text:
    Charles O. Shepherd et al., Appellants, v. The Mount Vernon Trust Company, Respondent.

      (Argued October 23, 1935;
    decided November 20, 1935.)

      Harold M. Edwards and Frank H. Connelly, Jr., for appellants.
    The statute unlawfully impairs the obligation of a contract and deprives appellants of their property without due process of law. (Matter of Delaney, 256 N. Y. 315; Matter of Holden, 264 N. Y. 215; Hendrickson v. Apperson, 245 U. S. 105; Poindexter v. Greenhow, 114 U. S. 270; Dahnke-Walker Milling Co. v. Bondurant, 257 U. S. 282; Doty v. Love, 295 U. S. 64; Hoff v. First State Bank, 174 Minn. 36; McConville v. Fort Pierce Bank & Trust

      Co., 101 Fla. 727; Farmers’ Bank v. Tomlinson, 55 S. D. 185; Hessen Siak Shams v. Nebraska State Bank, 48 Fed. Rep. [2d] 894; Engelecke v. Farmers’ State Bank, 246 N. W. Rep. 288; Island City Savings Bank v. Sachtleben, 67 Tex. 420; Rumble v. Tyns, 123 Ga. 295; Sliosberg v. V. F. Life Ins. Co., 244 N. Y. 482; Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398; Worthen Co. v. Thomas, 292 U. S. 426; Worthen Co. v. Kavanaugh, 295 U. S. 56; Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555; Matter of Prudential Outfitting Co., 250 Fed. Rep. 504; Lynch v. United States, 292 U. S. 571.) Appellants are not estopped from attacking the constitutionality of the plan because they have received a sum equal to fifty-five per cent of their withheld balance. (Wills v. Investors Bankstocks Corp., 257 N. Y. 451; Mellen v. Mellen, 137 N. Y. 606.)

      Clinton T. Taylor and James D. Hopkins for respondent.
    Neither section 61-a of the Banking Law (Cons. Laws, ch. 2) or the plan of reorganization of the defendant in any respect impairs the obligation of contract or deprives the appellants of their property without due process of law. (Brown Holding Co. v. Feldman, 256 U. S. 170; People v. Nebbia, 262 N. Y. 259; 291 U. S. 502; Hoff v. First State Bank, 174 Minn. 236; Paul v. Farmers & Merchants State Bank, 245 N. W. Rep. 832; McConville v. Fort Pierce Bank & Trust Co., 135 So. Rep. 392; Becker v. Amos, 141 So. Rep. 136; Dorman v. Dell, 52 S. W. Rep. [2d] 892; Milner v. Gibson, 61 S. W. Rep. [2d] 273; Smith v. Tetley, 225 N. W. Rep. 307; Nagel v. Ghingher, 171 Atl. Rep. 65; Timmons v. People’s Tr. Co., 173 S. E. Rep. 79; Warsaw Malt Products Co. v. Citizens State Bank, 254 N. W. Rep. 379; Matter of Citizens Sav. Bank, 30 Ohio W. P. W. S. 271; Felter v. Bank of Leipsic, 31 Ohio [N. S.] 241; Dunn v. Love, 155 So. Rep. 331; Doty v. Love, 295 U. S. 64; Matter of Chicago R. I. & P. R. Co., 55 Sup. Ct. 595; Hadacheck v. Sebastian, 239 U. S. 394; Atlantic Coast Line R. R. Co. v. Goldsboro, 232 U. S. 548;
      Matter of Morse, 247 N. Y. 290; Dyer v. Broadway Central Bank, 225 App. Div. 366; Canada Southern Ry. Co. v. Gebhard, 109 U. S. 527; Gibbes v. Zimmerman, 290 U. S. 326; Gilfillan v. Union Canal Co., 109 U. S. 401; Matter of People [Title & Mortgage Guarantee Co.], 264 N. Y. 69; Mose.s v. Guarantee & Mortgage Co., 264 N. Y. 476; Levy Leasing Co. v. Siegel, 230 N. Y. 634; 258 U. S. 242; Block v. Hirsh, 256 U. S. 135.) The appellants are estopped from attacking the constitutionality and the plan of reorganization. (Clay v. Smith, 28 U. S. 411; Daniels v. Tearney, 102 U. S. 415; Musco v. United Surety Co., 196 N. Y. 459; Bridgeport Construction Co. v. Duffey, 106 Misc. Rep. 252; Eustis v. Bolles, 146 Mass. 413; 150 U. S. 361.)
   Lehman, J.

In March, 1933, all the banks of the State were temporarily closed by proclamation of the Governor of the State and of the President of the United States. On March 24, 1933, the defendant bank was permitted to reopen, but subject to restrictions imposed by the Superintendent of Banks of the State of New York. At that time the plaintiffs maintained a deposit account in their joint names in the defendant bank. They collected ten per cent of the amount on deposit. The restrictions imposed by the Superintendent of Banks precluded the plaintiffs from collecting more at that time. The sum of $3,196.40 still remained in their deposit account. It could be collected from the bank only if the Superintendent of Banks should thereafter determine that the bank should be permitted to do business without restrictions; otherwise it could be collected only upon liquidation of the bank by the Superintendent of Banks, in so far as the funds in his hands might prove sufficient to pay the creditors of the bank.

While the bank was conducting its business under the restrictions imposed by the Superintendent of Banks, the Legislature by chapter 772 of the Laws of 1933 added section 61-a to the Banking Law (Cons. Laws, ch. 2). That section provides: The superintendent, in his discretion, may permit a corporation * * * which is operating on a restricted basis pursuant to regulations^ promulgated by duly constituted authority, to resume business in accordance with a plan of reorganization under which depositors and other creditors will receive less than the full amount of their claims and /or in partial payment thereof will receive certificates of beneficial interest' in certain segregated assets and /or stock of such corporation, and under which stockholders will contribute their shares of capital stock and /or money in lieu of assessments upon such stock. In any such case in which the superintendent permits resumption of business pursuant to such a plan of reorganization, all depositors and creditors and stockholders of any such corporation, whether or not they shall. have consented to such plan of reorganization, shall be fully and in all respects subject to and bound by its provisions, and claims of all depositors and other creditors shall be treated as if they had consented to such plan. * * * ” The statute then provides that the plan of reorganization must in the opinion of the Superintendent be fair and equitable to all depositors and other creditors and stockholders and in the public interest and, before it can become effective, must receive the consent of depositors and other creditors representing at least eighty per centum in amount of its total deposits and other liabilities, exclusive of the claims of depositors and other creditors which will be satisfied in full under the plan of reorganization ” and also the consent of stockholders owning at least two-thirds of its outstanding capital stock. Even then, permission to resume business under any such plan of reorganization shall be granted by the superintendent only upon an order of the Supreme Court,” made after notice to “ depositors, creditors and stockholders.”

Pursuant to the provisions of the statute, a plan of reorganization was prepared. It received the consent of the required number of depositors, creditors and stockholders, and was approved by the Supreme Court after numerous hearings. The plaintiffs appeared specially in these proceedings and filed an affidavit in opposition to the proposed plan, objecting to- the “ power or authority of the court to “ act ” in the matter, on the ground that the statute was unconstitutional and that the plan promulgated thereunder would result in the impairment of the agreement of the defendant bank to pay them the full amount of their deposit on demand.

It cannot be questioned that, prior to the adoption of the plan, the defendant bank had assumed an obligation to pay to the plaintiffs, on their demand, the amount deposited in the bank. That obligation could be performed according to its terms only so’long as the bank continued to do business. The right of a corporation to conduct a banking business has at all times been subject to reasonable regulation by the State. Its business always has been subject to examination and supervision by the Banking Department. If in the opinion of the Superintendent of Banks a corporation which had been authorized to conduct a bank, could not continue its business with safety, the State might interpose its power and command it to cease doing business. That command might be final and immediate or it might be conditioned upon the failure of the corporation to comply with suggestions or directions of the Superintendent, calculated to restore its stability. All obligations of the bank were qualified by the implied condition that the State might interpose and render exact performance by the bank impossible. The bank, though closed, would even then remain a debtor, and the debt might be collected in liquidation proceedings in accordance with the Banking Law. Here, as we have said, the bank had been permitted to reopen, after the so-called banking holiday ” of March, 1933, but subject to restrictions which precluded, at least temporarily, performance of its obligation to the plaintiffs. The right of the State to impose such restrictions has never been challenged by the plaintiffs, and is not challenged now. They challenge here the right of the State to compel them, without their consent, to accept from the bank, reorganized in accordance with the statute, payment of the bank’s indebtedness different in form and value from the payment which otherwise would be due to them; and which they might have obtained, in whole or in part, upon liquidation of the bank if it had not been reorganized.

The closing and liquidation of a bank almost inevitably produces economic injury in many directions, and may bring widespread ruin. It injures the community which has been accustomed to look to the bank as a source of credit for legitimate enterprises. It injures the borrowers who have obtained credit from the bank and who may not be able to repay their loans promptly if further credit is withheld and not obtainable elsewhere. Liquidation, too, results in a destruction of economic values to the injury of depositors or stockholders or both; for it cannot be doubted that the value of the assets of a going bank cannot be fully realized upon a forced liquidation, and that the amount which can be collected upon doubtful loans by a bank in the ordinary course of its business is greater than the amount which can be collected by a liquidation of the bank. Thus when the stability of a bank has become so impaired that public confidence in it is disturbed or the State determines that it cannot with safety continue to do business, the welfare of the community and of the creditors and stockholders of the bank is promoted if creditors and stockholders agree upon a plan of reorganization fair to all concerned, by which the bank, with additional capital and reduced liabilities, may be enabled to continue its business with safety.

Here more than four-fifths of the depositors and other creditors, and more than two-thirds of the stockholders, have agreed upon a plan of reorganization, and, after hearing objections, the Supreme Court has approved the plan as fair to all and in the interests of the public. The plan contemplated that the liabilities of the bank, excepting special trust accounts and deposits preferred by-statute, should be reduced by forty-five per cent, and new capital obtained so that the reorganized bank should have an unimpaired Capital and Surplus at least equivalent to the present book Capital and Surplus.” The method by which that result was accomplished is somewhat complicated. We shall state it only in barest outlines.

The reduction of forty-five per cent in the amount of the ordinary deposits was to be accomplished by the sale, to the depositors, of stock in the reorganized bank to the extent of one-quarter of such forty-five per cent and by the delivery to the depositors of certificates of beneficial interest, amounting to three-quarters of such forty-five per cent, in certain tangible segregated assets of doubtful value which were to be “ eliminated from said Trust Company and set over into a fund known as the Community Recovery Fund.” The increase of capital was to be obtained by the surrender by the stockholders of their stock together with an agreement on the part of the present stockholders to pay $3 per share as a contribution to the assets of the said Trust Company as reorganized.” The capital stock of the bank was originally divided into 75,000 shares of the par value of twenty dollars each. Under the plain of reorganization the capital stock of the bank was to be 150,000 shares of ten dollars each. One share of the new capital stock of the par value of ten dollars was to be issued to the old stockholders for each share of the par value of twenty dollars which had been surrendered, with the understanding, however, that said new stock, to wit: 7,500 shares, shall be held in escrow with a trustee for the benefit of the said depositor-certificate-holders in the event that there be any deficiency in the. recovery to the said depositor-certificate-holders.” The remainder of the stock in the reorganized trust company (with the exception of the stock sold to depositors as above provided) was to be sold to the public for at least twelve dollars and fifty cents or two dollars and fifty cents per share more than its par value. The plan provided, in addition, for the sale of Capital debentures ” in the sum of $1,500,000 to the Reconstruction Finance Corporation of the United States.

The plan was put in operation with the consent of the great majority of those directly interested and with the approval of the Supreme Court. The bank as reorganized with new capital and reduced liabilities was permitted to do business without restrictions. On the first day after the restrictions were removed, plaintiffs drew out fifty-five per cent of the amount of their deposit, as they were entitled to do under the plan of reorganization. They did not voluntarily accept the certificate of beneficial interest in the segregated doubtful assets, or the stock in the bank which under the plan of reorganization they were entitled to receive in payment or satisfaction of the remainder of the bank’s indebtedness to them. Instead, they drew a check for the remainder of the amount which had been deposited by them in the bank; and upon the bank’s refusal to pay the check, they brought this action. All the facts which we have stated in this opinion are disclosed by the pleadings, amplified by bills of particulars. By motion for judgment on the pleadings, both sides have challenged the legal consequences of the facts alleged in the pleadings, and judgment has been granted in favor of the defendant, dismissing the complaint.

It may be conceded that in the absence of a statute, a plan of reorganization of a bank could not be made binding upon any depositor who.did not voluntarily consent to it. The purpose and result of the plan may be beneficial to all directly concerned and may avert a threatened disaster to the community. None the less it does change, in some degree, the contractual rights and obligations of the parties, and such change can be effected only by unanimous agreement or by provision of law. A single depositor might selfishly interpose objections for the purpose of preserving rights which he may, though mistakenly, deem beneficial to himself, or even for the purpose of extorting an unfair benefit to himself as the price of withdrawing his objections. In that way the desire of the majority to arrange a plan which will benefit all may be thwarted. The purpose of the Legislature in enacting chapter 772 of the Laws of 1933 is clear. The statute was intended to prevent a small minority from blocking a fair and equitable plan of reorganization which has received the consent of the majority of those interested and the approval of an informed court, after a hearing. Undue insistence upon strict performance of a contractual obligation may be unfair to others and may be opposed to the general welfare. None the less, the curtailment of any right to insist upon the letter of a bond involves, in some degree, the impairment of a contractual obligation, and the Constitution of the United States (Art. I, § 10) prohibits any State,from impairing such obligations. Even though the statute may be reasonably calculated to remedy a condition which, especially during a period of sudden and widespread economic depression, threatens the stability of economic values and the general welfare, the question still remains whether, when the Legislature adopts that remedy, it does not transcend the restriction placed upon the power of the State by the Constitution.

The constitutional restriction is not intended to remove completely from the field of legislative power all rights derived from contract. To promote the general welfare, it may at times impose a reasonable restriction upon freedom to exercise a right derived from contract in form or manner which will bring injury to others. (Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398.) That is true, especially when the statute is not intended to relieve a debtor from his obligations, but is intended to permit creditors to take united action, consistent with the public interest, for the collection of their debts or the protection of their rights, in spite of the insistence of a minority upon a different course. (Matter of People [Title & Mortgage Guarantee Co.], 264 N. Y. 69. Cf. Doty v. Love, 295 U. S. 64.) The plaintiffs recognize the force of these decisions. They direct their attack rather against the plan adopted pursuant to the statute than against the statute itself. They urge that the plan impairs their contractual rights in manner and form which the State could not authorize and that the statute may not be so construed as to permit the approval of a plan which will have such effect and that, if so construed, it is unconstitutional.

The plaintiffs cannot now successfully attack the plan of reorganization on constitutional grounds, even if we should assume that the statute or plan is vulnerable to such attack; for the plaintiffs have already availed themselves of some of the benefits of that plan. Until the Superintendent gave the bank permission to resume business under that plan, without restrictions, the depositors’ right to demand payment of the amount of their deposits was suspended, and their remedy was dependent upon a reorganization of the bank or its liquidation in accordance with the Banking Law. If reorganization took place, then they could collect the debt due to them only in accordance with the terms of the plan of reorganization; if liquidation took place they could collect their indebtedness only out of the moneys available for that purpose. Through the plan of reorganization the bank was enabled to obtain new capital and was permitted to resume business, and the plaintiffs obtained an immediate right to payment of fifty-five per cent of the indebtedness due them, in addition to other benefits, in substitution for a remedy which, at some time in the future, might result in the collection of a sum, which cannot now be determined, in satisfaction of their indebtedness. The plaintiffs, though consistently objecting to the plan of reorganization., withdrew from the bank, on the first day that the bank was permitted to resume business without restrictions, under the plan of reorganization, the full amount to which they were entitled under that plan. In that way they availed themselves of the benefit of the plan. If that plan unlawfully impaired their contractual rights, they had the right to deny its validity and to assert their rights, unimpaired by the plan, but they could not claim and receive some of the benefits of the plan without losing their right to attack it thereafter on constitutional grounds.

It is true that the only benefit which the plaintiffs have claimed and received was the immediate payment of a portion of an indebtedness which would, concededly, have been due to them even if no plan of reorganization had been adopted. Though the debt was then due, it would not have been collectible upon demand, from the bank, at that time, or even at the present time, if the plan had not been adopted and the bank had not been permitted to resume business under the plan. Thus the plaintiffs, before bringing this action, have availed themselves of some of the benefits of a plan of reorganization which they now ask the court to treat as invalid and, in this action, they base their cause of action upon a refusal of the bank to pay out moneys which, except for the plan of reorganization, the bank could not have paid out lawfully, and they seek a.recovery payable out of the assets of' a bank which obtained additional assets under the plan of reorganization, and for the purposes of such reorganization. It is well established that no cause of action based on a foundation so shifting can be sustained.

In many cases in this and other jurisdictions, the courts have refused to permit a creditor to attack the validity of an insolvency statute, after the creditor has availed himself of the statute for the collection of a portion of the indebtedness due him. (Van Hook v. Whitlock, 26 Wend. 43; Clay v. Smith, 3 Pet. [U. S.] 411; Eustis v. Bolles, 146 Mass. 413; Murray v. Roberts, 150 Mass. 353; Fogler v. Clark, 80 Me. 237.) Though in all these cases the statute under attack was an insolvency or bankruptcy statute, the principle underlying these decisions applies equally here where the statute and the plan of reorganization adopted pursuant to the statute were intended to permit a bank and its creditors to agree upon a plan whereby without liquidation proceedings creditors might receive “ less than the full amount of their claims ” and the stockholders will contribute their shares of capital stock and/or money in lieu of assessments upon such stock.” (Banking Law, § 61-a.) The statute is at least analogous to an insolvency statute (Cf. Doty v. Love, 295 U. S. 64), and the plan oh- reorganization is in effect a composition agreement.^ Contribution by the stockholders of their shares of stock and money in lieu of assessments creates a fund which might not otherwise be available to creditors in insolvency proceedings. The agreement of stockholders and of creditors was obtained because the statute purported to give to such an agreement a binding effect even upon creditors who objected to it. The purpose of the agreement would be thwarted if such a creditor could avail himself of the attempted composition by withdrawing his share of the assets and then .hold the corporation hable for the remainder and satisfy any recovery against the corporation out of assets which are, in part at least, the fruits of the composition. The plaintiffs could not avail themselves of the advantages resulting from the proceedings [for reorganization] without submitting themselves to the consequences which the law imposes on such creditors.” (Murray v. Roberts, swpra, p. 355.)

“ Where a constitutional provision is designed for the protection solely of the property rights of the citizen, it is competent for him to waive the protection, and to consent to such action as would be invalid if taken against his will.” (1 Cooley on Constitutional Limitations [8th ed.], p. 368.) In spite of protests, the plaintiffs have received benefits and are now demanding other benefits which they could not have obtained if the plan of reorganization had not been adopted. They cannot assert the invalidity of the proceedings and at the same time share in the benefit resulting from such "proceedings. That conclusion is based upon well-recognized principles of fairness and justice, and in accord with an unbroken fine of judicial authority. It is immaterial whether we classify these principles in the category of estoppel or of waiver or of implied consent.

The judgment should be affirmed, with costs.

Crane, Ch. J., O’Brien, Hubbs, Lougbran and Finch, JJ., concur; Crouch, J., not sitting.

Judgment affirmed.


source: Caselaw Access Project

author: Crouch, J. Hubbs, J.

license: Public Domain

text:
    In the Matter of the Estate of Henry Rosenberg, Deceased. United States of America, Appellant; Jerome Rosenberg et al., Respondents.

      (Argued September 30, 1935;
    decided November 26, 1935.)

      F. W. H. Adams, United States Attorney (David H. Wainhouse and George B. Schoonmaher of counsel), for appellant.
    The tax lien created by section 115 of title 26 of the United States Code extends to and covers the interest of the beneficiary in the trust. (Metcalfe v. Union Trust Co., 181 N. Y. 39; Brearley School v. Ward, 201 N. Y. 358; Commissioner of Internal Revenue v. Blair, 60 Fed. Rep. [2d] 340; Matter of Williams, 187 N. Y. 286; Matter of Hohenshieldt, 105 Penn. Super. Ct. 18; Town of

      Shrewsbury v. Bucklin, 105 Vt. 188; Staley v. Vaughn, 50 S. W. Rep. [2d] 907; Cannon v. Nicholas, 10 Fed. Rep. 718.) The statutes and judicial decisions of the State of New York limiting judgment creditors in reaching the interest of a beneficiary of a spendthrift trust do not limit the United States in enforcing the statutory lien created by section 115 of title 26 of the United States Code. (Fink v. O’Neil, 106 U. S. 272; United States v. Harpootlian, 24 Fed. Rep. [2d] 646; Clark v. Allen, 114 Fed. Rep. 374; United States v. Stacey, 155 Fed. Rep. 510; Matter of Dartmont Coal Co., 46 Fed. Rep. [2d] 455; Burnet v. Harmel, 287 U. S. 103.)

      Nathan Lieberman and Isidore B. Seidler for Jerome Rosenberg, respondent.
    Independent of any State exemption laws, the United States has no authority to levy upon or distrain income from a spendthrift trust. ( United States v. Western Union Tel. Co., 50 Fed. Rep. [2d] 102; Clark v. Allen, 114 Fed. Rep. 374; 126 Fed. Rep. 738.) The United States is bound by State exemption laws in the collection of its claims. (Fink v. O’Neil, 106 U. S. 272; United States v. Harpootlian, 24 Fed. Rep. [2d] 646; United States v. Stacey, 155 Fed. Rep. 510; Clark v. Allen, 114 Fed. Rep. 374.)

      Chester Bordeau for Leslie Lester, as receiver, respondent.
    The income from the trust is not subject to the lien of the United States government. (Ellet v. McCord, 41 S. W. Rep. [2d] 110; Matter of Parrott, 1 Fed. Rep. 481; Buchanan v. Warley, 245 U. S. 60; Transcontinental Oil Co. v. Emmerson, 131 N. E. Rep. 645; Commissioner of Internal Revenue v. Adamson Mfg. Co., 51 Fed. Rep. [2d] 681.)
   Crouch, J.

Jerome Rosenberg, a life beneficiary of a trust created by the will of Henry Rosenberg, instituted a proceeding in the Surrogate’s Court to secure an adjustment of the rights of his creditors to the trust income, which was under the provisions of section 15 of the Personal Property Law (Cons. Laws, ch. 41) and section 103 of the Real Property Law (Cons. Laws, ch. 50), not assignable by the petitioner, and exempt from garnishee execution except (Civ. Prac. Act, § 684) as to ten per cent thereof. A number of judgments against petitioner were represented in the proceeding by a receiver of the petitioner appointed by the City Court in supplementary proceedings. The United States had previously informally arranged that the receivership extend to cover its claim for unpaid income taxes, for which it had filed notices of liens pursuant to United States Code (Tit. 26, ch. 3, § 115) on November 20, 1929, and May 25, 1931. Two of the judgments represented by the receiver were recorded prior to the filing of the notices of lien.

The United States intervened in the Surrogate’s Court proceeding and asserted that inasmuch as it was not a judgment creditor, confined by United States Code (Tit. 28, ch. 18, § 727) (R. S. § 916) to the same remedies which it might have had in the State courts, nor limited by any Federal exemption to a percentage of the trust income, its right to enforce its hen under section T15 was not limited by any law of the State of New York.

. The Surrogate rejected that contention and directed the trustees to pay ninety per cent of the income to the beneficiary and the remaining ten per cent to the receiver for the judgment creditors. The order was affirmed by the Appellate Division. The courts below seem to have found the absence of any reported holding to the contrary sufficient ground for determining that the Federal government either has no authority to satisfy its claim from the income of a spendthrift trust or that its policy in relation to that device is in accordance with the policy of our own State.

The fundamental policy to be borne in mind is that the right of property is a right cum onere. A person may not ordinarily have ownership of or right to enjoy property and at the same time be able to keep it from the claims of creditors and others. (Cf. Hallett v. Thompson, 5 Paige, 583, 586.) An individualistic cross-current came to permit fathers of improvident sons, by way of exception, to insure a sum necessary for education and support (Real Prop. Law, § 98) in order to protect them from their own extravagance and to prevent them from becoming public charges. Nevertheless, under the pressure of special circumstances, that apparently unreachable sum has been permitted by the courts to be reached. (Wetmore v. Wetmore, 149 N. Y. 520; and see 43 Harvard Law Rev. 63.) It is by no means certain that our State policy excludes the payment of State taxes and other possible claims by the State from the category of necessary support. A tax in some form nowadays is at least as certain as, say, medical or legal expenses.

However that may be, it is certain that no policy of this State may interfere with the power of Congress to levy and collect taxes on income. (Burnet v. Harmel, 287 U. S. 103, 110; United States v. Snyder, 149 U. S. 210, 214.) Cases where State exemptions have been applied to the collection of judgments in favor of the United States have been in every instance predicated on the statutory adoption of State exemptions. (Fink v. O’ Neil, 106 U. S. 272; Custer v. McCutcheon, 283 U. S. 514.)

Section 115 of title 26 of the United States Code provides as follows:

“ § 115. Lien for taxes, (a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a hen in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Unless another date is specifically fixed by law, the hen shah arise at the time the assessment hst was received by the collector and shall continue until the habihty for such amount is satisfied or becomes unenforceable by reason of lapse of time.”

If the right or interest which the beneficiary here has in the income of the trust may be said to fall within the sweeping limits of the phrase “ all property and rights to property, whether real or personal, belonging to such person,” then we see no reason to doubt the validity of the appellant’s contention. It is true that the legal estate is in the trustee. Nevertheless, “ the whole beneficial proprietorship, or interest, is in the cestui que trust, for whom he holds the estate and who has the right to enforce the performance of the trust.” (Metcalfe v. Union Trust Co., 181 N. Y. 39, 44.) To say that right is not a right to property within the meaning of the United States Code, title 26, section 115, because equity acts in personam and not in rem, would be mere legalism and would disregard the plain language and what we think is the plain intendment of the statute. Certain other arguments may be briefly noticed. It is said (granting that the beneficiary’s right is a right to property) that since United States Code, section 116 of title 26, grants to the government the power to distrain for taxes certain specified items of personal property, among which income from a spendthrift trust is not included, the lien and right to enforce given by section 115 should be confined to the items mentioned in section 116. The two statutes are not in pari materia. (Blacklock v. United States, 208 U. S. 75.) As to the lack of specific statutory authority to maintain a suit or proceeding in equity to enforce a lien on trust income (which authority is specifically given with respect to interests in real property), it is enough to say that if, as we think, such a lien exists here, it must have the attributes of liens generally and is something that courts of general equitable jurisdiction may enforce. (Cf. 1 Pomeroy on Equity Jurisprudence- [4th ed.], § 167; Gilchrist v. Helena Hot Springs & Smelter R. Co., 58 Fed. Rep. 708; Westmoreland & Trousdale v. Foster, 60 Ala. 448.) The powers of a Surrogate’s Court with respect to testamentary<trusts are sufficiently broad for the purpose. Finally, since the property right here in question may not be reached at all by distraint under section 116, and may be reached under the State statute by garnishment only to the extent of ten per cent (Civ. Prac. Act, § 684; United States Code, tit. 26, ch. 3, § 142), it is difficult to say that there is an adequate remedy at law.

The order should be reversed and an order granted to the effect that the judgments filed prior to the filing of the notice of lien are entitled to ten per cent of the trust income ahead of the United States and that the United States is entitled to ninety per cent of the trust income until the prior judgments are satisfied; and then, if the claim of the United States is still unpaid, to the entire income until paid; all, however, without costs.

The order of the Appellate Division and that of the Surrogate’s Court should be reversed, without costs, and the matter remitted to the Surrogate’s Court to proceed in accordance with this opinion.

Hubbs, J.

(dissenting). It is the contention of the appellant that the interest of the petitioner in the trust is “ property ” or “a right to property ” within the meaning of section 115 of title 26 of the United States Code; that by reason of that fact it possesses a lien upon the trust income; that it is not limited in the enforcement thereof by the laws of the State of New York, permitting the establishment of a spendthrift trust; and that the order directing payment to the petitioner should be reversed.

Section 115 of title 26 of the United States Code, in so far as material herein, reads as follows:

§ 115. Lien for taxes, (a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall he a lien in favor of the United States upon all property and rights to property, whether real or personal, helonging to such person. Unless another date is specifically fixed by law, the hen shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes -unenforceable by reason of lapse of time.”

It is contended by respondents that the interest of a beneficiary in a trust estate is not a property right of such nature that it comes within the purview of section 116 of title 26 of the United States Code so as to enable the government to distrain it. Section 116 of chapter 3 of title 26 of the United States Code provides as follows:

“ § 116. Distraint for taxes. If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with 5 per centum additional thereto, and interest as aforesaid, by distraint and sale, in the manner hereafter provided, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid, * * *.”

Then follow provisions for certain exemptions not material here.

Clearly the interest of the beneficiary of a spendthrift trust is not to be deemed included under the definition of any one of the words goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt.”

Section 142 of chapter 3 of title 26 of the United States Code provides in part as follows:

Suits for fines, penalties, and forfeitures, and taxes. * * * and taxes may be sued for and recovered in the name of the United States, in any proper form of action, before any district court of the United States for the district within which the liability to such tax is incurred * *

Section 117 of chapter 3 of title 26 of the United States Code provides that the collector may levy upon all property and rights to property belonging to the person neglecting or refusing to pay taxes. These three sections, 116, 117 and 142, provide the statutory method of enforcing the lien created by section 115. If they are to be deemed exclusive, then the appellant, not having adopted one of those methods, must fail in its effort to enforce its lien or to have its hen adjudicated in this proceeding.

It is conceded, that if it were to proceed under section 142 as a judgment creditor, it would be limited as would any other judgment creditor to whatever benefit it might obtain under a garnishment proceeding instituted pursuant to section 684 of the Civil Practice Act, since in the enforcement of judgments, the United States by act of Congress is limited to the remedies available in a State court for the enforcement of a judgment. For the same reason it could not levy upon the income from a trust fund not being subject to levy and sale. The property right of defendant not being a subject of distraint and not subject to levy, and no judgment having been recovered, the appehant can succeed only if it has a general right exclusive of the statutory provisions to enforce its hen in an equitable proceeding in the State court.

Statutory hens cannot be extended by the courts to those cases not provided for by the statute. (Buchan v. Sumner, 2 Barb. Ch. 165, 195; Aldine Mfg. Co. v. Phillips, 118 Mich. 162.)

“ Where a statute creates a specific hen, and gives a specific remedy for the enforcement of such hen, a court of equity has no jurisdiction to enforce it, in the absence of some such special ground of equitable interposition, such as renders the remedy at law unavailable or inadequate.” Equity will enforce a statutory hen where jurisdiction has been acquired for other purposes. But the jurisdiction * * * to enforce * * * rests upon the statute, and can extend no further.” (17 Ruling Case Law, 613, 614; Marshall v. Wabash Ry. Co., 201 Mich. 167.)

While a court of equity “ having acquired jurisdiction for other purposes, may, as an incident to general relief granted, order property sold to satisfy a lien, it has no jurisdiction to enforce a lien, either common law or statutory, upon a bill filed solely for that purpose.” (Marshall v. Wabash Ry. Co., supra, p. 178; Aldine Mfg. Co. v. Phillips, supra; Greil Bros. Co. v. City of Montgomery, 182 Ala. 291; 1 Jones on Liens [3d ed.], §94.)

Statutory liens are affected but slightly by the general principles and considerations applicable to the common law hen. Statutory liens may exist although the creditor has not possession of the property sought to be subjected to a lien, whereas possession independent and exclusive in the party who claims the lien is indispensable to the existence of a common law Hen. In the respect that the Hen may exist in the absence of possession, statutory Hens are somewhat more akin to certain forms of equitable Hens. ' However, statutory Hens are unlike equitable Hens in that the jurisdiction to enforce them, as stated above, rests upon the respective statutes by which they are created. The statute creating the Hen here under consideration provides certain specific methods .of enforcement, none of which have been adopted by the appellant and some of which could not be adopted by reason of the fact that the nature of the property sought to be subjected to the Hen is such that those methods are inapplicable. The statute does not give a right to proceed in equity for enforcement of the Hen and while in certain cases where jurisdiction has been acquired for other purposes a court of equity wiU enforce a statutory Hen, it would seem that it will do so only by giving effect to a method of enforcement provided for under the statute creating the Hen.

The appellant in this case has failed to' show that the remedy at law is unavailable. Its right to maintain an action for collection of the tax is undisputed. The other remedies specified in the statute being inapphcable by reason of the nature of the property, do not constitute remedies in the instant case. The appellant contends that the remedy at law is inadequate. It can hardly be said to be inadequate in the sense that it entitles the appellant to equitable relief when the limit of its adequacy grows out of the lack of effectiveness of a judgment which lack results from a limitation put upon the effectiveness of a judgm- nt by Congress when providing that a judgment shall have the same force and effect and be enforceable in the same manner as a judgment of the State court. To permit the appellant to succeed in establishing its lien in this proceeding would be to give an effectiveness to the hen not provided for by the statute under which the lien was created. In other words, that statute gives specific means of enforcement which, with respect to this particular property, would not give priority to the hen over other judgment creditors. If its lien be established in this proceeding it will be given such preference and that is exactly the benefit which the appellant seeks, namely, that the entire income of the fund is subject to a prior hen in its favor by reason of the tax liability.

Its position in that respect is untenable.

The appellant argues and it must, I think, be recognized that the hen of a United States tax upon property as to which the hen is applicable is paramount when considered in connection with the effect of State exemption statutes such as the statutes of the State of New York permitting the establishment of spendthrift trusts. While the hen is in terms made appHcable to “ all property and rights to property, whether real or personal,” no method other than by'judgment is provided for the enforcement of the Hen against the income from such trust and the effect of a judgment is limited by act of Congress to enforcement as in the case of a judgment of the State court. Thus, * it would seem that the property in question is not property to which the Hen is appHcable in the sense that it may be enforced in the manner by which it is sought to be enforced in the present proceeding. By its refusal to adjudicate that a lien exists in favor of the government with respect to the income from this trust, the Surrogate’s Court has in no wise affected any rights which the government now has. It may still avail itself of the statutory method. It may, without doubt, reach the money in the hands of the respondent Rosenberg to the same extent it could reach any other funds which he might possess. By refusing to extend the hen to the income in the hands of the trustee, the courts below have merely refused to provide a remedy not specified in the statute and to make the lien applicable to funds to which it would not be applicable except for a decree favorable to the contention of the government. If Congress had intended to extend the hen to trust funds it could have so stated in the statute, as it did with respect to bank accounts, and had Congress so stated there would then have been presented the question as to the power of the State to exempt funds included under the statutory Hen, a question which is not here present for the reason that a statutory Hen cannot be extended by imphcation and by judicial construction.

The order appealed from should be affirmed, with costs.

Lehman, O’Brien, Loughran and Finch, JJ., concur with Crouch, J.; Hubbs, J., dissents in opinion in which Crane, Ch. J., concurs.

Ordered accordingly.


author: Finch, J.

text:
    The Bowery Savings Bank, Respondent, v. Janet W. Nirenstein et al., Appellants, Impleaded with Others.
    (Argued October 16, 1935;
    decided December 3,1935.)

      Harris Jay Griston and George C. Baron for appellants.
    An issue of usury exists as a matter of law, as well as fact. Plaintiff’s application does not dispute that the issue of usury does exist, but limits itself to asking the court to fix the amount of the usury. (Standard Acc. Ins. Co. v. Marks, 233 App. Div. 466; Newburger v. Lubell, 241 App. Div. 250; Oppikofer v. Murphy, 146 App. Div. 581.) As the transaction by which plaintiff’s assignor acquired its rights under the bond and mortgage was usurious, it was absolutely “ void ” and by section 373 of the General Business Law (Cons. Laws, ch. 20) that usury is a complete defense to the plaintiff’s attempt to enforce the bond and mortgage. (Veazy v. Allen, 173 N. Y. 359; London v. Toney, 263 N. Y. 439; Ganz v. Lancaster, 169 N. Y. 357; DeWitt v. Brisbane, 16 N. Y. 508; Wyeth v. Braniff, 84 N. Y. 627; Talmadge v. Pell, 7 N. Y. 328; Johnson v. Bush, 3 Barb. Ch. 207; Malmud v. Blackman, 232 App. Div. 765; Kneher v. Greengrass, 232 App. Div. 761.) In stating that an usurious transaction is void, section 373 means that the transaction is “ absolutely void ” and not merely voidable. (Sabine v. Paine, 223 N. Y. 401; Claflin v. Boorum, 122 N. Y. 385.) The “ penalties ” as to which relief is given by sections 376 and 382 of the General Business Law do not include the defense of usury. (Curtiss v. Teller, 157 App. Div. 804; 217 N. Y. 649.) Section 382 of the General Business Law does not apply, because the action is not brought merely to recover the usurious excess by the borrower or by the overseer of the poor, nor is it an action involving brokerage on loans. (People v. Young, 153 App. Div. 567; 207 N. Y. 522; Curtiss v. Teller, 157 App. Div. 804; 217 N. Y. 649.)

      Harry Schneider, George M. Jajfln and Sydney Bernheim for respondent.
    No usury exists or is involved as a matter of law and fact in the transaction giving rise to the executian of the extension agreement. (Brown v. Robinson, 224 N. Y. 301; Hartley v. Eagle Ins. Co., 222 N. Y. 178; Morton v. Thurber, 85 N. Y. 550; Jefferson Title & Mortgage Corp. v. Dempsey, 153 Misc. Rep. 32; 242 App. Div. 626; Eldridge v. Reade, 32 N. Y. Super. Ct. 155; Seamen’s Bank v. McCollough, 166 App. Div. 271; 221 N. Y. 692; Thurston v. Cornell, 38 N. Y. 281; Harger v. McCullough, 2 Den. 119; Bennett v. Ginsburg, 141 App. Div. 66; London Realty Co. v. Riordan, 207 N. Y. 264; Guggenheimer v. Geiszler, 81 N. Y. 293; Houghton v. Burden, 228 U. S. 161; Matter of Mesibovsky, 200 Fed. Rep. 562.) Assuming that usury existed at the time of the execution of the extension agreement, such usury cannot affect the validity of the original bond and mortgage and is no defense against the plaintiff, the assignee of said bond and mortgage, subsequent to the execution of said extension agreement, without notice of such alleged usurious payment. (Rice v. Willing, 5 Wend. 595; Froese v. Prosnitz, 12 N. Y. Supp. 88; Winsled Bank v. Webb, 46 Barb. 177; Real Estate Trust Co. v. Keech, 69 N. Y. 248; Church v. Maloy, 70 N. Y. 63; Ganz v. Lancaster, 169 N. Y. 357; Salvin v. Myles Realty Co., 227 N. Y. 51; Gutman v. Schreiber, 173 App. Div. 670; Lesley v. Johnson, 41 Barb. 359; Union Bank of Brooklyn v. Schneider, 147 App. Div. 1; Silverstein v. Taubenkimmel, 209 App. Div. 710; Sherling v. Gallatin Improvement Co., 237 App. Div. 535; London v. Toney, 263 N. Y. 439; Kellogg v. Adams, 39 N. Y. 28; Patterson v. Birdsall, 64 N. Y. 294.) Sections 376 and 382 of the General Business Law permit plaintiff to avoid the defense of usury. (People v. Young, 207 N. Y. 522; Matter of Baker, 77 Misc. Rep. 90; Jefferson Title & Mortgage Corp. v. Dempsey, 153 Misc. Rep. 32; 242 App. Div. 626; 266 N. Y. 190; Smith v. Marvin, 27 N. Y. 137; Weyh v. Boylan, 85 N. Y. 394.) Sections 376 and 382 of the General Business Law do not require plaintiff to tender back the bond and mortgage in order to obtain relief. (People v. Young, 207 N. Y. 522.)
   Finch, J.

This is an action to foreclose a purchase-

money mortgage given by the defendants upon the purchase of a dwelling house. The mortgage was originally for $20,000 but was reduced by payment on account of principal to $12,000. Subsequently, by means of a transaction the nature of which is not clear from the record, the mortgage was transferred to the plaintiff’s assignor, the Equitable Mortgage and Title Guaranty Company, and the amount increased to $14,000, apparently by a loan of $2,000 additional. At the same time an extension of the principal sum for three years was arranged. The answer sets up the defense of usury and alleges that at the time of the increase of the mortgage from $12,000 to $14,000 and the extension of the time of payment there was retained a sum of approximately $500 for expenses and disbursements, which constituted usury. The defense of usury seems to be based largely upon a charge of $420, being three per cent of the total sum involved, which was retained allegedly for expenses which the defendants maintain cannot be substantiated.

A motion made by the plaintiff for summary judgment was denied. Thereafter, the plaintiff, without waiting for a trial, moved upon affidavits petitioning the court to fix summarily an amount sufficient to cover the alleged usurious excess, if any, and grant judgment for the plaintiff. To reach this result, it relied upon section 376 of the General Business Law (Cons. Laws, ch. 20), which reads as follows: Every person who shall repay or return the money, goods or other thing so taken, accepted or received, or the value thereof, shall be acquitted and discharged from any other or further forfeiture, penalty or punishment, which he may have incurred, by taking or receiving the money, goods or other thing so repaid, or returned, as aforesaid.”

An order was entered granting the motion, the court fixing the amount at $210 (which was exactly one-half of the amount paid), and providing that upon deposit of said sum judgment of foreclosure and sale should follow. The deposit was satisfactorily arranged by giving the sum to plaintiff’s attorney to hold in escrow, and plaintiff. had judgment. An appeal was taken to the Appellate Division, where it was affirmed by a divided court.

The question of procedure will presumably not arise again and as it becomes immaterial because of our decision on the construction to be given to section 376 of the General Business Law, we pass at once to the latter.

Assuming that after a proper trial of the issue as raised by the answer it is found that usurious payments were made, may the plaintiff then, by the mere deposit of the usurious excess, relieve itself of further consequences for its wrong in a civil action? The question is no longer open in this court. In Curtiss v. Teller (157 App. Div. 804) former Presiding Justice Kruse, of the Appellate Division, fourth department, after ably reviewing the historical development of the statutory law upon this subject, reached the conclusion that the above quoted section 376 could not be construed so as to exempt the usurer from any further consequences by the mere deposit of the amount found to be usurious. This court unanimously affirmed (217 N. Y. 649). Section 373 of the General Business Law provides:

All. bonds, bills, notes, assurances, conveyances, all other contracts or securities whatsoever, except bottomry and respondentia bonds and contracts, and all deposits of goods or other things whatsoever, whereupon or whereby there shall be reserved or taken, or secured or agreed to be reserved or -taken, any greater sum, or greater value, for the loan or forbearance of any money, goods or other things in action, than is above prescribed, shall be void.

Whenever it shall satisfactorily appear by the admissions of the defendant, or by proof, that any bond, bill, note, assurance, pledge, conveyance, contract, security or any evidence of debt, has been taken or received in violation of the foregoing provisions, the court shall declare the same to be void, and enjoin any prosecution thereon, and order the same to be surrendered and canceled.”

The statute is peremptory and unequivocal in enacting that an usurious obligation is absolutely void.” (Sabine v. Paine, 223 N. Y. 401, 405.) Section 376 was never intended and cannot be construed to emasculate section 373. In so far as usury permeates the transaction, the restitution must be complete. (Kellogg v. Adams, 39 N. Y. 28.) It is true that if a lender makes so complete a restitution there would seem little or nothing left from which he could be acquitted or discharged. This section, however, must be read in the light of the fact that at one time there existed a penalty of treble damages for usury (1 Colonial Laws, p. 909, ch. 328; 2 id. p. 980, ch. 660) which has since been repealed. In deciding the case at bar we reaffirm that this section 376 was not intended to furnish a simple means of eviscerating the usury laws.

Section 382 of the General Business Law, also relied upon by the plaintiff, does not apply, since it is apparent that the section is limited in its application to the provisions of sections 380 and 381 concerning brokerage charges. In any event, what has just been said regarding section 376 applies with equal if not greater force to section 382.

Upon this appeal the sufficiency of the attempted defense of usury is not challenged. A decision as to the rights of the plaintiff must await the trial and will depend upon the evidence there presented. We cannot now consider the effect of usury, if such there were, in the transaction between the plaintiff’s assignor and the defendant Nirenstein. As to the rights of the plaintiff under an assignment of a valid mortgage by its holder for a valid consideration compare Kellogg v. Adams (39 N. Y. 28); Real Estate Trust Co. v. Keech (69 N. Y. 248); Ganz v. Lancaster (169 N. Y. 357); Church v. Maloy (70 N. Y. 63).

The judgment of the Appellate Division and that of the Special Term should be reversed and the motion denied, with costs in all courts.

Crane, Ch. J., Lehman, O’Brien, Hubbs, and Lougkran, JJ., concur; Crouch, J., not sitting.

Judgments reversed, etc.


author: Crane, Ch. J.

text:
    The People of the State of New York, Respondent, v. Norman G. Bellinger, Appellant.
    (Argued November 26, 1935;
    decided December 10, 1935.)

      Jules C. Randal for appellant.
    The City Court of Buffalo had no jurisdiction to hear and determine the alleged offense charged in the information. (N. Y. Const, art. 1, § 2; People v. Cosmo, 205 N. Y. 91; Colon v. Lisk, 153 N. Y. 188; People v. Special Sessions, 74 N. Y. 406; Wynehamer v. People, 13 N. Y. 378; People v. Kaminsky, 208 N. Y. 395; People ex rel. Cosgriff v. Craig, 195 N. Y. 190; Matter of Cooley v. Wilder, 234 App. Div. 256; People v. Grogan, 260 N. Y. 138; People ex rel. Battista v. Christian, 249 N. Y. 314; Cancemi v. People, 18 N. Y. 128.) A failure to comply with subdivision 3 of section 359-e of the General Business Law (Cons. Laws, ch. 20) does not constitute a crime. (Dunham v. Ottinger, 243 N. Y. 423; People v. Federated Radio Carp., 244 N. Y. 33; People v. Grogan, 260 N. Y. 138; People v. Briggs, 193 N. Y. 457; United States v. Cohen Grocery Co., 255 U. S. 81; People v. Phyfe, 136 N. Y. 554; People v. Shakun, 251 N. Y. 107; People ex rel. Hallock v. Hennessy, 205 N. Y. 301; People v. Ahearn, 196 N. Y. 221; Morton v. Horton, 189 N. Y. 398; Matter of Cheesman, 236 N. Y. 47.)

      John J. Bennett, Jr., Attorney-General (Caleb Candee Brown, Jr., and Charles J. Kennedy of counsel), for respondent.
    The failure to file a supplemental dealer’s statement in accordance with the provisions of subdivision 3 of section 359-e of the General Business Law constitutes a crime. (People v. Federated Radio Corp., 244 N. Y. 33.) The City Court of Buffalo had jurisdiction of the crime charged. (People ex rel. Frank v. McCann, 253 N. Y. 221; People ex rel. Murray v. Justices, 74 N. Y. 406; People ex rel. Comaford v. Dutcher, 83 N. Y. 240; People v. Kaminsky, 208 N. Y. 395; People v. Best, 266 N. Y. 456; People ex rel. Kipnis v. McCann, 199 App. Div. 30; 234 N. Y. 502; People ex rel. White v. Commissioner, 198 App. Div. 384.)
   Crane, Ch. J.

The defendant was tried in the City-Court of Buffalo on the charge of violating section 359-e, subdivision 3, of the General Business Law (Cons. Laws, ch. 20), in that, being a dealer in securities, he failed to file a supplemental dealer’s statement with the Department of Law, as provided for therein. On appeal to the County Court of Erie county the judgment of conviction was affirmed, the appeal to this court being allowed by a justice of the Appellate Division, fourth department.

The jurisdiction of the City Court of Buffalo to try this offense has been challenged on the ground that while the charge is designated in the information as a misdemeanor, in reality it is a felony, to be prosecuted by indictment and tried by a jury of twelve jurymen.

The section of the General Business Law referred to provides that in the event that after any dealer shall have filed a dealer’s statement, under the provisions of subdivision 2 of this section, any change shall take place in the personnel of the partners, such dealer shall not sell or offer for sale to the public within this State any securities unless and until a statement, to be known as the supplemental dealer’s statement, shall have been filed with the Department of Law setting forth required details.

The information in this case alleges that the defendant, being a dealer in securities, failed to file such supplemental dealer’s statement after there had been a change in the partnership, and the evidence shows that securities were sold by him in apparent violation of the statute. When we notice that these dealer’s statements may be mailed to the Department of Law in Albany we would naturally expect that the penalty attached to absence of any such paper from the files in the law offices would be moderate at least. The sweeping provision of section 359-g dealing with violations and penalties is said to cover this failure to file the supplemental dealer’s statement or the want of such a statement from the files. This provision reads, “Any person, * * * violating any of the provisions of this article shall be guilty of a misdemeanor punishable by a fine of not more than five thousand dollars, or imprisonment for not more than two years or both.”

In our judgment this penalty removes such offenses from the class of crimes known as misdemeanors and makes of them felonies to be prosecuted as other infamous crimes by indictment and trial by a constitutional jury.

First let us turn to the Penal Law and the Code of Criminal Procedure to see what the judge may do in imposing sentence for such violations. The place of imprisonment for two years is not designated in this section of the General Business Law, but it finds designation in the Penal Law. Section 2192 reads:

§ 2192. Sentence where punishment prescribed is imprisonment for not more than a specified time.
“ When a crime is declared by any of the provisions of this chapter to be punishable by imprisonment for not more than a specified number of years, the court authorized to pronounce judgment upon conviction may, in its discretion, sentence the offender to imprisonment for any time less than that prescribed by the provisions of this chapter.”

Section 2183 contains the following provision: “ Where a person is convicted of a crime, for which the punishment inflicted is imprisonment for a term exceeding one year, or is sentenced to imprisonment for such a term, the imprisonment must be inflicted by confinement at hard labor in a state prison.”

Section 2182: “ Where a person is convicted of a crime, for which the punishment inflicted is imprisonment for a term of one year, he may be sentenced to, and the imprisonment may be inflicted by, confinement either in a county jail, or in a penitentiary or state prison.”

But this is not all that the sentencing judge may do. By section 484 of the Code of Criminal Procedure, the judge, in imposing the fine of five thousand dollars, may direct that the defendant be imprisoned until the fine be satisfied, “ specifying the extent of the imprisonment, which cannot exceed one day for every one dollar of the fine.”

The City Court of Buffalo, acting as a Court of Special Sessions, empowered to try misdemeanors, may sentence the defendant for failure to mail a supplemental dealer’s statement to State’s prison for two years and fine him five thousand dollars, directing that he be kept in prison one day for every one dollar of the fine unpaid. Of course no court would ever impose such an outrageous penalty for so slight an offense, but we are dealing here with a question of power and penalties in order to determine the grade, or class of crime to which different procedure and methods of trial apply. (People v. Lyon, 99 N. Y. 210.) The fundamental distinction between felonies and misdemeanors rests with the penalty and the power of imprisonment. Section 2 of the Penal Law describes a felony as a crime punishable in a State prison, and a misdemeanor as any other crime.

It may be said, and quite properly, that the Penal Law is an act of the Legislature which may be changed and modified by that body, and that the General Business Law, in section 359-g has made this change, so that a misdemeanor may be punished, when it involves the violation of the General Business Law, by imprisonment in State prison at hard labor for more than a year. The difficulty with any such suggestion is that the Constitution steps in and prevents the Legislature from enacting such a law.

Article I, section 6, of the State Constitution provides: “ No person shall be held to answer for a capital or otherwise infamous crime * * *, unless on presentment or indictment of a grand jury.” Section 2 of the same article insures that a trial by jury shall be had in all cases in which it has been heretofore used. These provisions are similar to those of. the Federal Constitution, which received interpretation upon the point in question in Matter of Wilson (114 U. S. 417). It was there stated: “ For more than a century, imprisonment at hard labor in the State prison or penitentiary or other similar institution has been considered an infamous punishment in England and America” (p. 428.)

This court, in People ex rel. Cosgriff v. Craig (195 N. Y. 190, at p. 196), said through Cullen, Ch. J.: “ It seems to me clear that the legislature could not make an offense punishable by imprisonment for ten years or for life and confer power on the Special Sessions to try it simply because it chose to call the act a misdemeanor and to enact that the imprisonment should be in a county jail or penitentiary instead of state prison.” How much less could the Legislature do this when it provides that the so-called misdemeanor may be punished by imprisonment in the State prison. Chief Judge Cullen further said: “At the time of the adoption of this constitutional provision [State Constitution] no misdemeanor that I can find in this state had been subject to punishment by imprisonment for a greater term than one year, with these exceptions.” The exceptions are unimportant here.

Also, in People v. Kaminsky (208 N. Y. 389, 394) this court again said: “ Whatever the original view of the subject may have been, the present judgment is that within this and similar constitutional provisions, the character of the offense is determined by the nature of the punishment rather than by its supposed moral turpitude.” (See, also, Matter of Cooley v. Wilder, 234 App. Div. 256, and People v. Hughes, 137 N. Y. 29.) The meaning of the words “ infamous crime,” which requires indictment by a grand jury and trial by a petty jury of twelve men, has been fairly well understood, during the years of our statehood, as evidenced by the distinctions between felonies and misdemeanors outlined by legislative enactment.

The difference between a felony and a misdemeanor is found in section 2 of the Penal Law, above stated, while section 1937 of that same law provides that a person convicted of a crime declared to be a misdemeanor, for which no other punishment is specially prescribed, is punishable by imprisonment in a penitentiary or county jail for not more than one year, or by a fine of not more than five hundred dollars, or by both. I do not find that the Legislature has ever attempted to make a misdemeanor punishable by imprisonment in a State prison, and, for only a short period, as stated in the Cosgriff case, has it attempted to extend the time in a penitentiary or a county jail beyond one year. On the contrary, when giving jurisdiction to Special Sessions to hear misdemeanors, the general provision has been a limitation of imprisonment to six months, or a fine of fifty dollars. (Code Crim. Proc. § 717.) We are justified, therefore, on authority as well as long-continued usage and practice, in determining that the provisions of the Constitution requiring indictment by a grand jury and a trial by a petty jury relate to those crimes where the punishment may be in State’s prison or for a longer term than one year in any prison.

The constitutional provision giving a party the right to a trial by jury does not apply to petty offenses tried before a Court of Special Sessions. (People ex rel. Murray v. Justices, 74 N. Y. 406; People ex rel. Comaford v. Dutcher, 83 N. Y. 240.) Petty offenses, however, have a well-defined meaning, classified as such by the penalties attached to them. They cease to be petty when the imprisonment is in State’s prison, possibly at hard labor, or in any prison for a longer term than one year. There may be a possible exception to this term of one year in a penitentiary in the application of section 4 of chapter 579 of the Laws of 1915 relating to an indeterminate sentence which is of a correctional nature. (People ex rel. Kipnis v. McCann, 234 N. Y. 502; People ex rel. Brewer v. Levy, 267 N. Y. 596; People ex rel. St. Clair v. Davis, 143 App. Div. 579.)

The objection was taken in the early part of this case to the jurisdiction of the court by a demand made for a trial by a jury of twelve men. Even if no such objection had been made the consent of counsel or of the defendant could not confer jurisdiction upon the court. (People ex rel. Battista v. Christian, 249 N. Y. 314.)

For the reasons here stated the judgments should be reversed, and the information dismissed.

Lehman, O’Brien, Hubbs, Loughran and Finch, JJ., concur; Crouch, J., not sitting.

Judgments reversed, etc.


text:
    Doubleday, Doran & Company, Inc., et al., Appellants, v. R. H. Macy & Co., Inc., Respondent.
    (Argued December 2, 1935;
    decided January 7, 1936.)

      Morris L. Ernst, Ambrose Doskow and Alexander Lindey for appellants.
    The principle of price maintenance has been recognized and approved by the courts. The only effect of the Fair Trade Act (L. 1935, ch. 976) is to give full protection to a legitimate business interest which has been long recognized but inadequately protected and to make “ meaningful ” the method of protection. (People ex rel. Central Park, N. & E. R. Co. v. Willcox, 194 N. Y. 383; Stillwell Theater, Inc., v. Kaplan, 259 N. Y. 405; Locker v. American Tobacco Co., 121 App. Div. 443; 195 N. Y. 565; Marsich v. Eastman Kodak Co., 244 App. Div. 295; Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373; United States v. Colgate & Co., 250 U. S. 300; Frey & Son v. Cudahy Packing Co., 256 U. S. 208; Cream of Wheat Co. v. Federal Trade Comm., 14 Fed. Rep. [2d] 40; Harriet Hubbard Ayer, Inc., v. Federal Trade Comm., 15 Fed. Rep. [2d] 274; 273 U. S. 759; United States v. General Electric Co., 272 U. S. 476; Locker v. American Tobacco Co., 121 App. Div. 443; 195 N. Y. 565; Park & Sons Co. v. National Wholesale Druggists’ Assn.,
      175 N. Y. 1; Murphy v. Christian Press Assn. Pub. Co., 38 App. Div. 426; Walsh v. Dwight, 40 App. Div. 513; Straus v. American Publishers’ Assn., 85 App. Div. 446; Garst v. Charles, 187 Mass. 144; Dr. Miles Medical Co. v. Goldthwaite, 133 Fed. Rep. 794; Dr. Miles Medical Co. v. Platt, 142 Fed. Rep. 606; Wells & Richardson Co. v. Abraham, 146 Fed. Rep. 190; 149 Fed. Rep. 408; Dr. Miles Medical Co. v. Jaynes Drug Co., 149 Fed. Rep. 838.) The Fair Trade Act is valid. (Boston Store v. American Graphophone Co., 246 U. S. 8; Bobbs-Merrill Co. v. Straus, 210 U. S. 339; Bauer v. O’Donnell, 229 U. S. 1; Trade Mark Cases, 100 U. S. 82; Ingersoll & Bro. v. Hahne & Co., 88 N. J. Eq. 222; 89 N. J. Eq. 332.) The means employed by the Fair Trade Act are reasonably related to the achievement of the objective of fair competition. (Nebbia v. New York, 291 U. S. 502; Chicago, B. & Q. R. R. Co. v. McGuire, 219 U. S. 549; Chattanooga Foundry v. Atlanta, 203 U. S. 390; Liberty Warehouse Co. v. Burley Tobacco Growers Co-operative Marketing Assn., 276 U. S. 71; Dahnke Walker Milling Co. v. Bondurant, 257 U. S. 282; Kansas City Southern R. R. Co. v. Anderson, 233 U. S. 325; St. Louis, I. M. & S. R. Co. v. Wynne, 224 U. S. 354; Matter of Waterson, Berlin & Snyder Co., 48 Fed. Rep. [2d] 704; Lord Strathcona S. S. Co. v. Dominion Coal Co., [1926] A. C. 108; Werderman v. Societe Generale d’ Electricite, 19 Ch. Div. 246; Murphy v. Christian Press Assn. Pub. Co., 38 App. Div. 426; New York Bank Note Co. v. Hamilton Bank Note Co., 83 Hun, 593; Great Lakes & St. Lawrence T. Co. v. Scranton Coal Co., 239 Fed. Rep. 603; Montgomery Enterprises v. Empire Theater Co., 204 Ala. 566; Matter of Rider, 16 R. I. 271; Lorillard Co. v. Weingarden, 280 Fed. Rep. 238.)

      Hugh S. Williamson and George W. Morgan, Jr., for National Straight Whiskey Distributing Company, Inc., amicus curice.

    The Fair Trade Act is a reasonable legislative enactment designed to promote public welfare. It is neither arbitrary nor discriminatory and is, therefore, a valid exercise of the police power. (Leslie v. Lorillard, 110 N. Y. 519; Messersmith v. American Fidelity Co., 232 N. Y. 161; Marsich v. Eastman Kodak Co., 244 App. Div. 295; Nebbia v. New York, 291 U. S. 502; Ingersoll Bros. v. Hahne & Co., 88 N. J. Eq. 332; Matter of Wulfsohn v. Burden, 241 N. Y. 288; Bacon v. Walker, 204 U. S. 311; Klein v. Maravelas, 219 N. Y. 383; Boston Stores v. American Graphophone Co., 246 U. S. 8; Noble State Bank v. Haskell, 219 U. S. 104; Sinking Funa, Fases, 99 U. S. 700.)

      Roy M. Sterne for New York State Pharmaceutical Association, Inc., et al., amici curice.

    Resale price maintenance contracts have never been contrary to public policy and the State has expressly declared its public policy to be in favor of such contracts. (Walsh v. Dwight, 40 App. Div. 513; Park & Sons v. National Druggists' Assn., 175 N. Y. 1; Grogan v. Chaffee, 156 Cal. 611; Gheradelli Co. v. Hunsicker, 104 Cal. 355; Ingersoll & Bros. v. Hahne & Co., 88 N. J. Eq. 222; Fisher Flouring Mills Co. v. Swanson, 76 Wash. 649; Messersmith v. American Fidelity Co., 232 N. Y. 161.) No constitutional rights of respondent are invaded by the act; it does not constitute an unauthorized delegation of powers and is not arbitrary or unreasonable. (City of Louisville v. Cumberland Tel. Co., 225 U. S. 430; People v. Lochner, 177 N. Y. 145.) The economic question is one for the Legislature. (Nebbia v. New York, 291 U. S. 502; Marsich v. Eastman Kodak Co., 244 App. Div. 295.)

      Charles Goldman and Harold Duhlirer for Cooper & Cooper, Inc., amicus curice.

      Crichton Clarke for American Booksellers’ Association, amicus curice.

    The willful and knowing sale of a trademarked commodity at a price below that stipulated in a resale price contract is unfair competition in fact and the Legislature has constitutional power to declare the same to be actionable as such. (Bitterman v. Louisville &

      Nashville R. R. Co., 207 U. S. 205; Bobbs-Merrill v. Straus, 210 U. S. 339; United States v. United States Steel Carp., 251 U. S. 417; Miles v. Park, 220 U. S. 373; United States v. American Tobacco Co., 221 U. S. 106; Bauer v. O’Donnell, 229 U. S. 1; Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502; Boston Store v. American Graphophone Co., 246 U. S. 8; United States v. Colgate & Co., 250 U. S. 300; United States v. Schrader’s Son, Inc., 252 U. S. 85; Frey & Son v. Cudahy Packing Co., 256 U. S. 208; Federal Trade Comm. v. Beechnut Packing Co., 257 U. S. 441; United States v. General Electric Co., 272 U. S. 476.)

      Leon Lauterstein, Melbourne Bergerman and Emanuel Dannett for respondent.
    The statute deprives retailers of liberty and property without due process of law, in violation of the Fourteenth Amendment of the Federal Constitution and of section 6 of article 1 of the State Constitution. (People ex rel. Moskowitz v. Jenkins, 202 N. Y. 53; City of Carrollton v. Bazzette, 159 Ill. 283; Allgeyer v. Louisiana, 165 U. S. 578; People v. Nebbia, 262 N. Y. 259; New State Ice Co. v. Liebmann, 285 U. S. 262; Darweger v. Staats, 267 N. Y. 290; Wolff Packing Co. v. Court of Industrial Relations, 262 U. S. 522; People v. Budd, 117 N. Y. 1.) Since the effect and purpose of section 2 of the statute is the fixing of prices on ordinary commodities sold by ordinary businesses, it is not within the scope of any constitutional power of the Legislature. (Wolff Packing Co. v. Court of Industrial Relations, 262 U. S. 522; Fairmont Creamery Co. v. Minnesota, 274 U. S. 1; People v. Gillson, 109 N. Y. 389; New State Ice Co. v. Liebmann, 285 U. S. 262; Ribnik v. McBride, 277 U. S. 350; People v. Nebbia, 262 N. Y. 259; Nebbia v. New York, 291 U. S. 502; People v. Budd, 117 N. Y. 1; German Alliance Ins. Co. v. Kansas, 233 U. S. 389; Block v. Hirsh, 256 U. S. 135.) The means provided by the statute to achieve its purpose are unreasonable, arbitrary and discriminatory, and are wholly irrevelant to any legislative purpose. (Nebbia v. New York, 291 U. S. 502; Nectow v. City of Cambridge, 277 U. S. 183; Adams v. Tanner, 244 U. S. 590; Bums Baking Co. v. Bryan, 264 U. S. 504; Weaver v. Palmer Bros. Co., 270 U. S. 402; Schlesinger v. Wisconsin, 270 U. S. 230; Yick Wo v. Hopkins, 118 U. S. 356; Eubank v. Richmond, 226 U. S. 137; Baltimore v. Radecke, 49 Md. 217; New State Ice Co. v. Liebmann, 285 U. S. 262; Meyer v. Nebraska, 262 U. S. 390; Pierce v. Society of Sisters of Holy Name, 268 U. S. 510; Buchanan v. WarZey, 245 U. S. 60; Darweger v. Staats, 267 N. Y. 290; Adams v. Tanner, 244 U. S. 590; Fairmont Creamery Co. v. Minnesota, 274 U. S. 1; People ex rel. Moskowitz v. Jenkins, 202 N. Y. 53; People v. Gillson, 109 N. Y. 389; Wolff Packing Co. v. Court of Industrial Relations, 262 U. S. 522; Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398; Sears, Roebuck Co. v. Federal Trade Comm., 258 Fed. Rep. 307; Sinclair Refining Co. v. Federal Trade Comm., 276 Fed. Rep. 686; 261 U. S. 463; Kresge Co. v. Champion Spark Plug Co., 3 Fed Rep. [2d] 415; Prestonettes v. Coty, 264 U. S. 359; Russia Cement Co. v. Frauenhar, 133 Fed. Rep. 518; Gorham Mfg. Co. v. Emery-Bird-Thayer Dry Goods Co., 92 Fed. Rep. 774; 104 Fed. Rep. 243; Vitascope v. United States Phonograph Co., 83 Fed. Rep. 30; Straus v. Victor Talking Machine Co., 243 U. S. 490.) The statute unconstitutionally delegates to private persons legislative power in violation of section 1 of article 3 of the State Constitution. (Darweger v. Staats, 267 N. Y. 290; Panama Refining Co. v. Ryan, 293 U. S. 388.)

      John C. Waison, for John G. Myers Co., Inc., amicus curice.

    The statute deprives a defendant thereunder of property without due process of law, in violation of the Fourteenth Amendment of the Constitution of the United States and section 6 of article 1 of the State Constitution. (People v. Nebbia, 262 N. Y. 259; 291 U. S. 502; New State Ice Co. v. Liebmann, 285 U. S. 262; Darweger v. Staats, 267 N. Y. 290; Wolff Packing Co. v. Court of

      Industrial Relations, 262 U. S. 522; People v. Budd, 117 N. Y. 1; People v. Gillson, 109 N. Y. 389; Fairmont Creamery Co. v. Minnesota, 274 U. S. 1; Ribnik v. McBride, 277 U. S. 350; German Alliance Ins. Co. v. Kansas, 233 U. S. 389; Block v. Hirsh, 256 U. S. 135.) The statute is arbitrary, capricious, discriminatory and irrelevant to any proper legislative purpose, and it unconstitutionally delegates to private persons legislative power in violation of section 1 of article 3 of the State Constitution. (Nebbia v. New York, 291 U. S. 502; Nectow v. Cambridge, 277 U. S. 72; Adams v. Tanner, 244 U. S. 590; Burns Baking Co. v. Bryan, 264 U. S. 504; Weaver v. Palmer Bros. Co., 270 U. S. 402; Schlesinger v. Wisconsin, 270 U. S. 230; Liggett Co. v. Baldridge, 278 U. S. 105; Yick Wo v. Hopkins, 118 U. S. 356; Washington v. Roberge, 278 U. S. 116; Baltimore v. Radecke, 49 Md. 217; Panama Refining Co. v. Ryan, 293 U. S. 388; Schechter Poultry Corp. v. United States, 295 U. S. 495.)

      Jay Leo Rothschild for Hearn Department Stores, Inc., amicus curice.

   Crane, Ch. J.

An appeal taken directly to this court from a dismissal of the complaint by the Special Term of the Supreme Court, held in Westchester county, brings up for determination solely the constitutionality of chapter 976 of the Laws of 1935. The Special Term held it to be unconstitutional.

The action is brought to restrain R. H. Macy & Co., Inc., from offering for sale three books at a less price than that fixed by the publisher. The complaint alleges that Doubleday, Doran & Company, Inc., is a publisher and manufacturer of books, and that Doubleday, Doran Book Shops, Inc., is a seller and distributor of books at retail. All books sold by Doubleday, Doran & Company, Inc., to Doubleday, Doran Book Shops, Inc., are sold under contracts between the parties with certain provisions that the buyer will not resell such books except at the prices stipulated by the vendor. The prices thus stipulated were for the book called “ Some Day,” $2 at retail; for " Vogue’s Book of Etiquette,” S3; and for The Garden Notebook,” $1.50. The complaint then sets forth that R. H. Macy & Co., Inc., has purchased these books and is advertising them for sale at the respective prices of $1.76, $2.64 and $1.31 per volume. Macy & Co. purchased the books for resale under no contract limiting the price, and none is alleged. The plaintiffs do not claim that Macy is bound by any agreement but that it is forced by the provisions of chapter 976 of the Laws of 1935 to conform to the price which they stipulated as the retail price in a contract between themselves, that is, a contract of sale between Doubleday, Doran & Co., Inc., and Doubleday, Doran Book Shops, Inc. Although the publisher sold the books to Macy without any restrictions as to price, it now says the law prevents Macy from disposing of them at a lower figure than that fixed by the publisher with another. What is this law which has thus undertaken to supplant contracts? We give it in full:

“ Section 1. Subdivision 1. No contract relating to the sale or resale of a commodity which bears, or the label or content of which bears, the trade mark, brand, or name of the producer or owner of such commodity and which is in fair and open competition with commodities of the same general class produced by others shall be deemed in violation of any law of the State of New York by reason of any of the following provisions which may be contained in such contract:
“ (a) That the buyer will not resell such commodity except at the price stipulated by the vendor.
(b) That the vendee or producer require in delivery to whom he may resell such commodity to agree that he will not, in turn, resell except at the price stipulated by such vendor or by such vendee.
2. Such provisions in any contract shall be deemed to contain or imply conditions that such commodity may be resold without reference to such agreement in the following cases:
(a) In closing out the owner’s stock for the purpose of discontinuing delivering any such commodity.
“ (b) When the goods are damaged or deteriorated in quality, and notice is given to the public thereof.
(c) By any officer acting under the orders of any court.
§ 2. Wilfully and knowingly advertising, offering for sale or selling any commodity at less than the price stipulated in any contract entered into pursuant to the provision of section one of this act, whether the person so advertising, offering.for sale or selling is or is not a party to such contract, is unfair competition and is actionable at the suit of any person damaged thereby.
§ 3. This act shall not apply to any contract or agreement between producers or between wholesalers or between retailers as to sale or resale prices.
§ 4. The following terms, as used in this act, are hereby defined as follows: ' Producer ’ means grower, baker, maker, manufacturer or publisher. ' Commodity ’ means any subject of commerce.
“ § 5. If any provision of this act is declared unconstitutional it is the intent of the legislature that the remaining portions thereof shall not be affected but that such remaining portions remain in full force and effect.
“ § 6. This act shall take effect immediately.”

Section 2 is that part of the law which is questioned in this case. The interpretation given below to this section and by all the parties apparently is that it attempts to accomplish just what the plaintiffs claim for it, as stated in the complaint and as given above. But for this we would have grave doubts whether the Legislature ever intended to fix the price of books after they had been purchased in the open market under no agreement as to resale price. Thus' it is possible to read section 2 as referring to the contract made under section 1, or as binding on those books like an equitable servitude which had been parted with under a contract as to resale price. However, for the purpose of this appeal we confine ourselves to the constitutionality of the statute as construed by the parties and the court below and treat this section 2 as allowing book price-fixing in the absence of contract made by the purchaser or his agents.

We agree with the Special Term that, if this be its meaning, the law is unconstitutional. That the States cannot fix the selling price of any and all commodities has been settled. (Williams v. Standard Oil Co., 278 U. S. 235; Tyson & Bro. v. Banton, 273 XT. S. 418; Wolff Packing Co. v. Court of Industrial Relations, 262 XJ. S. 522; Straus v. Victor Talking Machine Co., 243 XJ. S. 490.) Books, at least these books, are not “ affected with a public interest ” any more than theatre tickets; no emergency has yet arisen in literary publications, and the business is not such as comes within the class which must submit to rate-fixing. Circumstances which cannot be foreseen from one generation to another may arise which will require certain articles to submit to regulatory prices in order that the public may get them at all or get them in a pure and beneficial state. We cannot always express legislative power in exact formulas nor decide a case before it happens. Experience is the mother of teachers. Under the Nebbia case for instance (Nebbia v. New York, 291 U. S. 502) no one would doubt now that New York State would have the power to get milk to the public somehow if any combination of forces threatened to shut off all supply or to deteriorate that which was supplied. The price might be an element to be considered with other things in such a case. So we thought in People v. Nebbia, 262 N. Y. 259. But to fix arbitrarily the price of books by legislation and not by agreement comes within the condemnation of the decisions which have heretofore dealt with like legislation. What thé Legislature cannot do directly it cannot do indirectly npr does it cease to be a price fixed by the Legislature because that body has clothed the publisher with the power or authority to establish it. For a publisher to agree with its subsidiary or agent to the price of a book which shall thereafter bind all other parties who purchase like books from the publisher is in reality a method whereby the Legislature fixes the price; it is a species of delegated authority.

The plaintiff, Doubleday, Doran & Company, Inc., the publisher, was not obliged to sell Macy & Co. It could do so or not as it pleased and it could refuse to sell because Macy was cutting the price. (United States v. Colgate & Co., 250 U. S. 300.) Even this right, however, may have its limitations. (Federal Trade Comm. v. Beech-Nut Baching Co., 257 U. S. 441.) The publisher made no such refusal; it sold Macy. Likewise the publisher could have bound Macy by contract not to sell below a fixed price even though the restriction might not extend further to one who subsequently purchased without restrictive stipulation. (Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373; Boston Store of Chicago v. American Graphophone Co., 246 U. S. 8; Bobbs-Merrill Co. v. Straus, 210 U. S. 339; Park & Sons Co. v. National Wholesale Druggists’ Assn., 175 N. Y. 1.) Macy bought from the publisher or someone these books without any agreement as to their resale price.

The license or agency agreements have no application to the facts here before us. (United States v. General Electric Co., 272 IT. S. 476.)

The judgment below, declaring section 2 of chapter 976 of the Laws of 1935 unconstitutional as applied to the facts set forth in the complaint, and dismissing the complaint, should be affirmed, with costs.

Lehman, O’Brien, Hubbs, Crouch, Loughran and Finch, JJ., concur.

Judgment affirmed.


author: O’Brien, J.

text:
    Continental Casualty Company, Appellant, v. National Slovak Sokol, Inc., Respondent.
    (Argued November 18, 1935;
    decided January 7, 1936.)

      Jeremiah T. Mahoney and John E. McAniff for appellant.
    It is not necessary for the State Alcoholic Beverage Control Board to bring suit and to recover judgment on a bond issued under chapter 180 of the Laws of 1933, in order to fix the liability of principal and surety on such bond to the People of the State of New York. (People ex rel. Hill v. United Surety Co., 120 App. Div. 655; 755 Seventh Ave. Corp. v. Carroll, 266 N. Y. 157; Lyman v. Perlmutter, 166 N. Y. 410; Fidelity & Casualty Co. v. Zappolo, 153 Misc. Rep. 258; Clement v. Reavley, 126 App. Div. 215; Cullinan v. Burkard, 93 App. Div. 31; United States v. Orth, 59 Fed. Rep. [2d] 774; United States v. Engelberg, 2 Fed. Rep. [2d] 720; United States v. Wandmaker, 292 Fed. Rep. 24; Matter of Frasch, 245 N. Y. 174; Lyman v. Rochester Title Ins. Co., 37 App. Div. 234; Tuzzeo v. American Bonding Co., 226 N. Y. 171; Sisson v. Todd, 103 Misc. Rep. 99; 186 App. Div. 940; Brewster v. Gage, 280 U. S. 327; Norwegian Nitrogen Products Co. v. United States, 288 U. S. 294; Costanzo v. Tillinghast, 287 U. S. 341; Bullock v. Cooley, 225 N. Y. 566; Holmes Electric Protective Co. v. Williams, 228 N. Y. 407.) Plaintiff is entitled to recover, under the express terms of the indemnity agreement, the amount of the bond paid by plaintiff in good faith in the belief that it was liable therefor as surety on the bond, especially since such belief was induced by defendant’s own conduct. (Fidelity & Casualty Co. v. Zappolo, 153 Misc. Rep. 258; National Surety Co. v. Fulton, 192 App. Div. 645.) Under chapter 180 of the Laws of 1933 a licensee, whose license has been revoked or canceled and whose bond has been forfeited by the State Alcoholic Beverage Control Board, may review the forfeiture of the bond. (Matter of Gelces v. State Liquor Authority, 154 Misc. Rep. 517; People ex rel. Steward v. Railroad Commrs., 160 N. Y. 202; Matter of Yates v. Mulrooney, 245 App. Div. 146; Matter of Fenson v. State Liquor Authority, 152 Misc. Rep. 446; Reetz v. Michigan, 188 U. S. 505; Matter of Marwill Liquor Store, Inc., v. State Liquor Authority, 155 Misc. Rep. 489.) Defendant cannot in this action collaterally attack the determination of the State Alcoholic Beverage Control Board. (Matter of Torge v. Village of Salamanca, 176 N. Y. 324; Woollcott v. Shubert, 169 App. Div. 194; Racine v. Morris, 136 App. Div. 467; 201 N. Y. 240; Seely v. Tioga County Patrons Fire Relief Assn., 165 App. Div. 685; Bonat v. Crosswell, 241 App. Div. 230.)

      PaulL. Bleakley and Joseph J. Harding for respondent.
    It is necessary for the State Alcoholic Beverage Control Board to bring suit and to recover judgment on a bond issued under chapter 180 of the Laws of 1933 in order to fix the liability of principal and surety on such bond to the People of the State of New York. (People ex rel. Kane v. Sloane, 98 App. Div. 450; Sage v. Brooklyn, 89 N. Y. 190; People v. Ryan, 267 N. Y. 133; People ex rel. Sanford v. Thayer, 120 Misc. Rep. 571; Matter of Mandel v. Board of Regents, 250 N. Y. 173; City of Buffalo v. Neubeck, 209 App. Div. 386; City of Buffalo v. Schliefer, 25 Hun, 275; City of Buffalo v. Preston, 81 App. Div. 480; Matter of N. J. Fidelity & Plate Glass Ins. Co., v. Van Schaick, 236 App. Div. 223; 261 N. Y. 521.) The plaintiff, the alleged surety, if payment was made, being subrogated to the rights and liabilities of the Alcoholic Beverage Control Board and/or the People of the State of New York, is subject to the defenses of the principal against the State Board. (Farrelly v. Schaettler, 143 App. Div. 273; Lissner v. Haynes Automobile Co., 105 Misc. Rep. 359; 188 App. Div. 935; Dunn v. Uvalde Asphalt Paving Co., 175 N. Y. 214; Cornell v. Travelers Ins. Co., 175 N. Y. 239; National Surety Co. v. Fulton, 192 App. Div. 645.) The defendant did not have the right to review the determination of the State Board in canceling the license and forfeiting the bond. (People ex rel. Lahey v. Woodbury, 102 App. Div. 333; People ex rel. C. & H. R. R. Co. v. Public Service Comm., 195 N. Y. 157; People ex rel. Cook v. Hildreth, 126 N. Y. 360.) The alleged hearing afforded the defendant by the State Alcoholic Beverage Control Board violated its constitutional rights. (People ex rel. Loughran v. Flynn, 110 App. Div. 279; Matter of Peck v. Cargill, 167 N. Y. 391; Matter of Grand-

      view Dairy, Inc., v. Baldwin, 239 App. Div. 640; Ives v. South Buffalo R. R. Co., 201 N. Y. 271; Zimmerman v. Mulrooney, 241 App. Div. 695.)
   O’Brien, J.

In August, 1933, defendant was licensed by the State Liquor Authority to sell beer and, pursuant to section 83 of the Alcoholic Beverage Control Law (Cons. Laws, ch. 3-B; L. 1933, ch. 180; reenacted as § 112 by L. 1934, ch. 478), plaintiff as surety and defendant as principal executed a bond in the sum of $1,000 to the People of the State conditioned upon the non-violation by defendant of any of the provisions of the Alcoholic Beverage Control Law or the rules of the State Board. On April 13, 1934, the Beverage Control Board served upon defendant a notice of hearing based upon charges that defendant’s premises were not conducted as a bona fide restaurant and that liquor had been found upon the premises which had been licensed for the sale of beer only. A second notice, dated May 19, 1934, was served by the Board upon defendant in which was stated the fact that defendant’s restaurant beer license had been canceled after a hearing. A third notice, dated June 29, 1934, was served upon plaintiff as surety which recited that a hearing had been held on the charges dated April 13, 1934, the licensee had appeared at the hearing, proof had been taken and that defendant had been found guilty of the charges embraced in the notice of April 13, 1934. The notice of June 29,1934, to plaintiff as surety assumed to declare the bond forfeited.

Irrespective of the Board’s power or lack of it to declare the bond forfeited, there is no doubt of its authority to cancel the license. Section 87 of chapter 180 of the Laws of 1933 conferred the right to a judicial review by certiorari of the revocation of a license. Inasmuch as defendant admits that it consented to the cancellation, it did not and, of course, could not review it. The cancellation of the license for violation of law, therefore, stands as valid. It may not be collaterally attacked.

After the Board had undertaken to declare the bond forfeited and when it notified the surety of its declaration, it made demand upon the surety for payment of the sum provided for in the bond and the surety paid it. On these facts plaintiff sued to recover from its principal and moved for summary judgment. The order denying its motion was unanimously affirmed and the Appellate Division has certified eight questions for our determination.

The first question is: 1. Under the law of the State of New York is it necessary for the State Alcoholic Beverage Control Board to bring suit and to recover judgment on a bond issued under the Alcoholic Beverage Control Law (Chap. 180, Laws of 1933), in order to fix the liability of principal and surety on such bond, to the People of the State of New York? ” In answering a certified question we interpret it as concrete and as based on the particular record before us and not as an abstract question. (Drake v. Herrman, 261 N. Y. 414, 419.) We take this question as it is framed and not as if it requested an answer whether the Board is authorized to declare a bond forfeited without first obtaining a judgment. On the concrete facts in this case and on the first question as framed, we are not required to determine any issue of law whether the word may ” in section 83 of the statute is mandatory or permissive and whether the Board’s omission to institute a suit to recover on the bond results in every instance in relieving a surety or a principal or both from liability.

This plaintiff as surety can, on the facts of this case, fix its own liability by concession and by payment and it has so fixed it. This defendant as principal can fix its own liability by agreement. The issue of law presented by the first certified question is whether, in view of the agreement between the parties, it has fixed its liability.

The complaint alleges that as a consideration for the execution of the bond by plaintiff, defendant agreed to indemnify it against all liability, losses, costs, damages and expenses of every kind which plaintiff might sustain or incur by reason of the execution of the bond. This indemnity agreement executed August 10, 1933, provides that defendant will “ indemnify and keep indemnified the Company and save it harmless from and against any and all liability, losses, costs, damages, attorneys and counsel fees and disbursements, and expenses, of whatever kind or nature which the Company may sustain or incur by reason or in consequence of having executed or procured the execution of the bond hereinabove applied for and/or any renewal, continuation, extension or successor thereof * * Then follows an additional list of certain specified expenses which the company may sustain or incur for which the principal agrees to indemnify the surety. The part of the agreement above quoted constitutes a contract by which the principal is bound to reimburse the surety for every kind of liability or loss which may be sustained or incurred by reason of the execution of the bond by plaintiff. This agreement of course cannot be held to apply to a liability which might be assumed by the surety without reason where none can exist either in the present or the near future nor to a loss sustained otherwise than in the natural course of events. The liability or the loss to the surety must be such as normally arises from the execution of the bond.

If the fact be assumed that plaintiff prematurely admitted its liability on its bond to the People, nevertheless it must fairly be regarded as such a liability as the agreement contemplates and the loss which plaintiff sustained by payment of the face of the bond is also a loss within the meaning of the agreement. If by any possibility a defense could exist to such an action to recover on the bond as section 83 authorized the Board to bring, plaintiff might not have been warranted in acknowledging liability and making payment prior to a judicial determination that the conditions of the bond had been broken. However, in the event that an action to recover on the bond had been begun, it is plain that no defense would exist. The condition of the bond was such that “ the principal will not suffer any violation of the provisions of Chapter 3-b of the Consolidated Laws of the State of New York.” The principal did violate the statute. Its license was revoked for the reason, as determined by the Board, that defendant’s premises were not conducted as a bona fide restaurant and that liquor had been found on its premises at a time when its license permitted the sale only of beer. Although subdivision 4 of section 87 of chapter 180 of the Laws of 1933 conferred the right upon the present defendant to review the revocation of its license, it never contested the validity of the Board’s act. Instead, it consented to the cancellation of its license. If an action had been brought by the Board under section 83, the fact would necessarily stand admitted that the conditions of the bond had been violated and judgment for the amount of the bond would have gone in favor of the People as a matter of course. It would be a strange rule of law which would compel this plaintiff to impede the administration of justice by pretending to resist an incontestible claim and which would refuse to allow it, except at its peril, to admit a liability which, in the event of an action, would surely have been imposed. The surety’s liability was fixed by its proper concession without the useless formality of the institution of an action which could not be defended, the principal’s liability was fixed by its agreement with the surety and, therefore, on the facts in this record, the first question should be answered in the negative.

As the complaint discloses, this is an action on the agreement and not on the bond and plaintiff is not barred from maintaining this action by reason of the limitation of time set forth in the bond. The sixth question should, therefore, be answered in the negative. The fourth question should be answered in the negative and the fifth, seventh and eighth questions in the affirmative. The third question does not require an answer as it relates to matters not necessarily presented by this record.

The order of the Appellate Division and that of Special Term should be reversed, with costs to appellant in all courts, and the motion granted.

The first, fourth and sixth questions certified should be answered in the negative, and the fifth, seventh and eighth in the affirmative. The second and third questions certified are not answered.

Crane, Ch. J., Hubbs and Finch, JJ., concur; Lehman, Crouch and Loughran, JJ., dissent.

Judgment accordingly.