author: O’Brien, J.

text:
    Fred S. James & Company, Appellant, v. Rossia Insurance Company of America, Respondent.
    Debtor and creditor — fraudulent conveyance — insurance — corporations — assignment by Russian insurance company to defendant of its assets and liabilities in this country — action by foreign creditor of Russian company to set aside assignment as in fraud of creditors not maintainable where transfer was to preserve assets from revolutionists — power of refugees from revolution to conserve property in this country — acts recognized as legitimate.
    1. An action by an English corporation, as creditor of a Russian insurance company, which, since the year 1904, had conducted a department of its business in this country and which, under sections 27 and 28 of the Insurance Law (Cons. Laws, eh. 28) and of a similar statute of another State, had created within this country a capital corresponding to that of a domestic corporation, to set" aside, as in fraud of creditors, an assignment, made April 1, 1919, by the Russian corporation to the defendant of practically all of its assets and all of its liabilities in this country, cannot be maintained where, upon a careful examination of the whole case, no element of fraud in the assignment can be detected, the good faith of all parties seems quite apparent and it clearly appears that the assignment was not made for the purpose of defeating the claims of foreign creditors of the Russian corporation but was based upon the idea of conserving its assets at a time when, though not insolvent, it was threatened with destruction from revolution in the place of its origin.
    2. Nor is this changed by the facts that upon the record and on the basis of strict interpretation of law no authority is found for the resident trustee of the Russian company to act for it to the extent of assigning all its assets and liabilities to defendant and of holding as trustee for the old company shares of defendant’s stock, which he thereafter transferred to a French holding company, organized by shareholders and members of the board of directors of the Russian company for the purpose of concentrating its assets outside of Russia, which stock has been since sold to many persons. Proscribed individuals, fleeing from the fury of the Russian revolution, retained the power to conserve property in this country, so far as the courts of this State can protect it, and their acts to preserve assets from eonfiscation by revolutionists, whose authority our government rejects, are recognized by us as just, equitable and altogether legitimate acts of conservation.

      James & Co. v. Rossia Ins. Co., 220 App. Div. 404, affirmed.
    (Argued January 11, 1928;
    decided February 14, 1928.)
    Appeal from a judgment, entered May 24, 1927, upon an order of the Appellate Division-of the Supreme Court in the first judicial department, reversing an interlocutory judgment in favor of plaintiff entered upon a decision of the court on trial at Special Term and directing a dismissal of the complaint.

      David Rumsey and Louis J. Wolff for appellant.
    The transfers of the Russian company’s assets to the defendant and to the French corporation were not made with authority. (Russian Reinsurance Co. v. Stoddard, 240 N. Y. 149; 240 N. Y. 682; Andre v. Beha, 211 App. Div. 380; 240 N. Y. 605; Severnoe Securities Corp. v. Westminster Bank, 214 App. Div. 14; Russian Commercial & Industrial Bank v. Comptoir D’ Escompte Mulhouse, 40 T. L. R. 837; A. C. 112; 132 L. T. R. 99; Banque Internationale De Commerce De Petrograd v. Goukassow, 40 T. L. R. 837; A. C. 150; 132 L. T. R. 116.)

      Nathan L. Miller, Hartwell Cabell and Harold Otis for respondent.
    The refugee directors of the Russian company had authority to direct the sale of its United States branch to the defendant. (Matter of People, Second Russian Ins. Co., 243 N. Y. 524; Russian Reinsurance Co. v. Stoddard, 240 N. Y. 149; First Russian Ins. Co. v. Beha, 240 N. Y. 602; Hamilton Trust Co. v. Clems, 17 App. Div. 152; 163 N. Y. 423; City of Buffalo v. Balcom, 134 N. Y. 532; Holmes & Griggs Mfg. Co. v. Holmes & Wessell Metal Co., 127 N. Y. 252; Jourdan v. L. I. R. R. Co., 115 N. Y. 380; Woodruff v. Erie R. R. Co., 93 N. Y. 609; Castle v. Lewis, 78 N. Y. 131; Whitney Arms Co. v. Barlow, 63 N. Y. 62; St. Louis R. R. Co. v. Terre Haute

      R. R. Co., 145 U. S. 393; Mahoning Mining Co. v. Anglo-Californian Bank, 104 U. S. 192; National Bank v. Matthews, 98 U. S. 621; International Trust Co. v. Davis & Farnum Mfg. Co., 70 N. H. 118.)

      James H. McIntosh for Howard E. Jones, amicus curiae.

    The complaint does not state a case for equitable relief, nor justify an equity court in taking jurisdiction and rendering a judgment against the defendant. (Trotter v. Lisman, 199 N. Y. 497; Adee v. Bigler, 81 N. Y. 349; Spellman v. Friedman, 130 N. Y. 421; Ditmar v. Gould, 60 App. Div. 94; Kraemer v. Williams, 131 App. Div. 236; Wiggins v. Armstrong, 2 Johns. Ch. 144.) The transfer was not fraudulent. It not merely protected the American creditors, but it helped the foreign creditors by putting the equity in the American assets into concrete form instantly available to them in an action at law. (Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371; McDonald v. Williams, 174 U. S. 397; Sunderlin v. Terry, 95 Conn. 713; State v. Martin, 77 Conn. 142; Matter of Braus, 248 Fed. Rep. 55; Scripp v. Crawford, 123 Mich. 173; Plant v. Billings Drew Co., 127 Mich. 11; Kingman & Co. v. Mowry, 182 Ill. 256; Baker v. Naglee, 82 Va. 876; Skinner v. Southern Groceries Co., 174 Ala. 359; Jordan v. Lynch Land Co., 83 Ind. App. 33; Shumaker v. Davidson, 116 Iowa, 569; Coaldale Coal Co. v. Nat. Bank of Camden, 142 Penn. St. 288; Maskell v. Spokane Cycle & Auto Supply Co., 100 Wash. 16; Densmore Commission Co. v. Shong, 98 Wis. 380.) Sturhahn and the directors had all the authority and power they needed. The Russian corporation not merely authorized the transfer, but it ratified it and accepted its benefits and is now estopped to question it. (James & Co. v. Second Russian Ins. Co., 239 N. Y. 248; Whitney Arms Co. v. Barlow, 63 N. Y. 62; Castle v. Lewis, 78 N. Y. 131; Woodruff v. Erie Ry. Co., 93 N. Y. 609; Jourdan v. L. I. R. R. Co., 115 N. Y. 380; Holmes v. Willard, 125 N. Y.
      75; Linkauf v. Lombard, 137 N. Y. 417; Vought v. Eastern B. & L. A., 172 N. Y. 508; Wormser v. Met. St. Ry. Co., 184 N. Y. 83; Wallace v. Walsh, 125 N. Y. 26; Castle v. Lewis, 78 N. Y. 131; St. Louis R. R. Co. v. Terre Haute R. R. Co., 145 U. S. 393; Hervey v. Midland R. R. Co., 28 Fed. Rep. 164.)
   O’Brien, J.

During the year 1904, the Rossia Insurance Company of Petrograd, a corporation organized under the laws of the former Russian Empire, established a United States department of its business at Hartford, Conn. This department conducted reinsurance in this State and many other States. It was entirely in charge of Carl F. Sturhahn who possessed full power of attorney to do all things which the Rossia by its charter was authorized to do. Although this department was not then incorporated, its status was analogous to that of a corporation and it was managed on a basis entirely separate from the European affairs of the company. Pursuant to sections 27 and 28 of the Insurance Law of this State (Cons. Laws, ch. 28) and to a similar statute of Connecticut, the Rossia created within this country a capital corresponding to that of a domestic corporation. This capital consisted of bonds deposited with the Superintendents of Insurance of Connecticut, New York and Ohio of the value of $709,000 and other bonds, cash and real estate of the value of $8,819,613.86 held by three citizens of this country under deeds of trust. By statute such property constituted security for business transacted by the Rossia in this country and not elsewhere.” (Insurance Law, section 27; Matter of People (Norske Lloyd Ins. Co.), 242 N. Y. 148, 159.)

As early as 1907 the directors at Petrograd had seriously considered incorporating their American business. Nothing definite, however, was accomplished until the year 1915 when the Connecticut Legislature enacted a statute authorizing the incorporation of this defendant and in 1917 that authority was renewed. The complaint alleges that defendant, the Rossia Insurance Company of America, is a corporation organized and existing under the laws of Connecticut and the answer does not deny such allegation. In July, 1918, 2,450 of the 2,500 shares of defendant were subscribed by the Rossia of Petrograd and officers were elected. Issue of stock was delayed by the absence of approval by the United States government which then regulated investment of capital as a war emergency measure. In February, 1919, shortly after our government relinquished that power, the 2,450 shares, having been paid for with funds from one of the foreign accounts of the Russian company, were issued to Sturhahn as trustee for the Rossia of Petrograd and by him deposited in escrow with a trust company at Hartford until released by the Superintendent of Insurance of Connecticut. These shares were later increased to 3,950 shares and were transferred to the Societe Commerciale and Financiere Caross, a French holding company organized by shareholders and members of the board of directors of the Rossia for the purpose of concentrating the assets of the Rossia existing outside of Russia. In 1922 the stock was sold to Kidder, Peabody & Company of New York and marketed to many persons residing in this country. The Rossia has had no interest in this defendant since March, 1922.

While the incorporation of defendant was in progress, the Bolshevici revolution occurred. In November, 1918, the Soviet government issued its decree against all insurance corporations controlled by private capital. Insurance was declared a State monopoly, all private insurance companies were made subject to liquidation, and upon their liquidation all their available property was to become the property of the Russian Socialist Federated Soviet Republic. Liquidation was ordered to be completed not later than April 1, 1919.

In an instrument called a multipartite agreement made effective as of April 1, 1919, the Rossia of Petrograd and the Rossia of America with the consent of the Superintendent of Insurance of this State and with the concurrence of thirty-three insurance companies conducting business in the United States and having reinsurance treaties with the Russian company, executed a transfer of all the assets except $491,000 and all liabilities of the Russian company in this country to the recently organized Connecticut corporation, this defendant. The assets so transferred exceeded liabilities by the sum of $2,388,527.84. By the terms of the agreement, the new corporation assumed all the obligations of the old one and the Russian company was completely released from all its insurance liabilities in this country.

Prior to April 1, 1919, the Russian corporation had become indebted to plaintiff’s assignor, the Eagle, Star and British Dominions Company, Ltd., an English corporation. ■The indebtedness grew out of certain marine reinsurance treaties existing between those corporations and was contracted at London and Petrograd. None of it arose from transactions in this country. Plaintiff, alleging that it has no remedy at law, that the Russian corporation has no property anywhere except the property which had been assigned to this defendant and that the assignment of the American property was made with intent to hinder, delay and defraud creditors, that it was without authority and was not based upon any consideration, demands that the transfer be adjudged fraudulent and void as against plaintiff and that defendant be adjudged to hold in its possession funds of the Russian company properly applicable to payment of plaintiff’s claim and that defendant be adjudged to pay the amount of that claim. The basis of the action as stated by plaintiff’s counsel on the trial is the transfer of assets shown in the schedule attached to the multipartite agreement. The Appellate Division, reversing the Special Term, found that the Russian company’s assignment of its United States business to this defendant was made without fraud, for adequate consideration, with due authority and at a time when the Rossia was solvent. A careful examination of the whole case forces the conclusion that the judgment must be affirmed.

No element of fraud in the assignment can be detected. The good faith of all parties seems quite apparent. Every insurance company in this country having treaties with the Rossia of Petrograd consented to the substitution of the Connecticut corporation and accepted it and the property transferred to it as security for any indebtedness which might- grow out of such treaties. The statutory trustees, men highly reputable in the commercial affairs of this country, executed assignments and made physical delivery of the bonds, cash and real estate held by them under their deed of trust. Their conduct was regulated by their conviction that American creditors would thus be more fully protected. The whole proceeding received the approval of the Insurance Superintendents of three States and of the Superior Court of Connecticut. No one familiar with insurance business remained ignorant of the retirement of the Russian company from active affairs in this country and the entrance and participation into those affairs by its successor, this defendant. Even plaintiff’s assignor concluded a treaty with the new corporation. The assignment was not made for the purpose of defeating the claims of foreign creditors of the Rossia. At the time of the transfer, the Rossia’s manager in this country was not aware of the existence of plaintiff’s claim. The purpose of the assignment clearly appears to have been based upon the idea of conserving the assets of the old corporation at a time when it was threatened with destruction in the place of its origin and with liquidation in this State. The Russian corporation is not shown to have been insolvent at the time. Insurance business .continued to be transacted in Europe. The management departing from Petrograd and advancing before the spreading revolution, wrote policies at Moscow, Kiev and cities in southern Russia. Such business continued for a year and has not been proved unprofitable. Discontinuance in the United States cost the parent company nothing. It owned the capital stock of the new corporation and this corporation owned the assets formerly held and still held as security for American creditors. The Russian company saved its property in this country, continued to protect American creditors and injured no one. It did not, without consideration, give away its assets. In different corporate form, it retained them for the benefit of its American creditors.

In normal times under a government recognized by our own as a sovereign even de facto, the question of authority to effect the transfer might become the subject of serious doubt. If the decrees of the Soviet Republic were for all purposes accorded full credit by our government, if they were recognized in the largest measure as emanating from duly constituted authorities of a sovereign State, the Russian corporation on April 1, 1919, might be regarded as dead, its assets confiscated by the Republic, its liabilities obliterated and its directors mere fugitives and refugees shorn of all power even to conserve its property amid the chaos of revolution. We have never recognized that government. Its decrees are treated as a nullity except in so far as there is need to recognize them for the purpose of promoting justice and equity as we regard justice and equity. (Wulfsohn v. Russian Republic, 234 N. Y. 372; Russian Republic v. Cibrario, 235 N. Y. 255; James & Co. v. Second Russian Insurance Co., 239 N. Y. 248; Russian Reinsurance Co. v. Stoddard, 240 N. Y. 149; Joint Stock Company v. Nat. City Bank, 240 N. Y. 368; First Russian Insurance Co. v. Beha, 240 N. Y. 601, 602; Matter of People [Second Russian Insurance Co.], 243 N. Y. 524; Sliosberg v. N. Y. Life Ins. Co., 244 N. Y. 482.) Frank admission may be made that, on the record before us and on the basis of strict interpret tation of law, Sturhahn’s authority to act for the Rossia of Petrograd to the extent of assigning all its assets and liabilities to the new corporation and of holding as trustee for the old company the shares of stock of the new might be deemed to be lacking if it were not supplied by an emergency so great as to invest him by force of its existence with extraordinary powers. The. letter of the law, as it existed under the empire of the Czar, may have forbidden investment by a Russian corporation in the shares of any other corporation. That law had been swept away by the power of revolution. The decree of the Soviet Republic assumed to confiscate “ all available property ” of the Rossia. If we were to recognize and enforce that destructive proclamation, the Bolshevik government rather than this plaintiff would be the gainer. When old institutions have fallen and none which we will recognize have succeeded, how shall we deal with foreign owners of property within our jurisdiction? We cast aside rigid rules made to control other conditions. We insist upon honest conduct, but when the morality of the proceeding satisfies us as a court of equity, we will not obstruct the conservation of property accumulated and segregated by command of our own statute for the protection and security of business transacted by aliens “ in this country and not elsewhere.” We view with some degree of indulgence the honest though possibly irregular efforts of a resident agent of foreign property and of statutory trustees controlling that property when they are far removed from the owner, when mails and cables are interrupted, when old governments and old laws are overthrown and no new government and no new law acceptable to our institutions have been established. Our attitude is fully expressed when we say the problem before us is governed, not by any technical rules, but by the largest considerations of public policy and justice.” (James & Co. v. Second Russian Ins. Co., 239 N. Y. 248, 256.) The Rossia of Petrograd may, under the Soviet decree, have ceased on April 1, 1919, to exist in Russia. Even here, its corporate life may have expired. It was half dead and half alive. We make no effort to define the authority of its directors as such. We do hold that these proscribed individuals fleeing from the fury of the revolution retained the power to conserve property in this country as far as the courts of New York can protect it. Sturhahn and the trustees here exerted themselves to preserve assets from confiscation by revolutionists whose authority our government rejects. The acts of the manager and the trustees, ratified and confirmed by the refugee directors in Paris, are recognized by us as just, equitable and altogether legitimate acts of conservation.

The judgment should be affirmed, with costs.

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

Judgment affirmed, etc.


source: Caselaw Access Project

author: Cardozo, Ch. J.

license: Public Domain

text:
    Edward Coleman, Appellant, v. New Amsterdam Casualty Company, Respondent.
    Insurance (indemnity) — contract — effect of section 109 of Insurance Law providing that injured person may maintain action against insurance company where judgment against insured is returned unsatisfied — breach of condition vitiating policy good defense to such an action — policy vitiated by refusal of insured to co-operate in defense — meaning of “ co-operation ” — policy ended at election of insurer on breach by assured of condition of policy that it would “ co-operate ” with insurer.
    1. The effect of section 109 of the Insurance Law (Cons. Laws, ch. 28) providing that insolvency or bankruptcy of the assured “ shall not release the insurance carrier from the payment of damages,” and “ in ease execution * * * is returned unsatisfied * * * because of such insolvency or bankruptcy, that then an action may be maintained by the injured person * * * against such corporation under the terms of the policy,” is to give to the injured claimant a cause of action against the insurer for the same relief that would be due to a solvent principal seeking indemnity from the insurer after the judgment had been satisfied. The cause of action is no less but also it is no greater. Assured and claimant must abide by the conditions of the contract. A defense to an action brought under such statute that there was a breach of a condition vitiating the policy is, therefore, good.
    2. A provision in a policy of indemnity insurance, issued by defendant, that if a claim is made assured shall give notice thereof and “ at all times render the company all co-operation and assistance in his power,” is violated where assured, through one of its officers admitted to defendant’s attorney that a mistake had been made in filling a prescription but refused to say more unless the defendant would undertake to pay any judgment recovered against the officer as well as any judgment recovered against the assured. Though co-operation does not mean that the assured is to combine with the insurer to present a sham defense, it does mean that there shall be a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense. The attitude of the assured in refusing information except upon assumption by the insurer of an obligation not covered by its contract was one of willful and avowed obstruction.
    3. An argument that the default should be condoned, since there is no evidence that co-operation, however willing, would have defeated the claim for damages or diminished its extent, misconceives the effect of a refusal. Co-operation with the insurer is one of the conditions of the policy. When the condition was broken, the policy was at an end, if the insurer so elected.

      Colemanv. New Amsterdam Casualty Co., 220 App. Div. 748, affirmed.
    (Argued January 10, 1928;
    decided February 14, 1928.)
    Appeal, by permission, from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered May 25, 1927, unanimously affirming a judgment in favor of defendant entered upon an order of the court at a Trial Term setting aside a verdict in favor of plaintiff directed by the court and directing a dismissal of the complaint.

      Harold Cohn and Joseph Fried for appellant.
    Under a proper construction of section 109 of the Insurance Law, the failure of the insured to co-operate in the defense of the prior action is not a defense to this action. (Roth v. Nat. Automobile Mutual Cas. Co., 202 App. Div. 667;
      Schoenfeld v. N. J. Fid. & Plate Glass Ins. Co., 203 App. Div. 796; Merchants Liability Co. v. Smart, 267 U. S. 126; Archer v. Equitable Life Assur. Soc., 218 N. Y. 18.) There was no material breach of any of the conditions of the insurance policy by the assured. (Collins v. Standard Acc. Ins. Co., 170 Ky. 27; Roth v. National Automobile Casualty Co., 202 App. Div. 667; Porter v. Traders Ins. Co., 164 N. Y. 504; Taxicab Motor Co. v. Pacific Coast Cas. Co., 73 Wash. 631; Ward v. Maryland Cas. Co., 71 N. H. 262.)

      Bichard F. Weeks and Frederick Mellor for respondent.
    The failure of Endicott Drug Stores, Inc., to co-operate in the defense of the action of Coleman against Endicott Drug Stores, Inc., is a defense to this action. (Roth v. Nat. Automobile Mut. Cas. Co., 202 App. Div. 667; Schoenfeld v. N. J. Fid. & Plate Glass Ins. Co., 203 App. Div. 796; Schroeder v. Columbia Cas. Co., 126 Misc. Rep. 205.) The respondent proved a failure on the part of the assured to co-operate with the insurer in the defense of the Coleman action, which breach was material as a matter of law, and justified the court in dismissing the complaint. (Oakland Motor Co. v. Am. Fid. Co., 190 Mich. 94.)
   Cardozo, Ch. J.

The defendant issued to the Endicott Drug Store, Incorporated, its policy of insurance “ indemnifying the assured against loss from the liability imposed by law * * * as a result of any error or mistake * * * in the preparation of drugs or medicines or in filling any prescription or order for the same.” The insurance was subject to conditions. One of these (condition B) is to the effect that “ the assured shall give immediate written notice of any alleged error or mistake of which he has knowledge, with the fullest information obtainable at the time,” that “if a claim is made on account of such error or mistake,” he “ shall give like notice thereof with full particulars,” and that he “ shall at all times render the company all co-operation and assistance in his power.”

Plaintiff, a-customer, sued the assured for damages, claiming error in filling a prescription for a mixture of belladonna ■ and nitroglycerine. The prescription called for twelve capsules.' By error the full quantity prescribed was put into each of the capsules instead of being divided among all. The attorney for the insurer made ready to defend the suit. He sent for the secretary of the assured, one Weiss, who had compounded the prescription. Weiss said there had been a mistake, and refused to say more, unless the insurer would undertake to pay any judgment recovered against him as well as any judgment recovered against his corporation, the assured. On the refusal of the attorney to enlarge the liability, Weiss announced that he would neither sign an answer nor tell anything he knew. Letters were written to the assured requesting that some officer be sent to verify an answer, and later requesting a conference as to the merits of the claim at any time or place desired. The letters were ignored. In the end the insurer gave notice that it disclaimed liability, since the assured was unwilling to aid in the defense. Judgment for damages followed by default. The assured was adjudged a bankrupt, and execution was returned unsatisfied.

Plaintiff brings this action under Insurance Law (Cons. Laws, ch. 28), section 109, providing that insolvency or bankruptcy of the assured “ shall not release the insurance carrier from the payment of damages,” and “ in case execution * * * is returned unsatisfied * * * because of such insolvency or bankruptcy, then an action may be maintained by the injured person * * * against such corporation under the terms of the policy.” The insurer defends upon the ground that there was a breach of a condition, vitiating the policy. The trial judge, after taking the verdict of a jury, dismissed the complaint, The Appellate Division unanimously affirmed.

The argument is made that the effect of section 109 of the Insurance Law is to create an original obligation in favor. of the injured claimant for the amount of any judgment recovered against the holder of the policy without reference to any breach of condition as between insurer and assured. We see no basis for such a ruling (cf. Schoenfeld v. N. J. Fid. & Plate Glass Ins. Co., 203 App. Div. 796, 800; Roth v. Nat. Auto Mut. Cas. Co., 202 App. Div. 667, 669; Lorando v. Gethro, 228 Mass. 181, 185, 186). By express provision of the statute, the action is to be maintained by the injured person * * * against such corporation under the terms of the policy.” If the terms could be disregarded, insurers would be helpless to defend themselves against chicanery or covin. They might then be held though there had been neither notice of the claim nor opportunity reasonably prompt to investigate the merits (cf. Lorando v. Gethro, 228 Mass. 181, 185). The plaintiff argues that a bankrupt holder of a policy colluding with an insurer could refuse to co-operate, and thus enable the insurer to cheat the statutory remedy. With equal force, the defendant can argue that a bankrupt assured could collude with a claimant to fasten upon the insurer a fictitious Lability. The statute was prompted by a definite mischief (cf. Lunt v. Ætna Ins. Co., 253 Mass. 610; Roth v. Nat. Auto Mut. Cas. Co., supra). Before its enactment, the insolvency of the assured was equivalent in effect to a release of the surety. The policy was one of indemnity against loss suffered by the principal, and loss to him there was none if he was unable to pay. The effect of the statute is to give to the injured claimant a cause of action against an insurer for the same relief that would be due to a solvent principal seeking indemnity and reimbursement after the judgment had been satisfied. The cause of action is no less but also it is no greater. Assured and claimant must abide by the conditions of the contract.

The question remains whether the conduct of the assured was such a refusal to co-operate as to vitiate the policy. We are satisfied it was. Co-operation does not mean that the assured is to combine with the insurer to present a sham defense. Co-operation does mean that there shall be a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense. The attitude of this assured was one of willful and avowed obstruction. It did not deny that it was in a position to give information, material and instructive, in aid of an investigation of the grounds of liability. It affixed to the disclosure of whatever information it had an untenable condition, the assumption by the defendant of an obligation not covered by the contract. The insurer was not required to content itself with an unexplained admission that a mistake had occurred, when, coupled with the admission, there was a refusal to say more except at a price. The cause and occasion of the mistake were facts undisclosed, yet important to be known. The drugs or their containers might have been misbranded by the manufacturer or by some one else. The ingredients might have been harmless. In divers ways, there might be defense to a charge of negligence, or at all events palliation, though mistake were conceded. The default of the assured was more than sluggishness or indifference, phases of thought and conduct that might be the subject of varying inferences when considered by a jury. It was so avowed and purposed that but one inference is possible. If this was co-operation, one is at a loss to imagine when co-operation could be lacking.

The plaintiff makes the point that the default should be condoned, since there is no evidence that co-operation, however willing, would have defeated the claim for damages or diminished its extent. For all that appears the insurer would be no better off if the assured had kept its covenant, and made disclosure full and free. The argument misconceives the effect of a refusal, Co-operation, with the insurer is one of the conditions of the policy. When the condition was broken, the policy was at an end, if the insurer so elected. The case is not one of the breach of a mere covenant, where the consequences may vary with fluctuations of the damage.. There has been a failure to fulfill a condition upon which obligation is dependent.

Other rulings complained of have been considered, but no error has been found in them.

The judgment should be affirmed with costs.

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

Judgment affirmed, etc.


author: Kellogg, J.

text:
    In the Matter of Smith Fireproof Construction Co., Inc., Respondent, against Thompson-Starrett Company, Appellant.
    Contract — arbitration — construction of arbitration clause in building subcontract — delays and hindrances — alterations in work and additions thereto — subcontractor caused additional expense in removing hoists and cement plant and for additional men and overtime —■ alteration in form of construction — erroneous appointment of third arbitrator by court.
    1. Under a provision in a building subcontract that arbitration was to be invoked in ease the parties disagreed “ in relation to any clause in this contract,” disputes as to delays and hindrances not referable to a particular clause are not arbitrable.
    2. By a further provision making “ all clauses ” applicable “ to any ■ changes, omissions or extra work ” the arbitration clause was made applicable to disputes as to additional costs caused by alterations of the work, or additions thereto. They were, therefore, arbitrable.
    3. Claims for additional expense caused the subcontractor by its being required to dismantle and remove cement mixing plants and hoists, by restrictions imposed on its use of a platform hoist and by its being compelled to employ additional workmen and work its employees overtime are not arbitrable where the disputes involved are not referable to any clause of the contract.

      4. Disputes in relation to damages occasioned the subcontractor by alterations made in the form of floor construction are clearly arbitrable under the provision of the contract making the arbitration clause applicable “ to any changes, omissions or extra work.”
    5. Where the contract provided that the two arbitrators named by the parties should themselves select a third, it was error for the court to make the designation.

      Matter of Smith Fireproof Construction Co. v. Thompson-Starrett Co., 221 App. Div. 841, modified.
    (Argued January 20, 1928;
    decided February 14, 1928.)
    Appeal, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered October 14, 1927, which unanimously affirmed an order of Special Term directing that arbitration proceed between the parties hereto.

      Frederick Hulse for appellant.
    The papers submitted upon the application do not show that any dispute has arisen between the parties such as is contemplated to be arbitrated by the contract. (Matter of Gen. Silk Imp. Co., 200 App. Div. 786; 234 N. Y. 513; Matter of Young v. Crescent Dev. Co., 240 N. Y. 244; Borough Constr. Co. v. City of New York, 200 N. Y. 149.)

      Adolph Hirsch Rosenfeld for respondent.
    The disagreements between the parties relate to the clauses in the contracts, and the court properly ordered the ThompsonStarrett Company to arbitrate, pursuant to the very contracts prepared by it. (Matter of Wenger & Co. v. Propper S. H. Mills, 239 N. Y. 199; Faber v. City of New York, 22 N. Y. 225; Matter of Buxton v. Mallery, 245 N. Y. 337; Berkovitz v. Arbib & Houlberg, 230 N. Y. 261.)
   Kellogg, J.

The respondent, Smith Fireproof Construction Company, Inc., made a contract with the appellant, Thompson-Starrett Company, whereby, for a consideration expressed, it agreed, as Sub Contractor,” to perform all concrete construction work required in the erection of a building, which the Thompson-Starrett Company, designated “ Contractor,” had agreed to erect. The contract contained the following provision: “ In case the parties hereto disagree in relation to any clause in this contract, the question shall be referred to a Board of Arbitration consisting of three (3) disinterested parties, one nominated by Contractor, one by Sub Contractor, these two to select a third.” The contract further provided that the contractor might, from time to time, order extra work to be performed and make any changes in the work of construction which it saw fit. In case of disagreement as to additional sums to be paid, or as to additional time required by subcontractor, because of altered or additional work, the dispute was to be submitted to arbitration. The contract also contained the following clause: “All clauses of this Contract shall apply to any changes, omissions or extra work in like manner and to the same extent as to the work contracted for, and no changes, omissions, or extra work shall annul or invalidate this contract.”

Obligations not to delay or hinder the subcontractor in the performance of the work were doubtless imposed by implication upon the contractor. However, the implication arose, not from a particular contract clause, but from the entire contract and the relationship which was thereby established between the parties. Arbitration was to be invoked in case the parties disagreed “ in relation to any clause in this contract.” Disputes as to delays and hindrances, not being referable to “ any clause in this contract,” were not made arbitrable by the parties. The further provision which we have quoted made “ all clauses ” of the contract applicable “ to any changes, omissions, or extra work.” Doubtless the arbitration clause was one of the clauses thus made applicable. Consequently, disputes as to additional costs, caused by alterations of the work, or additions thereto, were made arbitrable.

The subcontractor complains that the contractor delayed the commencement of the work and caused its performance to be unduly prolonged, to the' damage of the subcontractor. Disputes of this character do not relate to “ any clause in this contract ” and, for this reason, are not arbitrable. Moreover, the petitioning subcontractor expressly stated in the papers filed by it: The petitioner makes no claim for delay due to no fault of the petitioner, but the delay was mentioned in order to explain the changes, orders and directions of Thompson-Starrett Company to complete its contract with Cimbel Brothers.”

The subcontractor also complains that it erected two cement mixing plants and hoists and one platform hoist at points designated by the contractor; that it was subsequently required by the contractor to dismantle and remove the two cement mixing plants and hoists at great expense to itself; that it was forbidden by the contractor to use the platform hoist except during certain hours of the day; that as a result it was compelled to use a passenger elevator for hoisting concrete and delivering it upon the work; that it was thereby caused great additional expense in the prosecution of the work. It also complains that it was compelled by the contractor to employ a large force of additional workmen, and to work its employees overtime, with a consequent loss of efficiency and a great increase of cost. No clause in the contract relates to the removal of hoists and plants once installed, or to restrictions upon the use of platform hoists. No clause in the contract gave to the contractor the right to compel the subcontractor to use an additional force of men or to work employees overtime. The subcontractor’s claims for damages in respect to these items, therefore, are not arbitrable, since the disputes involved are not referable to any clause in the contract.

The contract called for a monolithic cement finish upon substantially every floor of the building. This form of construction was changed, by order of the contractor, to a fill and finish job. The subcontractor claims that it performed the altered work of construction at great expense and loss of time to itself. Disputes in relation to damages occasioned to the subcontractor by the alterations made were clearly arbitrable under that provision of the contract which made the arbitration clause applicable to any changes, omissions, or extra work.”

• The order appealed from required the Smith Fireproof Construction Company, Inc., and the Thompson-Starrett Company each to select its own arbitrator, designated by name a third arbitrator, and directed the parties to proceed to arbitration. The contract provided that the two arbitrators named by the parties should themselves select the third arbitrator. It was, therefore, error for the court to make the designation.

The order should be modified in accordance with the opinion and, as modified, affirmed, without costs.

Cardozo, Ch. J., Crane, Andrews, Lehman and O’Brien, JJ., concur; Pound, J., not sitting.

Ordered accordingly.


author: Grane, J. Cabdozo, Ch. J.

text:
    The People of the State of New York ex rel. Central Hudson Gas and Electric Company, Respondent, v. State Tax Commission, Appellant. Same, Respondent, v. Same, Appellant.
    Tax — franchise tax — valuation of franchises to carry wires for transmission of electricity over streets and highways by “ net earnings rule ” — erroneous apportionment of net earnings according to lineal foot user of highways — erroneous allowance as operating expense of amount expended in marketing securities.
    1. Where, by common consent of all of the parties to franchise tax proceedings, the “ net earnings rule ” has been used in arriving at the valuation of franchises to carry wires for the transmission of electricity over streets and highways, it is error for the Appellate Division, after having determined the net earnings according to this rule, to apportion them according to the relative user of the streets and highways with the use of private property or privately owned rights of way and so value the franchises according to the lineal foot user. And this is especially so where it does not appear that the relator has at any time expressed a willingness to forego the benefit of a return upon the amount of its investment in easements over private lands. It may not resort, in estimating the value of its special franchises, to the method of apportionment, according to distance, between wires in a highway and those strung, by virtue of an easement, upon land in private ownership and also deduct from the gross, earnings a return upon the capitalized value of the same rights or easements. The burden is on the relator to show, with reasonable accuracy, how much should be deducted from the amount fixed by the assessors. The net earnings, therefore, according to which the special franchises are to be valued, must stand as they were before the attempted apportionment.
    2. It was also error to allow as operating expense on account of “ amortization of debt, discount and expense,” an item representing the actual amount set aside by the relator for amortization of expense incurred in the sale of bonds, such as printing, commissions, lawyers’ fees, and like expenses which the company incurred in marketing such securities. A fair return on the tangible property contemplates a sum sufficient to pay such expenses. A deduction from the gross earnings includes not only the operating expenses, but a fair return to the stockholders upon capital invested in the enterprise.

      People ex rel. Central Hudson Gas & El. Co. v. Tax Comm., 219 App. Div. 227, modified.
    (Argued December 16, 1927;
    decided February 14, 1928.)
    Appeal, in each of the above-entitled proceedings, from an order of the Appellate Division of the Supreme Court in the third judicial department, entered January-24, 1927, which modified and affirmed as modified final orders entered upon the report of a referee in favor of the relator in proceedings to review special franchise assessments against the relator for the years 1916, 1917, 1918 and 1919.

      Albert Ottinger, Attorney-General {John M. Farrell and Frederic J. Merriman of counsel), for appellant.
    The rule of valuation adopted by the Appellate Division was erroneous. (People ex rel. Jamaica Water Supply Co. v.
      State Board, 196 N. Y. 39; People ex rel. Manhattan R. R. Co. v. Woodbury, 203 N. Y. 231; Brooklyn Heights Case, 146 App. Div. 372; 204 N. Y. 648; McCardle v. Indianapolis Water Co., 272 U. S. 400; People ex rel. Third Ave. R. R. Co. v. Tax Comrs., 136 App. Div. 155; 198 N. Y. 608; People ex rel. Third Ave. R. R. Co. v. Tax Comrs., 157 App. Div. 748; 212 N. Y. 472.) The relator is not entitled to have the full value of the special franchises here under review, as finally determined, equalized because no evidence was submitted tending to show that any of the property assessed upon any of the assessment rolls under review was so assessed at less than full value and, further, a prima facie case was established to the effect that all property, excepting special franchises, had been assessed at full value. (People ex rel. N. Y. C. R. R. Co. v. Woodbury, 74 Misc. Rep. 145.)

      R. L. von Bernuth, John L. Wilkie and Morrell S. Lockhart for respondent.
    Only that part of the intangible value in each tax district representing the use and occupancy of the streets therein should be included in the determination of the full value of the special franchise in that district. (Matter of Cooley, 186 N. Y. 220; Matter of Thayer, 193 N. Y. 430; Matter of Greene, 115 Misc. Rep. 704; Matter of Ripka, 118 Misc. Rep. 351; People ex rel. N. Y. C., etc., R. R. Co. v. Gourley, 198 N. Y. 486; People ex rel. N. Y. C., etc., R. R. Co. v. Woodbury, 203 N. Y. 167; People ex rel. N. Y. C., etc., R. R. Co. v. Woodbury, 208 N. Y. 421; People ex rel. N. Y. C., etc., R. R. Co. v. Priest, 206 N. Y. 274.)
   Grane, J.

The facts in these cases are fully set forth in the opinion below. (219 App. Div. 227.) We agree with the Appellate Division except in two particulars.

These are special franchise proceedings relative to the years 1916, 1917, 1918 and 1919. The relator is a corporation organized under the Transportation Corporations Law (Cons. Laws, eh. 63), engaged in the manufacture and sale of gas, electricity and steam. Its main office is located in Poughkeepsie, and it serves a territory comprising Duchess, Orange and Ulster counties. It has two electric generating stations, one at Poughkeepsie and the other at Newburgh. The transmission and distribution systems of the company are both located in and outside of streets, highways and public places.

The method used in arriving at the valuation of the relator’s special franchises for the use of the streets and highways in the various cities and villages was the application of the net earnings rule. (People ex rel. Jamaica Water Supply Co. v. Tax Commissioners, 196 N. Y. 39.) It is conceded that the net earnings rule is the formula for determining the special franchise values in question, this being the basis on which the assessments under review were .made by the State Tax Department, and on which the cases were tried by both parties.

After having determined, according to this rule, the net earnings, the Appellate Division by a divided court apportioned them according to the relative user of the streets and highways with the use of private property or privately-owned rights of v;ay. As the wires of the company, being its transmission system, carried electricity from its distributing stations over a large territory, its wires or mains crossed private property as well as streets and highways. The Appellate Division has said that the net earnings figured according to this rule represent the whole length of the transmission system, and not the earnings from the franchises only. They have apportioned them by length of wires. By this rule of thumb they have allocated that portion of the net income which they say represents the user of the streets. To quote from the opinion of the Appellate Division:

The relator’s business is to deliver electric current to the buildings of its customers situate in divers places ,in three different counties. It is carried upon wires strung over private rights of way owned by the relator, as well as over public streets and public waters. The -distance which it is carried over private far exceeds the distance which it is carried over public ways. Every foot of carrying wire ‘s as essential to relator’s business as every other foot. * * *
It [the franchise tax] is merely a tax upon a property right — the right to cross a street. The right so to cross is no more valuable than the right to cross land privately owned. The public character of the right certainly gives it no added value.”

In other words, if a wire crosses the relator’s private right of way for 100 feet, and also crosses a public highway for 100 feet, the value of the user is equal, and the net earnings of the company under the net earnings rule must be divided in half.

In my judgment the Appellate Division has misconceived the nature of a special franchise. In no way is it to be compared to a private right of way, or the right to cross private property, whether owned by the company or by strangers. A street crossing franchise consists of the right to cross a street, and to use it, when but for a grant of the right to do so from competent public authority it would be a trespass. The franchise is created by grant, and cannot be acquired by purchase or condemnation. (People ex rel. N. Y. C. & H. R. R. R. Co. v. Woodbury, 203 N. Y. 167, at p. 176.) And the franchises so obtained to use or cross streets are not merely to be valued according to the length or extent of the user. Their value depends upon many conditions. Under the rule adopted by the Appellate Division, all the street crossings of the relator would be valued according to the same unit rule. It is the duty if necessary of the State Tax Commission to value each crossing or user, and allocate the franchise tax to the particular tax district. Under the rule adopted here the value would depend upon the lineal foot user. I fail to find any case upholding such a rule. In fact, we said in People ex rel. N. Y. C. & H. R. R. R. Co. v. Gourley (198 N. Y. 486, 493):

The valuation of each crossing depends upon various elements; such as its character, the extent to which it is occupied by the relator, the situation and the public use of the street, or way, and other facts bearing upon the advantage to the relator of the use at that point.”

Surely the user of wild Adirondack or Catskill mountain lands is not as valuable as the user of a street or highway in a populous city, and the value of a street franchise may be many times more valuable at a congested point than in that part of a city which is sparsely settled. The relator’s wires run over private property through vast country districts, and yet the court has held that the value of each lineal foot of such user is as valuable as a foot of wire crossing a street. The mere statement of this proposition to me indicates that the Appellate Division has misconstrued the nature of a franchise, and the rule by which a franchise is valued for assessment and taxation purposes.

The right to use a street is a special privilege. The right to use private property is not a special franchise, and is to be valued as any other property is valued, whether it be corporeal or intangible. Easements of all kinds are intangible, and yet they are and always have been valued as tangible property, or in connection with tangible property. If the relator, in connection with the operation of its distribution plants, had easements of right of way for transporting coal, or easements of water rights, these under the ruling of the Appellate Division would be intangible. Why should they be eliminated in valuing intangible rights, and the rule confined simply to the stringing of wires? The net earnings rule as applied here, and as set forth in the Jamaica Water Supply Company case, is a practical method for valuing street franchises. At least it is conceded to be the method to be used here. It has never been adopted for the purpose of valuing easements or other property rights.

The relator, it is said, runs its wires for many miles over its own private right of way. What is meant by its private right of way? If it owns the property, this is valuable, and can be valued, and its value is neither more nor less because of the fact that a wire runs over it. If it is an easement or a right procured from other private owners, this also may be valued. These values, when ascertained, go to make up the present value of the relator’s tangible property, upon which it is entitled under the net earnings rule to a fair return. This return is deducted from the gross earnings before net earnings, according to which the special franchise is to be valued, can and will be ascertained. If the private ways and the user of the private way for the stringing of wires has not been thus valued as tangible property, that is the relator’s misfortune. It should have been so valued. In no way, however, can it be considered a franchise, or the stringing of its wires over its own property valued equally with the franchise to use a street. We do not mean to say that this net earnings rule is the only way to value franchises such as these in question. There may be other methods of determining values. We do say that as all the parties have accepted this rule, the lineal foot valuation in this instance was erroneous.

The illustrations used by the respondent in its. brief are inept, for the reason that they eliminate the value of their private right of way from the value of their tangible property.

In this respect, therefore, we cannot agree with the Appellate Division. The net earnings, according to which the special franchises are to be valued, must stand as they were before the attempted apportionment.

As to one other item also we disagree with the Appellate Division. This is the amount allowed as operating expense on account of “ amortization of debt, discount and expense.” The item is $4,623 in the 1916 proceeding, and represents the actual amount set aside by the relator for amortization of that expense incurred in the sale of bonds, representing such expenses as printing, commissions, lawyers’ fees, and like expenses which the company incurred in marketing such securities.

In order to arrive at the net earnings under the rule applied, operating expense must be deducted from gross earnings, also, as above stated, a fair return upon all the tangible property of the relator, which of course includes its cash and property in which its capital is invested. If to raise additional capital stockholders had contributed the money, the deduction would consist of a fair return upon this amount. One hundred thousand dollars raised by the stockholders, added to the capital, would at 6 per cent amount to $6,000. However, if instead of putting in the capital themselves, the stockholders had borrowed the full $100,000 — what then? Would the deduction consist of 6 per cent upon this borrowed capital, it being part of the tangible property, and also a deduction as operating expense of the sum it cost to raise the money? This cost might amount .to quite a sum, when we consider that in this case it included lawyers’ fees. Such a ruling would make it more beneficial in tax assessments for the stockholders to borrow money than to put in the capital themselves. In other words, a fair return on the tangible property contemplates a sum sufficient to pay such expenses as are here designated debt expense.” As stated, a deduction from the gross earnings includes not only the operating expenses, but a fair return to the stockholders upon capital invested in the enterprise.

The orders of the Appellate Division in each proceeding should be modified in accordance with this opinion, and as thus modified affirmed, without costs.

Cabdozo, Ch. J.

(concurring). As to the first subject discussed in Judge Crane’s opinion, I concur in the result.

Cases can be imagined in which the value of a special "franchise will best be estimated by an apportionment according to distance between the wires in the highway and those strung, by virtue of an easement, upon land in private ownership. Very plainly, however, the taxpayer, resorting to such a method, may not also deduct from the gross earnings a return upon the capitalized value of the same rights or easements. This would be in effect to allow a single credit twice. I cannot find that the relator has at any time expressed a willingness to forego the benefit of a return upon the amount of this investment. Indeed, I have been unable to ascertain from the record what the amount of such investment is as contrasted with the investment in property more typically tangible, i. e., in power houses and lands. While one allowance stands, no other may be made. We are not dealing with a case where the assessors have adopted a false theory of assessment, for by common consent the net earnings rule was treated as the one to be applied. If there was error at all, it was in the application of the rule rather than in the rule itself. In such circumstances the burden was on the relator to show with reasonable accuracy how much should be deducted from the amount fixed by the assessors. This it has not done. The assessment, therefore, stands (People ex rel. N. Y. C. & H. R. R. R. Co. v. Priest, 206 N. Y. 274; People ex rel. Kohlman & Co. v. Law, 239 N. Y. 346).

I am in accord with the opinion as to the other matters in controversy.

Pound, Andrews, Lehman and O’Brien, JJ., concur with Crane, J.; Cardozo, Ch. J., concurs in result with memorandum in which all concur, except Kellogg, J., not sitting.

Ordered accordingly.


author: Pound, J.

text:
    In the Matter of the Application of Edward P. Morse, Appellant. Gerald Clokey et al., Copartners under the Firm Name of Clokey & Miller et al., Appellants; The Bank of America et al., Respondents.
    Corporations — voting trust agreements — banks and banking— constitutional law — validity in this State of voting trust agreements ruled by Stock Corporation Law, § 60 — voting trust agreement between stockholders of banking corporation valid before amendment by chapter 120 of Laws of 1925— holders of bank stock prohibited thereby from entering into voting trust agreements— statute retroactive — trustees under voting trust agreement made prior to amendment of statute without right to vote stock at election of directors of banking corporation — regulatory laws applicable to private contract rights which conflict with public policy — amendment within reserve power of Legislature to amend corporate charters —trustee acquired no property interest under voting trust agreement.
    1. The test of validity of voting trust agreements in this State is the rule of the statute (Stock Corporation Law, § 50; Cons. Laws, ch. 59) and, prior to its amendment by chapter 120 of the Laws of 1925, by no rule of statutory construction were banking corporations excluded from its operation. A trust agreement, therefore, entered into between stockholders of a domestic banking corporation December 31, 1924, conferring on trustees the right to vote on stock transferred to them, was at that time valid.
    2. By the amendatory statute, however, which added to section 50 the words, “ this section shall not apply to a banking corporation ” a new public policy was declared. The Legislature decreed that it is to the public advantage to withhold from the stockholders of a banking corporation the privilege of membership in voting trusts.
    3. And the statute operates retrospectively. It is not a mere repealing statute. It creates a specific exception to the existing law. The general object and the context of the language used indicate that the new law operates on existing rights by direct action as well as repeal. (Gen. Const. Law, § 110; Cons. Laws, ch. 22.) It follows that no existing rights of stockholders or voting trustees are saved by force of the provisions of section 93 of the General Construction Law, relative to the effect of a repealing statute upon rights accrued prior to the repeal of a statute.
    4. Furthermore, the Legislature has provided that it is essential to the validity of a voting trust agreement that any stockholder may become a party thereto. The right and power to transfer his stock to trustees rested in the provisions of section 50 and, when the section ceased to be applicable, that right and power became non-existent. No other statute permitted a stockholder to transfer his shares to a voting trust. Such an agreement must exist in its entirety or it ceases to be valid, and when stockholders who had not already entered into it were prohibited from becoming parties thereto it became invalid in its entirety. Trustees, under a voting trust agreement, entered into prior to the date when the amendment went into effect, were, therefore, without right after that date to vote the stock held by them at an election of directors of a banking corporation.
    5. Regulatory laws, reasonable in character, designed to accomplish a legitimate public purpose, and enacted to promote the public welfare apply even to private contract rights when the public policy is appropriately declared and defined and the two conflict. Moreover, the amendment comes within the reserved power to amend corporate charters so as to regulate methods of administration and details of procedure in the interest of the public and of all concerned. It cannot be said that the trustees have acquired any property interest under the voting trust agreement of which they are deprived by the statute.

      Matter of Morse (Bank of America), 220 App. Div. 830, reversed.
    (Argued December 15, 1927;
    decided February 14, 1928.)
    Appeal from an order of the Appellate Division of the Supreme Court in the first judicial department, entered June 24, 1927, which affirmed an order of Special Term denying a motion for review of an election of directors of the Bank of America, made under section 32 of the General Corporation Law.

      Nathan L. Miller and Harold Otis for Edward P. Morse, appellant.
    The voting trust statute never applied ■ to banks, being in fundamental conflict with the whole scheme of the Banking Law for responsible bank management in the paramount public interest. (Van Tuyl v. Scharmann, 208 N. Y. 53; People ex rel. Bd. of Education v. Graves, 243 N. Y. 204; Nassau Bank v. Jones, 95 N. Y. 115; Noble State Bank v. Haskell, 219 U. S. 104; Dillingham v. McLaughlin, 264 U. S. 370.) If the voting trust atatute ever applied to banks, it did not apply to banks sfter March 12, 1925, the effective date of the amendment thereto expressly declaring that it did not so apply. The effect of this amendment was not merely to forbid the subsequent making of new bank voting trust agreements; nor was it merely to forbid also the subsequent addition of new parties to such agreements theretofore made between other parties; but it was to forbid the subsequent exercise of voting powers by bank voting trustees under whatever agreements whenever made. (Noble State Bank v. Haskell, 219 U. S. 104; Shallenberger v. First State Bank, 219 U. S. 114; Assaria State Bank v. Dalley, 219 U. S. 121; Engel v. O’Malley, 219 U. S. 128; Dillingham v. McLaughlin, 264 U. S. 370; People v. Formosa, 131 N. Y. 478; Gause v. Commonwealth Trust Co., 196 N. Y. 134; Matter of Wulfsohn v. Burden, 241 N. Y. 288; Lord v. Equitable Life Assurance Society, 194 N. Y. 212; People v. O’Brien, 111 N. Y. 1; Miller v. State, 15 Wall. 478; Looker v. Maynard, 179 U. S. 46.) The 1925 amendment to the voting trust statute, expressly declaring it inappliciable to banks, forbade the subsequent joinder of additional parties to bank voting trust agreements previously existing between other parties, even assuming that it did not forbid the further operation of such agreements as between the existing parties thereto. (Matter of Wentworth, 230 N. Y. 176.)

      Frank H. Stewart, Henry L. Sherman and Abel E. Blackmar for intervening stockholders, appellants.
    The amendment to section 50 of the Stock Corporation Law prohibited the voting trustees after March 12, 1925, from voting or accepting for deposit under the voting trust agreement any stock of the Bank of America. (Hyatt v. Taylor, 42 N. Y. 258; .1 Kent Comm. 462; 1 Black. Comm. 86; Matter of Jannicky, 209 N. Y. 413; Woollcott
      v. Shubert, 217 N. Y. 212; Aldridge v. Williams, 3 How. 9; County of Cumberland v. Boyd, 113 Penn. St. 52; People v. Feitner, 168 N. Y. 360; Matter of Cram, 69 N. Y. 452; Freund on Police Power & Public Policy, 686; Louisville & Nashville R. R. Co. v. Mottley, 219 U. S. 467; U. S. v. Trans-Missouri Freight Assn., 166 U. S. 290; South & Central American Commercial Co., Inc., v. Panama Railroad Co., 237 N. Y. 287; People v. Hawkins, 157 N. Y. 1; New York State Loan & Trust Co. v. Helmer, 77 N. Y. 64; Kellogg v. Larkin, 3 Pinney [Wis.], 123; Matter of Harbeck, 161 N. Y. 211; Swiss Insurance Co. v. Miller, 267 U. S. 42; Mosle v. Bidwell, 130 Fed. Rep. 334.) The Legislature had constitutional authority to prohibit the voting of deposited stock, and the acceptance of further deposits. (U. S. v. Freight Assn., 166 U. S. 291; Johnston v. U. S., 17 Ct. of Claims, 157; Cox v. Hart, 260 U. S. 427; City of Rochester v. Rochester R. Co., 182 N. Y. 99; Brearley School v. Ward, 201 N. Y. 358; W. U. T. Co. v. L. & N. R. Co., 268 Fed. Rep. 4; 258 U. S. 13; Matter of Wentworth, 230 N. Y. 176; Metcalfe v. Union Trust Co., 181 N. Y. 39; City of Rochester v. Rochester R. Co., 182 N. Y. 99; Louisville & Nashville R. R. Co. v. Mottley, 219 U. S. 467; Douglas v. Kentucky, 168 U. S. 488; Knox v. Lee, 12 Wall. 457.)

      John Godfrey Saxe and Louis S. Posner for intervening certificate holders, appellants.
    The essence of a voting trust, and the provisions of the Bank of America trust, conflict with the provisions of the Banking Law and the statutory public policy pursuant to which they were enacted. (Knickerbocker Invest. Co. v. Voorhees, 100 App. Div. 414; Manson v. Curtis, 223 N. Y. 313; Nassau Bank v. Jones, 95 N. Y. 115; Noble State Bank v. Haskell, 219 U. S. 104; Dillingham v. McLaughlin, 264 U. S. 370; Schley v. Andrews, 225 N. Y. 110; Kavanaugh v. Commonwealth Trust Co., 223 N. Y. 103; General Corporation Law, § 321; Gause v. Boldt, 49 Misc. Rep. 340; 115 App. Div. 897; 188 N. Y. 546; Van Tuyl v. Scharmann, 208 N. Y. 53; Matter of Bronson, 177 App. Div. 374; 221 N. Y. 661; Cheney v. Scharmann, 145 App. Div. 456.) The agreement cumulatively violates public policy as expressed in specific provisions of law. (Eastham v. New York State Telephone Co., 86 App. Div. 562; Torbett v. Eaton, 49 Hun, 209; 113 N. Y. 623; Schley v. Andrews, 225 N. Y. 110; Bridgers v. First Nat. Bank, 152 N. C. 293; Matter of Glen Salt Co., 17 App. Div. 234; 153 N. Y. 688; People ex rel. Miller v. Cummings, 72 N. Y. 433; Manson v. Curtis, 223 N. Y. 313; Nat. Liberty Ins. Co. v. Bank of America, 126 Misc. Rep. 759; Kavanaugh v. Commonwealth Trust Co., 223 N. Y. 103; Kavanaugh v. Gould, 147 App. Div. 281; Van Tuyl v. Scharmann, 208 N. Y. 53.) The amendment of 1925 was an effective prohibition of all voting under voting trust agreements of bank stock, whenever formed. (People v. Railroad, 194 N. Y. 130; Tompkins v. Hunter, 149 N. Y. 117; Bank v. Collector, 3 Wall. 495; Ex parte Crow Dog, 109 U. S. 556; Morgan v. Hedstrom, 164 N. Y. 224; Woollcott v. Shubert, 217 N. Y. 212; American Bank v. Goss, 236 N. Y. 448; Croveno v. Atlantic Ave. R. R. Co., 150 N. Y. 225.) The amendment of March 12, 1925, was a valid prohibition against the further voting of bank stock by voting trustees; it did not interfere with any property right of vote but only with the manner or method of expressing the vote. (People v. O’Brien, 111 N. Y. 1; Lord v. Equitable Life Assur. Soc., 194 N. Y. 212; Grobe v. Erie County Mut. Ins. Co., 39 App. Div. 183; 169 N. Y. 613; Caminetti v. United States, 242 U. S. 470; Woollcott v. Shubert, 217 N. Y. 212; Lapina v. Williams, 232 U. S. 79; Duplex Printing Press Co. v. Deering, 254 U. S. 443; Aldridge v. Williams, 3 How. [U. S.] 9; U. S. v. Trans-Missouri Freight Association, 166 U. S. 290; Omaha Co. v. Interstate Commerce Commission, 230 U. S. 324.)

      Albert Ottinger, Attorney-General (C. T. Dawes of counsel), for State of New York.
    No action of the present Superintendent of Banks or his predecessors discloses a policy of the State in favor of voting trusts for bank shares. (Iselin v. United States, 270 U. S. 245.) Section 50 of the Stock Corporation Law never was intended for banks. (Holy Trinity Church v. United States, 143 U. S. 457; Matter of Meyer, 209 N. Y. 386; Murray v. N. Y. C. R. R. Co., 4 Keyes, 274; People ex rel. Wood v. Lacombe, 99 N. Y. 43; Murray v. Gibson, 15 How. [U. S.] 421; State ex rel. Heiden v. Ryan, 99 Wis. 123.) The amendment of 1925 was a clarifying legislative declaration added to the statute because banks were misreading section 50 and starting to use the voting trust. (People v. Davenport, 91 N. Y. 574; People ex rel. Mut. Life Ins. Co. of N. Y. v. Bd. of Supervisors, 16 N. Y. 431.)

      Charles E. Hughes, Henry Root Stern, Bertram F. Ship-man and S. S. Jennings, Jr., for respondents.
    The trust agreement was valid at the time it was entered into on December 31, 1924. (2 Machen on Modern Law of Corporations, §§ 1269, 1270; 3 Cook on Corporations [8th ed.], § 622; 3 Fletcher on Corporations, §§ 1705-1707; 10 Harvard Law Review, 428, “ Corporate Voting & Public Policy; ” Brightman v. Bates, 175 Mass. 105; Bowditch v. Jackson Company, 76 N. H. 351; Thompson-Starrett Company v. Ellis Granite Company, 86 Vt. 282; Smith v. San Francisco & North Pacific Railway, 115 Cal. 584; Clark v. Foster, 98 Wash. 241; Mackin v. Nicollet Hotel, Inc., 10 Fed. Rep. [2d] 375; United States v. Chemical Foundation, 272 U. S. 1; Cone v. Russell, 48 N. J. Eq. 208; Frost v. Carse, 91 N. J. Eq. 124; Mobile & Ohio Railroad v. Nicholas, 98 Ala. 92; Ecker v. Kentucky Refining Co., 144 Ky. 264; Bullivant v. First Nat. Bank of Boston, 246 Mass. 324; Hellier v. Achorn, 255 Mass. 273; Byington v. Piazza, 131 App. Div. 895.) At the time the trust agreement was entered into there was no public policy against voting trusts of bank shares. (Skinner v. Home Bank of Brooklyn, 190 App. Div. 187; United States v. Freight Assn., 166 U. S. 290; Hollis v. Drew Theological Seminary, 95 N. Y. 166; Baltimore & Ohio, etc., Ry. Co. v. Voigt, 176 U. S. 498; Hirshfeld v. Bopp, 145 N. Y. 84; Van Tuyl v. Scharmann, 208 N. Y. 53.) Section 26 of the General Corporation Law evidences no public policy against the trust agreement. (Cushing on Voting Trusts [ed. 1927], 162; Boyer v. Nesbitt, 227 Penn. St. 398; Ervin v. Phila. & Reading R. Co., 7 Railway & Corp. L. J. 87; Carnegie Trust Co. v. Security Life Ins. Co., 111 Va. 1; Brightman v. Bates, 175 Mass. 105; Lord v. Equitable Life Assur. Soc., 194 N. Y. 212; United States v. Moore, 95 U. S. 760; Matter of Washington St. Asylum & Park R. R. Co., 115 N. Y. 442.) The trust agreement was in no wise affected by the 1925 amendment of section 50 of the Stock Corporation Law. (Matter of Miller, 110 N. Y. 216; People ex rel. Fleming v. Dalton, 158 N. Y. 175; Woollcott v. Shubert, 217 N. Y. 212; Matter of Meng, 188 App. Div. 69; Coutant v. People, 11 Wend. 512; United States v. St. Paul, M. & M. Ry. Co., 247 U. S. 310; Duplex Co. v. Deering, 254 U. S. 443; United States v. Thind, 261 U. S. 204; Hecht v. Malley, 265 U. S. 144; Ex parte Farley, 40 Fed. Rep. 66; Tompers v. Bank of America, 217 App. Div. 698; N. Y. & Oswego M. R. R. Co. v. Van Horn, 57 N. Y. 473; Standard C. & M. Corp. v. Waugh C. Corp., 231 N. Y. 51; People v. Supervisors, etc., 43 N. Y. 130; People ex rel. P. S. L. Assurance Soc. v. Miller, 179 N. Y. 227; Germania Savings Bank v. Suspension Bridge, 159 N. Y. 362.) The amendment of March 12, 1925, would be unconstitutional if applied to this agreement. It would impair contract obligations and deprive of property without due process of law. (People v. O’Brien, 111 N. Y. 1; Mayor, etc., v. Twenty-third St. R. Co., 113 N. Y. 311; Boswell v. Security Mut. Life Ins. Co., 193 N. Y. 465; Lord v. Equitable Life Assur. Soc., 194 N. Y. 212; N. Y. C. & H. R. R. R. Co.
      v. Williams, 199 N. Y. 108; Stearns v. Minnesota, 179 U. S. 223; Shields v. Ohio, 95 U. S. 319; Sinking-Fund Cases, 99 U. S. 700; Chicago, Milwaukee & St. Paul R. R. Co. v. Wisconsin, 238 U. S. 491; Sturges v. Crowninshield, 4 Wheat. 122.)
   Pound, J.

This is a proceeding to review the election of directors of the respondent, The Bank of America, a domestic banking corporation, held January 11, 1927. The question is as to the right of trustees under a voting trust agreement entered into prior to March 12, 1925, to vote the stock held by them at such election.

A voting trust agreement confers on voting trustees the right to vote on stock transferred to them for such purpose, irrevocably for a definite period. Stock transferred under such an agreement is canceled and trust certificates are issued by the trustees to the stockholders. The right to vote is thereby separated from the beneficial ownership of the stock. The courts below have upheld the validity of the agreement in question.

Voting trust agreements whereby the voting power of the stock is separated from its beneficial ownership have been the subject of discussion and wide differences of opinion. They have, in some jurisdictions in the absence of statutory restrictions, been held within the policy of our law and lawful so long as their object is to carry out a particular policy to promote the best interests of all the stockholders or the corporation. (Brightman v. Bates, 175 Mass. 105; Carnagie Trust Co. v. Security Life Ins. Co., 111 Va. 1; Thompson-Starrett Co. v. Ellis Granite Co., 86 Vt. 282.) In other jurisdictions they have been held void on the ground that the voting power is inherently attached to and inseparable from the real ownership of each share and can only be delegated by proxy with power of revocation; that all agreements and devices by which stockholders surrender their voting powers are invalid as against a sound public policy. (Bostwick v. Chapman, 60 Conn. 553; Harvey v. Linville Imp. Co., 118 N. C. 693. See Cushing on “ Voting Trusts;” Wormser on “ The Disregard of the Corporate Fiction,” p. 142, Smith on The Validity of Voting Trusts,” 22 Col. Law Review, 627.)

In New York voting trusts do not stand or fall on common-law theories of public policy. They are recognized and regulated by statute. Whether they would be valid at common law in the absence of a statute defining and regulating them is immaterial. Public policy in regard thereto is defined by the Legislature. Between the conflicting rules of the common law, a choice has been made. No voting trust not within the terms of the statute is legal and any such trust, so long as its purpose is legitimate, coming within its terms is legal. The test of validity is the rule of the statute. When the field was entered by the Legislature it was fully occupied' and no place was left for other voting trusts.

Section 50 of the Stock Corporation Law (Cons. Laws, ch. 59), prior to the amendment ofo1925 (L. 1925, ch. 120), read as follows:

Voting trust agreements. A stockholder, by agreement in writing, may transfer his stock to a voting trustee or trustees for the purpose of conferring the right to vote thereon for a period not exceeding ten years upon the terms and conditions therein stated. Every other stockholder may transfer his stock to the same trustee or trustees and thereupon shall be a party to such agreement. The certificates of stock so transferred shall be surrendered and canceled and new certificates therefor issued to such trustee or trustees in which it shall appear that they are issued pursuant to such agreement, and in the entry of such ownership in the proper books of such corporation that fact shall also be noted, and thereupon such trustee or trustees may vote upon the stock so transferred during the term of such agreement. A duplicate of every such agreement shall be filed in the office of the corporation and at all times during business hours be open to inspection by any stockholder or his attorney.”

We are unable to apply any rule of statutory construction which would exclude banking corporations from the operation of the section. Banking Law (Cons. Laws, ch. 2, § 120) provides: “ The rights, powers and duties of stockholders of banks shall be as prescribed in the general corporation law and the stock corporation law.” One of the rights and powers of a stockholder in a bank was the right and power to transfer his stock to a voting trustee or trustees for the purpose of conveying the right to vote thereon for a period of not exceeding ten years. One of the rights and powers of every other stockholder was the right and power to become a party to any such agreement.

Voting trusts are, therefore, legal in New York only when organized and existing under the statute for proper ends. Whatever the rule of the common law may have been, when the Legislature, the source of corporate power and authority, acts, voting trusts become legal when organized in conformity with the statute and not otherwise. No stock corporations were excepted prior to the amendment of 1925. Public policy, although an aid to the interpretation of ambiguous statutes, is powerless to create an exception when the language is plain and all-comprehensive. However cogent the reasons may have been for not applying the voting trust statute to banks by reason of their peculiar relations with the public, it is enough to say that the Legislature did not recognize such reasons as controlling. The trust agreement herein considered was, therefore, valid at the time it was entered into, viz., December 31, 1924.

On March 12, 1925, a new public policy was declared by the Legislature. The words “ this section shall not apply to a banking corporation ” were added to section 50 (L. 1925, ch. 120). The only question here presented is as to the effect of this amendment as to existing valid voting trust agreements made by the stockholders of banking corporations. The amendatory statute is not a mere repealing statute. It creates a specific exception to the existing law. Section 93 of the General Construction Law (Cons. Laws, ch. 22) provides:

§ 93. Effect of repealing statute upon existing rights. The repeal of a statute or part thereof shall not affect or impair any act done, offense committed or right accruing, accrued or acquired, or liability, penalty, forfeiture or punishment incurred prior to the time such repeal takes effect, but the same may be enjoyed, asserted, enforced, prosecuted or inflicted, as fully and to the same extent as if such repeal had not been effected.” The general object and the context of the language used indicate that the new law operates on existing rights by direct action as well as repeal. Section 110 of the General Construction Law provides:

“ § 110. Application of chapter. This chapter is applicable to every statute unless its general object, or the context of the language construed, or other provisions of law indicate that a different meaning or application was intended from that required to be given by this chapter.”

It follows that no existing rights of stockholders or voting trustees are saved by force of the provisions of section 93 of the General Construction Law, relative to the effect of a repealing statute upon rights accrued prior to the repeal of a statute.

Without the application of section 50 of the Stock Corporation Law to banking corporations, the voting rights and powers of stockholders are defined by the General Corporation Law (Cons. Laws ch. 23) and the Stock Corporation Law. The statutes relative to the question must, therefore, be considered.

A corporation organized under the Banking Law may not issue non-voting shares of stock. (Stock Corporation Law, § 11.)

“ Unless otherwise provided in the certificate of incorporation or other certificate filed pursuant to law, every stockholder of record of a stock corporation shall be entitled at every meeting of the corporation to one vote for every share of stock standing in his name on the books of the corporation.” (Gen. Corp. Law, § 23; Stock Corporation Law, § 47.) Stockholders may vote by proxy but every proxy of a stock corporation is revocable at the pleasure of the person executing it, and no officer, clerk, teller or bookkeeper of a corporation formed under or subject to the Banking Law shall act as proxy for any stockholder at any meeting of the corporation. (Gen. Corp. Law, § 26.)

“ The stockholders of every bank shall hold an annual meeting for the election of directors on the second Tuesday in January or within ten days thereafter.” (Banking Law, § 122.)

When the voting trust privilege is withdrawn from the stockholders of a banking corporation, it becomes the duty of the stockholders to hold an annual meeting at which they alone are empowered to vote, in person and by proxy, for the election of directors. After March 12, 1925, the application of section 50 in its original form ceased. No stockholder could lawfully transfer his stock to a voting trustee or trustees for the purpose of conferring the right to vote thereon, even though the voting trustees were already acting as such for any other stockholder or stockholders of the bank. He could not so transfer his stock for the reason that no legislative authority existed for such transfer. The right and power so to transfer his stock rested in the provisions of section 50, and when the section ceased to be applicable that right and power became non-existent. No legislative purpose to preserve existing trust agreements in their entirety is evidenced by the language of the statute. It took them as it found them. If it left them intact as they were, it went no further. After March 12, 1925, no statute permitted a stockholder to transfer his shares to a voting trust. The right of stockholders to transfer their shares to the voting trustees was an “ inchoate personal privileges to which in a legal sense one has no indefeasible vested claim.” (Matter of Wentworth, 230 N. Y. 176, 187.)

The effect of the amendment on the rights of trustees to vote on the stock which had been transferred to them when the amendment took effect must next be considered. One of the elements of, a legal voting trust agreement is the privilege of any stockholder to become a party to such agreement. The reason is obvious. Such agreements would be contrary to a sound public policy if their purpose or result was to array voting trust stockholders against non-voting trust stockholders, so that the latter are not privileged to join forces with the former if they choose to do so. At least the Legislature has provided that it is essential to the validity of a voting trust agreement that any stockholder may become a party thereto and has thus declared the public policy which would uphold voting trusts otherwise unauthorized.

We may, for the moment, construe the statute as prospective only in effect and operation. What is the result? A principal purpose of such agreement is to obtain the control of the bank by the deposit thereunder of at least a majority of the stock of the bank, but this purpose had not yet been accomplished. When this purpose is thwarted; when a stockholder is prohibited from becoming a party to the agreement, the voting trust agreement has failed in one of its essential purposes. It is no longer an instrument of inchoate complete control. When the right of stockholders outside the charmed circle to avail themselves of its privileges ceases, its character is changed. It becomes an instrument to unite those who have availed themselves ’ of its privileges and exclude all others instead of an instrument aiming at ultimate control of a majority of the stock. To uphold such a trust as to the stock transferred to it prior to the amendment would be to legalize in part existing voting trusts which would otherwise be illegal under the old statute and to prohibit all others. Whatever the legislative purpose may have been, it cannot have contemplated such an incongruous result. Its purpose is to be found in its language rather than in the ideas expressed in debate by the introducer of the bill. (Woollcott v. Shubert, 217 N. Y. 212, 221, 222.) Essentially the operation of the amendment becomes retrospective. The voting trust agreement must exist in its entirety or it ceases to be valid. It cannot exist in its entirety. It is, therefore, invalid in its entirety.

Constitutional questions seem simple. The separation of the voting power from the beneficial ownership of stock of banking corporations is a matter for regulation by the police power of the State. Banking is a business affected with a public interest. (Noble State Bank v. Haskell, 219 U. S. 104.) Its nature makes it peculiarly an object of legislative solicitude in order that depositors and stockholders may be protected and proper management by those responsible therefor secured according to legislative theories of public welfare. The voting trust exists by virtue of statute and is subject to legislative approval for its continued existence. The amendment of 1925 is a declaration that the public welfare requires that stockholders in banks shall vote their own shares of stock in person or by proxy and shall no longer separate the voting power from the beneficial ownership of their shares. New York says in substance what some other States have held generally in the absence of statutory regulations, i. e., that a sound public policy requires that the power to vote shares in a banking corporation shall be inseparable from the real ownership of each share and can be delegated only by proxy with power of revocation. The Legislature has decreed that it is to the public advantage to withhold from the stockholders of a banking corporation the privilege of membership in voting trusts. The purpose of the Legislature to correct an evil, real or imagined, is clearly revealed by the recommendation of the Superintendent of Banks to the Legislature. Whether voting trust agreements as applied to banks are a great evil as tending to entrench existing officers and their policies beyond the control of the stockholders, or a great benefit as tending to stabilize sound administration, is not for us to say. It is enough that they have an evil aspect to the legislative eye. Regulatory laws, reasonable in character, designed to accomplish a legitimate public purpose, and enacted to promote the public welfare apply even to private contract rights when the public policy is appropriately declared and defined and the two conflict. (People ex rel. Durham R. Corp. v. LaFetra, 230 N. Y. 429, 448.) Moreover, as the amendment merely regulates the manner in which the stock of a banking corporation shall be voted, and does not affect the property of the corporation or its objects, it comes within the reserved power to amend corporate charters so as to regulate methods of administration and details of procedure in the interest of the public and of all concerned. (Lord v. Equitable Life Assur. Society, 194 N. Y. 212.)

Nor can it be said that the trustees have acquired any property interest under the voting trust agreement of which they are deprived by the statute. The trustees exercise certain voting powers, not for their own benefit, but for the benefit of the stockholders and the corporation. They have no beneficial interest in the stock and thus their right or interest lacks those elements of ownership which are so associated in our minds with the idea of property as to be beyond the legislative power or control. (Metcalfe v. Union Trust Co., 181 N. Y. 39, 44.)

Whatever line of attack on legislative power is taken, the assault is turned back by numerous decisions on the subject.

The orders of the Special Term and the Appellate Division should be reversed and petitioner’s motion for a new election granted, with costs in all courts and ten dollars costs of motion.

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

Ordered accordingly.


author: Per Curiam.

text:
    In the Matter of the Claim of William Pierce, Appellant, against William Bowen et al., Respondents. The State Industrial Board, Appellant.
    Workmen’s compensation — master and servant — driver of racehorses, at fixed price per race, but who is subject to owner’s directions as to methods of driving and handling horses, a servant — award for injury received in race improperly reversed.
    One who contracts to drive an owner’s horses in a certain number of races, at a stipulated price á race, but who, in respect to the methods to be pursued in making the races and handling the horses, is subject to the orders of the owner, is a servant and the owner is his master. It is immaterial that he is to receive a lump sum price for each race he drives. An award, under the Workmen’s Compensation Law, for injuries received in a race was, therefore, improperly reversed.

      Matter o/ Pierce v. Bowen, 221 App. Div. 628, reversed.
    (Argued January 9, 1928;
    decided February 14, 1928.)
    Appeal from an order of the Appellate Division of the Supreme Court in the third judicial department, entered November 29, 1927, reversing an award of the State Industrial Board, made under the Workmen’s Compensation Law and dismissing the claim.

      Albert Ottinger, Attorney-General (E. C. Aiken of counsel), for appellants.
    The relationship of employer and employee existed between Mr. Pierce and Mr. Bowen at the time the accident happened. (Fancher v. Boston Excelsior Co., 235 N. Y. 272; Liberatore v. Friedman, 224 N. Y. 710; Peake v. Lakin, 221 N. Y. 490; Claremont v. De Coss, 220 N. Y. 671; Woods v. Tupper Lake Chemical Co., 221 N. Y. 660.)

      Edward T. Wither and David B. Sugarman for respondents.
    The relation herein established falls squarely within the definition of “ independent contractor.” (Beach v. Velzey, 238 N. Y. 100; Hexamer v. Webb, 101 N. Y. 377; Litts v. Risley Lumber Co., 224 N. Y. 321.)
   Per Curiam.

The claimant contracted with the respondent to drive the latter’s horses in four races at a county fair at the prevailing rate of fifteen dollars a race. In the first race in which the claimant drove for the respondent he received an accidental injury. In respect to the methods to be pursued in making the race and handling the horse to be driven the claimant was subjected to the orders of the respondent. He was directed by the respondent to drive the horse with the rein not too tightly drawn. He was directed to drive on the outer circumference of the track in order to avoid frightening the horse. These instructions and many others which might have been given, it was claimant’s duty to honor under the penalty of a discharge for disobedience. Consequently the claimant was a servant and the respondent was his master. (Hexamer v. Webb, 101 N. Y. 377; Matter of Beach v. Velzy, 238 N. Y. 100.) It is immaterial that the claimant was to receive a lump sum price for each race in which he drove. (Matter of Fancher v. Boston Excelsior Co., 235 N. Y. 272.)

The order of the Appellate Division should be reversed, and the award of the State Industrial Board confirmed, with costs in the Appellate Division and in this court.

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

Ordered accordingly.


text:
    Midurban Realty Corporation, Respondent, v. F. Dee and L. Realty Corporation, Appellant.
    Vendor and purchaser — real property — title — decedent’s estate — lion of transfer tax on real property of decedent— title unmarketable until tax is paid — contract to convey real property • — ■ transfer tax unfixed on date for closing — lien of purchaser for amount paid on account of contract.
    1. Real property belonging to the estate of a decedent not specifically devised nor shown to have been sold for the purpose of administering the estate or of raising funds to pay the transfer tax is subject to the lien of such tax (Tax Law, § 222; Cons. Laws, ch. 60) and as long as the tax remains unpaid the title thereto is unmarketable. (Smith v. Browning, 225 N. Y. 358; Warner v. Doscher, 241 N. Y. 605, distinguished and explained.)
    2. Where, therefore, defendant to whom such property had been conveyed, contracted to sell it to plaintiff, the terms of the agreement providing that defendant would convey a marketable title and that all sums paid by plaintiff on account of the contract were to become liens on the premises, and on the date of closing the tax was unfixed, though more than enough to pay it had been deposited by the executors, under the agreement between the parties the sum paid by plaintiff on account of the contract became a lien on the premises.

      Midurban Realty Cory. v. F. D. & L. Realty Cory., 220 App. Div. 814, affirmed.
    (Submitted December 15, 1927;
    decided February 14, 1928.)
    Appeal from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered July 12, 1927, affirming a judgment in favor of plaintiff entered upon a decision of the court on trial at Special Term.

      Alexander Pfeiffer, Louis H. Samuels and Benjamin Weiss for appellant.
    The transfer tax upon the estate of Emily A. Watson was not a hen upon defendant’s property and not an objection to the taking of title.
      (Brown v. Lawrence Park Realty Co., 133 App. Div. 753; Smith v. Browning, 225 N. Y. 358; Matter of Meyer, 209 N. Y. 386; Dodge v. Pond, 23 N. Y. 69; Powers v. Cassidy, 79 N. Y. 602; Lent v. Howard, 89 N. Y. 169; Nasha Holding Corp. v. Ridge Building Corp., 221 App. Div. 238.)

      Jay Leo Rothschild and Louis Rivkin for respondent.
    An unfixed transfer tax is an incumbrance justifying the rejection of title on the ground that it is unmarketable, irrespective of what may be the purpose of the sale. (Warner v. Doscher, 213 App. Div. 117; 241 N. Y. 605; Smith v. Browning, 225 N. Y. 358; Personeni v. Goodale, 199 N. Y. 323; Matter of City of Rochester, 110 N. Y. 159; Matter of Gantert, 136 N. Y. 106; Clift v. Moses, 116 N. Y. 144; Matter of Bingham, 127 N. Y. 296; Cunningham v. Parker, 146 N. Y. 29.)
   O’Brien, J.

The parties entered into a conti act for the sale of real property known as No. 306 Fifth avenue in New York city. The terms of the agreement provided that defendant would convey a marketable title and that all sums paid by plaintiff on account of the contract were to become liens on the premises. When the contract was signed, plaintiff made a payment of $5,000, but later refused to take title and demanded the return of its deposit. At the time appointed for completion of the sale, an unfixed transfer tax on the estate of Emily A. Watson, a former owner, constituted, as urged by plaintiff, a lien which rendered the property unmarketable. Judgment has been awarded in favor of plaintiff declaring the sum of $5,000 paid by it a lien upon the premises.

The estate of Miss Watson, who died February 1, 1924, amounted to more than twelve million dollars of which only two hundred and fifty thousand dollars was invested in realty. About ten and a half millions was bequeathed in « legacies. The property at 306 Fifth avenue was appraised at $200,000, and, as part of the residuary estate, was devised in trust to the United States Trust Company as trustee. It was conveyed on April 7, 1925, by the executors, upon whom the will conferred that power, to 712 Holding Corporation. This conveyance, was valid. (Crittenden v. Fairchild, 41 N. Y. 289.) On the same day the property was conveyed by that corporation to defendant. The date for closing of title by the parties at bar had been appointed as June 30, 1925. At that time no transfer tax on the Watson estate had been fixed, but on July 28, 1924, in anticipation, $728,223.81 had been deposited by the executors. On July 1, 1925, the surrogate made an order assessing the tax and on December 11, 1925, made another reducing it as originally assessed. The second order finally fixed the tax at $722,274.79, and on January 29, 1926, the State refunded $5,949.02, the excess deposited on July 28,1924, in anticipation of the assessment. The result is that on June- 30, 1925, the date of closing, although the tax was then unfixed, more than enough to pay it had been deposited. The parties could not, however, know on that date whether the tax as finally fixed would exceed the deposit. Pursuant to section 222 .of the Tax Law (Cons. Laws, ch. 60), the tax was due and payable as of the death of Miss Watson February 1, 1924. (Matter of Penfold, 216 N. Y. 163, 167.)

Section 224 of the Tax Law enacts that “ Every such tax shall be and remain a lien upon the property transferred until paid,” and makes* executors, administrators and trustees personally liable for the tax until its payment. The same section authorizes such representatives to sell property to enable them to pay the transfer tax. This provision obviously has no application here, because no evidence indicates that the sale of 306 Fifth avenue was effected for any such purpose. Section 224 includes additional directions to executors, administrators and trustees in relation to their duties respecting delivery of specific legacies and payment of the tax on such transfer. These directions do not apply. No real property, except the homestead at White Plains, was specifically devised nor was any legacy charged upon or payable out of real property.

Smith v. Browning (225 N. Y. 358), cited by both parties, defines rules to control the ascertainment of a tax due upon the transfer of realty specifically devised and holds that the lien attaching to other property bequeathed and devised to the same individual, some of which was in money and some in property other than money, does not attach to the realty specifically devised. It decides that a tax accrues upon the appraised value of each separate interest into which the estate is divided and that a lien is imposed upon such separate interest. It does not decide that realty specifically devised is free from the lien of a tax. It holds the contrary. In Warner v. Doscher (241 N. Y. 605), also cited by both parties, the trial court disposed of the case upon the theory that existing tenancies constituted incumbrances and attached little importance to the fact that a transfer tax had remained unpaid.- The Appellate Division affirmed that judgment upon the ground of the existence of tenancies. It placed its affirmance upon the additional ground that the unpaid transfer tax constitutes a lien. Our affirmance can be deemed to apply only to the incumbrance of the existing tenancies, the point of law concerning which the trial court and the Appéllate Division were agreed. Nothing else was necessary for our decision and from our affirmance without opinion nothing else is necessarily inferable.

No. 306 Fifth avenue was not specifically devised. It formed part of the residuary estate. As such, it was part of the property transferred to the United States Trust Company. It was, therefore, subject to the lien of the tax provided for by the first sentence in section 224 of the Tax Law. Nothing would be gained by discussing the state of the law, if this property had been specifically devised or was shown to have been sold for the purpose of administering the estate or of raising funds to pay the transfer tax. It was “ property transferred ” and, therefore, a transfer tax lien for some amount attached. As long as the tax remained unpaid, the realty was not marketable and under the agreement between the parties the sum paid by plaintiff on account of the contract became a lien on the premises.

The judgment should be affirmed, with costs. Cardozo, Ch. J., Pound, Crane, Andrews, Lehman and Kellogg, JJ., concur.

Judgment affirmed, etc.