text:
    John Duncan, Respondent, v. Charles A. Stoneham et al., Individually and as Copartners under the Firm Name of Charles A. Stoneham & Co., Appellants, Impleaded with Another.

      (Argued December 2, 1929;
    decided February 18, 1930.)

      Frank H. Hiscock, I. Maurice Wormser and Leo J. Bondy for appellants.
    No cause of action was established and the complaint should have been dismissed for failure of proof at the close of plaintiff’s evidence. (Wisner v. Jewett, 243 N. Y. 562; Lamphere v. Lang, 213 N. Y. 585; Ganwell v. Bigley, 149 N. E. Rep. 155; Walrath v. Hanover Fire Ins. Co., 216 N. Y. 220; Beer v. Clyde Steamship Co., 212 App. Div. 463; Northam v. Dutchess County Mut. Ins. Co., 177 N. Y. 73.)

      Caruthers Ewing, Clinton De Witt Van Siclen and Wellington S. Crouse for respondent.
    The letter contains fraudulent misrepresentations, and every essential element that has to do with an action of fraud and deceit.. (Reno v. Bull, 226 N. Y. 546; Ochs v. Woods, 221 N. Y. 335; Downey v. Finucane, 205 N. Y. 251; Haddock v. Osmer, 153 N. Y. 604; Kountz v. Kennedy, 147 N. Y. 124; Rothschild v. Mack, 115 N. Y. 1; Brickett v. Griswold, 112 N. Y. 454; Beardsley v. Duntley, 69 N. Y. 577; Bradley v. Seaboard National Bank, 167 N. Y. 427; Levy v.
      Abramsohn, 81 N. Y. Supp. 344; Goldsmith v. Stern, 84 N. Y. Supp. 869; Wiser v. Lawlor, 189 U. S. 260; Bridger v. Goldsmith, 143 N. Y. 424; Reefs v. Twiss, L. R. [1896] App. Cas. 272; Gray v. Richmond Bicycle Co., 167 N. Y. 348; Zabriskie v. Smith, 13 N. Y. 322.)
   Per Curiam.

In their letter to the plaintiff, requesting that he consent to a transfer of their stock brokerage business to E. H. Clarke & Co., the appellants said: In this connection we have investigated Messrs. E. H. Clarke & Co., and believe them to be financially responsible and fully capable of carrying out any obligations they assume in the taking over of this business.” Clearly, this was not the utterance of a mere opinion or prophesy. The appellants asserted that they had investigated ” E. H. Clarke & Co., and “ believed them to be financi lly responsible ” and fully capable of carrying out any obligations they assume in the taking over of this business.” We interpret the representation to mean that the appellants had conducted a thorough investigation concerning the financial standing of Clarke, who did a brokerage business under the name of E. H. Clarke & Co.; that, as a result thereof, they entertained an honest belief in his responsibility and capability as represented. The representation was not merely that Clarke was capable of carrying out the appellants’ obligation to the plaintiff, which Clarke assumed on the transfer; it was an expression of a belief, based upon careful investigation, that Clarke was capable of performing any obligation ” which he might assume in the taking over “ of this business.” The representation related to performance of obligations assumed toward customers of the appellants other than the plaintiff, as well as to him. It likewise related to the obligations assumed toward the appellants in taking over the business. On the transfer Clarke assumed toward the appellants an obligation to pay the aggregate of the debts of all their customers, or a sum in excess of $280,000. The appellants exacted of Clarke no statement of assets and liabilities; made no inquiry as to his financial rating; inquired of no bank concerning his financial responsibility. The witness Robertson, one of the appellant firm, had a friend named Willis, a fellow-member of a country club, by whom he had been assured that Clarke was in splendid financial condition. Robertson stated that he made inquiries of other brokers, but was unable to give their names, except the name of the brokerage house of Deery & Co. That firm had taken over some of the offices of the appellant firm on the same basis as had Clarke. The firm subsequently became a bankrupt, as did Clarke. In point of fact Clarke conducted a small arbitrage business; was a member of no stock exchange; maintained an office, consisting of a few rooms of small size; employed no salesmen; ran his office with three or four girls, a telegraph operator and a couple of boys; kept a daily bank balance of less than $1,000. We think the appellants made an insufficient investigation, and were possessed of inadequate information, to assert a belief, based upon careful inquiry made, that Clarke was financially able to carry out all obligations assumed upon the transfer, especially to make a present payment of more than $280,000 to the appellants. It is said that the plaintiff had no right to rely upon the misrepresentations made except to conclude with Clarke the stock transactions begun with the appellants; that the result intended to be induced by the misrepresentation was merely the transfer of his present business with the appellants to the brokerage house of E. H. Clarke & Co.; that, in re-employing Clarke to carry out further transactions, from which a loss resulted, the plaintiff could not properly complain of an inducement to that end by the appellants. The appellants placed no limitation upon the use of their representation which would so restrict the plaintiff that he might rely upon it merely to bring to a conclusion stock transactions previously initiated. Clarke, they said, was fully capable of fulfilling “ any obligations he might assume in the taking over of this business.” In taking over the business Clarke would enter into the relationship of broker and customer with each of the appellants’ customers. The obligations he would then assume would relate to new transactions in stocks as well as the conclusion of old transactions. When the appellants said that he was fully capable of carrying out all obligations assumed we think they had reference to engagements of the future as well as of the past. This view is substantiated by other statements contained in the letter. The appellants stated to the plaintiff that in negotiating for the transfer of their offices, they had insisted that the firm selected should be sufficiently equipped and long enough established “ to render you the kind of service to which you are accustomed.” Clearly, the appellants intended to recommend Clarke as a. broker, not merely for the conclusion of old business, but as a suitable person to act for the plaintiff in transactions newly undertaken. We think that the plaintiff was entitled to rely upon the representation when it resumed business with Clarke after the original transaction had been concluded. For these views we find authority in Zabriskie v. Smith (13 N. Y. 322) and Bradley v. Seaboard Nat. Bank (167 N. Y. 427). It is said that error was made in receiving Exhibit 55 in evidence. For the reasons given in Harford v. Stoneham (253 N. Y. 188), decided herewith, approving the admission in that action of the same document under a different exhibit number, a majority of the court are of the opinion that the exhibit was properly received. We have examined numerous other assignments of error and have concluded that the record is free of any error which might seriously have prejudiced the rights of the appellants.

The judgment should be affirmed, with costs.

Cardozo, Ch. J., Crane, O’Brien and Hubbs, JJ., concur; Pound, Lehman and Kellogg, JJ., dissent on the ground of error in the admission of Exhibit 55.

Judgment affirmed


source: Caselaw Access Project

author: Per Curiam.

license: Public Domain

text:
    Robert Harford, Respondent, v. Charles A. Stoneham et al., Individually and as Copartners under the Firm Name of Charles A. Stoneham & Co., Appellants, Impleaded with Another.
    (Argued December 2, 1929;
    decided February 18, 1930.)

      Frank H. Hiscock, I. Maurice Wormser and Leo J. Bondy for appellants.
    Prejudicial errors were committed by the trial court in permitting the introduction in evidence of the books and records of Clarke, without first showing that the books were correctly kept or that appellants had knowledge of or connection with the entries therein. (Lent v. Shear, 160 N. Y. 462; Franklin v. Hoadley, 145 App. Div. 228; Cuyler v. McCartney, 40 N. Y. 228; Dutton v. Woodman, 9 Cush. 255; Schupp & Sons v. Barnett, 210 App. Div. 546; Chipman v. Palmer, 77 N. Y. 51; Dresch v. Elliott, 137 App. Div. 252.)

      Caruthers Ewing, Clinton De Witt Van Siclen and Wellington S. Crouse for respondent.
    No error, if any was committed, would justify a reversal of the judgment based on the jury's verdict. (People v. Atwater, 229 N. Y. 303; Kittredge v. Grannis, 244 N. Y. 169; Fuller
      v. Robinson, 86 N. Y. 306; Marvin v. Brooks, 94 N. Y. 73; Prout v. Chisholm, 21 App. Div. 54; Haight v. Haight, 112 App. Div. 475; 190 N. Y. 540; Stiebel v. Lissberger, 166 App. Div. 164; 222 N. Y. 604; Keys v. Leopold, 213 App. Div. 760;Lipkien v. Krinski, 192 App. Div. 454; Gray v. Richmond Bicycle Co., 167 N. Y. 348; Brown v. Montgomery, 20 N. Y. 287; Devoe v. Brandt, 53 N. Y. 462; Strong v. Repide, 213 U. S. 419; Stewart v. Wyoming Co., 128 U. S. 383; Copper Process Co. v. Chicago Co., 262 Fed. Rep. 66; 12 Ruling Case Law, 310.)
   Per Curiam.

The essential allegation is actual conversion by Charles A. Stoneham & Company rather than the allegation of a conspiracy to convert by these defendants. Conversion by the Stoneham firm has been proved by the testimony of defendant Robertson and corroborated by plaintiff’s Exhibit 79. This document was properly admitted in evidence. It conforms so closely with Robertson’s description of the recapitulation sheet that the jury was warranted by the evidence in inferring that the two papers were identical. There is, therefore, proof that the agreement between Stoneham & Company and Clarke & Company to which plaintiff consented, contemplated actual physical delivery of plaintiff’s securities by Stoneham & Company to Clarke & Company and that, without plaintiff’s knowledge and without direction from any apparent agent, Stoneham withheld such delivery, sold plaintiff’s shares of stock and his subscription rights in such stock and applied the proceeds to the reduction of the debt owed by Clarke <& Company to Stoneham & Company. The judgment should be affirmed, with costs.

Cardozo, Ch. J., Crane, O’Brien and Hubbs, JJ., concur; Pound, Lehman and Kellogg, JJ., dissent on the ground of error in the admission of Exhibit 79.

Judgment affirmed.


author: Cardozo, Ch. J.

text:
    Guaranty Trust Company of New York, as Trustee, Appellant and Respondent, v. New York and Queens County Railway Company et al., Respondents, and Bankers Trust Company, as Trustee, Respondent and Appellant.

      (Argued January 13, 1930;
    decided March 18, 1930.)

      Alfred T. Davison, Charles E. Hotchkiss, Martin A. Schenck and H. C. McCollom for plaintiff, appellant and respondent.
    The Steinway mortgage covers all additions and accessions necessary for use in connection with the mortgaged property, whether acquired by the Steinway Company or by the New York and Queens County Railway Company. (Galveston R. R. Co. v. Cowdrey, 11 Wall. 459; Compton v. Jesup, 68 Fed. Rep. 263; Commercial Trust Co. v. Chattanooga R. & L. Co., 281 Fed. Rep. 856.) The Purvis street substation is covered by the Steinway mortgage. (Central Trust Co. v. Kneeland, 138 U. S. 414; Knevals v. Florida Central & P. R. Co., 66 Fed. Rep. 224; Seymour v. Canandaigua & N. F. R. R. Co., 25 Barb. 284; Pennock v. Coe, 23 How. 117; People’s Trust Co. v. Schenck, 195 N. Y. 398; Hamlin v. Jerrard, 72 Me. 62; National Bank v. Wilmington, N. C. & S. Ry. Co., 9 Del. Ch. 258; Drake v. N. Y. Suburban Water Co., 26 App. Div. 499; 36 App. Div. 275; Atlantic Trust Co. v. N. Y. Suburban Water Co., 75 App. Div. 354; People ex rel. Huff v. Miller, 118 Misc. Rep. 681; 207 App. Div. 861; Marfield v. Traction Co., 111 Ohio St. 139; Compton v. Jesup, 68 Fed. Rep. 263; Ithaca Trust Co. v. Ithaca Traction Corp., 248 N. Y. 322; Commercial Trust Co. v. Chattanooga Ry. & L. Co., 281 Fed. Rep. 856; Wade v. Chicago R. R. Co., 149 U. S. 327; Citizens’ Savings & Trust Co. v. Cincinnati & Dayton Traction Co., 106 Ohio St. 577; Pintsch Compressing Co. v. Buffalo Gas Co., 280 Fed. Rep. 830; Phoenix Iron Works v. New York Security & Trust Co., 83 Fed. Rep. 757; Harris v. Youngstown Bridge Co., 90 Fed. Rep. 322; Front Street Cable Ry. Co. v. Drake, 84 Fed. Rep. 257.) The Wood-side car barn is covered by the Steinway mortgage. (Central Trust Co. v. Kneeland, 138 U. S. 414; Knevals v. Florida Central & P. R. Co., 66 Fed. Rep. 224; Seymour v. Canandaigua & N. F. R. R. Co., 25 Barb. 284; Stevens v. Watson, 4 Abb. Ct. App. Dec. 302; People’s Trust Co. v. Schenck, 195 N. Y. 398; Brooklyn Heights R. R. Co. v. City of Brooklyn, 152 N. Y. 244; Brooklyn Heights R. R. Co. v. Steers, 213 N. Y. 76; City of New York v. Brooklyn City R. R. Co., 232 N. Y. 463; Matter of Westchester Electric R. R. Co. v. City of Mount Vernon, 206 App. Div. 708; 237 N. Y. 199; Union Ry. Co. v. City of New York, 238 N. Y. 289.) The Steinway mortgage covers the steel cars acquired by the New York and Queens County Railway Company. (People’s Trust Co. v. Schenck, 195 N. Y. 398; Guaranty Trust Co. v. Metropolitan Street Ry. Co., 166 Fed. Rep. 569; Commercial Trust Co. v. Chattanooga Ry. & L. Co., 281 Fed. Rep. 856; National Bank v. Wilmington, N. C. & S. Ry. Co., 9 Del. Ch. 258; Shaw v. Bill, 95 U. S. 10; Louisville Trust Co. v. Cincinnati Inclined-Plane Ry. Co., 91 Fed. Rep. 699; American Sugar Ref. Co. v. Fancher, 145 N. Y. 552; Matter of Hicks, 170 N. Y. 195.)

      Charles F. Kingsley, Arthur G. Peacock and Jam.es L. Quackenbush for New York and Queens County Railway Company, respondent.
    The lien of a mortgage containing an after-acquired property clause executed by a railroad corporation which with other railroad corporations is subsequently merged into a possessor corporation, does not extend to the properties surrendered by the other companies nor to those purchased by the possessor corporation with its own funds and employed in the general operation of the consolidated lines. (Metropolitan Trust Co. v. Chicago & E. I. R. Co., 253 Fed. Rep. 868; 248 U. S. 586; Trust Co. v. City of Rhinelander, 182 Fed. Rep. 64; Pullman Car Co. v. Missouri Pacific Co., 115 U. S. 587; Chicago, St. Paul & K. C. Ry. Co. v.
      Kansas City, St. J. & C. B. R. Co., 38 Fed. Rep. 58; Mississippi Valley Trust Co. v. Southern Trust Co., 261 Fed. Rep. 765; Alexandria Ry. Trustees v. Graham, 31 Grat. 769; Gibert v. Washington, etc., R. R. Co., 33 Grat. 586; Compton v. Jesup, 68 Fed. Rep. 263; Hinchman v. Point Defiance Ry. Co., 14 Wash. 349; New York Security & Trust Co. v. Louisville, etc., R. Co., 102 Fed. Rep. 382; Central Trust Co. v. Pittsburg, S. & N. R. R. Co., 223 N. Y. 347; Susquehanna T. & S. Deposit Co. v. United T. & T. Co., 6 Fed. Rep. [2d] 179; Irvine v. New York Edison Co., 207 N. Y. 425; Syracuse Lighting Co. v. Maryland Casualty Co., 226 N. Y. 25; Citizens Savings & Trust Co. v. Cincinnati & Dayton Traction Co., 106 Ohio St. 577.) Purvis street substation was. acquired by the New York and Queens County Railway Company for its own corporate purposes, paid for with its own money, and the lien of the Steinway mortgage does not and cannot attach to it. (People ex rel. Huff v. Miller, 118 Misc. 682; 202 App. Div. 861; Metropolitan Trust Co, v. Chicago & E. L. R. R. Co., 253 Fed. Rep. 868.) The Woodside barn is not within the hen of the Steinway mortgage; the Steinway Company never had title to the site; the building was erected with money furnished by the Philadelphia Syndicate and the New York and Queens County Railway Company; neither the Steinway Company nor its predecessor had a franchise to lay tracks to the barn which is located outside the boundary of the former Long Island City. (Matter of Brooklyn, Queens County & Suburban Railroad Co., 185 N. Y. 171; First Construction Co. v. State of New York, 221 N. Y. 295; Matter of Westchester Electric Railroad Co., 237 N. Y. 199.)

      James H. McIntosh for Bankers Trust Company, respondent and appellant.
    The plaintiff’s mortgage covers only the property the mortgagor owned at the time of the merger. (N. Y. Security & Trust Co. v.
      L. E. & L. C. R. Co., 102 Fed. Rep. 382; Ithaca Trust Co. v. Ithaca Traction Corp., 248 N. Y. 322.) The hen of the defendant’s mortgage attached instantly to the interest of the defendant New York and Queens County Railway Company in all the property it owned at the time it made the mortgage and in ah the property it thereafter acquired. (New York Security Co. v. Saratoga Gas Co., 88 Hun, 569; Galveston, etc., R. R. Co. v. Cowdrey, 11 Wall. 459; New Orleans, etc., R. R. Co. v. Mellen, 12 Wall. 362; Toledo, etc., R. R. Co. v. Hamilton, 134 U. S. 296; Bear Lake Irrigation Co. v. Garland, 164 U. S. 1; Harris v. Youngstown Bridge Co., 90 Fed. Rep. 322; Washington Trust Co. v. Morse Iron Works, 106 App. Div. 195; Bommer v. American Spiral, 81 N. Y. 468; Seymour v. S. F. C. A., 144 N. Y. 333; Rogers v. N. Y. & T. L. Co., 134 N. Y. 197; Morgan v. Bon Bon Co., 222 N. Y. 22; Sanders v. Barnaby, 166 App. Div. 274; Whitney v. Wyman, 101 U. S. 392.) The defendant’s hen is a matter of contract, not of equity, and, having once attached, remains a hen until the mortgage debt is paid. (Pennsylvania Steel Co. v. N. Y. City Ry. Co., 165 Fed. Rep. 472; American Brake Shoe & Foundry Co. v. N. Y. Rys. Co., 293 Fed. Rep. 612; Pomeroy’s Equity Jurisprudence, §§ 43-54; McClure v. Leaycraft, 183 N. Y. 36.) The plaintiff’s mortgage is not a hen prior to the hen of this defendant on the office building and car house at Nos. 7 and 9 Borden avenue, nor a joint hen with this defendant on the tracks that surround it. (Tarbel v. Bradley, 7 Abb. N. C. 273; 73 N. Y. 599; Fosdick v. Schall, 99 U. S. 235; Meyer v. Western Car Co., 102 U. S. 1; Wright v. Ky. & Great Eastern Ry. Co., 117 U. S. 72; Harris v. Youngstown Bridge Co., 90 Fed. Rep. 322; Railway Steel Spring Co. v. Chicago & East. Ill. R. Co., 246 Fed. Rep. 338.) Where a mortgage contains an after-acquired property clause and the mortgagor’s property thereafter becomes a constituent part of a larger system either by merger, consohdation, sale or purchase, the after-acquired clause does not attach to the properties contributed by the other constituent companies or to the property acquired by the new corporation. (Central Trust Co. v. Pittsburgh, S. & N. R. R. Co., 223 N. Y. 347; Hinchman v. Point Defiance Ry. Co., 14 Wash. 349; New York Security & Trust Co. v. Louisville, etc., R. Co., 102 Fed. Rep. 382; Metropolitan Trust Co. v. Chicago & Eastern Illinois R. R. Co., 253 Fed. Rep. 868; Miss. Valley Trust Co. v. Southern Trust Co., 261 Fed. Rep. 765; Commercial Trust Co. v. Chattanooga Ry. & Light Co., 281 Fed. Rep. 856; Citizens Savings & Trust Co. v. Cincinnati & D. Traction Co., 106 Ohio St. 577; Pullman Palace Car Co. v. Missouri Pac. Ry. Co., 115 U. S. 587; Chicago, etc., Ry. Co. v. Kansas City Ry. Co., 38 Fed. Rep. 58; Harris v. Youngstown Bridge Co., 90 Fed. Rep. 322; Trust Co. of America v. City of Rhinelander, 182 Fed. Rep. 64.)
   Cardozo, Ch. J.

The action is one for the foreclosure of a mortgage given in 1892 by the Steinway Railway Company to a trustee for bondholders.

The mortgagor owned and operated a street railroad in Long Island City, and the subject-matter of the mortgage was the road so owned and operated, its rolling stock and equipment, and any after-acquired property necessary or convenient for use in connection therewith.

The defendant New York and Queens County Railway Company was incorporated in 1896 to acquire by merger the Steinway line as well as other lines in neighboring communities, i. e., in Newtown, Flushing and College Point.

Having purchased the entire capital stock of the Steinway Railway Company, it filed a certificate of merger under section 58 of the Stock Corporation Law then in force (L. 1896, ch. 932; Cons. Laws, ch. 59), with the result that it became the owner of the franchise and property of the corporation so merged. It did not, however, either by covenant or by statute, assume the obligations or liabilities of the merged corporation, nor was it answerable therefor (Irvine v. New York Edison Co., 207 N. Y. 425; Syracuse Lighting Co. v. Maryland Cas. Co., 226 N. Y. 25).

The shares of the Newtown Railway Company which operated a line in Newtown, the shares of the Riker Avenue and Sanford’s Point Company and the shares of the Flushing and College Point Company, as well as the property and franchises of the Long Island and Newtown Railroad Company, were acquired at or about the same time.

The New York and Queens County Railway thereupon executed its first consolidated mortgage to a trustee, subject to the underlying mortgages on the constituent lines, the new mortgage covering the property then owned by the mortgagor or thereafter to be acquired.

The present controversy is one between the trustee of the Steinway mortgage on the one side, and on the other side the maker and the trustee of the consolidated mortgage, the former contending that certain after-acquired properties are subject to the hen of the Stein way mortgage, and the others that they are free from that lien and subject only to the lien of the consolidated mortgage. The chief properties so acquired are the Purvis Street sub-station, the Woodside car barns and contiguous tracks, the Borden Avenue office building, and rolling stock, tools, supplies and miscellaneous equipment.

The essential facts as to these acquisitions are the following:

1. In 1906, ten years after the merger, the merging corporation acquired a new parcel of land at Purvis street, in what had formerly been Long Island City, and built a new power house thereon, which was completed in 1908, for the use of all the fines. Until then power had been supplied from the Mills Street power house which belonged to the Steinway fine. Sixty-three per cent of the current output of the new station is required for the Steinway cars, thirty-seven per cent for other cars. The trial court and the Appellate Division have held that the new station is subject only to the lien of the consolidated mortgage. The plaintiff insists that there is a prior hen in favor of the Steinway mortgage bondholders either upon the station as a whole, or upon an undivided sixty-three per cent interest therein, the percentage being determined by the proportion of the use.

2. In 1896 the merging corporation acquired a new parcel in what was formerly known as Woodside, Long Island, for a new car barn to serve the unified lines. A new barn was built upon the land in 1897. Till then the Steinway company had maintained a separate barn in which it kept its own cars. It also used the barn as a repair shop, though the shop and its equipment were already out of date. By the decision of the courts below the Woodside barn and connecting tracks have béen held to be security for the consohdated mortgage. The plaintiff insists that they should be made to feed the Steinway mortgage, at least to the extent of 50.8%, a percentage determined by the proportion of the use.

3. Land and building described as 7 and 9 Borden avenue were acquired in 1896 for use as an office, and title thereto was taken in the name of the Steinway company. The courts below have held that the result was an accession to the property that was subject to the Steinway lien. The trustee under the consohdated mortgage insists that its own bondholders should have the protection of the new security.

4. Railroad cars, bought by the merging corporation, have been held by the Appellate Division to be subject for the most part to the consohdated mortgage only, the evidence being insufficient except as to nineteen cars to make out an allocation to specific fines. On the other hand, miscellaneous equipment, tools and supplies have

been apportioned among the underlying mortgages in percentages corresponding to the proportionate use.

A mortgage of property to be acquired in the future is not a present lien at law (Rochester Distilling Co. v. Rasey, 142 N. Y. 570). It is, however, equivalent to a covenant to give a lien, and as such, when the property comes into existence, may be specifically enforced in equity (Kribbs v. Alford, 120 N. Y. 519). In the absence of intervening equities forbidding such a use, the property, when acquired, is deemed to feed the mortgage, as if in existence at the beginning (Holroyd v. Marshall, 10 H.L. Cas. 191; Zartman v. First Nat. Bank, 189 N. Y. 267). There is need to distinguish, however, between the enforcement of the covenant in respect of property thereafter acquired by the mortgagor itself, and property thereafter acquired by a successor or a purchaser. Property thereafter acquired by the mortgagor itself will be subject to the mortgage, if within the description of the covenant, however alien it may be in quality or function to the property presently subjected to the hen (People’s Trust Co. v. Schenck, 195 N. Y. 398; Ithaca Trust Co. v. Ithaca Traction Corp., 248 N. Y. 322). It is otherwise in respect of purchasers, and even at times successors. To spread the lien of the mortgage to property acquired by these, there must be an independent ground of duty. This may have its origin in a statute or in a covenant of assumption or in the principles of estoppel, or accession, or in some other kindred equity (Trust Co. v. City of Rhinelander, 182 Fed. Rep. 64, 69; Metropolitan Trust Co. v. Chicago, etc., R. R. Co., 253 Fed. Rep. 868; certiorari denied, 248 U. S. 586). In the case at hand the covenant as to acquisitions is sweeping in its terms, embracing anything “ necessary or convenient ” for the operation of the road. By its terms also it is to apply to such property when acquired by the mortgagor’s “ successors ” as well as by the mortgagor itself. The problem to be solved is the effect to be given to a covenant so phrased in its application to a railroad succeeding through merger to the franchise of another.

At the outset there is need to consider the meaning of the term “ successors.” A covenant by a corporation for itself and “ its successors ” is like a covenant by a natural person for himself, his executors and administrators.” It adds nothing of substance, for it is the expression'of an obligation that if not stated would be implied (Matter of Buccini v. Paterno Constr. Co., 253 N. Y. 270; Kernochan v. Murray, 111 N. Y. 306, 308; Chancellor v. Bell, 45 N. J. Eq. 538, 541; Overseers, etc., v. Sears, 22 Pick. 122, 126; Cumberland B. & L. Assn. v. Aramingo M. E. Church, 13 Phila. [Pa.] 171, 172; 8 Halsbury Laws of England, pp. 371, 372). In like manner, a covenant by a corporation extending the lien of a mortgage to property thereafter acquired by its “ successors ” is not an attempt to impose the continuing burden of the covenant in respect of future acquisitions upon a new corporation that is merely a purchaser. It is directed to future acquisitions by those successor corporations that preserve or continue the corporate persona (Mississippi Valley Trust Co. v. Southern Trust Co., 261 Fed. Rep. 765), much as the heir in the Roman law continued the persona of the ancestor (Holmes, The Common Law, p. 343), and in our own system the executor continues for the most part as universal successor the persona of a testator (Holmes, The Common Law, pp. 344, 345, 350; Holmes, Executors, 9 Harv. L. Rev. 42; Collected Legal Papers, pp. Y41, 143; Holdsworth, History of English Law, vol. 3, pp. 573, 583). How far the covenant is effective even then as to land or other property subsequently acquired must depend upon the statutes that regulate dissolution or succession.

At the present time in New York a possessor corporation, i. e., one which merges another through the purchase of its shares of stock, “ shall be deemed to have assumed all the liabilities and obligations of the merged corporation and shall be liable in the same manner as if it had itself incurred such liabilities and obligations ” (Stock Corp. Law, § 85, subd. 2). The same assumption of obligations and liabilities results where there has been a consolidation of two or more corporations as distinguished from a merger (§§ 86, 90). But in 1896, at the time of the absorption of the Steinway line, the consequences flowing from merger were sharply differentiated from those flowing from consolidation. The subject was fully considered in Irvine v. New York Edison Co. (supra). The merged corporation was not dissolved, but continued to exist in so far as its existence was necessary for the protection of its creditors. Its property was subject at their pursuit to execution or sequestration in appropriate proceedings, equitable or legal. On the other hand, the new or possessor corporation was not charged with any duty to the creditors except to the extent of holding the property thus acquired in subjection to their claims. It did not gather unto itself and thereafter embody and continue an existing corporate life. It was not bound by the covenants of the merged corporation, nor did it assume them as its own. It was not in the proper sense of the term a successor, but rather an assignee or a purchaser. All this was settled law. If in the case at hand the mortgagor’s covenant is enforcible against the merging corporation in respect of property acquired after the merger, it must be by force of some principle of estoppel or of accession, or some other kindred equity.

. It cannot be by force of any duty of assumption, contractual or statutory.

An attempt is made to relate the obligation to the principle of estoppel. Cases such as Galveston R. R. Co. v. Cowdrey (11 Wall. [U. S.] 459, 481); Wade v. Chicago, etc., R. R.Co. (149 U. S. 327,342) and Compton v. Jesup (68 Fed. Rep. 263) are cited to that end. There is, however, a distinction. In all those cases the property had already been acquired by the mortgagor, or by a corporation assuming the obligations of the mortgagor, before the ownership had passed to the successor or the buyer. There was thus estoppel to repudiate an equitable duty subsisting at the moment of the transfer. Thus, in Galveston R. R. Co. v. Cowdrey (supra) a railroad company of Texas made four successive mortgages with clauses in each covering after-acquired property. Thereafter it bought iron which it used for its tracks, and attempted to give to one Pulsford a special hen thereon (pp. 464, 465). All that the court held was that the new mortgage was ineffective to displace the prior equitable lien on property then acquired. Mr. Pulsford, as holder of the fourth mortgage, is an assignee of the railroad company, claiming under it, with full notice of the other mortgages. He is in privity with the company, and is bound by the estoppel ” (pp. 481, 482). So, in Wade v. Chicago, etc., R. R. Co. (supra) a mortgage covered a railroad right of way, its additions and extensions. The line as first laid out was south of Litchfield. Thereafter a right of way was acquired north of Litchfield, but title was taken in the name of a construction company for the use of the mortgagor as equitable owner (p. 341). Still later the road as a whole was conveyed to a reorganized corporation which took with notice of existing equities.' The court held that there was an estoppel to repudiate the underlying mortgage as a valid and subsisting lien upon the equitable interests previously acquired. The after-acquired property clause ’ of a mortgage will cover not only legal acquisitions, but all equitable rights and interests subsequently acquired by or for the mortgagor (p. 341), which is a very different thing from saying that it will acquire rights and interests 'subsequently acquired by or for the purchaser (cf. Mississippi Valley Trust Co. v. Southern Trust Co., supra; Ithaca Trust Co. v. Ithaca Traction Corp., supra). Again, in Compton v. Jesup (supra) the situation was the same, at least in its essential features. There the Toledo and Wabash Railroad Company of Ohio made a mortgage with an after-acquired property clause, and later consolidated with the Wabash and Western Railroad Company of Indiana in the formation of a new corporation, the Toledo and Wabash Railway Company. There was a covenant in the agreement of consolidation that all mortgages given by either of the parties “ shall be as valid and binding upon the whole of the road, real estate, fixtures, and personal property which may be described in such mortgage as though the same had been originally executed by such consolidated corporation” (p. 275). This latter corporation, having thus assumed all the obligations of the underlying mortgage, acquired a new terminal at Toledo. There was then a second consolidation, which resulted in the formation of still another corporation, the Toledo, Wabash and Western Railway Company. The question was as to the application of the underlying mortgage to the terminal at Toledo. The court held that the new corporation was estopped to deny the extension of the lien. Whether the same result might have been reached through the doctrine of accession, there is no occasion to consider. The first consolidated company had expressly assumed all the covenants of the mortgage as if executed by itself, and the new terminal had already been added, with the consequent extension of the equitable lien, when the second consolidated company took over the existing fines (cf. United States Trust Co. v. Wabash, etc., Ry. Co., 32 Fed. Rep. 480). Within Galveston R. R. Co., v. Cowdrey (supra) the estoppel was complete.

Nothing in these cases is authority for a holding that, apart from any principle of accession, a mortgagor can, by covenant in a mortgage, create an affirmative obligation running with the land whereby any and all subsequent purchasers acquiring for themselves other property convenient for use in connection with the mortgaged parcel will be bound by force of an estoppel, and without any covenant of assumption, to subject the property so acquired to the lien of the mortgage. A, the owner of Blackacre, executes a mortgage to B with a covenant that if he or any future owner of the property shall acquire Whiteacre, the adjoining lot, the mortgage shall be extended to the parcel so acquired. Thereafter he sells to C, who acquires the adjoining parcel. The covenant, however framed, does not run with the land so as to be enforcible against C either at law or in equity, (cf. Cole v. Hughes, 54 N. Y. 444; Crawford v. Krollpfeiffer, 195 N. Y. 185; Hurd v. Curtis, 19 Pick. 459). A different question would arise if at the time of the sale to C the adjoining parcel had already been brought within the ownership of A, in which case C would be estopped to dispute the extension of the lien. What we are supposing is a case where C, and not A, acquires the adjacent land. The new owner does not stand in privity of estate with either the covenantor or the covenantee in respect of the new parcel (Clark on Covenants and Interests Running with Land, p. 91). Subject to a few exceptions not important at this time, there is now in this State a settled rule of law that a covenant to do an affirmative act, as distinguished from a covenant merely negative in effect, does not run with the land so as to charge the burden of performance on a subsequent grantee (Miller v. Clary, 210 N. Y. 127; Sheehan v. Spring Valley, etc., Corp., 194 App. Div. 119; Clark on Covenants and Interests Running with Land, pp. 157, 158; cf. Morehouse v. Woodruff, 218 N. Y. 494, 501; Booth v. Knipe, 225 N. Y. 390, 395). This is so though the burden of such a covenant is laid upon the very parcel which is the subject-matter of the conveyance. A fortiori the same result must follow where there is an attempt to charge the burden upon another and independent parcel. There is nothing in the law of railroad - corporations exempting them from the restrictions applicable to persons generally in the creation of novel servitudes or other incidents of tenure (cf. Norcross v. James, 140 Mass. 188, 191,192; Keppell v. Bailey, 2 Myl. & K. 517, 535; Tulk v. Moxhay, 2 Phillips, 774; Hodge v. Sloan, 107 N. Y. 244; Bristol v. Woodward, 251 N. Y. 275; Clark, supra, p. 57). So, indeed, it was held, in effect, if not in terms, in Mississippi Valley Trust Co. v. Southern Trust Co. (supra); Trust Co. v. City of Rhinelander (supra, at 69); New York Security & Trust Co. v. Louisville, etc., R. R. Co. (102 Fed. Rep. 382, 398); Susquehanna Trust, etc., Co. v. United Tel. & Tel. Co. (6 Fed. Rep. [2d] 179); and Railway Steel Springs Co. v. Chicago, etc., R. R. Co. (246 Fed. Rep. 338, 347; affd. sub nom. Metropolitan Trust Co. v. Chicago, etc., R. R. Co., 253 id. 868).

What has been written is no denial that the new owner will be charged if the circumstances of the transaction are sufficient to bind him by an estoppel (that is, an estoppel by deed, for there is clearly none in pais), just as he may be bound in other circumstances by a covenant of assumption (Foley and Pogue, After Acquired Property under Conflicting Corporate Indentures, 13 Minn. L. Rev. 94, 95). Wffiat is meant is merely this, that the acceptance of a deed subject to such a mortgage of record does not avail without more to give rise to the estoppel, for the mortgage to that extent is invalid and inoperative. The buyer takes the land cum onere in the sense that he must carry out the covenant as to after-acquired property in so far as it was already specifically enforcible against the seller by force of acquisitions prior to the purchase. He does not take it cum onere in the sense that he must carry out the covenant in respect of acquisitions, not within the principle of accession, made thereafter by himself. The distinction is clearly marked in Ithaca Trust Co. v. Ithaca Traction Corp. (supra), where a separate power house acquired by a reorganized corporation was held to be free from the hen of an underlying mortgage, though power contracts previously acquired were part of the security. If Citizens’ S. & T. Co. v. Cincinnati & Dayton Traction Co. (106 Ohio St. 577) may seem to involve a holding to the contrary, we are to remember that under the statutes of Ohio governing the consolidation of corporations (Ohio General Code, § 9038), debts, liabilities, and duties of- either company, thenceforth shall attach to the new company, and be enforced against it to the same extent as if such debts, liabilities, and duties had been contracted by it (106 Ohio St. at 597, and cf. Foley and Pogue, 13 Minn. L. Rev. 81, 91). The case, therefore, was one of assumption of the mortgage and its covenants by virtue of a statutory duty (cf. Pullman Car Co. v. Missouri Pac. Co., 115 U. S. 587, 594, 595), and not a case of such assumption through the operation of estoppel. True indeed it is that even where the duty has a statutory origin, improvements and extensions must be segregated to the lines to which they are appropriately related, since only thus can conflict be avoided between after-acquired property clauses in underlying mortgages of equal generality;. accretions must still be marshalled according to their nature. On the other hand, the range of extension in such circumstances is spread beyond the lhnits that confine it when there is no duty of assumption, either contractual or statutory.

If estoppel is inadequate to enlarge the subject-matter of the mortgage, there is yet to be considered whether enlargement can be accomplished by force of the principle of accession. Accession as a source of title is quite distinct from the operation of a covenant for after-acquired property (13 Minn. L. Rev. at pp. 93, 94). Even in the absence of such a covenant the lien of a mortgage upon a railroad will extend to accretions such as fixtures that are physically united with the subject-matter of the mortgage, and to accretions that may be classified as appurtenances, where the bond of union is organic rather than corporeal. Not only that, but the nature of railroad property will cause the principle of accession to be liberally applied, so that things not strictly fixtures, and interests not strictly incorporeal hereditaments, may be brought within the principle as if they were fixtures or appurtenances under a narrow definition. This at least will be assumed, though the assumption has been questioned (13 Minn. L. Rev. 93, 94). Thus, in Phoenix Iron Works Co. v. N. Y. Security & Trust Co. (83 Fed. Rep. 757), machinery in the power house of a street railroad was held to be covered by a mortgage covering the road and plant, irrespective of any clause as to after-acquired property and irrespective of the question whether the machinery .was so annexed as to constitute a fixture within the rules applicable to the ordinary mortgage upon real estate (cf. Hoyle v. Plattsburgh, etc., R. R. Co., 54 N. Y. 314; Minnesota Co. v. St. Paul Co., 2 Wall. [U. S.] 609). So, in Trust Co. v. City of Rhinelander (supra) there was a liberal interpretation of the scope of an appurtenance.” A mortgage by a water works company covered the plant and its extensions and additions. The city of Rhinelander became the purchaser of the plant, and laid seven miles of pipe tributary thereto. The court held that the easements thus acquired were incorporeal hereditaments, “ appurtenances ” to the plant itself, and thus subject to the mortgage within the principle of accession (p. 70). To the same effect are other cases (Harris v. Youngstown Bridge Co., 90 Fed. Rep. 322, 330; Metropolitan Trust Co. v. Chicago, etc., R. R. Co., supra; Mississippi Valley Trust Co. v. Southern Trust Co., supra, at p. 767; Commercial Trust Co. v. Chattanooga Ry. & L. Co., 281 Fed. Rep. 856; Willink v. Morris Canal & Banking Co., 3 Green’s Ch. Rep. [N. J.] 377, and as to appurtenances ” generally cf. Kenney v. Apgar, 93 N. Y. 539, 549; Ogden v. Jennings, 62 N. Y. 526, 531). A straightening of tracks supplies a kindred illustration. It is not difficult to imagine other situations involving a like problem, though in some the conclusion will be more in doubt. At times stations or terminals may be so wedded to a particular road by construction or adaptation as to be almost inseparably a part of it. There is no need to formulate the rule for those and other cases in advance of the event.

The principle of accession, however liberally interpreted, cannot bring within the mortgage the power house and the barn. We put aside for the moment the extension of the mortgage to rolling stock, supplies and miscellaneous equipment. The power house and the barn are built upon land not owned by the merged corporations or any of them at the time of the merger. What is even more important, they serve the uses, not only of the Steinway line, but of all the other lines that have been operated since the merger by the merging corporation. Each road has been subject from the beginning to its own independent mortgage with after-acquired property clauses substantially the same. In these circumstances there is no more reason for holding the new buildings to be accessions to one road than for holding them accessions to the others. If accessions to one they must have been accessions to all, and this in uncertain proportions, fluctuating from year to year with the extent and nature of the use. Title by accession imports something more, however, than an executory right to acquire a hen or interest in the future through the judgment of a court of equity. It imports a hen or interest presently vahd ahke in equity and at law. If the use of the power house and the barn for the benefit of the merged fines gives any interest at ah to the underlying mortgagees, it is at most a right to compel the creation of a hen in equitable proportions as an incident to the jurisdiction to enforce the specific performance of a covenant. The reasons have already been stated why the covenant is unenforcible against an assignee or a purchaser as to later acquisitions. If those reasons are vahd and the property is not subject to an equitable mortgage through the operation of the covenant, the gap cannot be bridged and the difficulty avoided by rejecting the covenant in form and enforcing it under a new name, either accession or something else. What is involved is more fundamental than adherence to a ritual.

Since neither estoppel nor accession will extend the underlying lien to the power house or barn, it remains to be considered whether there is to be discovered some other equity whereby the extension can be justified. We are told that such an equity exists in the necessity of providing the underlying mortgagees with a substituted security as compensation for what was lost when the barn and the power house were abandoned or dismantled. Withold this security, it is said, and through the action of the merging corporation the subject-matter of the mortgage will have become a mere shell, a railway without power to move cars, without cars to be moved, and without barns in which to store cars. Granting, though provisionally only, that these consequences, if real, would supply the foundation of an equity, the assumption of their existence has its origin in a misconception of the facts. The Steinway mortgage was either a lien on the new power house and the new barn at the time of their construction, or it was never a lien at all. If it was not a lien at that time, then the lien of the new consolidated mortgage attached eo instanti for the benefit of the consolidated mortgage bondholders, and the plaintiff, to prevail, must be able to show that the lien thus attaching has been divested or subordinated. But plainly there was no impairment of the security of the underlying Steinway mortgage, no reduction of the Steinway line to the state of an empty shell, when the lands for the new bam and the new power house were acquired by the merging corporation and the new buildings were erected. The land for the new barn was acquired in 1896, and the work of constmction completed a short time thereafter. The old barn was not destroyed, and upon a sale of the Steinway line at that time under a judgment of foreclosure it would have gone to the purchaser along with the line itself. Indeed, it will go even now, for the tools, and the tools only, have been taken from the shops, which were already out of date. The new power house was acquired and put in operation in 1908, but for nearly a year thereafter the machinery in the old power house was oiled and kept in good condition, with the result that a buyer at a foreclosure sale at that time would have become the owner of the line intact, equipped for present use. The old power house is still there, but the machinery has been sold as junk, and the proceeds, about $14,000, have been allocated to the reduction of the Steinway lien. In the meantime, however, before the machinery was scrapped, the Hen of the consoHdated mortgage had attached to the new improvements, there being nothing in the purchase of the land or the construction of the buildings that made it necessary to destroy or remove any part of the security. Very Hkely the trustee for the Stein way bondholders might have enjoined the merging corporation from wasting the security by the later removal of any part of the old equipment. No such injunction was sought, not improbably for the reason that the bondholders had more to gain from economy of operation by a consoHdated company and the apphcation of the income to the payment of interest on the bonds than from the preservation of tools and machinery in the contingency at some distant time of a sale under foreclosure. At all events, the line was not a shell when the newly-acquired property came under the Hen of the consoHdated deed of trust. During a substantial period thereafter, it was maintained, not only with its own power house and barn, but with equipment and machinery properly kept up. For any loss that has been suffered through the removal at a later time of this equipment and machinery, the plaintiff had its remedy, equitable or legal. Even now it does not show the relation between the value of the equipment and machinery and the value of the land and buildings, part of the old line. The failure of the Steinway bondholders or of the plaintiff as their spokesman to take advantage of remedies, preventive or reparative, did not divest a lien in favor of the consolidated bondholders attaching in the interval.

What has been written as to the lien upon the power house and the barn supphes the answer to the question as to the hens upon the rolhng stock, supphes and miscellaneous equipment. In respect of the hens upon the rolling stock the appeal is by the plaintiff, the trustee for the Steinway bondholders; in respect of the tools, supphes and miscellaneous equipment, the appeal is by the Bankers Trust Company, the trustee for the bondholders under the consolidated mortgage. The cars in use by the merged hues at the date of the merger are no longer in existence. The cars now in existence were bought by the merging corporation, and with the exception of nineteen cars which were subjected to the Steinway hen were never allocated to any special hne, but were used indiscriminately for all. In the absence of a covenant, the merging corporation did not subject the new cars thus indiscriminately used to the underlying hens (New York Security & Trust Co. v. Louisville, etc., R. R. Co., supra, at p. 398; Mississippi Valley Trust Co. v. Southern Trust Co., supra; Metropolitan Trust Co. v. Chicago, etc., R. R. Co., supra, at p. 878; Hinchman v. Point Defiance Ry. Co., 14 Wash. 349; United States v. New Orleans R. R. Co., 12 Wall. [U. S.] 362). The situation might be different if they had been allocated specifically or even chiefly to the use of a particular road (Commercial Trust Co. v. Chattanooga Ry. & L. Co., supra). There is no need to dwell upon the difference, for the defendant trust company does not appeal from the segregation to the plaintiff of the cars appropriated to its use by the act of the receivers.

On the other hand, the application of the same principle that excludes the cars generally, forbids the subjection of the tools, supplies and miscellaneous equipment to the lien of the underlying mortgages, and requires a modification of the judgment, on the appeal of the Bankers Trust Company, by declaring them to be subject to the prior and superior hen of the consolidated mortgage.

The property 7 and 9 Borden avenue was correctly held to be within the coverage of the Steinway mortgage, since title thereto was taken in the name of the Steinway company, without reservation or condition.

The land, the buildings and the equipment, the subject of this controversy, were paid for with moneys supplied by the consoHdated mortgage bondholders. Without the aid of those moneys the unified operation of the fines would have been impossible, and the underlying bondholders would have lost the benefit of economies and facifities incidental to the merger. As a consequence of the merger, or at least as its sequel, foreclosure has been warded off for upwards of twenty-five years, and an income has been earned from which interest has been paid on the underlying obligations.

From the viewpoint of economics, the furtherance of business interests, there have thus arisen equities in favor of the consoHdated bondholders that may not be ignored altogether in determining their equities from the viewpoint of the law. To the extent that improvements, though made upon newly-acquired lands through the use of the new loan, have been charged with a Hen, declared with reasonable clarity, in favor of underlying mortgage bondholders, the courts wiH give effect, through the remedy of specific performance, to the ensuing equitable right. On the other hand, the advantages incidental to merger and consofidation would be discouraged, and new loans would be precarious, if less than reasonable clarity were exacted as a condition of subordination and extension.

The judgment of the Appellate Division should be modified by declaring the tools, supplies and miscellaneous equipment to be subject to a prior hen in favor of the trustee under the consolidated mortgage, and as modified affirmed without costs to either party.

Pound, Crane, Lehman, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgment accordingly.


author: Pound, J.

text:
    Frederic B. Pratt et al., as Executors and Trustees under the Will of Charles Pratt, Deceased, Respondents, v. Mary B. Ladd et al., Appellants, and Frederic B. Pratt et al., Respondents.

      (Argued January 16, 1930;
    decided March 18, 1930.)

      William Mason Smith for Mary B. Ladd et al., Ralph W. Crolly and Hugo Kohlmann for Brooklyn Trust Company, as committee, and A. Henry Mosle for Harold I. Pratt et al., as executors, appellants.
    The Appellate Division failed to apprehend the distinction between capital of the trust and capital of the corporation. (Bourne v. Bourne, 240 N. Y. 172; McLouth v. Hunt, 154 N. Y. 179; U. S. Trust Co. v. Heye, 224 N. Y. 242; Sturgis v. Roche, 217 App. Div. 573; Matter of Schley, 202 App. Div. 169.) The stock dividend declared against the value of stock which the declaring corporation had purchased with its profits earned since the inception of the trust, or received as a stock dividend on stock so purchased, should be allotted to income. (Macy v. Ladd, 128 Misc. Rep. 732;
      U. S. Trust Co. v. Heye, 224 N. Y. 242; Matter of Schaefer, 178 App. Div. 117; 222 N. Y. 533; Matter of Hoyt, 160 N. Y. 607; Rudd v. Cornell, 171 N. Y. 114; Thayer v. Burr, 201 N. Y. 155.) The life beneficiaries are entitled to the stock dividends. (Equitable Trust Co. v. Prentice, 250 N. Y. 1; Matter of Osborne, 209 N. Y. 450; U. S. Trust Co. v. Heye, 224 N. Y. 242; Matter of Schaefer, 178 App. Div. 117.) Earnings, made after the inception of the trust, do not lose their character by investment in capital assets and when stock dividends are declared against such capital assets they are income. (Smith v. Dana, 77 Conn. 543; Matter of Fisk, 45 Misc. Rep. 298; Union & New Haven Trust Co. v. Taintor, 85 Conn. 452; Bryan v. Aikin, 10 Del. Ch. 446; Davis v. Jackson, 152 Mass. 58; Poole v. Union Trust Co., 191 Mich. 162; Boyer’s Appeal, 224 Penn. St. 144; Pritchitt v. Nashville Trust Co., 96 Tenn. 472.)

      Douglas Campbell, Walter H. Merritt and D. Basil O’Connor for Theodore Pratt et al., appellants and respondents.
    No part of the stock dividends received by the trustees is income within the meaning of the statute against accumulations, and their retention in accordance with the will would not be an illegal accumulation and they should be retained in their entirety as part of the capital of the trusts. (Equitable Trust Co. v. Prentice, 250 N. Y. 1.) The unrealized increase in value of stock was)properly treated as capital increase, and .not as earnings, in apportioning the stock dividend. (Thayer v. Burr, 201 N. Y. 155; Matter of Osborne, 209 N. Y. 450; U. S. Trust Co. v. Heye, 181 App. Div. 544; 224 N. Y. 242; Macy v. Ladd, 227 N. Y. 670; Matter of Schley, 202 App. Div. 169; 234 N. Y. 616; Matter of Kernochan, 104 N. Y. 618; Stewart v. Phelps, 71 App. Div. 91; Craig v. Riggs, 5 Redf. 82; Bourne v. Bourne, 240 N. Y. 172; Matter of Schaefer, 178 App. Div. 117; 222 N. Y. 533.) The computations of the trustees in apportioning stock dividends were properly made. (Matter of Osborne, 209 N. Y. 450; Robertson v. de Brulatour, 188 N. Y. 301; Lowry v. Farmers L. & T. Co., 172 N. Y. 143; McLouth v. Hunt, 154 N. Y. 179; Chester v. Buffalo Car Mfg. Co., 70 App. Div. 442; Matter of Kernochan, 104 N. Y. 618; Stewart v. Phelps, 71 App. Div. 91; 173 N. Y. 621; Richmond v. Richmond, 123 App. Div. 117; 196 N. Y. 535; Matter of Stevens, 46 Misc. Rep. 623; 187 N. Y. 471; Matter of Rogers, 161 N. Y. 113; Bourne v. Bourne, 240 N. Y. 172; U. S. Trust Co. v. Heye, 181 App. Div. 552.)

      Edwin De T. Bechtel for plaintiffs, respondents.

      Leslie D. Dawson for Frederic B. Pratt et al., respondents.
    The judgment is a valid and binding direction to the trustees as to the administration of the trust. (Holland Trust Co. v. Sutherland, 177 N. Y. 327; Leggett v. Stevens, 185 N. Y. 70; Tonnele v. Wetmore, 195 N. Y. 436; Kent v. Church of St. Michael, 136 N. Y. 10; Thorn v. De Breteuil, 179 N. Y. 64; Newton v. Hunt, 134 App. Div. 325; 201 N. Y. 599; Matter of Schley, 202 App. Div. 169; 234 N. Y. 616.)
   Pound, J.

Charles Pratt died May 4, 1891. He left a will whereby he created trusts from his residuary estate for the benefit of each of his eight children. He directed his trustees to make annual payments to each of the beneficiaries, varying in amounts as to each child, during their several lives. These trusts were measured by two lives in being. One such life is now ended but the trusts continue during the life of Mary Babbott Ladd, a grandchild, who is still living. Upon the death of any child during the continuance of the trusts, the income of the trust for the benefit of such child is to be paid to the issue of such child in equal shares. Two of the children have died, but the eight trusts remain in force.

The trusts were duly established. An action was brought by the trustees in 1902 for directions as to income in excess of the annual payments to be made to each child under the will which resulted in a judgment directing the payment of the surplus income' of each trust to the person or persons who shall from time to time be presumptively entitled under said will to the next eventual estate in the trust fund, indicating the eight children as such persons.

This action is brought by the trustees to secure a judicial settlement of their account on the facts arising since the prior accounting of the trustees as of May 16, 1923. From the decision below, appeals have been taken to this court from a judgment of the Appellate Division of the Supreme Court affirming a judgment entered on the report of a referee in the accounting action, challenging the correctness of the judgment so far as it relates to certain stock dividends received by the trustees. The facts in regard thereto are as hereinafter stated.

On June 5, 1925, each trust created by the will contained 7,500 shares of the stock of the Anglo-American Oil Co., Ltd., an English corporation. On that day the company declared a stock dividend of thirty-three and one-third per cent or 2,500 shares to each trust fund. This represents an item of £495,000 transferred to capital reserve by the corporation. This has been awarded to principal. The fund arises out of a borrowing of American dollars in 1920, long after the trusts were set up under the will of Mr. Pratt. The indebtedness arising therefrom was entered on the corporation books as a transaction in English pounds. The dollars were borrowed when the English pound would purchase only 3.92 dollars but when the indebtedness in dollars was paid off in 1924 the pound would pay 4.79 dollars. An extraordinary profit resulted, of which the amount transferred to capital reserve was a part, arising out of the difference in American exchange. Thereon the common stock was increased 1,000,000 shares and such shares were distributed as a thirty-three and one-third per cent stock dividend. The mere adoption by the corporation of a resolution cañnot change accumulated earnings into capital, as between the life tenant and remainderman.” (McLouth v. Hunt, 154 N. Y. 179, 198.) The referee and the Appellate Division have held that the action of the directors was controlling upon the trustees under our decision in Bourne v. Bourne (240 N. Y. 172) and that the stock dividend declared against this profit was consequently capital of the trust. This does not follow. What is treated as capital by the corporation may be income to the life beneficiaries of the trust. (Equitable Trust Co. v. Prentice, 250 N. Y. 1.) The English corporation borrowed dollars and used pounds to pay them. The outcome was a profit for the operation of the business. From the standpoint of an English corporation American dollars are a commodity like oil. The difference in the purchasing price of the pound reduced the liabilities and correspondingly increased the profits of the corporation. To the extent that the profit on the transaction was distributed to the stockholders in the form of a stock dividend it was profit earned after the creation of the trust and the stock dividend thus declared went to the fife beneficiaries. (Matter of Osborne, 209 N. Y. 450.)

Another stock dividend of twenty-five per cent is in question. It was declared by the Standard Oil Company of New York, arising out of the receipt by the Standard Oil Company of a stock dividend declared by the Magnolia Petroleum Company. The Standard Oil Company had purchased eighty per cent of the Magnolia Petroleum Company stock with moneys earned since the inception of the trust. The directors might have declared cash dividends instead of purchasing the Magnolia stock. They might have divided up the Magnolia stock as a stock dividend. They did neither. They added to the capital surplus of the corporation the Magnolia stock and declared a stock dividend against such capitalization. The argument of the life beneficiaries appealing is that the stock dividend represents profits of the corporation earned since the inception of the trust and that they are entitled thereto. This contention is sustained by the evidence which does not suggest that the Magnolia shares were purchased out of anything but surplus profits earned long after the setting up of the Pratt trusts. It in no sense represents an increased value of the corporate stock arising out of an appreciation in the value of the capital investments of the Standard Oil Company. (Thayer v. Burr, 201 N. Y. 155.) When the investment is made out of profits earned after the creation of the trusts no distinction can be drawn between ordinary profits and profits arising out of some extraordinary or unusual investment of the profits thus earned. (United States Trust Co. v. Heye, 224 N. Y. 242, 260.)

Much thought has been bestowed upon the problem of the proper apportionment of stock dividends between capital and income of trust estates. The rule has been fairly stated in the Osborne Case (supra) and recently in Equitable Trust Co. v. Prentice (supra). Its application should not be made difficult by attempted distinctions between ordinary profits and extraordinary profits or in the form of the transaction. Profit is gain to be taken as earnings as distinguished from gain by increment in capital valuation. The corporation may augment its capital as a matter of corporate management but the rights of fife beneficiaries are not affected thereby. This presumable intention ” of the testator controls in the absence of contrary provisions of the will. (Equitable Trust Co. v. Prentice, supra.)

The remaindermen raise a point which the Appellate Division did not consider which arises in relation to the trusts other than that created for the benefit of Lydia R. Babbott, one of testator’s children, who died in 1904. Their contention is that the stock dividends, in excess of the amounts specified in the will to be paid to each child, received by the trustees should be retained by the trustees as a part of the capital of the trusts, as not being an illegal accumulation of income. But the question of their rights was settled by the judgment of January 2, 1903, which provided that in the future all surplus net income not required for making the payments directed by the will to be made should be paid over to the persons presumptively entitled from, time to time to the next eventual estate, i. e., the eight children. The remaindermen urge that stock dividends are not income under the will ” but are income directed to be paid by the judgment of 1903. There is no force in this contention. Appellants seek to raise for reargument a question of construction adjudicated in 1903 and acquiesced in.

The respondents-executors and trustees ask for instructions as to the further administration of the trusts but it is unnecessary to answer their questions at this time except as they are answered by the judgment herein.

The judgment of the Appellate Division and that of the Special Term should be modified in accordance with this opinion and as so modified affirmed, with costs to all parties appearing separately and filing briefs herein, payable out of the estate.

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

Judgment accordingly.


author: O’Brien, J.

text:
    The People of the State of New York ex rel. Harry Frank, Appellant, v. John A. McCann, as Warden of the New York County Penitentiary, Defendant. The People of the State of New York, Respondent.
    (Argued February 10, 1930;
    decided March 18, 1930.)

      Louis B. Boudin, Phillip Wittenberg and Jacques BuitenJcant for appellant.
    The Legislature never intended that the crime of criminal contempt should be prosecuted otherwise than by indictment, or tried otherwise than by jury. . (People ex rel. Batista v. Christian, 249 N. Y. 314.) The language of the existing statutes, when taken together, clearly shows that it was not the intention of the Legislature that the Court of Special Sessions should have jurisdiction to try cases of contempt committed in other courts. (People ex rel. Cosgriff v. Craig, 195 N. Y. 190.) To confer upon the Court of Special Sessions the power to try criminal contempts committed.against other courts, without a jury, would be unconstitutional. (Moat v. Moat, 214 N. Y. 204; People ex rel. Cosgriff v. Craig, 195 N. Y. 190; People v. Dutcher, 83 N. Y. 240; People v. Dwyer, 90 N. Y. 402.)

      Thomas C. T. Crain, District Attorney (Felix C. Benvenga of counsel), for respondent.
    The criminal contempt in question is punishable as a misdemeanor in the Court of Special Sessions of the city of New York. (Typothetœ v. Typographical Union, 66 Misc. Rep. 484; Matter of Deuel, 116 App. Div. 512; People ex rel. Sherwin v. Mead, 92 N. Y. 415; People ex rel. McDonald v. Keeler, 99 N. Y. 463; People v. Meakim, 133 N. Y. 214; Matter of Hanbury, 160 App. Div. 662; People ex rel. Deal v. Williams, 51 App. Div. 102; People ex rel. Dembinsky v. Fox, 182 App. Div. 642; People v. Hammerstein, 155 App. Div. 204; 211 N. Y. 552; People ex rel. Pinchback v. Warden, 184 App. Div. 777; People ex rel. Kipnis v. McCann, 199 App. Div. 30; 234 N. Y. 502; People v. Thompson, 251 N. Y. 428.) The writ of habeas corpus does not lie. (Matter of Watkins, 28 U. S. 193; People ex rel. Tweed v. Liscomb, 60 N. Y. 559; People ex rel. Scharff v. Frost, 198 N. Y. 110; People ex rel. Hubert v. Kaiser, 206 N. Y. 46; People ex rel. Doyle v. Atwell, 232 N. Y. 96; People ex rel. Bailey v. McCann, 222 App. Div. 465; People ex rel. Smith v. Barr, 223 App. Div. 168; People v. Perrin, 170 App. Div. 376;
      People ex rel. Phillips v. Hanley, 164 App. Div. 150, People v. Zambounis, 251 N. Y. 94; People ex rel. Kuhn v. House of Mercy, 133 N. Y. 203; People ex rel. Frey v. Warden, 100 N. Y. 20; People ex rel. Van Riper v. Catholic Protectory, 106 N. Y. 604.) The Legislature may now confer upon Courts of Special Sessions jurisdiction over such offenses of the grade of misdemeanors which it did not possess when the Judiciary article was adopted. (People ex rel. Cosgriff v. Craig, 195 N. Y. 190; People ex rel. Comaford v. Dutcher, 83 N. Y. 240; People v. Lyon, 99 N. Y. 210; People v. Harris, 123 N. Y. 70; Devine v. People, 20 Hun, 98; People v. Austin, 49 Hun, 396; People ex rel. Stetzer v. Rawson, 61 Barb. 619; People v. Levy, 24 Misc. Rep. 469; People v. Cornyn, 36 Misc. Rep. 135; People ex rel. Warren v. Brady, 37 Misc. Rep. 126.)
   O’Brien, J.

On an information charging him with violation of section 600 of the Penal Law in that he had willfully disobeyed a lawful mandate of the Supreme Court, appellant was convicted of that misdemeanor by the Court of Special Sessions of the City of New York, was fined one hundred dollars and in default of payment was committed to the City Prison for sixty days. The issue raised by this writ of habeas corpus is limited to the jurisdiction of the Court of Special Sessions to punish for the crime of a contempt of any court other than itself. Questions are not present concerning the punishment for criminal contempt by a court of record for willful disobedience of its own mandate as provided by article 19 of the Judiciary Law (Cons. Laws, ch. 30), nor punishment by court or magistrate for disobedience to a subpoena or a refusal to be sworn as provided by sections 619 and 729 of the Code of Criminal Procedure nor punishment by the Court of Special Sessions for criminal contempt of its own mandate as provided by chapter 659, section 31, subdivision 5, Laws of 1910, as added by chapter 679, Laws of 1913. The statute last named merely confers upon the Court of Special Sessions the same power to punish for a criminal contempt of its own mandate as courts of record possess by virtue of article 19 of the Judiciary Law. None of the acts defined by any of these statutes, although denominated criminal contempt, are denounced as crimes. The issue is narrowed to the jurisdiction of the Court of Special Sessions in relation to its right to try and punish for the misdemeanor of criminal contempt as defined by section 600 of the Penal Law. The determination of this question requires an examination of the statutes in order to derive knowledge of legislative intent and consideration of the Constitution for the purpose of testing the validity of such expressed intent.

Section 600 of the Penal Law provides: “ A person who commits a contempt of court, of any one of the following kinds, is guilty of a misdemeanor: * * * 4. Wilful disobedience to the lawful process or other mandate of a court.” No language could more clearly declare an intent to define as a misdemeanor any act which constitutes a willful disobedience to a lawful mandate of the Supreme Court and no one can or does doubt that fact. The purpose to confer upon the Court of Special Sessions jurisdiction to determine, in the first instance, all charges of misdemeanors, except libel, committed within the city of New York is also indisputably plain. Such power granted to that statutory court by the provisions of section 31, chapter 659, Laws of 1910, is direct and explicit. Article 19 of the Judiciary Law, sections 601 and 602 of the Penal Law and section 31 (lb) of chapter 659, Laws of 1910, must be read together. So read, the purpose is clear that an act-is not the less punishable as a crime because it is also declared to be punishable as a contempt of court, that an indictment may be presented for such an offense and that the initial jurisdiction of the Court of Special Sessions to try for that misdemeanor is not divested except in the event of an indictment.

The jurisdiction so conferred by the statutes is not in violation of any constitutional mandate or prohibition. In view of the fact that by chapter 659, section 31, subdivision 4, the declaration is made that “ All trials in the Court of Special Sessions provided for by this act shall be without a jury,” appellant argues that his conviction without trial by jury conflicts with that provision in article 1, section 2, of the Constitution which conserves and renders forever inviolate trial by jury in all cases in which it has been heretofore used. This argument overlooks the provisions of the former article 6, section 26, of the Constitution as adopted in the Judiciary article of 1869 and the present article 6, section 18, in effect since January 1, 1926, as well as the construction placed upon the Judiciary article by decisions of this court. Section 26 of the article adopted in 1869 provided: “ Courts of Special Sessions shall have such jurisdiction of offenses of the grade of misdemeanors as may be prescribed by law.” During the existence of that constitutional provision this court declared its effect upon the right of Courts of Special Sessions to convict without a jury for a misdemeanor. In People ex rel. Murray v. Justices, etc. (74 N. Y. 406), decided in 1878, the relator was convicted, by the Court of Special Sessions of the City of New York without a jury, of the misdemeanor of assault and battery of which that court had jurisdiction by statute. Courts of Special Sessions have existed in this State since 1744 and have exercised their jurisdiction under the Colonial and State governments without a jury until the year 1824 when provision was made for such courts outside the city of New York for a jury of six. We held that the provision of article 1, section 2, providing for trial by jury “in all cases in which it has been heretofore used ” refers to a common-law jury of twelve men, and since such a jury had not been used in Courts of Special Sessions in the city of New York at the time of the adoption of the Constitution, relator’s constitutional rights had not been impaired. In People ex rel. Comaford v. Dutcher (83 N. Y. 240), decided in 1880 upon the relator’s conviction of the misdemeanor of petit larceny as a first offense in the Court of Special Sessions in Dutchess county, we held that the right to a common-law jury did not exist in cases of petty offenses triable in these inferior courts. The reason for our decision in People ex rel. Cosgriff v. Craig (195 N. Y. 190), decided in 1909 and holding that the Police Court of the city of Rochester was without jurisdiction to try for the crime of petit larceny as a second offense is based upon the fact that that crime is an aggravated offense, somewhat analogous to a felony and punishable by imprisonment for a longer term than a petty misdemeanor. In People v. Kaminsky (208 N. Y. 389), decidedjin 1913, this court held that larceny from the person, when committed by a child under the age of sixteen years is only a misdemeanor, is triable without a jury by the Court of Special Sessions of the City of New York, pursuant to the jurisdiction conferred by article 6, section 23, of the Constitution, and we cited the Comaford and Cosgriff cases as authority. Since the rendition of those decisions, the provisions of article 6, section 23, have been substantially incorporated in article 6, section 18, effective January 1, 192G, so that this section now reads in part as follows: Courts of Special Sessions and inferior local courts of similar character shall have such jurisdiction of offenses of the grade of misdemeanors as may be prescribed by law, and the Legislature may authorize them to try such offenses without a jury.” Prior to the adoption of section 18 in its present form, the Legislature, by chapter 659, section 31, subdivision 4, Laws of 1910, had authorized, indeed had commanded, the Court of Special Sessions of the City of New York to conduct all its trials without jury. The prospective provision in article 6, section 18, of the Constitution conferring legislative power to authorize trials without a jury includes the anterior exercise of such power by which such authority had been prescribed. (People ex rel. Comaford v. Dutcher, supra.) The order should be affirmed.

Cardozo, Ch. J., Pound, Crane, Lehman, Kellogg and Hubbs, JJ., concur.

Order affirmed.


author: Cabdozo, Ch. J.

text:
    Benjamin Block et al., Individually, and as Copartners under the Firm Name of Block, Maloney & Co., Appellants, v. The Pennsylvania Exchange Bank, Respondent.
    (Argued February 17, 1930;
    decided March 18, 1930.)

      James Marshall for appellants.
    The bank is liable for the purchase price because the defense of ultra vires is not available to the bank as the transaction was executed by the plaintiff and was no longer executory. (Tracy v. Talmage, 14 N. Y. 162; Messersmith v. American Fidelity Co., 187 App. Div. 35; Bissell v. Michigan, etc., R. R. Co., 22 N. Y. 258; Appleton v. Citizens’ Nat. Bank, 190 N. Y. 417; 216 U. S. 196; Higgins v. Hocking Valley R. Co., 188 App. Div. 684; Holmes & Griggs Mfg. Co. v. Holmes & Wessell Metal Co., 127 N. Y. 252; American Surely Co. v. Philippine Nat. Bank, 245 N. Y. 116; Mullen v. Quinlan & Co., 195 N. Y. 109; Content v. Banner, 184 N. Y. 121; Markham v. Jaudon, 41 N. Y. 235; National Bank v. Case, 99 U. S. 628; Riggs v. Palmer, 115 N. Y. 506.) The transactions set forth in the complaint are neither illegal nor ultra vires but were incidental to the conduct of the business of banking. (National Revere Bank v. National Bank of Republic, 172 N. Y. 102; Allen v. Merchants’ Bank, 22 Wend. 215; Dyer v. Broadway Central Bank, 252 N. Y. 430; American Surety Co. v. Philippine Nat. Bank, 245 N. Y. 116; First National Bank v. Mott Iron Works, 258 U. S. 240; Tracy v. Talmage, 14 N. Y. 162; Central Nat. Bank v. White, 139 N. Y. 631; LeMarchant v. Moore, 150 N. Y. 209; Pepperday v. Citizens Nat. Bank, 38 Atl. Rep. 1030.)

      Max Dorff and Louis Greenblatt for respondent.
    Unless specially authorized by the Superintendent of Banks, a corporation organized under the banking laws of this State has no power to act as agent for a third party for the purchase of common stocks in the open market, and such special authorization, if any, must be pleaded. (Appleton v. Citizens’ Nat. Bank, 190 N. Y. 417; Jemison v. Citizens’ Sav. Bank, 122 N. Y. 135; Whiting v. Hudson Trust Co., 234 N. Y. 394.) Not only are the transactions alleged in the complaint ultra vires, but they are also illegal, void and against public policy, and, therefore, it is immaterial whether they are executory or executed. (Gause v. Commonwealth Trust Co., 196 N. Y. 134; Higgins v. Hocking Valley Ry. Co., 188 App. Div. 684; American Surety Co. v. Philippine Nat. Bank, 245 N. Y. 116; Nassau Bank v. Jones, 95 N. Y. 115; Jemison v. Citizens’ Savings Bank, 122 N. Y. 135; Talmadge v. Pell, 7 N. Y. 328; Oelberman v. N. Y. & Northern R. R. Co., 77 Hun, 332; Bank of Salina v. Alvard, 31 N. Y. 473; Marie v. Garrison, 83 N. Y. 14.)
   Cabdozo, Ch. J.

Plaintiffs, stockbrokers in the city of New York, bought shares of stock and subscription rights on the order of the defendant bank, which “ was acting as agent for a third party or parties unknown at said times to the plaintiffs.”

The bank declined to accept the certificates when tendered or to pay the purchase price. Upon this, the brokers sold what they had bought, and sued for the deficiency.

The Appellate Division sustained a motion by the defendant to dismiss the complaint upon the authority of its decision in Dyer v. Broadway Central Bank (225 App. Div. 366), which has been reversed by this court (252 N. Y. 430).

The complaint in the Dyer case was silent as to the occasion for the purchase of the shares. The bank was stated to have ordered them; whether for itself or for a customer, the record did not show. Confining ourselves strictly to the case presented, we held that the burden was on the defendant to plead the illegality of the transaction, if illegality there was. Circumstances were suggested in which a purchase would be plainly wrongful, as where the bank was buying for itself in aid of a speculative enterprise. Circumstances were suggested in which a purchase would be plainly rightful, as where it was made to take the place of collateral belonging to the customer and lost or misappropriated by an agent of the bank through negligence or fraud. ■ Other situations more obscure or uncertain were left open for the future. We were asked to suppose a case where the bank in communicating the order was acting as agent for an undisclosed customer, who had supplied it in advance with the moneys requisite for the purchase, or had borrowed them upon a note, the shares to be bought with the proceeds of the loan and to be held in the name of the bank as collateral security. We did not feel ourselves at liberty to make definitive pronouncement as to the legality or illegality of a transaction so purely supposititious. For all that we could know from the record then before us the purchase had been made by the bank, not for the use of a customer, but as a speculative investment, made in such circumstances as to be without support in banking practice, for itself or its directors. At the same time in the opinion by Hubbs, J., we pointed out some of the considerations tending to sustain the transaction if in truth it had been effected for the use of a depositor.

The complaint now at hand has transferred the hypothetical transaction from conjecture to reality. The defendant was acting as agent for a third party or parties unknown to the plaintiffs.” We find nothing in such a statement that bespeaks a departure by the bank from the functions and activities appropriate to banking. “ The central function of a commercial bank is to substitute its own credit, which has general acceptance in the business community, for the individual’s credit, which has only limited acceptability ” (Willis & Edwards, Banking and Business, p. 74). A bank “ manufactures credit by accepting the business paper of its customers as security in exchange for its own bank credit in the form of a deposit account (Holdsworth, Money and Banking, p. 182). It stands ready to exchange its own credits for those of its customers (Westerfield, Banking Principles and Practice, p. 71; cf. Langston & Whitney, Banking Practice, p. 309; Kniffin, Commercial Banking, vol. 2, p. 511; Fiske, The Modern Bank, p. 154). Whatever is an appropriate and usual incident to this substitution or exchange of credits, instead of being foreign to the functions and activities of banking, is in truth of their very essence. It is the end for which a bank exists.

Indisputably the defendant would have kept within its charter if it had made a loan of money wherewith to enable a customer to buy securities for himself. It could not have done an act more characteristic of the banking business. Having power to loan, it had power as an incident to receive securities as collateral, and to use the proceeds of the loan, if so authorized by the borrower, in acquiring the securities and subjecting them thereafter to its possession and dominion. This would not be doubted if in ordering the securities, it had given up the name of its customer with the result that the brokers would look to the customer as principal. We think its power does not fail where it buys in its own name, the moneys being already in its coffers either through previous deposits or as the proceeds of a discount. We are told that in giving an order in its own name it augments the risk of the transaction. Negligence or mistake in the transmission of the order might lead the customer thereafter to repudiate the purchase, in which event the bank would hold the securities as owner. We may doubt whether the risk would be greatly different if the bank in transmitting the order were to give up the name of its customer as principal. There would go with the order even then an implied warranty of authority, and the customer might repudiate the purchase if there was a departure from his mandate. But risk without more does not serve as a decisive test of power and legality. The bank might have opened a credit in favor of the brokers, to be availed of by drafts when accompanied by shares of stock. The risk would be substantially the same, yet no one would doubt that the transaction would be within the range of banking power. Every day banks subject themselves to a like risk of liability when upon the instructions of a customer they take up drafts with bills of lading attached. A failure to scrutinize with care the recitals of the documents or a departure in some trifling detail from the letter of the mandate may charge the mandatary with loss or with the obligations of an owner (Laudisi v. American Exchange Nat. Bank, 239 N. Y. 234; Lamborn v. National Park Bank, 240 N. Y. 520). Risk of loss there also is when a bank assumes an obligation to establish a credit by cablegram or otherwise with a foreign correspondent (Richard v. American Union Bank, 241 N. Y. 163; Richard v. Credit Suisse, 242 N. Y. 346), or accepts checks or coupons for collection (National Revere Bank v. National Bank of Republic, 172 N. Y. 102), or issues a letter of credit. The test of power in all such cases is not the presence of the risk, or its absence, unless it be so inordinate as to be a speculative enterprise (Jemison v. Citizens Sav. Bank, 122 N. Y. 135); the test is the relation of the act to that substitution of credits which is of the essence of the banking function. Whatever risk is incidental to the fulfilment of that function, according to the practice of banking as it has developed in these days, is to be accepted and suffered as one of the perils of the business.

There is no question that the practice of banking as it has developed in our day upholds the purchase of securities for the benefit of customers whose deposit accounts are sufficient, as the result of loans or otherwise, to justify the credit. The practice is so general that it may be the subject of judicial notice. In many banks special departments are organized for that very purpose. All this was elucidated in our opinion in Dyer v. Broadway Central Bank (supra). Hubbs, J., writing for the court, reminded us that many depositors are accustomed to deal directly with their banks in the purchase of securities; that the validity of the practice has had tacit recognition in our decisions (Central Nat. Bank v. White, 139 N. Y. 631; Le Marchant v. Moore, 150 N. Y. 209); that it has never been questioned by the Superintendent of Banks or other administrative agencies; and that the transactions of banking in a great financial center are not to be clogged, and their pace slackened, by over-burdensome restrictions ” (Whiting v. Hudson Trust Co., 234 N. Y. 394, 406; cf. Empire Trust Co. v. Cahan, 274 U. S. 473, 480). At the same time the case of Jemison v. Citizens Sav. Bank (supra) was sufficiently distinguished (cf. Hotchkin v. Third Nat. Bank, 219 Mass. 234). It is enough indeed to recall that a bank for savings, unlike a bank of discount, is merely a depository and not a medium for the exchange of credits. In principle at least, the line of demarcation is not doubtful, however much it may be blurred at times by the encroachments of obscuring facts. On the one side are speculative purchases for the benefit of the bank itself, or in aid of some transaction foreign to the banking function. On the other are transactions where the pledge of the credit of the bank is tributary to an exchange of credit for the accommodation of a customer.

We have considered one set of circumstances in which a purchase of shares for the benefit of a customer is an exercise of banking powers. Not improbably there are others. There is no occasion to develop them. On the other hand, we do not say that there may not be still other situations in which a purchase for a stranger, or even for a customer, would be foreign to any function appropriate to the banking business, and so forbidden by the statute. If such situations can be imagined, there is nothing on the face of this complaint to give token of their existence.

The judgment and order should be reversed, and the motion denied, with costs in all courts.

Pound, Crane. Lehman, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgment and order reversed, etc.