author: Fuld, J.

text:
    Thomas J. Brennan, as President of Lackawanna Lodge No. 715, Brotherhood of Railroad Trainmen, et al., Appellants and Respondents, v. Delaware, Lackawanna & Western Railroad Company, Respondent, and George C. Slade, as General Chairman of General Adjustment Committee of Said Railroad of Switchmen’s Union of North America, et al., Respondents and Appellants, et al., Defendants.
    Argued November 27, 1951;
    decided January 24, 1952.

      Thomas J. McKenna for plaintiffs, appellants and respondents.
    1. The Appellate Division erred in dismissing plaintiffs’ complaint on the authority of Slocum v. Delaware, L. & W. R. Co. (339 U. S. 239). (Elgin, J. & E. R. Co. v. Burley, 325 U. S. 711; Order of Conductors v. Pitney, 326 U. S. 561; Southern Pac. Co. v. Joint Council Dining Car Employees, 165 F. 2d 26, 333 U. S. 838; Order of R. R. Tel. v. New Orleans, Texas & Mex. Ry. Co., 156 F. 2d 1, 329 U. S. 758, 829; Hunter v. Atchison, T. & S. F. Ry. Co., 171 F. 2d 594, 337 U. S. 916; Shipley v. Pittsburgh & L. E. R. R. Co., 83 F. Supp. 722; Missouri-Kansas-Texas R. Co. v. Randolph, 182 F. 2d 996; Terminal Assn. v. Trainmen, 318 U. S. 1; Switchmen’s Union v. Board, 320 U. S. 297; General Committee v. M.-K.-T. R. Co., 320 U. S. 323). II. If the Appellate Division’s reversal of the judgment was predicated on a finding that the Referee erred when he held that plaintiffs’ 1926 contract was abrogated by defendant carrier’s letter of August 8, 1935, then such a reversal was proper in view of the answers, the undisputed proof and applicable law controlling the interpretation or understanding of the letter itself, and the legal conclusiveness of prior findings to the contrary by jurisdictionally empowered tribunals of the Railway Labor Act. (Paige v. Willet, 38 N. Y. 28; Milbank v. Jones, 127 N. Y. 370; Wood v. Proudman, 122 App. Div. 826; Willey v. Cameron, Michel & Co., 217 App. Div. 651; Matter of Burmester v. De Lucia, 263 N. Y. 315; Brearton v. De Witt, 252 N. Y. 495; Railway Express Agency v. Order of R. Telegraphers, 137 F. 2d 46, 321 U. S. 342; Knickerbocker Trust Co. v. O’Rourke Eng. Constr. Co., 124 App. Div. 210, 196 N. Y. 509; Williams v. United States, 26 U. S. Ct. Cl. 132; Chicot County Dist. v. Bank, 308 U. S. 371; Case v. Beauregard, 101 U. S. 688.) III. Plaintiffs’ rights under the “ Due Process ” clause of section 6 of article I of the New York Constitution were violated as were their like rights under section 1 of the Fourteenth Amendment of the United States Constitution. (Gilbert v. Ackerman, 159 N. Y. 118; Busch Jewelry Co. v. United Retail Employees’ Union, 168 Misc. 224; Bradley v. Lightcap [No. 2], 195 U. S. 24; Bradley v. Lightcap, 195 U. S. 1; Southern Railway Co. v. Carson, 194 U. S. 136; Westervelt v. Gregg, 12 N. Y. 202; Bertholf v. O’Reilly, 74 N. Y. 509; Campbell v. Evans, 45 N. Y. 356; Rockwell v. Nearing, 44 Barb. 472, 35 N. Y. 302;
      People ex rel. MacDonald v. Leubischer, 34 App. Div. 577; Riverside Mills v. Menefee, 237 U. S. 189; Campbell v. Holt, 115 U. S. 620; Hurtado v. California, 110 U. S. 516; Matter of Davies, 168 N. Y. 89; Gilman v. Tucker, 128 N. Y. 190; Davidson v. New Orleans, 96 U. S. 97; Stuart v. Palmer, 74 N. Y. 183.) IV. The Appellate Division’s decision violated plaintiffs’ rights under article VI of the United States Constitution.

      Andrew B. Gilfillan and Harold C. Heiss for defendants, respondents and appellants.
    I. The trial court had jurisdiction of the subject matter of this action and of the counterclaim or cross complaint. (Slocum v. Delaware, L. & W. R. Co., 339 U. S. 239; Order of Conductors v. Pitney, 326 U. S. 561.) II. The cause of action contained in this defendant’s counterclaim or cross complaint is not barred by any of the affirmative defenses pleaded. The determinations of the Railroad Adjustment Board, or of the National Mediation Board, are not a bar to the Referee’s finding of abrogation of plaintiff’s contract. The pleadings do not preclude the finding of an abrogation of the contract by the letter of August 8, 1935. (41 Am. Jur., pp. 400-402; Civ. Prac. Act, § 42; Catholic Foreign Mission Soc. v. Oussani, 215 N. Y. 1.) III. The judgment of the Appellate Division should be reversed and the case remitted to the Appellate Division for determination of the questions of fact and law raised in that court.

      Hugh McM. Russ, Rowland L. Davis, Jr., and Robert H. Daley for respondent.
    I. The decisions of the United States Supreme Court in the cases of Slocum v. Delaware L. & W. R. Co. (339 U. S. 239) and Order of Conductors v. So. R. Co. (339 U. S. 255), to the effect that State courts are without jurisdiction to grant a declaratory judgment in an action involving a railroad company and one or more unions for contract interpretation, are controlling and decisive of this case. (Moore v. Illinois Central R. Co., 312 U. S. 630; Order of Conductors v. Pitney, 326 U. S. 561; Missouri-Kansas-Texas R. Co. v. Randolph, 182 F. 2d 996; New Orleans Public Belt Railroad Comm. v. Ward, 182 F. 2d 654; Hettenbaugh v. Airline Pilots Assn. International, 189 F. 2d 319; Kendall v. Pennsylvania R. Co., 94 F. Supp. 875; Michel v. Louisville & N. R. Co., 188 F. 2d 224; Hayes v. Union Pac. R. Co., 184 F. 2d 337; Rose v. Brotherhood of Railway & Steam

      ship Clerks, 181 F. 2d 944; Seaboard Air Line R. R. Co. v. Brotherhood of R. R. Trainmen, 181 F. 2d 599.) II. Since the issue presented here is solely a question of representation, and since the National Mediation Board has determined, after mediation, election and certification in 1935, that the Switch-men’s Union of North America is the proper union to represent the men on the “ 3:00 P. M. City Line Job ”, any action to review the mediation, election and certification is not justiciable. (Switchmen’s Union v. Board, 320 U. S. 297; General Committee v. M.-K.-T. R. Co., 320 U. S. 323; General Committee v. Sou. Pac. Co., 320 U. S. 338; Virginian Ry. v. Federation, 300 U. S. 515; Order of Railway Conductors v. National Mediation Board, 141 F. 2d 366; Elgin, J. & E. R. Co. v. Burley, 325 U. S. 711.) III. If, despite the decision of the United States Supreme Court in the Slocum case, this court should hold that there is jurisdiction, then the rights of both unions are clearly barred by the Statute of Limitations. (Washington Terminal Co. v. Boswell, 124 F. 2d 235, 319 U. S. 732.) IV. Since the Appellate Division’s reversal of the judgment was predicated solely upon its lack of jurisdiction under the decision in the Slocum ease, plaintiffs’ conjectures and speculations as to other possibilities with respect to the trial court’s holding of abrogation of the 1926 contract are academic. The answers did not preclude a finding of abrogation of the contract. (Sternstein v. Heit, 186 App. Div. 45; Auerbach v. Taub, 194 Misc. 86, 275 App. Div. 802; Milbank v. Jones, 127 N. Y. 370; Calvo v. Davies, 73 N. Y. 211; Clark, Code Pleading [2d ed.], p. 621; Civ. Prac. Act, § 109; Farmers’ Loan & Trust Co. v. Housatonic R. R. Co., 152 N. Y. 251; 4 Carmody on New York Practice, p. 3163.) V. Plaintiffs’ constitutional rights, either Federal or State, have not been violated.
   Fuld, J.

This suit concerns a controversy between rival railroad unions — in which defendant railroad is necessarily involved — as to which union is entitled to furnish employee-members to man certain railroad operations or “ runs ”, known collectively as the “ 3:00 P.M. City Line Job ” and the “ seventh day extra job ”, in the Buffalo district of defendant railroad company. The Brotherhood of Railroad Trainmen (hereafter referred to as plaintiff union) seeks an injunction and a declarátory judgment — an injunction to enjoin the railroad from assigning the city line job to the yardmen or switchmen belonging to the Switchmen’s Union (hereafter called defendant union) and a.declaration as to the respective rights of the two unions to employment on the various ‘ ‘ runs ’ ’ described in the contract. It is defendant railroad’s position that the courts lack jurisdiction of the controversy.

The Official Referee decided, on the strength of this court’s decision in Delaware, L. & W. R. R. Co. v. Slocum (299 N. Y. 496), that it had jurisdiction of the dispute and found in favor of defendant union as to the city line job and in favor of plaintiff union on the seventh day extra job. The Appellate Division, Fourth Department, unanimously reversed and dismissed the complaint, holding — on the authority of the United States Supreme Court’s decision in Slocum v. Delaware, L. & W. R. Co. (339 U. S. 239), which reversed our determination, supra — that the state courts lack jurisdiction of the controversy.

The dispute or, more precisely, its origin can be traced to 1920, when a wildcat strike of switchmen initiated a number of employment changes in the Buffalo district of defendant railroad. Defendant union, unable to control the strike in that area, surrendered its existing contract to the railroad which assigned that contract to plaintiff union, with the consequence that plaintiff thereafter represented both roadmen and yardmen in the Buffalo district. Plaintiff’s claim to the city line job is based on its 1926 contract with defendant railroad. That contract contained an “ appendix ”, wherein certain runs ” — which before 1920 had been operated by switchmen belonging to the Switchmen’s Union — were included in “ Road Service ” and manned by roadmen of plaintiff union. Neither side claims that the city line job was originally included in the 1926 appendix — although, defendant railroad acknowledges, plaintiff union could, at any time between 1920 and 1935, have required it to be included therein and manned by its roadmen. But plaintiff union maintains that in December, 1937, the “ type, character and nature of work ” on the city line job changed from yard and switching work to road service and that job should now be governed by the 1926 appendix denominating similar types of former yard work as “ Road Service ”.

Defendant union’s claim to the city line job and the seventh day extra job is founded upon the results of an election held in 1935 under the auspices of the National Mediation Board. At that election, held to determine whether defendant union should again represent yardmen in the Buffalo district, only yardmen, including the “ crew ” on the city line job, were allowed to vote. The election won, defendant union entered into its “ 1935 Memorandum ” agreement with the railroad. That Memorandum provided that that union would thereafter represent yardmen in the Buffalo district and that ‘‘ all work in that [yard] will be performed ” by them, and a letter from the railroad company to the chairmen of the two unions gave notice of “ the discontinuance of the existing contract between this company and [plaintiff union], insofar as it relates to yard men at Hoboken and Buffalo ”. Denying that the character of its operations has changed, defendant union presses the claim to the city line job by reason of the election, the 1935 Memorandum and the letter to which reference has just been made.

After the reinstatement of defendant union in 1935, both unions attempted to clarify the status of the city line job. In 1938, defendant union invoked the jurisdiction of the National Mediation Board in an effort to be designated representative of those employees included in the appendix of plaintiff union’s 1926 contract with the railroad. The Mediation Board dismissed the case, declaring that the Switchmen’s Union was not entitled to represent those employees because they had been excluded from the election which resulted in the certification of defendant union. No specific reference was made to the city line job.

In 1944, however, plaintiff filed a claim with the Bailroad Adjustment Board which, the parties concede, involves the same issues as are presented in the case before us. Based upon grievances of two of its trainmen members who sought yardworkers’ pay rates in connection with the city line job, the claim was “ dismissed ” by the Board. In essence, the Board’s decision directed the two unions to adjust the dispute between themselves. After noting that This Division of the Adjustment Board has jurisdiction over the dispute involved herein ”, the Board went on to declare that “ The question * * * involved should be adjusted by and between the interested organizations, i.e., Brotherhood of Railroad Trainmen, Order of Railway Conductors [now represented by plaintiff union] and Switchmen’s Union of North America, as it involves classification of service on run under what seem to this Division to be conflicting agreements and facts concerning the dispute.” The Award ” was that the “ Case [be] dismissed.”

Attempts on the part of the unions to adjust the question ” having proved futile, plaintiff union filed its present complaint in the Supreme Court. It is our view, as it was the Appellate Division’s, that the courts of this state lack jurisdiction to entertain the action.

The Railway Labor Act accords the Adjustment Board jurisdiction over “ disputes between an employee or group of employees and a carrier or carriers growing out of grievances or out of the interpretation or application of agreements concerning rates of pay, rules, or working conditions ” (Railway Labor Act, § 3, subd. [i]; U. S. Code, tit. 45, § 153, subd. [i]). And the Supreme Court of the United States has held that, where an interpretation of their respective agreements is needed to determine which of two unions is entitled to furnish employees for a particular job or jobs, the dispute is one envisaged by the Act and falls within the Board’s jurisdiction. (See, e.g., Slocum v. Delaware, L. & W. R. Co., supra, 339 U. S. 239; Order of Conductors v. Pitney, 326 U. S. 561.) In the Slocum case, for instance, it was a clerks’ union and a telegraphers’ union which claimed jobs covered by their respective agreements; in the Pitney case, trainmen and conductors relied upon agreements which covered identical jobs. And such is the case before us. The two unions dispute the status of the city line job, each claiming that its own members are entitled to work it. Both of their agreements with defendant railroad are concededly legal and valid. The ultimate question for determination is whether the jobs which each contract encompasses cover the work on that particular “ run ”. Assuredly, that involves the “ scope of [the] respective agreements ” (Slocum v. Delaware, L. & W. R. Co., supra, 339 U. S. 239, 240) and requires their “ interpretation ” and application ” to the situation in question (Railway Labor Act, § 3, subd. [i]). And, beyond that, we fail to see how, in any event, it may be said that the dispute is not one growing out of grievances * * * concerning rates of pay, rules, or working conditions ” (id).

Whatever authority the courts retain to determine the existence, validity or legality of contracts between railroads and their employees or the unions representing them (see, e.g., Hettenbaugh v. Airline Pilots Assn. International, 189 F. 2d 319, 320), the determination here sought is of an entirely different sort — going beyond such matters and involving much more. This is not, as plaintiff union suggests, a dispute concerning clear breaches of solemn clear contracts ” which require no “ interpretation ”, nor one involving mere indecision as to which of two agreements — insofar as the city line job is concerned— is in force and effect. And, significantly, the National Mediation Board, in connection with defendant union’s claim in 1938 in this very case, after declaring that it was without authority to change the specific classification of these [union] agreements ”, went on to say that, “ If any reclassification is to be made it will have to be done by changing the existing agreements in accordance with the provisions for their amendment or interpretation. ” “ Interpretation ”, of course, requires presentation to the Adjustment Board.

That the Adjustment Board has jurisdiction of the controversy may not, then, be doubted. The primary question here posed, however, is whether the parties — having once invoked the jurisdiction of the Board and having failed to “ adjust ” the controversy as suggested by that body — were privileged to initiate an action in the courts to have their respective rights defined and declared. It is entirely clear, of course, that the parties must in the first instance proceed before the Board. (See, e.g., Slocum v. Delaware, L. & W. R. Co., supra, 339 U. S. 239; Order of Conductors v. Pitney, supra, 326 U. S. 561.) Thus, in the Pitney case, the court wrote (p. 566): “ Not only has Congress thus designated an agency peculiarly competent to handle the basic question here involved, but as we have indicated in several recent cases in which we had occasion to discuss the history and purpose of the Railway Labor Act, it also intended to leave a minimum responsibility to the courts.” And the Slocum case is to the same effect. It involved a dispute in which a clerks’ union and a telegraphers’ union each maintained that certain jobs were covered exclusively by its own particular contract with the defendant railroad. The parties pursued their claims in the manner initially provided by the Bailway Labor Act — that is, by conferences among the respective representatives. When they failed to agree, the railroad, instead of proceeding before the Adjustment Board, commenced an action for declaratory judgment in the state court. Assuming jurisdiction of the controversy, the court decided it on the merits; its determination was affirmed both by the Appellate Division and by this court, but as indicated, the Supreme Court reversed, holding that the jurisdiction of the Adjustment Board was “exclusive” (339 U. S., at p. 244). Pointing to the Pitney case — 'Where it was held that the federal court should have refused to entertain a jurisdictional dispute involving a railroad and two unions — the Supreme Court declared in Slocum that the reasoning in Pitney “ equally supports a denial of power in any court — state as well as federal — to invade the jurisdiction conferred on the Adjustment Board by the Railway Labor Act ” (339 U. S., at p. 244). It was the court’s rationale that Congress had provided an administrative method of settling disputes before they reached “ acute stages ”; that the administrative officials comprising the Adjustment Board were better equipped than the courts to handle railroad employment problems; and that their decisions would provide a “ desirable degree of uniformity in the interpretation of agreements throughout the nation’s railway systems ” (pp. 242-243). Accordingly, concluded the court, “We hold that the jurisdiction of the Board to adjust grievances and disputes of the type here involved is exclusive ” (p. 244).

Since the type of controversy in the Slocum case is remarkably similar to that here involved, it follows that the Board’s jurisdiction of the present dispute is likewise “ exclusive.” We need not decide — as the Supreme Court declined to do in Slocum — where the parties would stand, insofar as rights of review are concerned, if the Board had made a determination on the merits or had refused to take action at all. The court’s remark that it was not “ called upon to decide any question concerning judicial proceedings to review board action or inaction ” (339 U. S., at p. 244, fn. 7), may leave open the question whether there is any such power of review and, if there is, its scope and its extent. But the court’s reservation of that question is not relevant here, since plaintiff is seeking, not a review of an administrative decision, but a trial of the facts de novo.

There is, of course, a difference between the Slocum case and the present one. Unlike the plaintiff in Slocum, the Brotherhood of Railroad Trainmen did first proceed before the Board, seeking redress in the courts only after the suggested adjustment efforts had failed. That did not justify the parties in foregoing further pursuit of their claims before the Board, in removing the controversy from the agency and litigating the controversy in the courts. In other words, the action taken by the Board did not render its jurisdiction one whit less exclusive. (Cf. New Orleans Public Belt Railroad Comn. v. Ward, 182 F. 2d 654, 656; Hayes v. Union Pac. R. Co., 184 F. 2d 337, 338; Hettenbaugh v. Airline Pilots Assn. International, supra, 189 F. 2d 319, 321.) In ruling that the courts had no jurisdiction, even after the Board’s jurisdiction had been invoked and it had taken some action, the Court of Appeals for the Fifth Circuit wrote in the Ward case (supra, 182 F. 2d 654, 656): It is true that in that case [the Slocum case] the suit was brought in the state court and before the Board had acted, instead of, as here, in the federal court and after it had acted, but the language and scope of the decision is conclusive authority for the view that we take, that the complaint does not present a justiciable declaratory judgment controversy.” And in the Hettenbaugh case, it was said: ‘ ‘ The Congress did not, by the Railway Labor Act, grant jurisdiction to the federal courts to afford relief for breaches of performance of collective bargaining agreements. Appropriate quasi-judicial tribunals have been established for that purpose. Slocum v. Delaware, L. & W. R. Co., 339 U. S. 239 * * *. It. is only when collective bargaining agreements are unlawfully entered into, or when the agreements themselves are unlawful in terms or effect, that federal courts may act ” (189 F. 2d, at p. 321).

Turning again to the case before us, all the Adjustment Board did was to dismiss plaintiff union’s case with a direction that the question should be adjusted ” between the interested unions, because it involved “ classification of service ” under conflicting agreements and facts ”. This was in no sense any adjudication, final or otherwise, of the merits of the controversy. What the parties wanted to know, and what they wanted decided, was which of the unions, under the agreements in question, was entitled to the 3:00 P.M. City Line Job. Instead of giving them an answer, the Board sent them back either to negotiate further in conferences between representatives or to seek arbitration. It recognized, of course, that it had jurisdiction of the controversy, and there is nothing to indicate that it did not contemplate ultimate settlement of the issue in accordance with the administrative procedures provided within the Railway Labor Act. If further conferences proved of no avail, and arbitration was not desired or pressed — for it could not be compelled (Railroad Labor Act, § 7; U. S. Code, tit. 45, § 157) — the dispute should have been resubmitted to the Adjustment Board, for it remained the ultimate and sole arbiter of the dispute. (Cf. Order of Railway Conductors and The Central Railroad Company of New Jersey, Award No. 14673, pp. 15-16.)

It may be urged that, upon such resubmission, the Board may still decline to decide the controversy, and that the Railway Labor Act provides neither for a review of the Board’s “ dismissal ” of the claim nor for a method to compel the Board to decide the “ merits ” of the controversy presented. Even if that be so, we suggest that that follows from the provisions of the federal statute, its scheme and its desigp. In enacting the statute, Congress determined that, if decisions are to be made upon basic questions of railroad-employee relations, they must be made, if at all, by the designated agency “ peculiarly competent ” to decide them; that, if disputes arise as to the meaning, application or scope of agreements between railroads and unions involving labor relations, they must be read and construed, in the light of usage, practice and custom, by the designated body most familiar with them. (See Slocum v. Delaware, L. & W. R. Co., supra, 339 U. S. 239, 244.) To attain the essential certainty and uniformity of decision and policy in the field, and to avoid a myriad of divergent and conflicting determinations by numberless courts and judges throughout the country, Congress found it necessary to vest exclusive jurisdiction in the Railroad Adjustment Board.

The judgment of the Appellate Division should be affirmed, with costs to the defendant Delaware, Lackawanna & Western Railroad Company.

Loughran, Ch. J., Lewis, Conway, Desmond, Dye and Froessel, JJ., concur.

Judgment affirmed. [See 303 N. Y. 907.]


source: Caselaw Access Project

author: Froessel, J.

license: Public Domain

text:
    In the Matter of the Application of the People of the State of New York, by George S. Van Schaick, as Superintendent of Insurance of the State of New York, for an Order to Take Possession of the Property of and Rehabilitate the Bond and Mortgage Guarantee Company. In the Matter of the Plan of Readjustment of the Rights of the Holders of Investments in a Mortgage Covering Premises Known as Half Moon Hotel, Coney Island, Brooklyn, Guaranteed by Bond and Mortgage Guarantee Company. (Guarantee No. 186,039.) Jack L. Alpert et al., Appellants and Respondents; Walter McMeekan, as Trustee, et al., Respondents and Appellants.
    Argued November 29, 1951;
    decided January 24, 1952.

      Leo E. Sherman, William I. Alpert and Abraham Alpert for appellants and respondents.
    The trusts created under the mortgage rehabilitation statutes were a part of the legislative program designed solely for the benefit of certificate holders as a class. Their protected rights are neither divisible nor separable. (Matter of Morgan, 277 N. Y. 203; Matter of New York, Tit. & Mtge. Co., 257 App. Div. 19, 281 N. Y. 829; Munson v. Syracuse, G. & C. R. R. Co., 103 N. Y. 58; Wendt v. Fischer, 243 N. Y. 439; Matter of Lawyers Westchester Mtge. & Tit. Co., 176 Misc. 435, 262 App. Div. 878, 288 N. Y. 40; Title Guar. & Trust Co. v. Mortgage Comm., 273 N. Y. 415; Matter of Lawyers Mtge. Co., 157 Misc. 813, 248 App. Div. 715, 272 N. Y. 554; Meinhard v. Salmon, 249 N. Y. 458; Globe Woolen Co. v. Utica Gas & Elec. Co., 224 N. Y. 483; Matter of Lawyers Westchester Mtge. & Tit. Co. [Herman], 253 App. Div. 895, 278 N. Y. 593; City Bank Farmers Trust Co. v. Cannon, 291 N. Y. 125.)

      Charles H. Tuttle and Lewis L. Fawcett for respondents and appellants.
    The holders of the purchased certificates owned both the legal and equitable title thereto, without fiduciary obligation to any other holder. They had an absolute right to sell. The certificates were not held by any one in trust, and were not a claim adverse to the trust res, which was the mortgaged property — the hotel. The purchases were not from the trustee or the objectants, but from offering brokers in the open market, and fully recorded in the firm’s name on the trustee’s transfer books. Neither the trust estate nor the present certificate holders suffered any damage. (Fischer v. Guaranty Trust Co., 259 App. Div. 176, 285 N. Y. 679; Donnelly v. Consolidated Inv. Trust, 99 F. 2d 185; Victor v. Hillebrecht, 405 Ill. 264, 339 U. S. 980; Brown v. Cooper, 62 Tenn. 153; American Bank & Trust Co. v. Lebanon Bank & Trust Co., 28 Tenn. App. 618; Anderson v. Fry, 123 App. Div. 46, 194 N. Y. 515; Hooker v. Midland Steel Co., 215 Ill. 444; Bawden v. Taylor, 254 Ill. 464; Union Pacific R. R. Co. v. Credit Mobilier, 135 Mass. 367.)
   Froessel, J.

This proceeding was initiated in July, 1948, by application of a so-called Schackno Act trustee (L. 1933, ch. 745) for an order (a) settling his final account; (b) granting an allowance to him and his attorneys, and (e) granting other / related relief. The trustee was appointed in 1935 for the benefit of holders of first mortgage certificates on the Half Moon Hotel in Coney Island, and he operated the property until 1947, when said hotel was sold for $855,000. When the trustee made the present application, appellants-respondents, certificate holders, opposed the granting of any fee to his attorneys on the basis that, by having purchased certificates, said attorneys forfeited) the right to be compensated for their services. The question of their right to compensation, however, is not before us on these cross appeals.

Special Term, Kings County, referred the matter to an official referee to hear and report. It thereafter approved the referee’s report and ordered that the trustee’s attorneys:

(a) Deliver and surrender to Walter McMeekan, Trustee for Certificate Holders in the issue specified in the caption, all mortgage certificates held by them in said issue.
“ (b) Deliver to Walter McMeekan, Trustee aforesaid, a statement duly acknowledged, giving the face amount and the time of purchase of all certificates purchased by them and the actual amount paid for said certificates, and at the same time pay to the Trustee the amount they received on said certificates by the three distributions heretofore made by the Trustee, less the cost to them of the acquisition of such certificates as may be shown on their statement, together with interest at the rate of six (6%) percent per annum on each amount that was due on the date of each of the said three distributions to the date of payment to the Trustee ”.

The order further directed that all remaining questions relevant to the settlement of the trustee’s account, his commissions and attorneys’ allowance be held in abeyance until the order had been complied with, and that upon compliance the referee should continue the hearing and make further report. The Appellate Division (one Justice dissenting), modified the Special Term order by striking out subparagraphs “ a ” and “ b ” above referred to, ordered that those former certificate holders from whom the trustee’s attorneys purchased certificates be brought in as parties, and that they be given notice of the possibility of their ownership of claims against said attorneys with reasonable opportunity to assert such claims, if any. That court also remitted the matter to Special Term for further proceedings in accordance with its opinion, obviously because it was not satisfied upon the record before it whether the attorneys had observed the rule of full disclosure to the beneficiaries with whom they were dealing.

The objecting certificate holders have obtained leave from the Appellate Division to appeal on the certified question: “ Was the order of the Special Term properly made? ”, and the trustee and his attorneys similar leave on the question: “Was the order of the Appellate Division properly made? ”.

The Half Moon Hotel was constructed in 1928 and 1929 at an alleged cost of over $2,500,000. The Title Guarantee and Trust Company issued first mortgage participation certificates in a mortgage in the sum of $690,000 covering the premises. The Bond and Mortgage Guarantee Company guaranteed the payment of the bond secured by the aforesaid mortgage to the owners and holders of said bond and mortgage and/or participating certificates therein. The business and property of Bond and Mortgage Guarantee Company were taken over by the Superintendent of Insurance in 1933, pursuant to the provisions of article XI (now art. XVI) of the Insurance Law, and the Mortgage Commission of the State of New York took over the mortgage investments. The Superintendent of Insurance thereupon sought and obtained judicial approval of a plan for readjustment, modification and reorganization of the rights of the holders of the guaranteed mortgage participation certificates. In pursuance of this plan, the Mortgage Commission foreclosed the mortgage, and title to the Half Moon Hotel was transferred to the trustee.

The order of the Supreme Court, Kings County, dated October 7, 1935, provided, among other things, that “ Walter McMeekan shall be appointed Trustee by the Court of all of the property of every description securing or intending to secure the certificates issued by Title Guarantee and Trust Company against the mortgage which is the subject-matter of this proceeding and guaranteed by Bond and Mortgage Guarantee Company. * * * Upon the execution of the said Declaration of Trust, the Trustee shall become vested with title to the said trust estate and shall hold the same in trust for the benefit of certificate holders solely to liquidate the same in an orderly businesslike manner ”. (Emphasis supplied.) This was done pursuant to chapter 745 of the Laws of 1933, as amended (McKinney’s Unconsol. Laws, § 4871 et seq.). The purpose of this legislation was to prevent demoralization of the general real estate market under the economic pressure of the depression, with consequent ruin to real estate owners and damage to investors; it sought to provide a method of disposing of these mortgages in an orderly manner over a reasonable period of time (Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69, 85). Chapter 19 of the Laws of 1935 created the Mortgage Commission of the State of New York. In section 1 thereof a public emergency affecting the health, safety and comfort of the people was declared, the enactment providing: “ Many holders of mortgage investments are receiving no income or little income therefrom and they and their families are in want. The present market for such mortgage investments has depreciated to such an extent that few of such mortgage investments can be sold except at great sacrifice and at distress prices.” By section 3 of chapter 944 of the Laws of 1939 (McKinney’s Unconsol. Laws, § 4846), the Mortgage Commission was terminated and its powers transferred to the Superintendent of Insurance.

The hotel had been operated by a receiver for two and a half years before the trustee took possession in December, 1935. The attorneys for the trustee have acted as such since that time. Between September 25, 1941, and June 21, 1944, the attorneys made a total of five purchases of certificates of the face amount of $47,489.42 at a cost of $3,995.42, or on the average less than 8% cents on the dollar. On July 1, 1946, they purchased additional certificates in the face amount of $9,000 for which they paid $5,040. Thus their total average cost was less than 16 cents on the dollar. Distributions thus far made have amounted to nearly 56 cents on the dollar, and the attorneys’ profit has amounted to well over $22,000. In addition, the attorneys have received thus far over $10,000 for their legal services, and on the present accounting request approximately an additional $25,000. The objecting'certificate holders purchased their certificates of the face value of some $103,000 at various times in 1939, 1941, 1942, 1944, 1946 and 1947 at an average price of more than 43 cents on the dollar.

There is no claim of actual fraud, bad faith, or manipulation of the trust deahngs by the attorneys. The attorneys assert they did not buy any of the certificates from certificate holders; they bought from dealers and brokers only. They bought in their own name without attempt at concealment. The attorneys stated they never solicited certificates for sale either from certificate holders or brokers. They also state that they did not rely on any “ inside or secret information ” in buying the certificates. Of course, by reason of their situation, they could not help but have the fullest information concerning the trust. The attorneys also claimed that in response to many inquiries from certificate holders, they always advised them to hold on rather than to sell at the then depressed market values. It does not appear, however, that the attorneys informed such holders that they were buying certificates, nor how many' inquired.

The trustee knew about the attorneys’ purchases because, after a sale was completed, the certificate was sent to him for transfer. He stated that “ they had a perfect right to do it ”, although neither he nor any of his family directly or indirectly participated in any purchases. However, it is stated in the referee’s report — and undisputed here — that the attorneys “ admit their dealings in certificates were never disclosed in any way to the judges who made the allowances to them for services or to the justices in charge of reorganization and rehabilitation matters with whom they were frequently in contact as set forth in their detailed claim for fees.”

We are of the view that the attorneys did breach their fiduciary obligation. The duty of the trustee, as defined by court order, was to hold the hotel in trust for the benefit of certificate holders solely to liquidate the same in an orderly businesslike manner ”. One of the most fundamental duties of a trustee in any case is complete unselfishness and inflexible loyalty to the interests of the beneficiaries of the trust. This duty stems from human frailty when confronted with conflicting interests,' evidenced by the centuries-old scriptural passage: :i No man can serve two masters

The attorneys, concededly in the same position as the trustee, owed an equally high degree of fidelity, and so both courts below held, the Appellate Division stating that, “ by reason of their status as attorneys for the trustee, [they] were no less fiduciaries than was the trustee himself.” (277 App. Div. 1132.) Thus the attorneys, like the trustee, owed to these certificate holders the duty of the finest loyalty ”, something stricter than the morals of the market place ” (Meinhard v. Salmon, 249 N. Y. 458, 463-464). The attorneys put themselves in a position in which thought of self was to he renounced, however hard the abnegation their loyalty to the certificate holders was to be “undivided and unselfishindeed, for them this “rule of undivided loyalty ” was “ relentless and supreme ” (Meinhard v. Salmon, supra, pp. 467, 468, emphasis supplied; see, also, Case v. Carroll, 35 N. Y. 385, 388; Merrick v. Waters, 51 App. Div. 83, affd. 171 N. Y. 655, and, more recently to the same effect, City Bank Farmers Trust Co. v. Cannon, 291 N. Y. 125, 131; Matter of Durston, 297 N. Y. 64).

Moreover, the question of bad faith or damage is irrelevant to our inquiry. As was said in Wendt v. Fischer (243 N. Y. 439, 443-444): we are told that the brokers acted in good faith, that the terms procured were the best obtainable at the moment, and that the wrong, if any, was unaccompanied by damage. This is no sufficient answer by a trustee forgetful of his duty. The law ‘ does not stop to inquire whether the contract or transaction was fair or unfair. It stops the inquiry when the relation is disclosed, and sets aside the transaction or refuses to enforce it, at the instance of the party whom the fiduciary undertook to represent, without undertaking to deal with the question of abstract justice in the particular case ’ (Munson v. Syracuse, etc., R. R. Co., supra [103 N. Y. 58], at p. 74; cf. Dutton v. Willner, 52 N. Y. 312, 319). Only by this uncompromising rigidity has the rule of undivided loyalty been maintained against disintegrating erosion.”

Measured by these standards, we think it clear that these attorneys placed themselves in a situation wherein their own personal purposes might well conflict with the purposes of the trust beneficiaries, the certificate holders. Countless illustrations of such conflict suggest themselves on slight reflection. In every detail of legal advice and legal action with respect to the trust estate, the attorneys would consciously or unconsciously have in mind their own investment in the trust property. If all went well, the difficulty might not be great, but if the trust estate were in great danger, and the market price of certificates again began to decline, the temptation to protect themselves with respect to their own investment would have a tendency to affect their best judgment, advice and action. They would find it difficult to obliterate a divided loyalty, and the endangering process of “ disintegrating erosion ” would quickly present itself. Hence .the uncompromising rigidity of the rule, and it applies irrespective of good or bad faith. There is no shadowy borderline or twilight zone. Where doubt exists, full and complete disclosure, and authorization from the court upon due notice, are the fair and simple remedies.

That the attorneys could have influenced the course of the liquidation is too plain for controversy; indeed, they could not help but influence it in one way or another, as evidenced by the affidavit of one of the attorneys in connection with the negotiations surrounding the Navy lease. The same affidavit discloses that the attorneys, when several prospects indicated an interest in buying the hotel, were “ continuously consulted [by the trustee] * * * as to the manner of procedure, the type of contracts to be entered into, the terms of any sale and other related matters.” How could the attorneys give an absolutely unbiased opinion on such matters when their own profits and losses were involved? That their advice and action in this case may have been correct, despite their personal Interest in the trust estate, is beside the point. In another ease it may be otherwise. The law cannot always discover and measure the influence of a trustee or his attorneys. The basic vice is the existence of a personal interest, entangling their private claims with those of their beneficiaries, thus creating the danger of biased judgments and opening the way to fraud and wrong. That is sufficient to brand this conduct as a breach of fiduciary obligation under the circumstances here presented (see 3 Bogert on Trusts and Trustees, part 1 [1946], § 485, p. 108; § 543, pp. 375, 379, 380; § 544, p. 399; 2 Scott on Trusts, [1939], § 170.21, subd. [2], pp. 899-901; Restatement, Trusts, § 170, particularly comment j; Restatement, Restitution, § 196).

In Matter of Dwight (61 App. Div. 357, appeal dismissed 173 N. Y. 583) it was held that where the attorney for the assignee for the benefit of creditors, acting in the interest of the assigned estate, induces creditors thereof to execute assignments of their claims to him, paying personally therefor an amount less than their face value, he is only entitled to be allowed out of the assigned estate the amount paid by him for the claims, with interest. At page 362 the court said: “ To allow a trustee and his attorney to take advantage of their trust relation and their special knowledge by reason of such relation to make an individual profit out of the trust fund is contrary to public policy.” It quoted at length with approval from Manhattan Cloak & Suit Co. v. Dodge (120 Ind. 1, Note, 6 L. R. A. 369), where a situation similar to the Dwight case (supra) was presented.

The attorneys rely largely on Donnelly v. Consolidated Inv. Trust (99 F. 2d 185) and Victor v. Hillebrecht (405 Ill. 264, certiorari denied 339 U. S. 980), the only two cases cited by the Appellate Division herein. The Donnelly case (supra) involved trustees’ purchases of shares of a Massachusetts trust at a time apparently when the trust was a going concern and not under judicial supervision. The court pointed out that a Massachusetts trust resembled a corporation, “ the trustees being analogous to directors and the shareholders to corporate stockholders ” (p. 186). (See, on the question of directors and officers of a corporation purchasing its stock, Fischer v. Guaranty Trust Co., 259 App. Div. 176, affd. 285 N. Y. 679.) Such a situation is not comparable to the one now before us. Moreover, it appeared in the Donnelly case that one of the trustees caused letters to be sent to all shareholders advising them not to sell; no such all-inclusive admonition was given in the instant case. Certainly the disclosure made by the attorneys here, ‘ ‘ so indefinite and equivocal ” as it was, did not meet the test that, where dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance ” (Wendt v. Fischer, 243 N. Y. 439, 443, supra; see 3 Bogert on Trusts and Trustees, part 1 [1946], [commenting that the Donnelly decision “ seems of dubious soundness ”], § 485, p. 109, n. 91).

In Victor v. Hillebrecht (supra), also relied upon by the attorneys and the Appellate Division, purchases were made by trust managers under a liquidation trust agreement which appointed both trust managers and a liquidation trustee. There, however, the trust agreement provided: “ Trust Managers, may, but need not, be holders of participation certificates. The rights of any holder of participation certificates to deal freely with Liquidation Trustee and Trust Managers shall not be affected by his being a Trust Manager.” (See 3 Bogert on Trusts and Trustees, part 1 [1950 Cumulative Pocket], § 544, n. 24.)

In any event, to the extent that the Donnelly and Victor cases (supra) may be construed as imposing a less rigid duty upon trustees, we are not disposed to follow them. In our State “ Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘ disintegrating erosion ’ of particular exceptions ” (Meinhard v. Salmon, supra, p. 464). We have taken this unyielding position because of a belief that only thus can the “ level of conduct for fiduciaries ” be kept “ higher than that trodden by the crowd ”, and we have stated that this higher level “ will not consciously be lowered by any judgment of this court”; we should not lower it now, and thus make the first breach in a “ tradition that is unbending and inveterate ” (Meinhard v. Salmon, supra, p. 464; see, also, Munson v. Syracuse, G. & C. R. R. Co., 103 N. Y. 58, 74, supra). And certainly not in a judicial proceeding, authorized by the Legislature to relieve distressed holders of mortgage investments, who can no longer act independently. By virtue thereof, the Supreme Court was given complete supervisory powers to assist in preserving the trust estate for their benefit, and the Superintendent of Insurance and the State Mortgage Commission were empowered to make financial advances. This emergency legislation was not enacted to assist trustees or their attorneys to make private profits from the trust estate by purchasing for themselves mortgage certificates with the right to vote and act that accompanied them.

The distinction sought to be made between the trust property and the certificated interests in the mortgage is without substance. By foreclosure of the mortgage, the certificate holders became the beneficial owners of the property in place of the foreclosed mortgage, and the trustee holds the fee title for them pursuant to court order. The certificate holders are to all intents and purposes the owners of the property and the clients of the trustee’s attorneys. The latter look to them for compensation out of their interest in the property. The attorneys bought such interests in the trust estate, in the administration of which they were under a duty to assist. The trust corpus was owned by the certificate holders, there was but one trust to be administered, and dual interests could not be served. (Cf. U. S. Code, tit. 11, § 649; Real Property Law, § 127, subd. 1.)

We agree with the Appellate Division’s order insofar as it directs that the former certificate holders from whom the attorneys purchased certificates be brought in and given notice of the possibility of their ownership of claims, and insofar as it remits the matter to Special Term for further proceedings. However, we do not agree with the Appellate Division insofar as it struck out Special Term’s direction that the attorneys’ certificates be delivered and surrendered to the trustee, and that their profits be ac.oQpnted for. As we see it, the attorneys in no event may keep the certificates and the profits, but must account therefor to the trust estate as upon a constructive trust, subject to the rights of the former certificate holders.

The order of the Appellate Division should be modified by striking out the direction in the first decretal paragraph thereof, and by reinstating in lieu thereof subdivisions “ a ” and “ b ” of the third decretal paragraph of the Special Term order, excepting as to the time of compliance, and the matter remitted for further proceedings not inconsistent with this opinion, and, as so modified, affirmed, without costs. The certified questions should be answered in the negative.

Loughran, Ch. J., Lewis, Conway, Desmond, Dye and Fuld, JJ., concur.

Ordered accordingly.


author: Froessel, J. Desmond, J.

text:
    In the Matter of George R. Wignall, Respondent, against Clifford J. Fletcher, as Commissioner of Motor Vehicles of the State of New York, Appellant.
    Argued October 10, 1951;
    decided January 24, 1952.

      Nathaniel L. Goldstein, Attorney-General (John R. Davison, Wendell P. Brown and Philip J. Fitzgerald of counsel), for appellant.
    The Appellate Division erred (1) in holding (a) that the statute was designed to give the holder of a license an opportunity to be heard before revocation, and (b) that petitioner was entitled to cross-examine the road-test examiner and to present evidence of his own; (2) in ordering the matter remitted to the commissioner for a further hearing, and (3) in instructing the commissioner to make findings. (Matter of Marburg v. Cole, 286 N. Y. 202; People v. Rosenheimer, 209 N. Y. 115; Reitz v. Mealey, 314 U. S. 33; Matter of Romaner v. Williams, 270 App. Div. 948, 296 N. Y. 637; Matter of Sacharoff v. Corsi, 294 N. Y. 305, 326 U. S. 744; Matter of Small v. Moss, 277 N. Y. 501; Benjamin on Administrative Adjudication in State of New York, Vol. I, pp. 351-359; Matter of Erlanger v. Regents of Univ. of State of N. Y., 256 App. Div. 444, 281 N. Y. 627; Matter of Rosenberg v. Board of Estimate, 257 App. Div. 839, 281 N. Y. 835; Matter of Larkin Co. v. Schwab, 242 N. Y. 330; People ex rel. Schau v. McWilliams, 185 N. Y. 92; Matter of Strauss v. Hannig, 256 App. Div. 662, 281 N. Y. 612; Foley v. Equitable Life Assur. Soc., 290 N. Y. 424.)

      Johnson S. Albright for respondent.
    I. A driver’s license should not be taken away except by due process. (New York Water Service Corp. v. Water Power & Control Comm., 283 N. Y. 23; Matter of New York Tit. & Mtge. Co., 277 N. Y. 66; Matter of Friedel v. Board of Regents, 296 N. Y. 347.) II. Licenseholder should be confronted with and have right to cross-examine the witness against him, and present his own evidence if any. (Matter of Yates v. Mulrooney, 245 App. Div. 146; Matter of Greenebaum v. Bingham, 201 N. Y. 343; Matter

      of Brenner v. Bruckman, 253 App. Div. 607, 278 N. Y. 503; Matter of Kafka v. Fletcher, 272 App. Div. 364.) III. Definite findings should have been made after the hearing. (Matter of Elite Dairy Products v. Ten Eyck, 271 N. Y. 488; Matter of New York Water Service Corp. v. Water Power & Control Comm., 283 N. Y. 23; Matter of Guernsey Breeders Co-op. v. Noyes, 284 N. Y. 197; Matter of Dusinberre v. Noyes, 284 N. Y. 304; Matter of Collins v. Behan, 285 N. Y. 187; matter of Scudder v. O’Connell, 272 App. Div. 251.)
   Froessel, J.

Petitioner is a farmer. Except for the first two months of his life, he has lived in the towns of Marion and Walworth in western New York for eighty years. He alleges that he has driven an automobile since 1910 and has always been licensed to drive, has always carried liability insurance, and never had an accident until 1948, when a young boy ran into the road and into the rear end of petitioner’s car. He felt the jar, immediately stopped, and thereafter reported the accident to a deputy sheriff. The boy’s injuries were not serious. There is not a scintilla of evidence in the record showing any negligence on petitioner’s part.

On May 17, 1949, appellant Commissioner of Motor Vehicles ordered petitioner to appear for a hearing at Lyons, New York. The notice stated that such hearing would be held “ Pursuant to Section 71 of the Vehicle and Traffic Law * * * to investigate accident on 10/10/48 at Monroe Co. and to determine whether or not your license * * * should be suspended or revoked.” The notice contained the following note: The principal purpose of this hearing is to determine if your physical condition is such that you may safely operate a motor vehicle on the highways.”

It appears that the hearing was scheduled under paragraph (b) of subdivision 3 of section 71 of the Vehicle and Traffic Law, dealing with permissive suspensions and revocations “ because of some physical * * * disability of the holder ”. That subdivision also provides: Where revocation or suspension is permissive, the holder shall have an opportunity to be heard ”, and in subdivision 6 it is provided: “ Eevocation or suspension hereunder shall be deemed an administrative act reviewable by the supreme court as such.” Provision is also made for notice of hearing and compulsory attendance of witnesses.

The hearing was held on June 2,1949, and the original report contained the following: “ Remarks: This man is eighty-two years of age but seems to be in good condition despite his advanced years. However, I feel that it is best for him to take a road test.” After the word “ Decision ” there was typewritten: “ Make arrangements for road test. If he passes case can be closed, otherwise license revoked.” A road test was given, not at Lyons, the place of hearing, but in the city of Rochester in the vicinity of the “ Four Corners ”. The petitioner failed the test, not because of “ Physical Defects ”, “Accident”, or any “Serious Violation ”, but because of “ W T L ” (wrong traffic lane), apparently while making a left turn, denominated as “ Dangerous Action ”, and lesser infractions, adding up to 28 points where only 15 were allowed. Thereupon the original decision above quoted was stricken out and in its place handwritten: “ 7/5/49 — Revoke license — Failed test ”. Petitioner was thereupon notified that he had failed the road test “ pursuant to Section 20-8 of the Vehicle & Traffic Law ”, under which section no proceeding had been instituted. (Italics supplied.) It will be noted that under the latter section lesser penalties might have been imposed, such as suspension or restriction, but the commissioner determined upon “ revocation ” even in advance of the failure of the test.

In petitioner’s first proceeding to review, the determination of revocation was annulled by the Appellate Division and the proceeding remitted “ for a further hearing and with instructions to the commissioner to make findings in support of whatever determination he may reach upon the evidence ” (277 App. Div. 828). His license was thereupon restored to him and reissued. A further exceedingly brief hearing was held on June 1, 1950, under the same Motor Vehicle Bureau case number as the section 71 proceeding, and he was simply directed to take another road test on Main Street in Rochester. Again petitioner is said to have failed as before, chiefly because of his handling of the automobile in making left turns at intersections. Despite the difference in traffic conditions, the examiner “ noted ” that petitioner’s faults “ are not predominantly of the type which would not be apparent at a test post outside Rochester.” On this occasion, two licensed operators accompanied petitioner, and they stated that he “ drove his car perfectly ”. Brief findings .were made under the same case number, obviously as part of the section 71 proceeding. Petitioner thereupon received the same notice of revocation, namely, under subdivision 8 of section 20 and not under section 71 of the Vehicle and Traffic Law.

He thereupon instituted the present proceeding to review the second determination, which the Appellate Division again annulled, declaring that petitioner was never “ given an opportunity to test, by cross-examination, the accuracy of the facts and conclusions as reported by the road-test examiner, or to offer any evidence of his own in contradiction or explanation ”. (278 App. Div. 28, 30.) The appeal from this determination is now before us.

Appellant contends that the Appellate Division erred in making its order, in that a hearing under section 71 was concluded and that all subsequent proceedings were taken under subdivision 8 of section 20, which requires no hearing but simply an objective test on the licensee’s qualifications. In this view, it is claimed that petitioner’s remedy in the event of arbitrary or illegal action by the commissioner would rest in a proceeding in the nature of mandamus, and any factual issue therein would be a matter for determination by Special Term under section 1296 of the Civil Practice Act. Accordingly, it is appellant’s position that the Appellate Division erred in law in any event, since the proceeding should not have been remitted for further administrative hearing and findings, but should have been dismissed or at most sent back to Special Term for trial of any issues of fact found to have been raised.

In the view we take of this case, we do not reach the question as to the nature of the right of review where the proceeding is commenced under subdivision 8 of section 20 as distinguished from a section 71 proceeding. A comparison of subdivision 8 of section 20 and section 71 of the Vehicle and Traffic Law shows that they are concerned with separate and distinct methods of procedure. Although they appear to provide alternative procedures for dealing with the same situation, their validity may not for that reason be drawn in question (see Matter of Sacharoff v. Corsi, 294 N. Y. 305, certiorari denied 326 U. S. 744). In this case, however, the commissioner proceeded under paragraph (b) of subdivision 3 of section 71, the purpose of the hearing being to determine petitioner’s physical condition, and he was found in good condition despite his advanced years, but his license was revoked under subdivision 8 of section 20.

We are here dealing with the exercise of power by the commissioner in the revocation of a driver’s license, and our decision will apply not only to this petitioner, but may affect any other holder of a driver’s license in the State of New York. A license to operate an automobile is of tremendous value to the individual and may not be taken away except by due process. If in the instant case it may be done loosely and informally and without regard to the statutes in such case made and provided, then it may be done in any case, and every automobile driver in the State will be at the mercy of the commissioner and his assistants. However much we may recognize the need for the rightful exercise by the commissioner of his duties in his laudable effort to prevent unsafe driving on the highways, it would be a dangerous step indeed if we permitted him to follow any loose practice formulated by him, regardless of the law. Due process required that petitioner be duly informed under what statute he was being proceeded against. In the second hearing in the section 71 proceeding, he was simply directed to take another road test. Such direction is not in compliance with the statute.

The danger in commingling these proceedings was recognized in the brief of the Attorney-General when he said: “ Sections 71 and 20, subdivision 8, of the Vehicle and Traffic Law are independent provisions, each dealing with a separate problem. There is no indication of a legislative intent that these two forms of procedure are to be merged.” Yet, that is precisely what was done here.

As before noted, even before the first road test was taken the commissioner decided that in the event of petitioner’s failure the license would be revoked, without taking into consideration the lesser penalties provided by subdivision 8 of section 20. The record before us must be examined in the light of what appellant did, not what might have been done under some other statute (Matter of Hickox v. Griffin, 298 N. Y. 365, 371; Securities Comm. v. Chenery Corp., 318 U. S. 80, 87-88). When the commissioner chose to proceed under section 71, orderly procedure as intended by the Legislature would require that he should not make a determination under subdivision 8 of section 20 (see Matter of Sacharoff v. Corsi, supra, p. 311). Moreover, fairness required that due notice be given to the licensee that the commissioner regarded the section 71 proceeding as terminated and had initiated a subdivision 8 of section 20 proceeding.

In this case, petitioner was prepared by the original notice of hearing to meet a specific issue in a proceeding in which he was clearly entitled to an administrative hearing. It is not strange, then, that both parties and the Appellate Division treated the determination as one made in such proceeding. Under these circumstances, we cannot say that the Appellate Division erred as a matter of law.

It also may be noted that such confusion of the two statutes within the Motor Vehicle Bureau as shown here is in itself potentially harmful. Under section 71, suspension or revocation is the only penalty provided; under subdivision 8 of section 20, the commissioner may impose a milder sanction, such as “ restrictions on the use of the license ”, as, for example, limiting this licensee to the vicinity of his village or town. Petitioner stated that he desired to drive only in the locality in which he lived and for the essential purposes of attending at the village stores, taking his invalid wife to church on Sundays, and the like. If so little consideration is given to the form of procedure, it may also happen that little consideration is given to the form of sanction imposed, and indeed in this case the penalty was prematurely prescribed. This practice clearly violates the legislative intention, as evidenced by the provision for separate forms of proceedings.

In our opinion, the Appellate Division was justified in treating the determination as one made in a section 71 proceeding. Since appellant has given a stipulation for order absolute in the event of affirmance, the order should be affirmed and order absolute directed.

The appeal from the first order of the Appellate Division, dated May 2, 1950, should be dismissed, as the second order, dated March 6, 1951 — itself an intermediate order — was obtained in a new and independent proceeding.

On the appeal from the second order: The order should be affirmed, and order absolute ordered against the appellant on the stipulation, with costs in all courts.

Desmond, J.

(dissenting). On October 10,1948, an automobile driven by petitioner-respondent, then eighty-one years old, injured a child. On May 17, 1949, pursuant to authority contained in section 71 of the Vehicle and Traffic Law, respondent-appellant, the State Commissioner of Motor Vehicles, served on petitioner a notice requiring the latter to attend a hearing called for the purpose of investigating the accident and of determining whether petitioner’s license as an automobile operator should be suspended or revoked. The notice of hearing stated that it was the practice of the bureau to hold such a hearing “ where the operator involved in an accident is sixty-five years of age or over.” That hearing, held on June 2,1949, resulted in a report to the commissioner, by the examiner who conducted it, that petitioner “ seems to be in good condition despite his advanced years ” but that the examiner believed that petitioner should be required to take a road test.” (Some importance seems now to be attached to the fact that no formal notice was ever given to petitioner that this section 71 hearing was closed — we see no necessity for, or utility of, any such notification.)

What the commissioner did send to petitioner, after that section 71 hearing, was a letter dated June 14, 1949, informing petitioner that he would have to submit to a road test on June 24,1949. The test was given him on that date, he failed to pass it, and his driving license was revoked. As the result of a litigation with the bureau which petitioner then commenced, that revocation was set aside by the Appellate Division (277 App. Div. 828); petitioner was, a year later, given another such test, and again failed. Again the Appellate Division set aside the revocation, remitting the matter to the commissioner for u a further hearing ” and for the making of “ findings ” (278 App. Div. 28, 31). The commissioner was, understandably, reluctant to continue the testing process indefinitely, and so appealed to this court, being required on this appeal, since the order was nonfinal, to file a stipulation for order absolute, in case of affirmance. Thus, the affirmance which this court is about to order will mean that petitioner, now eighty-four years old, continues to hold an automobile operator’s license, although he has twice been unable to pass the usual, routine, driving license tests, the necessity for which arose from his advanced age, and which had been confirmed by petitioner’s own statements that when, in daylight on a country road, his car injured a child, he did not even know of the occurrence until he looked back and saw people picking up the child from the road.

Of course, the commissioner, after this decision by us, can, we assume, order that still another road test be given to petitioner (three years after the accident) but we see no reason for setting aside the first two determinations. We do see the compelling necessity of a workable system of operator-license control, in a State where there are 4,000,000 such licenses outstanding and where 100,000 accidents (30,000 involving pedestrians and 2,000 fatal) were reported in 1950 (see N. Y. Legislative Manual, 1951).

Section 71 of the Vehicle and Traffic Law, under which petitioner was originally notified to attend a hearing, and under which that hearing was held, specifically authorizes the commissioner to take such action. That section 71 hearing was duly held, but it resulted in no revocation or suspension of petitioner’s license, and in no way prejudiced him or affected his rights. However, the hearing examiner did consider it advisable that petitioner be subjected to a road test. Authority for such reexamination of licensees ” is given the commissioner by subdivision 8 of section 20 of the same Vehicle and Traffic Law. In plainest language that subdivision empowers the commissioner, if he “ has reasonable grounds to believe that a person holding a license issued pursuant to this section is not qualified to operate a motor vehicle,” to “ require such person to submit to an examination to determine his qualifications.” Petitioner has now had two such re-examinations, and has not passed either of them. Each time the examiner’s report showed him guilty of serious driving faults, including improper turns, improper speed at intersections, delayed braking, inattention to traffic signs and lights, etc. Such determinations by a competent licensing authority can be upset by the courts only on a showing that they were made arbitrarily, capriciously, maliciously or corruptly (see Matter of Small v. Moss, 277 N. Y. 501, 507; Matter of Stracquadanio v. Department of Health, 285 N. Y. 93, 95, 96). There is no possible basis in this record for so condemning these re-examination results, and we do not understand that anyone claims there is. Surely this petitioner has not shown a clear, legal right to hold an operator’s license. The courts, therefore, have no power to set those results aside.

True, after the Appellate Division had annulled the first revocation, and after the second re-examination had been given and failed, petitioner in his next petition to the Appellate Division, asserted that he had in fact driven his car safely and properly during the second re-examination, and produced affidavits to that effect, made by two persons who had accompanied him in his car during that latest road test. But the opinions of those persons as to petitioner’s competency were no proof of arbitrariness or capriciousness of the examiner, and so raised no triable issue of fact for any court (Matter of Marburg v. Cole, 286 N. Y. 202, 211). The commissioner, not the courts, examines and licenses operators, and for a court or the commissioner himself to hold a later “ hearing ” to review the announced result of a road test is to do something not contemplated by any statute, and something which, we submit, would defeat the purpose of the road test. Decisions dealing with court review of findings of fact made on disputed testimony at hearings required by statute, have nothing to do with a situation like this.

As we understand this court’s decision on this appeal, however, the Appellate Division’s annulment of the commissioner’s actions is being affirmed here, not because of any supposed necessity for hearings or findings by the commissioner, but for an entirely different reason. This court’s reason for affirmance is based solely on the fact that the commissioner, after notifying petitioner of, and holding, a hearing under section 71, then proceeded, without formal notice of termination of that section 71 hearing, to order a road test under section 20. But those statutes authorize and direct the commissioner to do both those things, independently of each other or both at once, and there is no sign that anyone was confused or prejudiced or bothered by the way in which the commissioner performed these simple, routine duties assigned to him by the Legislature.

The order should be reversed and the proceeding dismissed, with costs in all courts.

Lewis, Conway and Dye, JJ., concur with Froessel, J.; Desmond, J., dissents in opinion in which Loughran, Ch. J., and Fuld, J., concur.

Ordered accordingly.


text:
    Herman Allhusen, Appellant, v. Caristo Construction Corp., Respondent.
    Argued November 26, 1951;
    decided January 24, 1952.

      Bruce A. Hecker, John F. Dooling, Jr., and James A. Thomas, Jr., for appellant.
    I. A prohibition against the assignment of money due under a private contract is per se invalid. (State Bank v. Central Mercantile Bank, 248 N. Y. 428; Sacks v. Neptune Meter Co., 144 Misc. 70, 238 App. Div. 82; De Peyster v. Michael, 6 N. Y. 467; Portuguese-American Bank v. Welles, 242 U. S. 7; Bank of U. S. v. Public Bank of N. Y. City, 88 Misc. 568.) II. The anti-assignment language at most renders the assignor liable to the debtor in damages for making an assignment without written consent. (Manchester v. Kendall, 19 Jones & Sp. 460, 103 N. Y. 638; Reliable Loan & Investment Co. v. Delgus Co., 223 App. Div. 94; Snyder v. City of New York, 74 App. Div. 421.) III. The assignment is always effective to pass title to the right of action of the assignee; the assignee is an indispensably necessary party plaintiff. (Seibert v. Dunn, 216 N. Y. 237; Blog v. Burden & Co., 238 App. Div. 634; Keon v. Saxton & Co., 257 N. Y. 412.) IV. The language in the present contracts is inadequate to prevent assignment. (Reisler v. Cohen, 67 Misc. 67; State Bank v. Central Mercantile Bank, 248 N. Y. 428; Snyder v. City of New York, 74 App. Div. 421; Manchester v. Kendall, 19 Jones & Sp. 460, 103 N. Y. 638; Bank of U. S. v. Public Bank of N. Y. City, 88 Misc. 568, 168 App. Div. 915; Reliable Loan & Investment Co. v. Delgus Co., 223 App. Div. 94.)

      George B. Balamut for Manufacturers Trust Company, amicus curiæ, in support of appellant’s position.
    The result below places an unwarranted clog on the use of accounts receivable for collateral security purposes. (Koessler, Accounts Receivable, 44 Mich. L. Rev. 563; Saulnier & Jacoby, Accounts Receivable Financing [1943]; State Bank v. Central Mercantile Bank 248 N. Y. 428; Bank of U. S. v. Public Bank of N. Y. City, 88 Misc. 568.)

      Milton P. Kupfer and Theodore M. Newman for National Conference of Commercial Receivable Companies, Inc., and another, amici curiæ, in support of appellant’s position.

      Emanuel Harris and Max E. Greenberg for respondent.
    I. The contract provision declaring the assignment of the contract or of any interest therein, or of any money due thereunder, void without the written consent of defendant, is valid and binding on plaintiff. (Fortunato v. Patten, 147 N. Y. 277; Devlin v. Mayor of City of N. Y., 63 N. Y. 8; Burck v. Taylor, 152 U. S. 634; Arkansas Smelting Co. v. Belden Co., 127 U. S. 379; Delaware County v. Diebold Safe Co., 133 U. S. 473; State Bank v. Central Mercantile Bank, 248 N. Y. 428; Portuguese-American Bank v. Welles, 242 U. S. 7; Nassau Hotel Co. v. Barnett & Barse Corp., 162 App. Div. 381, 212 N. Y. 568.) II. The prohibition against assignment was not invalidated by section 41 of the Personal Property Law. (Eberson v. Gere, 40 Hun 248; Sacks v. Neptune Meter Co., 144 Misc. 70, 238 App. Div. 82; Bank of U. S. v. Public Bank of N. Y. City, 88 Misc. 568; State Bank v. Central Mercantile Bank, 248 N. Y. 428; Barringer v. Bes Line Constr. Co., 23 Okla. 131; La Rue v. Groezinger, 84 Cal. 281; Reef v. Mills Novelty Co., 126 Tex. 380; Matter of Malloy, 253 App. Div. 30, 278 N. Y. 429; Twin Realty Corp. v. Glens Falls Portland Cement Co., 225 App. Div. 515; Morse v. Morse Dry Dock & Repair Co., 249 App. Div. 764; City of Ithaca v. Ithaca St. Ry. Co., 145 App. Div. 675; Lana v. International Harvester Co., 258 App. Div. 851.) III. The prohibition against assignments was essential for the protection of defendant in the event of defaults by Kroo subsequent to notice of attempted assignments. (Whitehall Mercantile Corp. v. Jamaica Ellbee Furriers’ Corp., 54 N. Y. S. 2d 653; State Bank v. Central Mercantile Bank, 248 N. Y. 428.) IV. The contention that the decision of the court below places an additional burden on the business of lending money upon security of accounts receivable on a non-notification basis is irrelevant for the reason that concededly the assignment herein was upon a notification basis. Y. The failure to give effect to the provision prohibiting assignment would deprive defendant of its constitutional right of freedom of contract. (W. H. H. Chamberlin, Inc., v. Andrews, 271 N. Y. 1, 299 U. S. 515; Rosenblum v. Rosenblum, 181 Misc. 78; Billie Knitwear, Inc., v. New York Life Ins. Co., 174 Misc. 978, 262 App. Div. 714, 288 N. Y. 682; People v. Nebbia, 262 N. Y. 259, 291 U. S. 502; Locker v. American Tobacco Co., 121 App. Div. 443, 195 N. Y. 565.)
   Froessel, J.

Defendant, a general contractor, subcontracted with the Kroo Painting Company (hereinafter called Kroo) for the performance by the latter of certain painting work in New York City public schools. Their contracts contained the following prohibitory provision: “ The assignment by the second party [Kroc] of this contract or any interest therein, or of any money due or to become due by reason of the terms hereof without the written consent of the first party [defendant] shall be void.” Kroo subsequently assigned certain rights under the contracts to Marine Midland Trust Company of New York, which in turn assigned said rights to plaintiff. These rights included the “ moneys due and to become due ” to Kroo. The contracts were not assigned, and no question of improper delegation of contractual duties is involved. No written consent to the assignments was procured from defendant.

Plaintiff as assignee seeks to recover, in six causes of action, $11,650 allegedly due and owing for work done by Kroo. Defendant answered with denials, and by way of defense set up the afore-mentioned prohibitory clause, in addition to certain setoffs and counterclaims, alleged to have existed at the time of the assignments. It thereupon moved for summary judgment under rule 113 of the Pules of Civil Practice, and demanded dismissal of plaintiff’s several causes of action on the sole ground that the prohibitory clause constituted a defense sufficient as a matter of law to defeat each cause of action. Special Term dismissed the complaint, holding that the prohibition against assignments “ must be given effect.” The Appellate Division affirmed, one Justice dissenting on the ground that the “ account receivable was assignable by nature, and could not be rendered otherwise without imposing an unlawful restraint upon the power of alienation of property.” (278 App. Div. 817.)

Whether an anti-assignment clause is effective is a question that has troubled the courts not only of this State but in other jurisdictions as well (Burck v. Taylor, 152 U. S. 634; State St. Furniture Co. v. Armour & Co., 345 Ill. 160; Bewick Lbr. Co. v. Hall, 94 Ga. 539; Dixon-Reo Co. v. Horton Motor Co., 49 N. D. 304; Inter-Southern Life Ins. Co. v. Humphrey, 122 Miss. 579; Trubowitch v. Riverbank Canning Co., 30 Cal. 2d 335; Portuguese-American Bank v. Welles, 242 U. S. 7; Barringer v. Bes Line Constr. Co., 23 Okla. 131; Joint School Dist. No. 2 v. Marathon Co. Bank, 187 Wis. 416; Concrete Form Co. v. Grange Constr. Co., 320 Pa. 205; Reef v. Mills Novelty Co., 126 Tex. 380; 31 Mich. L. Rev. 304; 74 U. of Pa. L. Rev. 226).

Our courts have not construed a contractual provision against assignments framed in the language of the clause now before us. Such kindred clauses as have been subject to interpretation usually have been held to be either (1) personal covenants limiting the covenantee to a claim for damages in the event of a breach (as, e.g., Manchester v. Kendall, 19 Jones & Sp. 460, affd. 103 N. Y. 638; Sacks v. Neptune Meter Co., 144 Misc. 70, affd. 238 App. Div. 82), or (2) ineffectual because of the use of uncertain language (State Bank v. Central Mercantile Bank, 248 N. Y. 428). But these decisions are not to be read as meaning that there can be no enforcible contractual prohibition against the assignment of a claim; indeed, they are authority only for the proposition that, in the absence of language clearly indicating that a contractual right thereunder shall be nonassignable, a prohibitory clause will be interpreted as a personal covenant not to assign.

In the Manchester case (supra) it was held (p. 463) that the words, “ 1 This contract not to be assigned, or any part thereof, or any installments to grow due under the same ’ ”, must be construed as an agreement not to assign, the breach of which would give rise to a claim for damages by the covenantee. The court stated (p. 463) that the quoted words “ would not make the assignment void.” In the clause now before us, however, it is expressly provided that the assignment * * * shall be void.” In the State Bank case (supra, p. 431) which involved the assignment of certificates of deposit which were “ not subject to check ” and were “ payable only to himself [depositor] * * * on return of this Certificate properly endorsed ”, we held that such language did not make the certificates nonassignable, and that nonnegotiable certificates of deposit are assignable in the absence of an agreement to the contrary. Judge Pound, writing for a unanimous court, added, however (p. 435): “ Clear language should, therefore, be required to lead to the conclusion that the certificates are not assignable. (1 Williston on Contracts, § 422.) We cannot deduce such consequences from uncertain language. (Scheffer v. Erie Co. Sav. Bank, 229 N. Y. 50.) The plainest words should have been chosen, so that he who runs could read, in order to limit the freedom of alienation of rights and prohibit the assignment. It might have been stipulated on the face of the certificates that they should be non-transferable ’ or non-assignable. ’ ”

In Devlin v. Mayor of City of N. Y. (63 N. Y. 8), we said (pp. 17, 20): “ Parties may, in terms, prohibit the assignment of any contract [“ and the interest of the contractor under it ”] and declare that neither personal representatives nor assignees shall succeed to any rights in virtue of it, or be bound by its obligations.” In Fortunato v. Patton (147 N. Y. 277), where the contract with the city provided in substance that the contractor shall not assign the contract, or any moneys payable thereunder, without the consent of the city, we noted (p. 281): “ it was inserted in the contract solely for the benefit of the city, and prevents any claim being asserted against it in the absence of consent ”.

In the lower courts, Sacks v. Neptune Meter Co. (supra), expresses the view, and Morkel v. Metropolitan Life Ins. Co. (163 Misc. 366 [App. Term, 1st Dept.]), and Reisler v. Cohen (67 Misc. 67) hold that, where the agreement provides that the claim is nonassignable, the assignee may not recover. This is in harmony with Restatement of the Law of Contracts (§ 151): “A right may be the subject of effective assignment unless * * * (c) the assignment is prohibited by the contract creating the right.” (See, also, 2 Williston on Contracts, § 422, pp. 1217-1218.)

In the light of the foregoing, we think it is reasonably clear that, while the courts have striven to uphold freedom of assign-ability, they have not failed to recognize the concept of freedom to contract. In large measure they agree that, where appropriate language is used, assignments of money due under contracts may be prohibited. When “ clear language ” is used, and the plainest words * * * have been chosen ”, parties may 11 limit the freedom of alienation of rights and prohibit the assignment ” (State Bank v. Central Mercantile Bank, supra, p. 435). We have now before us a clause embodying clear, definite and appropriate language, which may be construed in no other way but that any attempted assignment of either the contract or any rights created thereunder shall be “ void ” as against the .obligor. One would have to do violence to the language here employed to hold that it is merely an agreement by the subcontractor not to assign. The objectivity of the language precludes such a construction. We are therefore compelled to conclude that this prohibitory clause is a valid and effective restriction of the right to assign.

Such a holding is not violative of public policy. Professor Williston, in his treatise on Contracts, states (Vol. 2, § 422, p. 1214): “ The question of the free alienation of property does not seem to be involved.” The New York cases do not hold otherwise (State Bank v. Central Mercantile Bank, supra, p. 435). Plaintiff’s claimed rights arise out of the very contract embodying the provision now sought to be invalidated. The right to moneys under the contracts is but a companion to other jurai relations forming an aggregation of actual and potential interrelated rights and obligations. No sound reason appears why an assignee should remain unaffected by a provision in the very contract which gave life to the claim he asserts.

Nor is there any merit in plaintiff’s contention that section 41 of the Personal Property Law requires that the prohibitory clause be denied effect. Because the statute provides that a person may transfer a claim, it does not follow that he may not contract otherwise. Countless rights granted by statutes are voluntarily surrendered in the everyday affairs of individuals. In Rosenthal Paper Co. v. National Folding Box & Paper Co. (226 N. Y. 313, 325-326), we noted: “ The general rule now prevailing * * * that any property right, not necessarily personal, is assignable, is overcome only by agreement of the contracting parties or a principle of law or public policy. [Citing cases.] In this jurisdiction the statute, in effect, so provides [referring to the predecessor of section 41 of the Personal Property Law].” (Emphasis supplied.)

The judgment should be affirmed, with costs.

Loughran, Ch. J., Lewis, Conway, Desmond, Dye and Fuld, JJ., concur.

Judgment affirmed.