself and others, unless there be * * * something ultra vires on the part of the company qua company, or on the part of the majority of the company, so that they are not fit persons to determine it, but that every litigation must be in the name of the company, * * * if the company really desire it. * * * There may be a variety of things which a company may well be entitled to complain of, but which, as a matter of good sense, they do not think it right to make the subject of litigation; and it is the company, as a company, which has to determine whether it will make anything that is a wrong to the company a subject matter of litigation, or whether it will take steps itself to prevent the wrong from being done.”

Courts of equity will, at the suit of a stockholder, interpose their powers to remedy or- prevent a wrong to a corporation by its officers or directors when the corporation, because it is controlled by the wrongdoers or for other reason, fails and refuses to take appropriate action for its own protection. The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights. (Grant v. Greene Consolidated Copper Co., 169 App. Div. 206; affd., 223 N. Y. 655.)

The Superintendent of Banks, as we have said, is, in effect, a statutory receiver. He is not an officer of the court and he derives his powers from the fiat of the Legislature. The Legislature pursuant to its power to regulate banking and to create banking corporations, has provided that the Superintendent of Banks shall supersede the officers and stockholders of the corporation in the control of the corporate affairs. In him the Legislature has vested not only broad powers but broad discretion. Where an officer of the State is in control of the corporation, many of the reasons fail for the assumption by a court of equity of jurisdiction to remedy a wrong to the corporation at the suit of the stockholder. No longer are the alleged wrongdoers in control of the corporation; and the Legislature has vested in the Superintendent of Banks the power theretofore exercised by those in control of the corporation to determine whether there should be appeal to the court to remedy or restrain wrong to the corporation.

It is evident that when the Legislature vested in the Superintendent of Banks authority to institute and maintain against the corporate directors any action or proceeding which is vested in such corporation or in the stockholders or creditors thereof,” it intended that the Superintendent of Banks should have the duty to bring such an action whenever in Ms opimon it would be to the advantage of the corporation. No less evident is the legislative mtention that he should not be hampered m the exercise of that power and the performance of Ms duty by hasty or ill-considered action on the part of any stockholder. So long as the corporation was m existence, no stockholder had any derivative right of action for injury to the corporation until it appeared that those who controlled the corporation refused to or were unable to protect its rights. As part of Ms derivative cause of action a stockholder must allege and prove a demand upon the corporation or the futility of making such a demand. “ He should show to the satisfaction of the court that he has exhausted all the means within Ms reach to obtain, witMn the corporation itself, the redress of Ms grievances, or action in conformity to Ms wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and tMs must be made apparent to the court.” (Hawes v. Oakland, supra, at p. 460.) The managing body of the corporation no longer can control its action. The Superintendent of Banks stands in the place of the managing body. Even if the right of action conferred upon him is not exclusive and a stockholder may maintain an action based upon the misconduct of a corporate officer or director, he must still prove all the essentials of the cause of action vested in him. He has no grievance or derivative right of action until the corporation, acting through its managing body or the Superintendent of Banks, refuses to enforce the right of action vested in the corporation against those who despoil the corporation of its assets. He has not “ exhausted all the means within his reach to obtain within the corporation itself, the redress of his grievances, or action in conformity to his wishes ” until he has placed the Superintendent of Banks in a position which calls for a definite choice whether or not the liquidator of the bank shall institute the action vested in such corporation or in the stockholders or creditors thereof.”

Logic, practical considerations, analysis of the statute and judicial authority alike support these conclusions. There can be only a single recovery for a single wrong. If there is recovery for wrong done to the banking corporation it must be paid to the liquidator while he is in possession of its assets, and, so far as necessary to meet their claims, it must be distributed among its creditors. The legislative grant to the Superintendent of Banks of authority to bring an action vested ” in a stockholder may not be thwarted by the prior assertion of the cause of action by the stockholder. If the Legislature had intended that a stockholder might assert his derivative right of action even while the Superintendent of Banks asserted the primary right of action of the corporation, then no reason appears why the Legislature should have in addition given the Superintendent authority to bring any action vested ” in the stockholder. It is clear that both the stockholder and the Superintendent cannot at the same time maintain actions vested ” in the stockholder, and it is equally clear that the Legislature did not intend that there should be a race between a stockholder and the Superintendent for priority in bringing such an action. All the sections of the statute read together show clearly that the Legislature intended to impose upon the Superintendent of Banks the duty to collect and liquidate all the claims and assets of the banking corporation, at least until all the claims of creditors are satisfied, and to give him full power to carry out that duty free from interference by officers, directors or stockholders of the bank. An action by a stockholder against the directors and third parties would not be controlled by the Superintendent and might hamper him in obtaining a recovery. Even though the courts still remain open to stockholders for the protection of corporate rights where those in control of the corporation are remiss in protecting those rights, after the Superintendent of Banks has taken possession of the business of a banking corporation, a stockholder, appealing to the courts, must show that the •Superintendent of Banks has failed and refused to bring such an action and that an action by a stockholder would not hamper unreasonably the liquidation of the corporation. Otherwise there must be intolerable confusion and, by choice of a stockholder, the statutory liquidator must be deprived of part of the authority conferred upon him by the Legislature. It cannot be supposed that the Legislature intended that a stockholder and the Superintendent of Banks should have authority to maintain, at the same time, separate actions upon a single cause of action “ vested in the stockholder. Either Superintendent or stockholder must have a paramount right and the implication in the statute is clear that it is the Superintendent who has such right. So the courts have construed similar provisions in statutes of other jurisdictions. Analogy is not complete, but the uniformity of the decisions in other jurisdictions points to the same construction of our statute. (Ryan v. Ray, 105 Ind. 101; Abbott v. Morris, 101 W. Va. 127; Northwestern Fuel Co. v. Live Stock State Bank, 182 Minn. 276; Hunter v. Moss, 41 Ga. App. 13; Hulse v. Argetsinger, 12 Fed. Rep. [2d] 933; 18 Fed. Rep. [2d] 944.) Nothing said or decided in Mosler Safe Co. v. Guardian Trust Co. (208 N. Y. 524) is contrary to this conclusion.

We do not say that the right of the Superintendent of Banks is exclusive. There may be times when the interests of a stockholder and the rights of the corporation can be adequately protected only by action instituted by a stockholder even after the Superintendent of Banks has taken control of the corporation. It would be unreasonable to construe the statute as limiting not only the right of a stockholder to bring an action but the power of a court of equity to remedy or restrain a wrong to the corporation. We say that the grant of power to the Superintendent of Banks to .maintain an action vested in the corporation or a stockholder or creditor by necessary implication precludes the stockholder or creditor from instituting such an action until he shows that he is injured or aggrieved by failure, refusal or inability of the Superintendent of Banks to remedy the alleged wrong. He must first exhaust the means within his reach to induce adequate remedial action on the part of the Superintendent.

Allegation and proof of refusal of a demand is not sufficient. There may be sound reason why no such action should be brought. Before a court of equity will assert,its-power to protect a corporation against wrongs done to it, though the corporation asks no relief, there must be proof that the interests of the corporation and its creditors and stockholders will be served by appeal to the courts. We have said that the Superintendent of Banks is in effect a statutory receiver, yet for some purposes the assets in his hands may be regarded as “ in custodia legis.” (Lafayette Trust Co. v. Beggs, 213 N. Y. 280.) The court may not substitute its discretion for his own where the statute leaves discretion to him. There still remains a field within which the court is supreme. (See Matter of Casualty Co. of America [Rubin Claim], 244 N. Y. 443.) Perhaps the court may not direct him to bring an action if in his discretion it would not be for the best interests of the banking corporation. That we do not now decide. At least it can issue an order to show cause why he should not bring such an action, or why a stockholder should not be permitted to protect the rights of stockholders by instituting the action vested in him.

Upon the return of such an order the court can determine whether the Superintendent of Banks is willing and able to protect those rights or whether the equitable jurisdiction of the court may be invoked by the stockholder. It can determine whether failure or refusal by the Superintendent of Banks to bring an action at that time may imperil a recovery. It can determine whether the Superintendent should have more time in which to decide whether or not to bring an action or whether a stockholder should be permitted to institute the action vested in him. It can adjust any possible conflicting interests so that a single action for a single recovery may be instituted under conditions which will protect the rights of all. That would not transcend the supervisory power of the courts over the affairs of a corporation. Until such an order to show cause has been sought by the stockholder it cannot be said that he has exhausted all the means within his reach to induce appropriate action by the statutory, receiver in control of the corporate affairs. The complaint sets forth no cause of action because it fails to allege such facts.

The judgment should be affirmed, with costs.

Cardozo, Ch. J., Pound, Crane, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgment affirmed.


text:
    Joseph Frankenberger, Respondent, v. Alexander Schneller et al., as Executors of Bernhard Schneller, Deceased, Appellants.

      (Argued November 30, 1931;
    decided January 5, 1932.)

      Samuel Seabury, William J. Grange and Charles Hollender for appellants.
    The testimony fails, as a matter of law, to establish the contract alleged in the complaint. (Hamlin v. Stevens, 177 N. Y. 39; McKeon v. Van Slyck, 223 N. Y. 392; Holt v. Tuite, 188 N. Y. 17; Rosseau v. Rouss, 180 N. Y. 116; Wildman v. Jones, 150 App. Div. 514; 209 N. Y. 531; Robinson v. Munn, 238 N. Y. 40; Walrath v. Insurance Co., 216 N. Y. 220; Southwick v. Bank, 84 N. Y. 420.)

      Caruthers Ewing for respondent.
    There were no conflicting inferences which could fairly and honestly be drawn from the undisputed evidence, and only in this situation does an issue of fact arise. (Matter of Totten, 179 N. Y. 112; Hirsch v. Jones, 191 N. Y. 195; Tousey v. Hastings, 194 N. Y. 79; People v. Clougher, 246 N. Y. 106.) When declarations or admissions are deliberately made and are clearly proved, they afford very strong and satisfactory evidence of the fact admitted or asserted. (McRorie v. Monroe, 203 N. Y. 426.) Ample consideration is found in any promise duly performed which limits one’s freedom of action. (Hamer v. Sidway, 124 N. Y. 538.)
   Lehman, J.

The plaintiff entered the decedent’s employ in 1917. He was a nephew of the decedent’s wife. Doubtless the family relation affected to some extent the terms of employment, and the wages paid to the plaintiff may not have been the sole reward the plaintiff expected. The evidence shows that, in addition to wages, the decedent gave to the plaintiff a house and an inexpensive bungalow and that he expressed to numerous witnesses an intention, at his death, to leave the plaintiff the sum of $50,000 if the plaintiff remained in his employ until that time. Indeed, after his first wife’s death in 1925 he made a will containing such a conditional bequest. Then he transferred to another nephew the business in Which the plaintiff was employed and obtained a promise from the nephew who took over the business that he would continue to employ the plaintiff and pay him in addition to his wages the sum of $1,000 a year. Even then the decedent insisted that each day he must have the “ first call ” on plaintiff’s services to drive his car or do other work for him. Before his death the decedent revoked his will and left nothing to the plaintiff. Now the plaintiff brings this action to recover the sum of $50,000 upon an alleged oral contract made with the decedent in 1918 whereby the plaintiff was to work for the decedent as a chauffeur and in other capacities, from that date up to his death at an inadequate wage for the services being then and expected thereafter to be rendered, in consideration of said decedent’s agreement that at his death plaintiff was to receive $50,000.”

Two former employees of the decedent testified that he told them that he had " promised ” to leave plaintiff $50,000 if plaintiff “ stayed ” with him till his death. The testimony of the other witnesses produced by the plaintiff shows that the decedent had benevolent testamentary intentions — but nothing more. No witness testifies that he was present when the decedent made such a promise to the plaintiff. We are without information of the circumstances which led the decedent to make the alleged promise. We do not know whether the plaintiff at that time was satisfied with the compensation he was receiving or whether he contemplated seeking other employment. Certainly no inference can be drawn that the decedent’s promise to leave him $50,000 at his death, if plaintiff stayed with him till then, was made, in consideration of a promise, given by plaintiff in return, to remain in his employ till then. The evidence entirely fails to sustain a finding that the bilateral contract alleged in the complaint was ever made.

Nor is the evidence sufficient to show a unilateral contract which became binding when the plaintiff by performance of services, stipulated as the consideration for the promise, accepted the decedent’s offer. The admissions of the decedent that he did make such a promise are equivocal. They are capable of construction that the alleged promise was merely the expression of a testamentary intention for which he neither asked nor received any consideration and which might be changed at his will. We may not weigh the evidence nor set aside inferences drawn by the jury if supported by the evidence though we might draw other inferences. Here the plaintiff must establish that the decedent’s alleged promise was made and understood, not as a mere, expression of intention, but as the assumption of a binding obligation in consideration of a promise given by the plaintiff in return, or of performance by the plaintiff of a stipulated act. That the plaintiff has wholly failed to do.

The plaintiff has received wages for the services he has rendered to the decedent. For many years he may have relied on the decedent’s benevolent testamentary intentions and generosity for further reward, or he may have relied on a promise which he regarded as binding. It is certain that the decedent reconsidered his benevolent intentions. The decedent cannot contradict the testimony of the alleged admissions or explain the admissions if made. Recovery against his estate cannot be based on disappointed expectations or even on expression of intention, in the form of a promise which was not carried out. The evidence is insufficient to show more.

The judgment of the Appellate Division and that of the Trial Term should be reversed and the complaint dismissed, with costs in all courts.

Cardozo, Ch. J., Pound, Crane, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgments reversed, etc.


text:
    M. Arthur Helfhat, Respondent, v. J. Norman Whitehouse et al., Copartners, under the Firm Name of Whitehouse & Co., Appellants.

      (Argued December 3, 1931;
    decided January 5, 1932.)

      Thomas G. Prioleau and Robert W. Bernard for appellants.
    The exclusion by the trial court from the evidence of the written contract between the parties, wherein plaintiff agreed that all transactions for his account were subject to the rules and customs of the New York Stock Exchange and its clearing house, constitutes reversible error. (Koehler v. New York Steam Co., 183 N. Y. 1; Horton v. Morgan, 19 N. Y. 170.)

      Michael M. Helfgott for respondent.
    The agreement between plaintiff and defendants which governed their relationship of customer and broker was properly excluded. (Gettin v. Boyle, 184 App. Div. 499; Dunham v. Cudlipp, 94 N. Y. 129; Decker v. Mathews, 12 N. Y. 313; McCarthy v. Heiselman, 140 App. Div. 240; Paltey v. Egan, 200 N. Y. 83.)
   Lehman, J.

The defendants are stockbrokers and members of the Stock Exchange. In February, 1928, they held 1,000 shares of Warner-Quinlan Oil Company stock for plaintiff’s account. They gave one E. H. Stern a “ stop loss ” order to sell this stock when it fell to a certain price. Stem was a “ specialist ” in that stock. Stern notified the defendants that the stock was sold in accordance with the stop loss order, and the defendants in turn notified the plaintiff. He objected to the sale and then brought this action, alleging in his complaint that his stock was “ held and carried, under and pursuant to an agreement that * * * said defendants * * * would hold and carry the same, subject to the plaintiff’s direction as to the sale and disposition thereof, as long as plaintiff should desire, and would not sell or dispose of the same unless plaintiff’s margin should become exhausted and insufficient, and not then, unless plaintiff should fail to comply with their demand of plaintiff that he should give further security or margin.” All this the defendants admitted in their answer but they denied the further allegations of the complaint that “ without calling on plaintiff for any additional margins * * * [they] wrongfully sold or pretended to sell the 1,000 shares of Warner-Quinlan stock, and misapplied the proceeds of said sale, and wrongfully converted them to then own use,” and the defendants affirmatively alleged that the stock had been sold by defendants at the special instance and request of plaintiff on February 17, 1928, * * * pursuant to the directions of plaintiff and under certain so-called stop loss orders theretofore duly given and placed by plaintiff with defendants and that defendants in maldng the sale * * * were acting in strict compliance with the express orders and directions of the plaintiff.”

The issues raised by the answer to the complaint were brought to trial. If there could be doubt as to what these issues were, the plaintiff’s counsel in his opening statement gave practical construction to the allegations of the complaint. Though in the complaint sale or “ pretended sale ” are alleged in the alternative, the basis of the cause of action pleaded is that in either event the action of the defendants was illegal because authority from the plaintiff was lacking either for a sale or a pretended sale. Indeed in his opening, plaintiff’s counsel repeatedly said that the sales were made, and added that when the sales were made, they were properly put back on the sales of the day before. That is all right. That had to be done.” The wrong was, so he said, that the sales were made without authority. That alleged wrong the defendants denied, and that issue was litigated by the parties at the trial.

The same issue had been litigated at a previous trial. Then the jury found in favor of the plaintiff, but the Appellate Division set aside the verdict on the ground that it was against the weight of evidence (231 App. Div. 701). At the second trial the trial judge refused to submit that issue to the jury, but directed a judgment in favor of the plaintiff on the ground that it then conclusively appeared that the “ specialist ” employed by the defendants to sell the stock was the sub-agent of the defendants to carry out the plaintiff’s orders; that the specialist sold the stock to himself and that a sale so made is not a sale but a conversion of the stock for which the defendants are responsible.

The evidence upon that point was admitted as an incident to the trial of the issues defined in the pleadings as construed by the parties both at the earlier trial and in their opening here. That evidence shows that the order to sell was given by the defendants to a specialist named Stern; that the defendants so informed the plaintiff. He testified that one of the defendants said that Stern was the only specialist ” in the Warner-Quinlan stock; that all brokers who received orders from customers to buy or sell executed their orders through him. The plaintiff promptly received a formal notice of the sales which stated that the stock was “ sold to E. H. Stern.”

The plaintiff never protested that a pretended sale by a specialist to himself constituted a conversion of the stock. Not until the close of the second trial did he raise such objection. His counsel urges in his brief that the plaintiff had obviously failed to notice that the purchaser named in the sales notice and the specialist who made the sale were the same. That may be true, but it emphasizes the fact that the complaint was never intended or understood to allege a cause of action based upon a pretended sale by an agent to himself. The defendants never were apprised that they were called upon to meet such a cause of action until after both sides had rested, and then they were told that it was too late to interpose any defense to such a cause of action or to controvert the proof presented.

A party charged with a wrong is entitled to notice of the charge and opportunity to defend. The pleadings may be disregarded, the notice may be waived, if the parties choose to litigate at the trial an issue not raised by the pleadings. Then pleadings may be amended to conform to the proof. Perhaps the rule that judgment must be in accordance with the allegations contained in the pleadings does not apply when the evidence, though admitted to prove these allegations, shows beyond dispute that a party is responsible for a wrong which is not alleged, and that further opportunity to defend would be futile and a source only of delay and injustice. Where it appears that the trial has been adequate for the presentation of all relevant testimony, technicalities may be disregarded. The courts are administered to promote the search for the truth; when that is accomplished, all else may be immaterial. The pleadings may not be amended, enlarged or restricted in a manner which deprives a party of opportunity to litigate a substantial question.

That has been done here. The defendants maintain that by agreement of the parties, sales were to be made in accordance with the rules of the Stock Exchange. We must assume that to be true. Evidence to show that such was the agreement of the parties was offered, and excluded over the exception of the defendants as immaterial. The rules of the Stock Exchange were not offered in evidence. They were not relevant to the issues that the defendants litigated at the trial, though perhaps they might be relevant upon the new charge on which recovery was actually based.

We are not informed of the nature of the “ specialist’s ” functions. The parties and the court apparently understood that he is a broker to whom orders are given regularly by other brokers for execution in a particular stock which he watches continuously. He has been described as a “ member designated by the exchange to keep the record of outstanding bids for and offers of that stock.” (Meyer on the Law of Stockbrokers and Stock Exchanges, p. 487.)

The contract between a broker and his customer is primarily one of agency. (Levy v. Loeb, 85 N. Y. 365.) As agent the broker must actually execute his customer’s orders to buy or sell. (Hurd v. Taylor, 181 N. Y. 231.) He may not offset one customer’s order to sell against another customer’s order to buy by mere bookkeeping entries. (Haight v. Haight & Freese Co., 112 App. Div. 475, affd., 190 N. Y. 540.) It has been held, nevertheless, that where a broker sells as agent for one customer to himself as agent for another customer, in accordance with the rules and customs of the exchange, the sale is binding upon both customers. (Hall v. Paine, 224 Mass. 62.) Indeed where all orders to buy and sell a particular stock are executed through one specialist in that stock, it is difficult to see how sales can be made otherwise. In such case the courts will give effect to the rule if they find it is fair and not opposed to public policy; and in the same ease in which the Massachusetts court held that a rule was valid though it permitted a broker to make a contract of purchase and sale as agent for both buyer and seller, it held invalid and against public policy a rule that a broker might as agent sell to or buy from himself as principal, at least where it was not shown that the customer knew of that particular custom or usage. (See, also, Robinson v. Mollett, [L. R.] 7 English & Irish Appeals [H. L.], 802; Irwin v. Williar, 110 U. S. 499.)

Where a broker executes an order through a sub-agent called a floor broker or specialist, the sub-agent is ordinarily under the same restrictions as the original broker and the principal may repudiate the contract made in his behalf where the floor broker purchases for himself the stock which he was directed to sell. (See Evans v. Wrenn, 93 App. Div. 346; affd., 181 N. Y. 566, though that ruling was not subject to review upon the appeal taken by the plaintiff.) If there is a rule or custom of the exchange which permits the specialist to purchase for his own account under any circumstances, it would to that extent transform the specialist into an independent dealer rather than a subagent, and change the ordinary rule that the original broker must execute orders received from his customer by purchase and sale on the floor of the exchange. Here, as we have said, we are not informed by record or briefs whether such a rule exists or, if it exists, of its limitations, or whether the conditions under which the rule was intended to operate existed, or whether the plaintiff knew of such rule. We cannot say that if such rule exists it would not contravene public policy or would constitute an answer to a charge of conversion, but manifestly the defendants should have had the opportunity to have the courts pass upon such questions. Moreover, though the notice to the plaintiff states that the stock was sold to the specialist, we are not informed whether that form of notice is used only when the specialist buys for his own account or when he acts as agent for both buyer and seller. Perhaps we might assume that it is used only where the specialist purchases for himself stock which he has been directed to sell. Even then the question would remain whether the plaintiff after receiving such notice, as well as information of the name of the specialist to whom the order to sell had been given, was not chargeable with knowledge that the sale had been made by the specialist for himself and whether failure to object promptly did not preclude him from belated repudiation. The vice of the judgment is that the defendants have been deprived of their day in court in which such questions might be presented.

The judgment of the Appellate Division and that of the Trial Term should be reversed and a new trial granted, with costs to abide the event. (See 258 N. Y. 608.)

Cardozo, Ch. J., Pound, Crane, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgments reversed, etc.


author: Pound, J.

text:
    In the Matter of the Accounting of Brooklyn Trust Company, as Trustee under the Will of Theodore F. Jackson, Deceased, Respondent. Stewart M. Neff, as Executor of Cornelia B. Jackson, Deceased, Appellant; Joseph H. Jackson et al., Respondents.

      (Argued November 16, 1931;
    decided January 12, 1932.)

      Robert H. Wilson for appellant.
    The will of deceased Clearly shows that the Sole object of his care and solicitude was his wife. (Woodward v. James, 115 N. Y. 346.) The dividend declared by the Vandervoort Realty Company was income payable to the widow. (Matter of Enz, 204 App. Div. 634; 237 N. Y. 577; Matter of Langdon, 139 Misc. Rep. 379; Matter of James, 78 Hun, 121; 146 N. Y. 78; Clarkson v. Clarkson, 18 Barb. 646; Reed v. Head, 88 Mass. 174; Matter of Thomson, 153 Penn. St. 332; Matter of Oliver, 136 Penn. St. 43.) The decree of the Surrogate of Suffolk county construing the will of deceased as to his unproductive real estate is res judicata. (Surr. Ct. Act, §§ 80, 274; Matter of Sternfels, 133 Misc. Rep. 565; Matter of Bermuth, 127 Misc. Rep. 705; Hull v. Hull, 225 N. Y. 342; Reynolds v. Reynolds, 224 N. Y. 429; Matter of Schley, 202 App. Div. 169; 234 N. Y. 616; Matter of Stewart, 88 App. Div. 23; Phalen v. U. S. Trust Co., 100 App. Div. 264; Matter of Goldsticker, 192 N. Y. 35; Matter of Gargiulo, 138 Misc. Rep. 90; Matter of Moran, 136 Misc. Rep. 615; Loeb v. Hasslacher, 209 App. Div. 58; Demuth v. Kemp, 159 App. Div. 422; Matter of Howard, 46 Misc. Rep. 204; Jewett v. Schmidt, 45 Misc. Rep. 34; 108 App. Div. 322; 184 N. Y. 608; Pray v. Hegeman, 98 N. Y. 351; Brown v. Wheeler, 53 App. Div. 6.) It was clearly the intention of deceased that his widow should receive an income from the unproductive real estate. (Lawrence v. Littlefield, 215 N. Y. 561; Spencer v. Spencer, 219 N. Y. 459; Furniss v. Cruikshank, 230 N. Y. 495.)

      Albridge C. Smith and Boyd L. Bailey for Joseph H. Jackson et al., respondents.
    The extraordinary cash dividend declared by Vandervoort Realty Company out of the proceeds of the sale of the greater part of its real estate was a distribution of capital and was properly awarded to the principal of the trust. (McLouth v. Hunt, 154 N. Y. 179; Matter of Osborne, 209 N. Y. 450; United States Trust Co. v. Heye, 224 N. Y. 242; Thayer v. Burr, 210 N. Y. 155; Riggs v. Cragg, 26 Hun, 89; Stewart v. Phelps, 71 App. Div. 91; 173 N. Y. 621; Equitable Trust Co. v. Prentice, 250 N. Y. 1; Miller v. Payne, 150 Wis. 354; Matter of Humbird, 114 Md. 627.) No part of the proceeds of sale of the unproductive real estate should be apportioned to income. (Matter of Albertson, 113 N. Y. 434; Yates v. Yates, 28 Beav. 637; Matter of Marshall, 136 Misc. Rep. 116.) The decree on the intermediate accounting was not an adjudication of anything not embraced in the accounting and the present matter is not res judicata. (Brinkley v. Brinkley, 50 N. Y. 184; Webb v. Buckelew, 82 N. Y. 555; Rudd v. Cornell, 171 N. Y. 114; Bowditch v. Ayrault, 138 N. Y. 222; Matter of Hoyt, 160 N. Y. 607; Megrue v. Megrue, 231 App. Div. 245; Central Trust Co. v. Falck, 177 App. Div. 501; Kirk v. McCann, 117 App. Div. 56.)

      Ralph W. Crolly for Brooklyn Trust Company, respondent.
   Pound, J.

Theodore F. Jackson was a lawyer of standing and experience. .He drew a will when he was eighty-one years of age which he executed on February 11, 1911, and a codicil thereto which he executed on February 14, 1913. He died June 18, 1913. He left a gross estate of upwards of $850,000. His wife, Cornelia B. Jackson, survived him. She was then seventy-six years of age. She died, fifteen years later, on October 1, 1928. His nearest relatives were nephews and nieces.

By his will and the codicil thereto Mr. Jackson gave his wife his real and personal property at Southampton, Long Island, $150,000 in money and 160 shares of his stock in the Vandervoort Realty Company, “ which shares,” says the will, I recommend her to retain and hold during her life.” After giving some minor legacies he left the residue of his estate in trust to the Long Island Loan and Trust Company (now Brooklyn Trust Company), to receive the rents, profits and income thereof and pay over the same to my beloved wife during her natural life.” After the decease of his wife he directed the payment of the remainder of his estate to collateral relatives. He authorized his trustee to sell and dispose of all his real estate held by it' in trust, for the purpose of making a final distribution of the residuary estate. He also authorized it in its discretion to sell at any time any of his unproductive real estate and convert the same into money and invest the proceeds. Similar language has been held to indicate an intention of the testator to constitute an imperative power of sale and an equitable conversion of the real estate into personalty at his death. (Lawrence v. Littlefield, 215 N. Y. 561.)

His widow had at the time of his death property of her own of the value of more than $86,000. She took under the will property of the value of upwards of $200,000. The trust estate consisted approximately of

Personal property...................... $280,000 00

Income-producing real estate............ 67,036 71

Unproductive real estate................ 195,053 29

Total............................. $542,090 00

During the life of the trust the prevailing rate of interest on bonds and mortgages was from five to six per cent, but the income of the widow from the trust estate was much less than that amount.

The Yandervoort Realty Company was incorporated in 1906 with a capital of $187,000, primarily to hold title to a large tract of vacant and unimproved property in Brooklyn which was purchased by Mr. Jackson and other coadventurers in the hope of making a profit on its resale. The corporation was also authorized by the certificate of incorporation to lease, develop and manage the property. Mr. Jackson received 660 shares of the stock which he held at the time of his death. The trustee sold 40 shares, leaving 460 shares in the trust fund of the appraised value of $71,300. The widow’s estate claims a dividend of 100% paid by this company in 1927 as profits ” of the trust estate. The dividend was declared on the surplus earnings and paid from the proceeds of an advantageous sale of a large portion of the land of the company to the Long Island Railroad Company in 1927, immediately before the dividend was declared. The courts below have held that the dividend was capital and not income.

At the time of his death, Mr. Jackson owned valuable unproductive real estate which went into the trust fund from which no income was received. Of this the larger part was sold by the trustee. All the carrying charges on this property, which is a substantial part of the trust estate, were prior to the sale thereof charged against 'principal, pursuant to a decree of the Surrogate’s Court made in 1915, but on the final settlement of the account of the trustee the courts have denied the claim of the widow’s executor that the life tenant was privileged to receive as delayed income a portion of the sale price to be ascertained as provided in Lawrence v. Littlefield (supra). (See, also, Matter of Pinkney, 208 App. Div. 181; affd., 238 N. Y. 602.)

The questions that arise on this appeal have to do with the conflicting claims of the remaindermen and the life tenant.

1. As to the dividend declared by the Vandervoort Realty Company.

2. As to the carrying charges of the unproductive real estate.

The wife was doubtless the nearest and dearest object of the testator’s solicitude. For her benefit he recommended to her that she retain and hold during her fife the shares in the realty company that he left to her outright. The court looks into the real nature and substance of things with that fact in mind and construes the will without slavish deference to mere names or forms employed by the testator or to labels attached to the corporate organization and its acts. If the will does not express the intention of the testator in so many words, the court will give a fair and reasonable construction to the words which he uses to effectuate his intention. In so doing we may perhaps seem to endow him with prescience that he did not possess by assuming that he did possess it. The declared intention of the corporation was to pay the dividend “ out of the surplus earnings of the company.” Doubtless Mr. Jackson, if living, would have regarded the dividend as profit on the sale of the real estate. Doubtless he gave to his wife all the profits ” from the trust estate. Doubtless the corporate capital remained unimpaired after the dividend was declared. How shall we construe the will with these facts in mind?

The right of life tenant and remainderman to dividends on corporate stock arising out of the sale of lands by a corporation organized to buy and sell lands and to conduct farming operations was considered in Matter of Enz (204 App. Div. 634; affd., 237 N. Y. 577). It was there held that cash dividends made up in part from the sale of lands came from the primary source of corporate income and that, so long as the capital remained unimpaired, they belonged to the life tenant.

The rule applied in the Enz case was stated as an exception to the general rule that dividends representing increased value of the investments of the corporation are to be considered as a distribution of capital and belong to the remaindermen. (Thayer v. Burr, 201 N. Y. 155.) Shall the rule or the exception be applied in this case?

When corporations which are organized to take title to unproductive real estate as here, to make it possible to dispose of the said property readily at any time/’ distribute the moneys arising from a sale in the ordinary course of business as a cash dividend, they are distributing income and not dividing capital. The income is derived from the increment in value which makes a sale profitable. Such is the gist of the holding in Matter of Enz (supra). The distinction, if any, between that case and the one before us rests on no conflict of legal principles. The facts are in substantial accord. That in the current case no sale of the corporate lands was to be had and no development thereof for profit earning was proposed, while in the Enz case the lands were used for farming • operations, seems to emphasize the conclusion that the testator intended that his wife should have the dividends declared from profits made on sales of lands in her lifetime rather than that such profits should augment the principal of the trust estate. Why should he advise her to keep her own stock unless he deemed it a source of potential profit to her? If he expected that she would profit frorn the ownership of the stock presumably he intended that she rather than the remaindermen should profit from dividends paid to the trust estate.

We give effect to the intention of the testator as ascertained from the will by holding that the dividends should go to the widow as profits and not to the remaindermen as capital.

As to the apportionment of the proceeds of sales of unproductive real estate between the life tenant and the remaindermen, there has been no conclusive adjudication of the Surrogate’s Court in this proceeding as contended by the appellant. The determination made by the intermediate decree of 1915 is not binding as to the ultimate rights of the parties. (Rudd v. Cornell, 171 N. Y. 114, 129, 130.) We, therefore, proceed to consider it as an original proposition.

The general rule is that the capital of a trust fund should not be impaired by carrying charges unless the intent of the donor may clearly be inferred. (Matter of Albertson, 113 N. Y. 434.) This follows from the usual purpose of the testator to give the beneficiary the net income and to preserve the corpus intact until the termination of the trust. The reasonableness of the rule as applied to productive property permits no question.

In cases of unproductive lands held in trust, apportionments have been made between income and principal of the purchase price when such lands are sold. (Lawrence v. Littlefield, supra; Spencer v. Spencer, 219 N. Y. 459; Furniss v. Cruikshank, 230 N. Y. 495.) These cases rest on the assumption that the testator did not intend to impoverish or hamper the life tenant with carrying charges for the benefit of the residuary estate.

Difficult it is to distinguish in principle these cases from the case before us although the facts are not always identical. The distinction rests not wholly on the failure of other income to support the life tenant and the inference from that fact that testator would not leave the life tenant penniless, for in Furniss v. Cruikshank (supra) the net income of the beneficiary was adequate for her support in comfort. The inference that Mr. Jackson did not intend that his wife’s income should be impaired for fifteen years by bearing the heavy carrying charges of the unproductive real property or that on a sale the entire proceeds should go to the residuary estate is equally permissible although she was otherwise amply provided for. The distinction does not rest on the lack of “ words of the most unmistakable import ” calling for such an apportionment (Matter of Albertson, supra, p. 440), for the decisions in the cases cited rest on the implied intention of the testator. “ It is not to be assumed that a testator intends that a provision of income for a life beneficiary shall be rendered nugatory by delay ” was the argument which prevailed in Lawrence v. Littlefield (supra, p. 569). The corollary that “ unequivocable direetions to the contrary ” alone will justify an exception to the rule (Matter of Albertson, supra) was, in Spencer v. Spencer (supra, p. 465), made to yield to the implied intention of the testator, and in Furniss v. Cruikshank {supra) the intention of the testator that the life tenant should be made good for lost income due to delay in selling the trust lands was readily discerned from the situation of testator’s property at the time of his death, the condition of the beneficiaries and the circumstances surrounding the execution of the will. It was the testator’s intention that when the sale was made in the future she [the life tenant] should be thereafter entitled to whatever income the trust fund should yield and that as to the past she should be equitably recompensed for the period of abstinence” (p. 510).

In Edwards v. Edwards (183 Mass. 581) the court said, in giving delayed income to the life beneficiary on the sale of unproductive land:

“ In the present case the testator obviously intended that the entire property should be converted into one fund, and that the unproductive and speculative investments which he had at the time of his death should be changed without unreasonable delay. * * *.

It was, therefore, the duty of the trustees to convert this property into an income-producing fund, and this they did according to their best judgment and discretion. The testator is presumed to have expected that some time would be required to accomplish this. At the same time, he is presumed to have intended that the rights of the life tenant to income should be ascertained on the creation of the fund, as if the fund had come into existence immediately after his death.

“ * * *. The rule is applicable as well when the delay in converting the property is necessary as when it is caused by the voluntary act or default of the trustees” (p. 583).

The language of the Edwards case is pertinent here. While authorities are not controlling, they indicate a liberalizing of the rule which thwarted the testator’s probable purpose by loading carrying charges of unproductive real property upon the life tenant although such tenant was obviously the first object of his solicitude so long as she lived.

Mr. Jackson plainly directed a sale of his real estate by his trustee for the purpose of making a final distribution of the estate and authorized the sale of his unproductive real estate at any time. His design was that the real property should be sold, with discretion only as to the time of sale. (Furniss v. Cruikshank, supra.)

The distinction between this case and cases where there is no imperative power of sale or equitable conversion; where the testator directs the trustees to sell only in their discretion and where it is, therefore, said that the only inference is that testator intended to benefit the principal of his estate (Furniss v. Cruikshank, supra, p. 500) may not ultimately prevail.

The orders of the Surrogate’s Court and the Appellate Division should be reversed so far as appealed from and the proceeding remitted to the Surrogate’s Court to render a final decree, after making a proper apportionment between capital and income of the sale price of the unproductive real estate in accordance with this opinion, with costs in all courts to all parties appearing and filing briefs, payable out of the estate of Theodore F. Jackson, deceased. (See 258 N. Y. 610.)

Crane, O’Brien and Hubbs, JJ., concur with Pound, J.; Cardozo, Ch. J., Lehman and Kellogg, JJ., dissent as to the dividend declared by the Vandervoort Realty Company and in other respects concur.

Ordered accordingly.


author: Crane, J.

text:
    In the Matter of Samuel S. Koenig et al., Appellants, against Edward J. Flynn, as Secretary of State, et al., Respondents.

      (Argued January 21, 1932;
    decided February 9, 1932.)

      Abraham S. Gilbert and Benjamin L. Fairchild for appellants.
    The Legislature in dividing the State into congressional districts exercised an administrative or political function pursuant to the provisions of section 4, article I of the Constitution of the United States. It did not exercise a law-making function. (People ex rel. Carter v. Rice, 135 N. Y. 473; People ex rel. Smiley v. Holm, 238 N. W. Rep. 494; Richardson v. McChesney, 128 Ky. 363.) The division of the State of New York into congressional districts was validly done by the Legislature by concurrent resolution pursuant to the provisions of section 4, article I of the Constitution of the United States. (Hawke v. Smith, 253 U. S. 22; McPherson v. Blacker, 146 U. S. 1; Behan v. People, 17 N. Y. 516; Mangam v. City of Brooklyn, 98 N. Y. 585; Cherokee Nation v. Georgia, 5 Pet. 1; Hood Rubber Co. v. Comm. of Corp., 167 N. E. Rep. 670; Pine v. Commonwealth, 121 Va. 812; Clifford v. West Hartford Creamery Co., 153 Atl. Rep. 205; Lewellyn v. Harbison, 31 Fed. Rep. [2d] 740; Matter of Kirkstall Brewery Co., 5 Ch. Div. 535; Rex v. Poor Law Commrs., 6 A. & E. 56; Courtauld v. Legh, L. R. 4 Ex. 126.) There being no doubt as to the meaning of the word “ Legislature ” as used in the Constitution of the United States, resort cannot be had to the rule of practical interpretation. (United States v. Sprague, 282 U. S. 716; Newell v. People, 7 N. Y. 9; People v. Rathbone, 145 N. Y. 434; Brown v. City of New York, 213 App. Div. 206; 241 N. Y. 96; Louisville & Nashville R. R. Co. v. Kentucky, 161 U. S. 677; People v. Tremaine, 252 N. Y. 27.) The clear meaning of the word “ Legislature ” as used in section 4, article I of the Constitution of the United States is not and cannot be changed by resort to the rule of practical construction. (Wendell v. Lavan, 246 N. Y. 116; People v. Rathbone, 145 N. Y. 434; Newell v. People, 7 N. Y. 9; McPherson v. Blacker, 146 U. S. 1; United States v. Sprague, 282 U. S. 716; Hawke v. Smith, 253 U. S. 221; Story v. Craig, 231 N. Y. 33; People ex rel. Snyder v. Hylan, 212 N. Y. 236; Matter of Doyle, 257 N. Y. 244; Pollack v. Bridgeport Steamboat Co., 114 U. S. 411; Matter of McNiel, 80 U. S. 236; People ex rel. Einsfeld v. Murray, 149 N. Y. 367.) Chapter 5 of the act of Congress of August 11, 1911, was limited to the apportionment therein made and expired with the enactment of the act of June 18, 1929. (People ex rel. Smiley v. Holm, 238 N. W. Rep. 494.)

      John J. Bennett, Jr., Attorney-General (Henry Epstein of counsel), for Edward J. Flynn, respondent.
    One hundred and forty years of continued and uninterrupted legislative experience of all the States in their districting for the election of Representatives of Congress furnishes a practical construction of article I, section 4, of the Federal Constitution opposed to the validity of the concurrent resolution of the Senate and the Assembly of the State of New York. (Story v. Craig, 231 N. Y. 33; Matter of La Rocca v. Flynn, 257 N. Y. 5; Gardner v. Ginther, 232 App. Div. 296; People ex rel. Argus Co. v. Palmer, 12 Misc. Rep. 392; 146 N. Y. 406; People ex rel. Burritt v. Commissioners, 11 N. E. Rep. 180; Mullan v. California, 114 Cal. 578; May v. Rice, 91 Ind. 546; State v. Kinney, 56 Ohio St. 721; State ex rel. Peyton v. Cunningham, 39 Mont. 197.) The constitutional use of the term “ Legislature ” in connection with the division of the State into districts for the purposes of election or otherwise has invariably had reference to the law-making body and not merely the elected representative bodies, such as the Senate and the Assembly. (State ex rel. Barrett v. Hitchcock, 241 Mo. 433; Matter of Doyle, 257 N. Y. 244; Davis v. Hildebrandt, 241 U. S. 565; Hawke v. Smith, 253 U. S. 221; McPherson v. Blacker, 146 U. S. 1; Clairborne Co. v. Brooks, 111 U. S. 400; Detroit v. Osborne, 135 U. S. 492.) The Congress of the United States has by law acted in a manner foreclosing the redistricting of New York State other than by statute. (Davis v. Hildebrandt, 241 U. S. 565; Woods v. Supervisors, 136 N. Y. 403; Davis v. Supreme Lodge, 165 N. Y. 159; People v. Dwyer, 215 N. Y. 46; Matter of Tiffany, 179 N. Y. 455; Frost v. Wenie, 157 U. S. 46; United States v. Greathouse, 166 U. S. 601.) Chapter 890 of the Laws of 1911 of the State of New York is still effective and has not been superseded or repealed by the concurrent resolution of the Senate and Assembly. (Rumsey v. People, 19 N. Y. 41.)

      John Godfrey Saxe, Robert F. Wagner and John J. O’Connor for James A. Farley, respondent.
    The Senate and Assembly was without power, by concurrent resolution, to repeal chapter 890 of the Laws of 1911, as amended, or the Election Law. (People ex rel. Fitzgerald v. Voorhis, 222 N. Y. 494; Rumsey v. People, 19 N. Y. 41.) The act of Congress of 1929 did not repeal sections 3 and 4 of the act of Congress of 1911, nor the United States Code. (Coyle v. Oklahoma, 221 U. S. 559; People v. Worden, 187 N. Y. 322; Brown v. City, 241 N. Y. 96; United States v. Greathouse, 166 U. S. 601; United States v. Lee Yen Tai, 185 U. S. 213; Washington v. Miller, 235 U. S. 422; Graham v. Goodcell, 282 U. S. 409; Woods v. Supervisors, 136 N. Y. 403; Davis v. Lodge, 165 N. Y. 159; Matter of Tiffany, 179 N. Y. 455; People v. Dwyer, 215 N. Y. 46; United States v. Gear, 44 U. S. 120; The Reform, 70 U. S. 617.)
   Crane, J.

Following the census of 1910, Congress enacted the Thirteenth Apportionment Act, in August of 1911 (Yol. 37, U. S. Statutes at Large, chap. 5, p. 13). It reads in part as follows:

That after the third day of March, nineteen hundred and thirteen, the House of Representatives shall be composed of four hundred and thirty-three Members, to be apportioned among the several States as follows: * * * New York, forty-three.

Sec. 3. That in each State entitled under this apportionment to more than one Representative, the Representatives to the Sixty-third and each subsequent Congress, shall be elected by districts composed of a contiguous and compact territory, and containing as nearly as practicable an equal number of inhabitants. The said districts shall be equal to the number of Representatives to which such State may be entitled in Congress, no district electing more than one Representative.

“ Sec. 4. That in case of an increase in the number of representatives in any State under this apportionment, such additional Representative or Representatives shall be elected by the State at large and the other Representatives by the districts now prescribed by law until such State shall be redistricted in the manner provided by the laws thereof and in accordance with the rules enumerated in section three of this Act; and if there be no change in the number of Representatives from a State, the Representatives thereof shall be elected from the districts now prescribed by law until such State shall be re-districted as herein prescribed.”

Thereafter, and in accordance with this act of Congress, New York State passed an act known as chapter 890 of the Laws of 1911, which became a law on October 18, 1911, with the approval of the Governor. It read: For the election of representatives in congress of the United States, this state shall be and is hereby divided into forty-three districts, namely,— ” The districts were then described, and it wound up by stating that all acts inconsistent with this law were repealed.

Thus the matter stood. Representatives were elected in this State from the congressional districts described in this State law of 1911, up to and until the present time. Another census was taken, pursuant to an act of Congress, passed June 18, 1929. This act not only provided for the taking of the census, but also provided for the increase or decrease in State representation according to the results of the census. The total number of Representatives was not to be increased. (46 U. S. Stat. at Large, chap. 28, June 18, 1929.) That part of the act providing for the apportionment of Representatives is also to be found in Mason’s Code (Yol. 5, No. 3, October, 1929, p. 20). Section 22(a) reads as follows:

“ On the first day, or within one week thereafter, of the second regular session of the Seventy-first Congress and of each fifth Congress thereafter, the President shall transmit to the Congress a statement showing the whole number of persons in each State, excluding Indians not taxed, as ascertained under the fifteenth and each subsequent decenial census of the population, and the number of Representatives to which each State would be entitled under an apportionment of the then existing number of Representatives made in each of the following manners: [the rule is then stated] * * *

(b) If the Congress to which the statement required by subdivision (a) of this section is transmitted, fails to enact a law apportioning Representatives among the several States, then each State shall be entitled, in the second succeeding Congress and in each Congress thereafter until the taking effect of a reapportionment under this Act or subsequent statute, to the number of Representatives shown in the statement based upon the method used in the last preceding apportionment. It shall be the duty of the Clerk of the last House of Representatives forthwith to send to the executive of each State a certificate of the number of Representatives to which such State is entitled under this section. * * * ”

This much of the act of June 18, 1929, I have quoted, in order to show that it provided for the apportionment of four hundred and thirty-three Representatives among the various States according to population as indicated by the census, but in no way indicated how the number of Representatives allotted to each State should be chosen. The previous apportionment act of August 8, 1911, in sections 3 and 4, above quoted, made such a direction, but it is lacking in this later act of June 18, 1929. Upon the certificate of the President to Congress, followed by the certificate of the Clerk of the House, all in accordance with the provisions of the census and apportionment act of June 18, 1929, New York became entitled to forty-five Representatives instead of the forty-three apportioned to it under the act of 1911. This was an increase of two. How are the two to be elected?

The New York Legislature determined that it could be done by a joint resolution, and-on April 10, 1931, divided the State into forty-five congressional districts in this manner. The concurrent resolution not being a law was, of course, not submitted to the Governor for his approval, pursuant to the Constitution of this State. This method of electing Congressmen is here challenged on two grounds: First, because the Legislature must redistrict the State by a duly enacted law, and not by resolution, and second, if this be not so, the act of Congress, August 8, 1911, is still in force and effect.

The Constitution of the United States, article I, section 4, provides: The Times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Places of chusing Senators.”

By the Constitution of the State of New York, article III, section 1, the legislative power of the State is vested in the Senate and Assembly. The law-making power, however, includes control or supervision by the Governor in so far as it is provided by article IV of the Constitution, section 9, that:

Every bill which shall have passed the Senate and Assembly shall, before it becomes a law, be presented to the Governor; if he approve, he shall sign it; but if not, he shall return it with his objections to the house in which it shall have originated, which shall enter the objections at large on the journal, and proceed to reconsider it. If after such reconsideration, two-thirds of the members elected to that house shall agree to pass the bill, it shall be sent together with the objections, to the other house, by which it shall likewise be reconsidered; and if approved by two-thirds of the members elected to that house, it shall become a law notwithstanding the objections of the Governor.”

When this government began to function under the Constitution adopted in 1787-1789, the then existing States apparently understood section 4, article I, of the Federal Constitution to refer to the law-making power of the Legislature or to such bodies as the individual States had created for the enactment of laws. The uninterrupted practice in all of the States has been to create congressional districts by laws enacted in accordance with the Constitution of the respective States, whatever that may be. While the plain and direct provisions of a constitution cannot be modified or amended by practice, custom or violation, no matter how long continued, such uniformity by all the States in the method of electing Congressmen indicates quite clearly the meaning which was given to section 4 of article I, especially in the early days when the people were so sensitive to intrusion and control by individual executives. A uniform course of action involving the right to the exercise of an important power by the State government without question is no unsatisfactory evidence that the power is rightfully exercised. (Briscoe v. Bank of Kentucky, 36 U. S. 257; McPherson v. Blacker, 146 U. S. 1, pp. 36, 37; United States v. Sprague, 282 U. S. 716; Matter of Wendell v. Lavin, 246 N. Y. 115; People v. Tremaine, 252 N. Y. 27.)

The wording of section 4, article I, very likely suggested that the action by the State Legislature under it should be in the form of a law. It was to be more than an assent by the people of the State to some Federal proposition and more than a choice by them of a Federal representative. The legislative act was to be a direction to the people of the State demanding certain things to be done, fixing a time, a place, and a manner which had to be followed. From the Legislature was to come a mandate, the disobedience of which would result in penalties or legal consequences. Naturally, this would be effected in the same way as all other like mandates. The action of the Legislature would, therefore, be in the form of a law. Section 4 says that the times, places and manner shall be “ prescribed by. the Legislature. Prescribed ” means to lay down authoritatively a rule of action. From time immemorial this has been done by a law according to the forms existing at the time. That which must be obeyed and followed by citizens subject to sanctions or legal consequences is a law. Such a direction must take the form of law. Likewise, in section 4, we find that Congress may exercise the power given to the State Legislature, and when it makes its regulations, it shall do so “ by law.” The matter being dealt with in section 4 is the time, place and manner of holding elections for Representatives. Whether these details be fixed by the Legislature of the State or by Congress, they are to be fixed by law. If Congress must do it by law, it is reasonable to suppose that the State Legislature was intended to do it in the same way. This at least has been the interpretation given to this section for over one hundred and forty years, and it is too late now to overturn it.

There is a distinction to be drawn between the functions of a Legislature, such, for instance, as choosing Senators, making application to the Federal government for protection against invasion, ratifying a constitutional amendment, consenting to a purchase of State lands —■ there is, I say, a difference between these functions of the Legislature and the prescribing or enacting of a rule or direction, which must be followed and obeyed by the people of the State, called the law-making power; such, for instance, as dividing the State into congressional districts and directing the people where, when and how to vote. We find such a distinction referred to in McPherson v. Blacker (146 U. S. 1); State ex rel. Davis v. Hildebrant (241 U. S. 565); Hawke v. Smith (253 U. S. 221); United States v. Sprague (282 U. S. 716), although these cases did not pass upon the point here in question. (See, also, Matter of Doyle, 257 N. Y. 244.) We conclude, therefore, that the resolution of April 10, 1931, was ineffective, and that its attempted redistricting of the State is null and void.

Even if this were not so, we would be inclined to hold that the act of Congress, August 8, 1911, was still in force and effect as a regulation to be followed in providing for the election of an additional number of Representatives. Section 3 of that act certainly is a general provision which practically can apply to any increase or decrease in the number of Representatives. Section 4, while in terms limited to the apportionment under the act of 1911, also provides and enacts a general rule which may be adopted to subsequent changes in the number of Representatives, the rule being that additional Representatives are to be elected at large and the others according to existing laws. This is simple, direct and universal. The act of June 18, 1929, did not touch these matters, made no reference whatever to the provisions enacted in sections 3 and 4 of the Laws of 1911. The number of Representatives in any given State was automatically readjusted upon the certificate of the President after each census. This was the only thing accomplished by the act of June 18, 1929. We do not think that Congress intended to repeal the act of 1911 or thought that it would terminate upon the passage of the subsequent act. The two should be read together, if possible. One provided for the method of election and the other merely for the number of Representatives. The two can be read together as a fair and reasonable regulation by Congress for the election of its Representatives, and this is the view we shall take of it.

Even if we were to take a different view, however, our conclusion would be that by the act of 1911 and the similar acts that preceded it, there had been a practical recognition by Congress of the just and reasonable rule to be followed in the absence of a statute, and that this rule should be adhered to even if the statute does not govern ex proprio vigore.

With this expression of our opinion, we hold that the resolution of April 10, 1931, is without effect; that forty-three of the forty-five Congressmen are to be elected according to the districts created by chapter 890 of the Laws of 1911 of the State of New York, as amended, and the additional two will be elected at large by the entire State. This, of course, is in the absence of a law passed by the present Legislature now in session, redistricting the State into forty-five congressional districts.

The order below should be affirmed, without costs.

■ Cardozo, Ch. J., Pound, Lehman, O’Brien and Hubbs, JJ., concur; Kellogg, J., not sitting.

Order affirmed.