author: Cokway, J.

text:
    In the Matter of the Construction of the Will of Mary E. Jones, Deceased. Theodore B. Klapper, as Trustee under the Will of Mary E. Jones, Deceased, et al., Respondents; Rosalie G. Jones, Appellant. In the Matter of the Estate of Mary E. Jones, Deceased. Theodore B. Klapper, as Trustee under the Will of Mary E. Jones, Deceased, Respondent; Rosalie G. Jones, Appellant.
    Argued October 15, 1953;
    decided January 8, 1954.

      Frederick A. Keck and Harold S. Meltser for appellant in both above-entitled proceedings.
    I. Testatrix did not intend that the power of sale should survive the death of the persons whose lives measured the continuance of the trust. (Matter of Miller, 257 N. Y. 349; Bruner v. Meigs, 64 N. Y. 506; Matter of McLaughlin, 193 Misc. 192, 275 App. Div. 652; Cussack v. Tweedy, 126 N. Y. 81; Hutkoff v. Winmar Realty Co., 211 App. Div. 726.) II. The trust having terminated, the trustee was without power to continue to manage, operate and control the real property forming the corpus of the terminated trust and the Surrogate’s Court was without power or jurisdiction to grant these powers to the trustee. Appellant remainderman, as an owner in common, had legal title and could not properly be restrained from managing, operating and controlling her own property. (Hutkoff v. Winmar Realty Co., 211 App. Div. 726.)

      Jack Korshin for Theodore B. Klapper and others, respondents in first above-entitled proceeding and for respondent in second above-entitled proceeding.
    I. The power of sale in article Fifteenth of the will contains within itself authority for its exercise after the termination of the trust. (Crittenden v. Fairchild, 41 N. Y. 289; Bruner v. Meigs, 64 N. Y. 506.) II. The power of sale in article Twentieth of the will relates to the trust realty. It must be construed as a specific authorization to sell after termination of the trust or, at the very least, as a general power of sale pervading the entire will. (Jones v. Jones, 206 App. Div. 774; Goodwin v. Coddington, 154 N. Y. 283; Matter of Title Guar. & Trust Co. [Baxter], 195 N. Y. 339; Meyer v. Cahen, 111 N. Y. 270.) III. A general power of sale of realty survives the termination of a trust unless a contrary intention appears in the will. (Cussack v. Tweedy, 126 N. Y. 81; Hutkoff v. Winmar Realty Co., 211 App. Div. 726; Matter of Rosenberg, 145 Misc. 581; Matter of McLaughlin, 193 Misc. 192, 275 App. Div. 652; Matter of Ring, 98 Misc. 119; Lindo v. Murray, 91 Hun 335, 157 N. Y. 697; Taber v. Willetts, 1 App. Div. 285, 153 N. Y. 663.) IV. Circumstances within the contemplation of testatrix show an intent that the powers of sale should survive the termination of the trust. (Kinnier v. Rogers, 42 N. Y. 531; Matter of Bielby, 91 Misc. 353.) V. The trustee is charged with the duty of managing trust property until the end of the trust. The trust will not end until the trustee’s discharge after his final accounting. (Neary v. City Bank Farmers Co., 260 App. Div. 791.)

      Mary Gardiner Jones, respondent in person, and for Anna L. Watkins and another, respondents in first above-entitled proceeding.

      Frank P. Bros for Mary H. Jones and another, respondents in first above-entitled proceeding.
   Cokway, J.

Two proceedings are involved herein. The first is brought by the successor trustee under the last will and testament of one Mary E. Jones, deceased, for a construction of the language of that will conferring a power of sale upon the trustees. The second is brought on behalf of the successor trustee and by the caretaker of the real property involved for an order restraining appellant, Eosalie Gr. J ones, from interfering with the trustee in the management, operation and control by him of the real and personal property constituting the principal and income of the trust estate.

We shall treat the proceedings in turn.

The last will and testament of Mary E. Jones was duly admitted to probate in the Surrogate’s Court of Nassau County following her death in 1918. By the terms of article Fifteenth certain property at Eaton’s Neck was to constitute the entire corpus of the original trust. By virtue of a second codicil to the will certain other properties in Bayville, Lloyd’s Neck and Jones’ Point were added to the trust. The will devises the said parcels of real estate to the executors as trustees of a spendthrift trust, to pay the income to the use of such of [testatrix’] children as shall survive [her], in equal shares, and the issue of any deceased child or children, per stirpes and not per capita, during the lives of Philip L. Jones and Louise E. Jones.” Philip L. Jones died shortly after the decedent. Louise E. Jones died on June 12, 1952, and the trust, by its terms, came to an end on that day.

At the date of the death of the said Louise E. Jones a portion of the realty constituting the corpus of the trust remained unsold. 1 -i'|íí|í;

The successor trustee, who is also the administrator c.t.a. of the estate, petitioned the Surrogate’s Court (Nassau County) for a construction of his power under the will to sell the realty.

Both the trustee and appellant agree that the trust terminated upon the death of Louise E. Jones in 1952 and that at that point of time the real property remaining in the trust vested in the remaindermen. The parties also agree that there is in the law such a phenomenon as a power of sale of realty which will continue after the vesting of interest in the remaindermen. The only contest is as to whether the last will of Mary E. J ones conferred upon the trustees such a power, that is, an unlimited, general or unrestricted power of sale which survives the termination of the trust or whether she gave them only a limited or restricted power which ceased with the termination of the trust.

The pertinent portion of article Fifteenth of the will provides : “ * * * And I hereby give and grant to my said Executors full power and authority, at any time, to sell, mortgage or lease any or all of the said premises, as in their discretion may seem best, and I further give and grant to my said executors full power to deal with the said premises in any manner or way as in their discretion may seem best, with the same powers that I might have if I were living. If any or all of the aforesaid premises are sold by my Executors, under the power of sale herein granted to them, I direct that the proceeds of such sale must be administered upon the same uses and trusts as the real property herein given in trust. * * *”

The quoted clause contains neither an express statement that the power of sale is to continue after termination of the trust nor an express statement to the contrary. Nevertheless, there is evidence in article Fifteenth of the intent of the testatrix to have the power continue. Thus, in the first sentence quoted the trustees are given full power and authority, at any time, to sell * * * any or all of the said premises, as in their discretion may seem best * * The testatrix then continued by saying that the trustees were to have “ the same powers that [she] might have if [she] were living.” Such language is broad and unlimited. In terms the trustees were empowered to sell “ at any time ” and they were granted the. same absolute power over the property that the testatrix would have had had she been living. We think it obvious that the power of sale created by such language must necessarily be held to be a general and unlimited power unless the will contains other expressions demonstrating a desire on the part of the testatrix to free the trust of the power upon its termination.

The appellant contends that such a manifestation of testatrix’ intent can be found in the sentence following that quoted above, to wit, ‘ ‘ I direct that the proceeds of such sale must be administered upon the same uses and trusts as the real property herein given in trust. ’ ’ The argument is that this provision requiring the proceeds of a sale by the trustees to be administered upon the same uses and trusts as the real property given in trust, specifically limits the power of sale to the term of the trust.

The Surrogate construed this sentence as follows: ‘ ‘ It should be noted that paragraph ‘Fifteenth ’ gives the property to the executors in trust. As executors, the persons acting as trustees had charge of the balance of the estate. The Court construes the sentence quoted in this paragraph as directing that the proceeds of the sale of real property be continued as a part of the trust rather than to become a part of the general estate. It was not intended as a limitation of the time in which the power of sale might be exercised but merely to earmark the proceeds of such sales as trust funds of the spendthrift trust.”

In other words, the Surrogate concluded, and, in our opinion, properly, that the sentence was inserted to instruct the executors, who were also the trustees by the terms of the will, that if during the term of the trust they exercised the power of sale given to them they were to retain the proceeds of the sale as a part of the trust estate and not to commingle it with the funds of the general estate. The sentence was not intended to restrict the broad power conferred by the early sentences of article Fifteenth.

Further evidence in support of the conclusion that testatrix intended to create a continuing power of sale is to be found in this will. Wherever she devised real property, with the exception of the home farm which she apparently intended should be used for homes for her children, she granted a power of sale. In all, the will contains three powers of sale. The language of article Fifteenth conferring such a power on the executor-trustees has already been quoted. By article Nineteenth she disposed of her residuary estate and granted a power of sale as follows: * * * All the rest, residue and remainder of my property, both real and personal, of whatsoever kind, and wheresoever situate, I hereby give, devise and bequeath to my executors, in trust, to sell and convert the same into cash * *

Articles Fifteenth and Nineteenth were the only paragraphs under which it might have been necessary to make any sale of realty since the remainder of the will covers specific bequests or the devises of the home farm. Notwithstanding that she had two powers of sale already in the will, under article Twentieth naming her executors, who thereby became her trustees, she granted a further power of sale: “ * * * giving to my said executors full power and authority to sell, lease or mortgage any or all of my real property, with the exception of the aforesaid home farm, at any time, as in their discretion may seem best, hereby giving them full power and authority to execute all necessary conveyances, leases, mortgages, etc.”. We may not close our eyes to article Twentieth nor disregard its provisions as surplusage. Effect must be given, so far as possible, to all parts of a will. It seems to us that article Twentieth was included in the will to dispel any doubt that might arise as to Mary E. Jones’ intent to authorize her executor-trustees to sell the real estate devised to them in trust under article Fifteenth or devised to them under article Nineteenth, the residuary clause of the will.

Even if in a case such as this it could be said that there were two reasonable, but conflicting, inferences which might be drawn as to the intent of the testatrix in writing article Fifteenth we should choose that construction which the law favors by reason of common experience, that is, that the power of sale continues beyond the date of the termination of the trust (see Cussack v. Tweedy, 126 N. Y. 81; Forman v. Young, 166 App. Div. 815; Matter of Ring, 98 Misc. 119; Hutkoff v. Winmar Realty Co., 211 App. Div. 726; Matter of McLaughlin, 193 Misc. 192, affd. 275 App. Div. 652). In the last case cited (p. 193) Surrogate Delehanty correctly stated the principle that may be gleaned from the cases as follows: The authorities say that a general, unlimited and unrestricted power of sale of realty is not inconsistent with the devise to another of a vested interest in the same property. These cases say that if the tenor of a will does not limit the power to sell expressly or impliedly upon the trust term, the power is deemed to continue unaffected by the passing of the title to the trust res (Cussack v. Tweedy, 126 N. Y. 81; Hutkoff v. Winmar Realty Co., 211 App. Div. 726). Commentators are in agreement with these principles (Chaplin on Express Trusts and Powers, p. 570; 3 Scott on Trusts, pp. 1890-1891).”

It is not surprising that the courts should favor a construction which continues the power of sale. Buies of construction of wills operate as presumptions and like other presumptions indulged by the law have generally been derived from common experience. If a general power of sale is conferred upon trustees costly partition actions with their attendant delay may be avoided — particularly complicated and protracted where infants and incompetents are involved — and the possibility of discord among the residuary owners may at least be reduced, if not eliminated. Those are salutary results and so it is reasonable to expect that a decedent would wish to accomplish them. Moreover, it is reasonable to assume that a testatrix who has given her property into the hands of another to manage with absolute freedom of discretion during the period of two lives in being, has sufficient confidence in such person’s judgment, to leave it to such person to determine, when the trust has ended, whether the interests of the remaindermen will best be served by a sale of the property and a division of the proceeds obtained thereby.

Only one case has been called to our attention where it has been held that the power of sale conferred upon the trustee was a limited one. That is the early case (1876) of Bruner v. Meigs (64 N. Y. 506), where the power of sale was limited by the terms of the will to the continuance of such trusts ”. That is not this case.

The construction placed upon the power of sale below was correct.

It appears that on July 13,1952, a month after the trust had terminated, the appellant went to the Eaton’s Neck property which forms part of the corpus of the trust, and there demanded that the caretaker desist from collecting parking fees from the visitors to the property and over the protest of the caretaker began, herself, to collect such fees.

The appellant’s position is that the trust having terminated, the trustee was without power to continue to manage, operate and control the real property forming the corpus of the terminated trust and that the Surrogate’s Court was without power or jurisdiction to grant such powers to the trustee; that the appellant remainderman, as an owner in common, had legal title and could not properly be restrained from managing and controlling her own property.

The trustee recognizes, as we have already said, that the trust terminated upon the death of the second measuring life. It is his contention, however, that his duties and rights as trustee did not end at that time but that there remains, after the termination of the trust, the duty of finally accounting and of conveying the corpus to the persons entitled to it, and there remains to him the absolute right to be discharged by the court before he relinquishes control of the trust property. This, he contends, necessitates his having the power to manage and control the property, to the exclusion of the remaindermen, pending final accounting by him.

A tenant in common has the right to enter upon her land and take the rents and profits thereof. Of course, one joint tenant may maintain an action to recover his just proportion against his cotenant who has received more than his or her own just proportion (Real Property Law, § 532). But, we are not here concerned with that problem. This case deals only with the question of the trustee’s right to exclude a cotenant from management and control of the property after termination of the trust but before final accounting.

With respect to personal property belonging to a terminated trust the rule is that the duty remains with the trustee to divide the personalty and to distribute it and the trust is not complete until the trustee has finally accounted, distributed the property to the persons entitled to it and been discharged (see Matter of Miller, 257 N. Y. 349, 355; Neary v. City Bank Farmers’ Trust Co., 260 App. Div. 791, 793). A different role obtains with respect to trusts of real property. That rule we stated in Matter of Miller (supra, p. 356), as follows: In respect to the real estate # * * the Surrogate was without jurisdiction concerning expenditure, income, commissions or any other item relating to it. Upon the termination of the trust, title to that realty immediately vested in the widow and the other beneficiaries mentioned in the will. (Watkins v. Reynolds, 123 N. Y. 211; Townshend v. Frommer, 125 N. Y. 446, 461.) The trustees no longer possessed a right under that instrument to perform any act of administration in respect to such real property. The trust had ended and no court was warranted in extending the term. That part of the judgment in the Supreme Court action which assumed to bestow upon retiring trustees of a terminated trust a continuing faculty as testamentary trustees to control and manage the real estate for an indefinite duration is unauthorized.” (See, also, Matter of McLaughlin, supra, 193 Misc. 192, 193-194, affd. 275 App. Div. 652), where Surrogate Delehanty wrote: “It is now settled law (Matter of Miller, 257 N. Y. 349) that title to real estate which constitutes the corpus of a trust vests in the remainderman perforce the provisions of the will and immediately upon the termination of the intervening estate. The incidents of ownership thus acquired are complete and unencumbered except for the power of sale which still remains in the trustee. * * *” And, section 109 of the Beal Property Law provides: “ When the purpose for which an express trust is created ceases, the estate of the trustee shall also cease.”

Consequently, the trustee here no longer possesses a right to perform any act of administration in respect to the realty. Ownership in the remaindermen is complete and unencumbered except for the power of sale which still remains in the trustee. The remaindermen may not be restrained from collecting the rents-and profits falling due from the realty.

In the first above-entitled proceeding the order of the Appellate Division should be affirmed, with costs to all parties filing briefs payable out of the estate.

In the second above-entitled proceeding the orders of the Appellate Division and the Surrogate’s Court should be reversed and the motion of the respondent for a restraining order denied, with costs to the appellant in all courts and to the respondent in this court, payable out of the estate.

Lewis, Ch. J., Desmond, Dye, Fuld, Froessel and Van Voorhis, JJ., concur.

In first above-entitled proceeding: Order affirmed.

In second above-entitled proceeding: Orders reversed, etc.


source: Caselaw Access Project

author: Desmond, J. Fuld, J.

license: Public Domain

text:
    In the Matter of Holt S. McKinney et al., Appellants. Bush Terminal Buildings Company, Respondent.
    Argued October 19, 1953;
    decided January 14, 1954.

      Henry Cohen and Holt S. McKinney, in person, for Holt S. McKinney and another, appellants.
    I. Appellants’ petitions for appraisal were presented in time. (Anderson v. International Minerals & Chemical Corp., 295 N. Y. 343; Matter of Thomas, 259 App. Div. 843; Standard Brewing Co. v. Peachey, 202 Misc. 279; Matter of Isaac [Bohack Realty Corp.], 198 Misc. 85.) II. The plan of recapitalization gave rise to a right of appraisal as to both common and preferred stock. (Matter of Silberkraus, 250 N. Y. 242; Matter of Kinney, 279 N. Y. 423.)

      Vermont Hatch, John M. Johnston and Malcolm J. Edgerton, Jr., for respondent.
    I. Petitioners are not entitled to an appraisal and payment of the value of their stock pursuant to section 21 of the Stock Corporation Law because of their failure to assert any such right within the time limited therefor by statute. (Matter of Marcus [Macy & Co.], 297 N. Y. 38; Matter of O’Hara, 133 Misc. 184; Matter of Thomas, 259 App. Div. 843; Matter of Millard v. Moore Co., 221 App. Div. 113, 246 N. Y. 546; Standard Brewing Co. v. Peachy, 202 Misc. 279; Matter of Isaac [Bohack Reatty Corp.], 198 Misc. 85.) II. No provision of the plan of recapitalization gave rise to a right of appraisal in petitioners either as to their preferred or common stock. (Matter of Gerstle-Rhein S. A. [Merry Hull, Inc.], 194 Misc. 795; Matter of Kinney, 279 N. Y. 423.)
   Desmond, J.

Petitioners-appellants McKinney are the owners of sizable blocks of both the cumulative preferred stock and the common stock of respondent Bush Terminal Buildings Company. They object to a plan of recapitalization adopted by respondent, which, as briefly described, contemplates the split-up of old $5 par value common stock into fifty shares of new ten-cent par value common, and a (voluntary) exchange of each share of existing $100 preferred stock, plus accumulated dividends, for $100 principal amount of new mortgage bonds plus one share of new $50 par value preferred plus one share of the new ten-cent common stock. This proceeding was brought by the McKinneys for an appraisal of their stock, pursuant to section 21 of the Stock Corporation Law, and was opposed by the corporation, which claimed not only that the proceeding had not been brought within the time limited by subdivision 3 of section 21, but, also, that the proposed plan of recapitalization was not such as to give objecting stockholders a right of appraisal under subdivision 11 of section 38 of the Stock Corporation Law. At Special Term the application was granted and an appraiser appointed. On appeal by the corporation to the Appellate Division, First Department, there was, however, a unanimous reversal on the law with an opinion in which it was held that the application was not made in time. Accordingly, the question as to whether the proposed recapitalization was of such a character as to give objectants a right to an appraisal was not reached by the Appellate Division. Since it is our conclusion that notice of application to the Supreme Court for an appraisal was not served on time, under the plain language of the statute, we do not reach the other question, that is, as to whether any of the provisions of the plan of recapitalization gave rise to a right, in dissenting stockholders like petitioners, to an appraisal as to either their preferred or their common stock.

Section 21 of the Stock Corporation Law contains a precise time table for preliminary objections by nonconsenting stockholders, for demands by them for payment, and for bringing a proceeding for appraisal if those demands for payment are not met. These petitioners made their original objections in time, but did not bring this proceeding in time, as we will show. Since petitioners failed to comply with those mandatory time requirements of the statute, they are put to the necessity of arguing here that the time limitations of the statute are not to be. literally applied when, as here, the approval vote of stockholders is conditioned on a further action by directors, or that, to such a case, the time limitations of the statute are not applicable at all.

Article 4 of the Stock Corporation Law, applicable to various kinds of amendments of certificates of incorporation, including changes in capital stock, is specifically made subject to section 21 of the same law, and section 21 says, in its subdivision 1, that if a corporation’s stockholders have taken action for such a change in capitalization and if any stockholder has made timely objection and demand for payment, the corporation within ten days after the last day on which a demand for payment might have been made, shall mail to the objecting stockholder an offer of payment for his stock. Here, the petitioners made due objection and demand but the corporation did not respond with an offer to pay. That brings up subdivision 3 of section 21 which says that, if the corporation fails to make an offer to buy the stock, the nonassenting stockholder may petition the Supreme Court to determine the value of the stock, but — and here we come to the time question before us on this appeal — such petition, on five days’ notice, shall he made returnable in court on the fiftieth day after the last day ,, the demand of the objecting stockholder for payment might have been made, or on the first succeeding day permitted by the practice of the court. Our first question, then, is as to the date from which that fifty days is to be computed.

Subdivision 11 of section 38, which is part of article 4 (supra), applicable to changes in capitalization, requires that, when at least twenty days’ notice of a stockholders’ meeting on a plan of recapitalization has been given, as was done here, objecting stockholders, in order to have a right to appraisal and payment, must object to the plan and demand payment before the vote authorizing such action. The stockholders’ meeting in this case was held on November 26, 1951, and these petitioners filed their objection and demand on November 6th and 7th, respectively, thus putting themselves in a position to move in court for appraisal if the corporation should not make a satisfactory offer of payment. This corporation did not make any such offer of payment. In that situation, under subdivision 3 of section 21 (supra), petitioners’ only further right as to appraisal was conditioned on their bringing a proceeding in Supreme Court returnable on the fiftieth day after the last day on which their demand for payment might have been made. Since this stockholders’ meeting voted in favor of this plan on November 26, 1951, as aforesaid, that was the last day for petitioners to demand payment, and the fiftieth day after November 26, 1951, was January 15, 1952. However, this proceeding was not begun until these petitioners, on May 1, 1952, served their petition for appraisal returnable May 6, 1952, nearly five months after the fiftieth day. We, in Matter of Marcus (Macy & Co.) (297 N. Y. 38, 44), reminded the Bar that the Legislature has clearly prescribed the conditions under which a nonconsenting stockholder may have his stock evaluated and enforce payment therefor. ” Similarly, in Anderson v. International Minerals & Chemical Corp. (295 N. Y. 343, 350), we pointed out that the Stock Corporation Law prescribes the sole method and the sole conditions for appraisal mid payment.

How then do petitioners seek to avoid the effect of their delay? They point out that the notice of such meeting of stockholders called for a vote on a proposed plan of recapitalization but provided, also, as a part of the proposed plan, that,, the approval by^ stockholders was to contain and be accompanied by an'authorization by the stockholders to the directors “ in their discretion, to declare the Plan operative ”. The stockholders did so vote at their meeting — that is, they approved the proposed plan, authorized the amendment of the certificate of incorporation and the execution of a new mortgage, accordingly, but left it to the discretion of the directors to put the plan into operation. The directors determined, later, that the plan should become operative upon receipt of consents for exchange of stock from the holders of at least 80% of the preferred stock but could be declared operative by the directors on receipt of such lesser percentage as the board of directors might determine. In other words, although the stockholders ^approved and authorized the plan as required by law, they | reserved to the directors a power of final action to put the | plan into effect. Petitioners argue that such a conditional X authorization by stockholders is not within the contemplation of the statutes, but we see nothing in any of the statutes forbidding the addition of such a reservation. As pointed out by the Appellate Division, there are a number of reasons why such a reservation might be appropriate, including the pend-ency of proceedings before the Federal Securities and Exchange Commission for registration of the new securities, a proceeding which was required here, and which registration with the commission did not become effective until February 14, 1952, or nearly three months after the meeting of stockholders. There seem to be no decisions in the appellate courts of this State on this precise question, but there are a number of cases in the lower courts holding valid stockholders’ authorizations which were made subject to various conditions, such as subject to the number of objectors (Matter of O’Hara, 133 Misc. 184), or subject to opinion of counsel (Standard Brewing Co. v. Peachey, 202 Misc. 279). In Matter of Isaac (Bohack Realty Corp.) (198 Misc. 85), the situation was much like the one we have here, since there the stockholders’ vote of approval required the affirmative vote of the board of directors to consummate the plan, and objecting stockholders who did not bring their proceeding in time argued, as petitioners do here at one point, that the time would not he set running until the directors should approve the plan. This contention ivas rejected in the Isaac case, under the authority of Matter of Marcus (Macy & Co.) (supra), which says that the precise language of section 21 cannot he altered by the courts.

Petitioners here go so far as to say that the language of paragraph (d) of subdivision 11 of section 38, as to “ the vote authorizing such action ’ ’ should be taken to mean, in a case like this, the subsequent vote of directors putting the plan into final effect. The difficulty is, though, that a reading of the whole of sections 21 and 38 shows that, throughout those statutes, the “ vote ” referred to is a vote of stockholders, and the whole purpose and sense of both statutes is that the various changes described require, for validity, the affirmative \Tote of an appropriate number of stockholders. The fact that this plan required further action by directors cannot change the statutes which condition the right to appraisal on the objectors doing certain things in timely relation to the action taken by the stockholders.

A further argument of petitioners is from sections 36 and 37 of the Stock Corporation Law which state the requirements for the certificate of amendment which ultimately effects the change in capitalization, and require that, in a case like this, the certificate be subscribed by certain corporate officers. Petitioners argue, therefore, that the statutory phrase: vote authorizing such action ’ ’, which fixes the time for demand for payment by an objecting stockholder and thus fixes the beginning of the fifty days, must refer here to a vote not of the stockholders but of the directors, since only a directors’ vote can put this plan finally in effect. The answer to this is, as already stated, that sections 21 and 38 cannot be read as referring to any voting except voting by stockholders. The record shows that the resolution passed at the stockholders’ meeting of this corporation contains an authorization to the “ proper officers of the Company * * * to execute and file a Certificate of Amendment ”. In other words, when appellants tell us that what the statute provides for is an authorization by stockholders to officers to execute a certificate of amendment and other necessary papers, they are met by the answer that this is exactly what this stockholders’ meeting did authorize, although the same resolution left it to the discretion of the directors as to when (and whether) to declare the plan operative.

What appellants are really complaining of is this: that, if these statutes be construed so as to require the bringing of this proceeding within fifty days of the stockholders’ meeting even though the day of putting the plan into effect and the question of whether or not to put it into effect have been left to the directors, then, say appellants, dissenting stockholders will be required to bring a proceeding for appraisal at a time when they do not know whether the plan will ever actually go into effect. But their plight is not as bad as it sounds. Any such recapitalization plan can always be abandoned^ by the corporation, it would seem (see Matter of Millard, 246 N. Y. 546, where a proposed sale was dropped after appraisal proceeding’s were under way), in which event objecting stockholders will have been put to the trouble and expense of a useless appraisal proceeding. The statute itself recognizes this possibility, in subdivision 6 of section 21, which starts out by i providing that, after a stockholder has objected and demanded payment, his right to receive dividends, and all his other stock-1 holder’s rights cease. Then the next sentence of subdivision 6 says, among other things, that if the action to which the object-ant objects be abandoned or rescinded, the status of the objecting stockholder shall be restored and he shall then receive any dividends to which he would have been entitled had he not demanded payment and appraisal. A question comes to mind, of course, as to what will or would happen, in a situation like the present one, if the appraisal proceeding was timely brought, but the corporate action, made subject to final decision by the directors, was still in abeyance at the time the proceeding for appraisal came on to be heard at Special Term. The answer is, we assume, that, in such event, the proceeding for appraisal would have to be adjourned to await the action of "directors, and, if the corporate action should finally be abandoned, subdivision 6 of section 21 (supra), would come into play. That is the best available answer, and, if some better protection is to be afforded dissenting stockholders, the Legislature will have to amend the statute. In any event, a non-assenting stockholder who fails to come into court in time can hardly excuse that delay by a showing that the statute which he failed to follow might not have worked out to complete justice for him, had he obeyed its time limitations.

The dissenting opinion in this court takes the position that the corporate action here was defective and ineffective since, it is said, the stockholders could not validly leave to the directors, in their discretion, the ultimate decision as to amending the certificate or not. But there is nothing in the corporation statutes of this State outlawing such an arrangement. No one doubts that, under article 4 (supra), it is the stockholders who must authorize these corporate charter and stock changes, but here such authorization was obtained, in due form. And, when that consent had been given by the owners of the required percentage of stock, the statutory rules for their protection had been obeyed, the statutory intent was satisfied, and those who withheld their assent had their clearly defined remedy. The Legislature has nowhere prohibited — nor would it have any reason for prohibiting — voluntary action by the majority of the stockholders leaving it to the directors, who manage the corporation in other respects (General Corporation Law, § 27) to decide when and if the plan consented to, should go into effect. In most instances, like the present one, the plan itself is initiated by the directors, and the stockholders are merely consenting to a proposal by the directors. It may be that, in some dark and devious manner hinted at but not explained, this device of leaving to the directors the putting into effect of the plan may be used to cheat minority stockholders, but we see no sign here of such chicane, but of routine corporate management only.

The order should be affirmed, with costs.

Fuld, J.

(dissenting). This case presents another instance of the anomalies and contradictions that arise when the corporation laws are used in a manner which the legislature neither sanctioned nor contemplated. (Cf. Eisenberg v. Central Zone Property Corp., 306 N. Y. 58.)

On October 17, 1951, petitioners — the owners of 980 shares of 7% Cumulative Preferred Stock (with dividends in arrears) and 202 shares of Common Stock of respondent Bush Terminal Buildings Company — were notified of a special meeting of respondent to be held on November 26 to vote upon a so-called “ Plan of Becapitalization,” involving, among other things, an amendment of the certificate of incorporation and a reduction of the corporation’s capital. The notice “ told ” the stockholders that there was no right of appraisal. However, undeterred by such advice, petitioners sent in their proxies against the proposals and demanded appraisal and payment of their shares.

At this meeting of November 26, the plan was approved by a large majority — but with the proviso that the Board of Directors, in its discretion, be and hereby is authorized to declare the Plan of Becapitalization operative and, in the event that the Plan be declared operative, to take or cause to be taken all such other action as it may deem necessary or advisable to carry the same into effect ”. (Emphasis supplied.) Petitioners promptly sent their stock certificates to the corporation for notation thereon of their demand for payment, but the certificates were returned, unmarked, on the ground that there was no right of appraisal.

The record is silent as to what, if anything, the directors did between November 26, 1951, the date of the meeting, and February 15, 1952, when they sent a letter to the preferred stockholders asking them to consent to exchange their stock for the new securities provided for by the plan. In that letter, the directors stated that they would declare the plan effective, if holders of 80% of the preferred stock agreed to the exchange — but they reserved the right to declare the plan operative with a smaller number of consents. Almost two months later, on April 7, 1952, the directors finally voted to make the plan effective, although, it is to be noted, the specified percentage of consents had not been obtained. Learning of this action within a few days, petitioners again sent their certificates to the corporation for appropriate notation, and again it was refused. Thereupon, on May 1, 1952, pursuant to section 21 of the Stock Corporation Law, they filed the present petition for appraisal of their stock in the Supreme Court.

No one reading the record before us can fail to be impressed with petitioners’ diligence in declaring and maintaining their position as dissenting stockholders. Nevertheless, the court is holding that their petition was not timely, because the legislature has prescribed a ‘ ‘ precise time table ’ ’ under which petitioners. were required to file their petition for appraisal by January 15,1952 — almost three months before it could possibly be known whether there was to be a plan or a charter amendment.

In my view, this is, at best, to insist on strictissimum lus with respect to the stockholder, while sanctioning noncompliance with the statute on the part of the corporation.

Section 38 of the Stock Corporation Law provides that objecting stockholders, in order to have a right of appraisal and payment, must object to the action and demand payment “ prior to the vote authorizing such action ” (subd. 11, par. [d]), and section 21 requires that they must file their petition for appraisal on the fiftieth day after the last day on which [such] demand * * * might have been made ” (subd. 3).

The crucial question, therefore, is, when was the vote had which authorized the action. Respondent argues that the stockholders’ vote of November 26 was the vote and action specified by the statute. Petitioners argue that where, as here, the stockholders merely authorized the directors to act in their discretion, the vote and authorization were not complete until the directors had exercised their discretion in favor of the action. If, as the court is deciding, petitioners are not permitted, for the purpose of their appraisal proceeding, to split the vote and authorization prescribed by the statute into two parts, it certainly follows that the corporation is likewise without warrant in endeavoring to split the vote. Consequently, the requirements for amendment of the corporate charter were never complied with and no proper corporate action ever voted.

The issue here involved is more basic than the right of these petitioners to the appraisal which they seek. The stockholders ’ vote is the care and concern of the entire statutory scheme for charter amendment and change.

Section 27 of the G-eneral Corporation Law provides that the general affairs of a corporation are to be managed by its board of directors. However, when it came to fundamental changes, the legislature reverted to the original source of authority, the stockholders. An amendment of the charter, such as was here contemplated, can only be effected by filing a certificate which, by section 37 of the Stock Corporation Law, must be “ subscribed and acknowledged by the president or a vice-president and the secretary or an assistant secretary ” (subd. 1, par. [c]), who must make and annex an affidavit stating that ‘ ‘ they have been authorized to execute and file such certificate by the votes * * * of the holders of record of a majority [in certain cases; in others, two-thirds] of the outstanding shares entitled to vote at the stockholders’ meeting * * * with relation to the proceedings provided for in the certificate ” (subd. 1, par. [c], cl. [1]).

It is evident that the legislature deliberately excluded the directors, as such, from any voice in the determination of these questions, and that the action of the officers is entirely ministerial. The specified" authority — and it is the only one needed or permitted — is action by the stockholders authorizing the officers to execute and file the certificate. That action may be, as usually it is, taken at a meeting, but it may also be taken without one (§ 37, subd. 1, par. [B]). In .either case, definitive action by the stockholders — without the intervention of the board óf"directors — is the essence of the entire statutory scheme. Unless this requirement is complied with, the assenting stockholder cannot know what he is authorizing; unless there is such compliance, the dissenting stockholder cannot be protected.

The resolution adopted at the stockholders’ meeting of November 26, 1951, did not comply with the statute’s demands. Instead of authorizing the officers named in section 37 to subscribe and acknowledge a certificate of amendment, as the statute required, it authorized the board of directors simply to proceed or not ‘ ‘ in its discretion. ’ ’ Even if the statute were not as clear as it is in directing what must be done, such a resolution would violate the maxim, “ Delegatus non potest delegare.” The statute neither sanctions nor leaves room for blank checks.

XThe requirement of definitive stockholder action is emphasized, and the deficiencies of the resolution highlighted, when the provision's designed for the benefit of dissenting stockholders are considered. As the court points out, the legislature has prescribed a time table for action when there are dissenters. That time table is intelligible and appropriate, however/ only when proper stockholder action is taken, and, as this very case demonstrates, it becomes involved in contradictions and absurdities, if a corporation is permitted to do what was here done.

l‘observe, in the first place, that the entire right of appraisal is made dependent on an actual change in the charter. “ If ”, declares section 38, “ the certificate ” effects certain changes, then, the stockholder not in favor of such action may object, in which case either he or the corporation is entitled to have the stock appraised and payment made for it. , It is too farfetched, I suggest, to say that the legislature intended that petitions for appraisal should be filed and prosecuted even before it could possibly be known whether there would ever be a certificate of amendment. It would be just as reasonable, I 'am impelled to interpolate, to require one to commence an / action for breach of contract before the contract is violated or to institute a suit for divorce on the possibility that grounds; therefor will later eventuate.

On the argument before us, counsel for respondent was asked, what would happen if the petition came on for hearing before the directors exercised their discretion, and his answer was that it would have to be adjourned. If that be so, the question arises, where is the authority for refusing to permit the prosecution of the right * * * to have such stock appraised and paid for ”? And for how long? In the case before us, it would have been only a period of months, but it might just as well have been years. I know of no other instance, in the entire range of the law, of such an anomalous proceeding, andjb-perceive no basis for attributing~su*ch a design' to the lq^islature.

Indeed, by reason of other requirements of the statute’s time table, such a proceeding is more than an anomaly; it may actually become a potent instrument for oppression. The stockholders’ vote terminates the dissenter’s rights as a stockholder and limits his claim solely to the ultimate award, and he may not thereafter resume his status as a stockholder without the consent of'the corporation. Within twenty days after the vote, the -stockholder must send his certificate to the corporation for appropriate notation, so that the rights of innocent third persons may not intervene. This means, not only that his interest becomes, in effect, nonsalable, but that he is deprived of current income that he would otherwise have received in the form of dividends. These may appear to be the necessary or appropriate concomitants of a charter amendment and a vested right to payment. But to impose these disabilities exceptúas corollary to a right to payment would appear to be so harsh and purposeless as to require the very plainest language of the legislature.

Such consequences as these, I venture, account for the form of the resolution here adopted. Those in control of the corporation were seeldng a means to force the preferred ’ stockholders to accept the “ voluntary ” plan, while at the same time depriving them of the right to appraisal which the legislature intended them to have as an alternative. (Cf. 1938 Report of Securities Exchange Commission on Protective and Reorganizations Committees, pt. VII, § III, p. 109 et seq.) If that sort of vote and action is permissible, then — as was said, though in an entirely different context (Garner v. Los Angeles Bd., 341 U. S. 716, 728, per Frankfurter, J.) — “ All but the hardiest may well hesitate ” to voice their dissent. In truth” under the circumstances present in this case, the right to appraisal, intended to protect dissenting stockholders, ceases to be a right and becomes a trap. “ All of these corporation statutes ”, we wrote in Small v. Sullivan (245 N. Y. 343, 354), “ have their legitimate purposes, but they cannot be used as a blind ”.

Every legitimate corporate objective could have been accomplished without sanctioning the sort of conditional and qualified resolution here used. Respondent, however, contends that there are practical reasons why such a resolution should be permitted. Even if the statute were not clear, these contentions would offer little aid to construction. :

It is urged, for example, that the corporation should know how much money will be required for dissenters before it is committed to proceed. That very argument, however, was the basis and reason for the amendment made in 1934 (L. 1934, ch. 764, amdg. Stock Corporation Law, § 38), whereby the demand for payment by the dissenter must be made “ prior to ” the vote instead of after it is recorded. (See, e.g., 1934 Bulletins on Committee on State Legislation of Assn. of Bar of City of N. Y., pp. 637-640.)

And the federal laws relating to securities and their registration have even less relevance. Contrary to the implication “contained in the court’s opinion (p. 212), there was no require- ' ment of registration of the new securities with the Securities Exchange Commission, or of a proceeding before that body, as a condition precedent to amendment of the charter. The registration was necessary, only to permit the later solicitation of the preferred stockholders to exchange their shares (U. S. Code, tit. 15, § 77e). Consequently, the stockholders were entirely free, were fully privileged, to adopt an unconditional and unqualified resolution authorizing the filing of an amending certificate. However, to have proceeded in that way would have given a dissenting stockholder an indisputable right to appraisal and payment, and would have defeated the very purpose that the conditional resolution was intended to secure.

We are told, also, that the legislature must have contemplated such a conditional resolution, such an in nubibus approval, as the corporation here employed, because subdivision 6 of section 21 provides that the status of the dissenting stockholder as a stockholder in the corporation must be restored, if the action to the taking of which objection was made shall be abandoned or rescinded ”. These words, if given their natural and legitimate scope, do not justify the kind of cat-and-mouse game with the stockholders which the corporation has here attempted. Section 21 is applicable to a variety of situations in addition to amendments under section 35. For example, a sale of the corporate assets under section 20 is coupled with a right to appraisal and payment under section 21. Indeed, it is in connection with sales and consolidations that the right to appraisal originated in this' state (L. 1893, ch. 638). In the case, of either-a sale or a consolidation, it is J evident that the action by the stockholders may fail of its I object. Even if a binding contract has been entered into," the j other contracting party may fail to obtain the requisite author-i ization or may default. It may, accordingly, be necessary to abandon the action, in which event the reason for the appraisal will, of course, have ceased — well illustrated, I believe, by Matter of O’Hara (133 Misc. 184), one of the very cases cited by the court (opinion, p. 212). We need not dwell on the application of the provision concerning rescission, for here no action was taken by the stockholders’ meeting and, therefore, there was nothing to rescind.

The applicable principles stated, I turn to the controversy" raised by petitioners’ demand for appraisal and payment.

Had the “ corporate action ” taken on November 26, 1951, been proper, the filing of the petition would have been, as respondent asserts, too late. But that action was, I have sought to show, without statutory warrant and, accordingly, the proposed plan was de jure defective. However, it has been carried out de facto, and has, so far as appears, been acquiesced in by all the stockholders except petitioners. If the latter had brought an action for an injunction to prevent the consummation of the plan — as they could have done — a court of equity, on a balancing of conveniences, might well have denied relief, upon condition that they be paid the value of their preferred shares. In a mistaken, but not illogical, belief that the corporate action was completed hy the vote of the directors, petitioners have prosecuted their demand for payment and have, in all other respects, scrupulously complied with the requirements of the statute. Under the circumstances, the present appraisal proceeding should continue. And I would reach the same conclusion, even if I were to agree with the view of the majority that the stockholders’ vote may be made contingent upon subsequent approval by the directors. On that assumption, I see no basis for holding that the corporate action is completed, or that the statutory time table becomes operative, prior to the decision of the directors.

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, and the matter remitted to Special Term so that it may proceed to direct appraisal and payment of petitioners’ preferred stock.

Lewis, Ch. J., Dye and Van Voorhis, JJ., concur with Desmond, J.; Ftjld, J., dissents in opinion in which Conway and Froessel, JJ., concur. , ,

Order affirmed.

      . Since the court does not reach the question, I would merely note that, in my judgment, the proposed plan, by providing for a reduction of capital, effects such “ a material alteration of the preferential rights of the old preferred ” as to entitle dissenting holders of that preferred stock to an appraisal and payment of their shares under paragraph (a) of subdivision 11 of section 38 of the Stock Corporation Law. (Matter of Kinney, 279 N. Y. 423, 431.)

      . The legislature has attempted to mitigate them by requiring the corporation to make an offer. Under the resolution adopted in this case, however, the corporation could not make an offer, because it had no authority to proceed until the directors had exercised their discretion.


author: Lewis, Ch. J.

text:
    The People of the State of New York, Respondent, v. Stella Marshall, Appellant, et al., Defendants.
    Argued October 23,1953;
    decided January 14, 1954.

      Sidney E. Friedman and Martin S. Friedman for appellant.
    I. The failure of the trial court to advise the jury that the statement of the codefendant was not admissible as to defendant-appellant and was only binding upon the maker thereof and constituted no evidence of the guilt or innocence of defendant misled and confused the jury and constituted reversible error. (People v. Vaccaro, 288 N. Y. 170; People v. Ryan, 263 N. Y. 298; People v. McQuade, 110 N. Y. 284; People v. Kief, 126 N. Y. 661; People v. Carborano, 301 N. Y. 39; People v. Robinson, 273 N. Y. 438; People v. Tassiello, 300 N. Y. 425.) II. The trial court committed reversible error in denying defendant-appellant’s motion for a mistrial and this error was emphasized and made even more prejudicial by the trial court’s action, immediately prior to charging, in rereading to the jury the objectionable material and extracting from each individual juror a promise to disregard the admittedly prejudicial and incompetent material. (People v. Mleczko, 298 N. Y. 153; People v. Marendi, 213 N. Y. 600; People v. Pignatoro, 263 N. Y. 229; People v. Sobieskoda, 235 N. Y. 411.) III. The trial court committed reversible error when it by inference and innuendo placed the character of defendant in issue. (People v. Manning, 278 N. Y. 40; People v. Zackowitz, 254 N. Y. 192; People v. Richardson, 222 N. Y. 103; People v. Forte, 277 N. Y. 440.)

      George B. De Luca, District Attorney (John B, Lee and George Tilzer of counsel), for respondent.
    I. The rulings of the court in no way prejudiced appellant. (People v. Ryan, 263 N. Y. 298; People v. Storrs, 207 N. Y. 147; People v. Connolly, 253 N. Y. 330; People v. Miles, 123 App. Div. 862, 192 N. Y. 541; McCarney v. People of State of N. Y., 83 N. Y. 408; People v. Arnstein, 157 App. Div. 766; People v. Mather, 4 Wend. 229; United States v. Johnson, 26 F. 682; People v. Guardino,
      286 N. Y. 132; People v. Pacelli, 251 N. Y. 66.) II. The trial court properly denied appellant’s motion for a mistrial. (People v. Feolo, 282 N. Y. 276; People v. Fisher, 249 N. Y. 419; People v. Leyra, 304 N. Y. 468; People v. Guardino, 286 N. Y. 132; People v. Pacelli, 251 N. Y. 66.) III. No error was committed by the trial court in its charge with respect to appellant’s failure to testify. (People v. Russell, 266 N. Y. 147; People v. Johnson, 185 N. Y. 219.)
   Lewis, Ch. J.

The record which this appeal brings to us for review discloses incidents at the trial which we regard as so prejudicial to the defendant-appellant’s rights as to require a reversal of the judgment of conviction and a new trial.

The two defendants stand convicted by a County Court jury of Bronx County upon an indictment which charged that acting in concert with each other ” they caused to be performed an abortion which was unnecessary to preserve the life ” of the woman aborted. The defendant Benjamin did not appeal from the judgment of conviction entered upon the jury’s verdict.

Upon the trial, at which neither defendant took the witness stand, there was evidence that a pregnant woman was taken by a friend to the defendant Benjamin who, after accepting payment of a sum of money, took the young woman to the apartment of the appellant Marshall who there performed the abortion and received from Benjamin a part of the money which had been paid to her. There was also testimony from a detective that, in the course of the investigation to which he had been assigned, and while he was accompanied by the young woman upon whom the abortion had been performed, he interviewed the appellant who admitted that she knew the defendant Benjamin but denied that she knew the young woman and denied further that she had received money to perform an abortion upon her.

As part of the People’s case, the District Attorney called a stenographer whose direct examination indicated that the prosecution was about to have read before the jury a statement by the defendant Benjamin previously made by her to the District Attorney. Thereupon counsel for the appellant interposed an objection on the ground that, having been taken in the absence of the appellant, the statement was hearsay, and that such statement by the coconspirator Benjamin, made after the alleged conspiracy had come to an end, was not binding-on the appellant. "When that objection was denied with exception to the appellant, her counsel stated: I further ask your Honor now to charge this jury that whatever statement was made by Mrs. Benjamin to the District Attorney is binding upon Mrs. Benjamin alone.” In denying that request, with exception to the appellant, the court stated: ‘‘ The Court will instruct the jury at the conclusion of the case as to the law applicable.” We think the objection by counsel for the appellant to the receipt in evidence of the Benjamin statement was well taken, based as it was upon the following rule of evidence: “Declarations made by one conspirator in the prosecution of the enterprise are evidence against all, but they must be made in furtherance of the enterprise and while the enterprise is pending. Narration of past facts after the enterprise has come to an end by success or failure is not admissible in evidence against the others ” (People v. Ryan, 263 N. Y. 298, 305; see, also, People v. McQuade, 110 N. Y. 284, 307; People v. Kief, 126 N. Y. 661, 662-663; People v. Vaccaro, 288 N. Y. 170, 172).

Not only was the statement by the defendant Benjamin erroneously received in evidence but its prejudicial effect upon substantial rights of the appellant was greatly enhanced when the jury heard read from the Benjamin statement the following questions and answers:

Question: Have you brought other women up to Mrs. Marshall’s? Answer: No.

“Question: This was the first time? Answer: Yes.

“ Question: How did you come to find out that she did this hind of thingf Answer: It was from somebody quite a while ago.’ ” (Emphasis supplied.)

At that point in the examination there was an interruption by counsel and the following occurred:

“ Mr. Friedman [defendant Marshall’s attorney] : Just a moment.

“ The Court: Sustained; strike it out.

“Mr. Friedman: I move at this time, if the Court pleases, for a mistrial on the ground that the statement read by this stenographer is prejudicial.

The Court: Motion denied. The jury will disregard that last statement.

‘ ‘ Mr. Friedman: I respectfully except. ’ ’

It thus appears that at a critical point in the trial a witness for the People read into the record within the jury’s hearing a statement by the defendant Benjamin, a coconspirator, which statement, as to the appellant, was incompetent and inadmissible. In view of the implication which the jury might well have drawn from that statement ■ — ■ that the appellant had done “ * * * * this kind of thing * # *” before — the jury, in compliance with the request made by counsel for the appellant, should have been instructed, contemporaneously with the receipt of the statement in evidence, that it was not competent evidence against the appellant. In the absence of such instructions at that critical time we cannot say that the implication mentioned above did not become indelibly impressed upon the minds of the fact-finders.

In our view the prejudice to the rights of the appellant resulting from the occurrence of that incident mid-trial, was aggravated later at the close of all the evidence when the record shows the following occurred:

‘ ‘ The Court: I wish to call the attention of the jury at the outset before I begin my charge to the fact that inadvertently during the reading of the statement of the defendant Charlotte Benjamin the following questions were asked: ‘ Have you brought other women up to Mrs. Marshall? No.

‘This is the first time? Yes.

‘ How did you come to find out that she did this kind of thing? It was from somebody quite a while ago. I don’t remember the name.

‘ And this is the only girl you brought up there Í Yes.

‘ You are sure of that? That’s right.’

“ I ask the jury — I order this stricken from the record. I ask the jury to completely and absolutely disregard it. Let me have the jury roll, please. I ask you jurors will you disregard such testimony in this case, all the testimony in this case that has been ordered stricken from the record and not make it part of your deliberations.”

The jury was then polled and each member gave an affirmative answer to the court’s question.

We cannot say with assurance that any instructions were given the jurors that served to erase from their minds the excerpt from the Benjamin statement (quoted supra) which the court reread to them after the evidence was closed. As stated in the dissenting opinion in Appellate Division — Reserving the instructions until after the evidence had sunk in and then asking the jury to excise it from consideration as to appellant was not psychologically the equivalent of the proper instruction at the proper time.” (282 App. Div. 36, 42.)

We have recently had occasion to say: 1 ‘ The decision in each case as to whether the trial was fair or unfair, whether the error was harmless or prejudicial, must of necessity depend upon the nature of the proof adduced and upon the type of error committed ” (People v. Carborano, 301 N. Y. 39, 43). In the circumstances disclosed by this record we conclude — paraphrasing language of this court — that the admonition to disregard evidence which had been stricken out was easy to give and hard to follow. (People v. Robinson, 273 N. Y. 438, 445-446; see, also, People v. Posner, 273 N. Y. 184, 190; People v. Mleczko, 298 N. Y. 153, 162; People v. Tassiello, 300 N. Y. 425, 430-431.)

The judgments should be reversed and a new trial ordered.

Conway, Desmond, Dye, Fuld, Fboessel and Van Voobhis, JJ., concur.

Judgments reversed, etc.


author: Dye, J. Fuld, J.

text:
    Alfred J. Bohlinger, Superintendent of Insurance of the State of New York, as Liquidator of The Preferred Accident Insurance Company of New York, Respondent, v. Aaron Zanger, Appellant.
    Argued April 22, 1953;
    decided January 14, 1954.

      Charles P. Butter for appellant.
    I. Defendant, as an insurance broker, functions in a dual capacity and owes a fiduciary obligation to both the insureds and to the insurance company, which obligation cannot be diminished in its extent by any contention that he is agent of one party to an insurance transaction more than he is agent of the other party. (Matter of Ebenstein v. Pink, 249 App. Div. 164, 275 N. Y. 613.) II. No settlement by defendant having been made with the insurance company before its ordered liquidation and cancellation of contracts, defendant, in his dual capacity, discharges his fiduciary agency obligation to the insurance company by paying to it the earned premiums and discharges his fiduciary agency obligation to the insureds by crediting or returning to them the unearned premiums. III. Accepting the construction of defendant’s status as only and exclusively the agent of the insurance company, which is the reasoning of the court at Special Term and affirmed by the Appellate Division, defendant should not pay more than the earned premiums to plaintiff. (Carson v. Federal Reserve Bank, 254 N. Y. 218.)

      Irvin Waldman and Alfred C. Bennett for respondent.
    I. Defendant’s liability as a fiduciary of the now defunct insurance company is fixed by common law and statute. (Matter of Ebenstein v. Pink, 249 App. Div. 164, 275 N. Y. 613; Hermann v. Niagara Fire Ins. Co., 100 N. Y. 411; Von Wein v. Scottish Union Nat. Ins. Co., 20 Jones & Sp. 490; Grace v. American Central Ins. Co., 109 U. S. 278; Bank of United States v. Braveman, 259 N. Y. 65; Gerseta Corp. v. Equitable Trust Co. of N. Y., 241 N. Y. 418.) II. Defendant’s failure to remit to the insurance company the moneys due it for premiums, prior to the entry of the order of liquidation, does not authorize him to interfere with the orderly process of liquidation and give unlawful preferences by dealing with the assets of the defunct company. (Pink v. Title Guar. & Trust Co., 274 N. Y. 167.) III. Defendant must account for and pay over the entire premium collected by him to the liquidator. He may not offset or deduct unearned portions thereof.
   Dye, J.

In this appeal by our permission, we deal with an aspect of the dual agency status of an insurance broker, namely, whether upon the cancellation of policies of insurance pursuant to an order of liquidation, premium moneys in the hands of a licensed broker belong in toto to the statutory liquidator or only so much thereof as represents the prorata premium earned to date of liquidation.

The problem arises in this motion for judgment on the pleadings in an action brought by the State Superintendent of Insurance as statutory liquidator of the Preferred Accident Insurance Company against the defendant, a licensed broker, for insurance premiums collected, but not remitted to the company prior to effective date of the liquidation order. For the purposes of this motion, we treat as true the allegations in the pleadings from which it appears that prior to May 2, 1951 (the effective date of the liquidation order), the company had issued in due course and at the request of the defendant broker, two policies of automobile insurance to two separate individuals who paid the broker the full premium and which the broker had not remitted to the company prior to the effective date of the liquidation order. The liquidator sues to recover such sums in toto.

In his answer the defendant broker admits that he collected and has possession of the full premiums, but denies that plaintiff as liquidator is entitled to anything more than the prorata premium earned on the respective policies to date of termination, less his commissions, which differences he concedes are due and owing and which he is willing and able to pay and consents that a judgment may be entered against him in such an amount and asks that the complaint be otherwise dismissed.

With the issue thus joined, the plaintiff moved at Special Term in Supreme Court, New York County, for judgment on the pleadings, which motion was granted, except that commissions were allowed, on the general ground that in law, the broker in receiving the premiums was acting for the insurance company (Insurance Law, § 121) and while holding same was its fiduciary (Insurance Law, § 125). Upon appeal the Appellate Division, First Department, unanimously affirmed without opinion.

It is a well-settled principle of common law that an insurance broker, when acting for an insured, is deemed the agent of the insured, which principle is now embedded in the statute (Insurance Law, §§ 111, 119) and that at the same time the broker has authority to receive premiums on behalf of the insurer (§ 121). The validity and applicability of these general principles to this case are not challenged nor are the rights of the insured involved.

The dispute turns, rather, on the meaning of these sections when read in connection with section 125 which, so far as pertinent, provides: “ Every insurance * * * broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as * * * insurance broker and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or in any other capacity. ’ ’

When these sections are read together it cannot reasonably be said that the fiduciary obligation thus created is exclusively for the protection of the company but must be deemed to have reference, insofar as the company is concerned, to those moneys in which the company has an interest. While the statute forbids commingling of funds, it does not, in so many words, require a broker to maintain a separate bank account for deposit of the funds of each such principal so long as the amount held for each principal [is] reasonably ascertainable from the books of account and records of such agent or broker, as the case may be ” (§ 125); that the broker has fully complied with the requirement of this section is not challenged here.

Had the Legislature intended to treat all premium moneys in the hands of a broker as belonging to the company, it is reasonable to assume that it would have said so in more particular language. What they unquestionably had in mind was the well-recognized dual agency status of the broker in his dealings with the companies and their insureds and that there would be times in the course of such dealings when a broker would have moneys in his possession subject to the rights of the insurer, particularly in the situation where the policy concerned is terminated prior to settlement of his accounts. We are told — and the Legislature must be deemed to have known about it — that when termination occurs before settlement of accounts, for which a ninety-day period is allowed (§ 121), it is an accepted practice according to general usage for brokers to deal with such accounts by remitting to the company the prorata premiums earned to date of termination less commission and by refunding to the insured the unearned portion. When, on the other hand, the broker has settled his accounts with the company and remitted to it the full net premium prior to the termination date of the policy, the procedure usually followed is for the broker, if so authorized, to make a claim for refund of the unearned part of the premium or, in a given case, the insured may make his claim direct. If, however, the policy is terminated before the insured has paid the premium either to the broker or to the company, the company has a right to collect from the insured only such sum as represents the prorata earned premium to date of cancellation for in truth that is all the insured justly owes. The Legislature must be deemed to have had the situation and practice in mind when it enacted the applicable legislation and this affords strong grounds for construing the statute as a two-way proposition in the public interest aimed at protecting the company for premiums earned and the insured for refunds of premiums unearned. Such a construction gives recognition to the established relationship of principal and agent existing between broker and insured (Clinchy v. Grandview Dairy, 283 N. Y. 39). We see no distinguishing difference when cancellation prior to settlement is accomplished by operation of law (§ 514).

In such event the liquidator concedes that in dealing directly with an insured to recover an unpaid premium, he may collect only the prorata premium earned to date of liquidation or, if the full premium has been paid prior to liquidation, he may eventually retain only so much as represents the earned premium and, if his assets permit, is obliged to refund the unearned portion. Notwithstanding such common-sense rule, the liquidator says that, when liquidation occurs, such reasonable practices are no longer available, but that, on the contrary, the premium moneys in the broker’s possession belong in toto to the liquidator ; that as soon as the liquidation order becomes effective the broker is without power or authority to do other than turn over in toto all premium moneys in his possession; that to permit him to do otherwise would lead to a substitution of his judgment for that of the liquidator and would lead to the giving of unlawful preference and would amount to an avoidance of the restraining order enjoining him from “ dealing with or disposing of the property or assets of said Company, or doing or permitting to be done any act or thing which might waste the assets or allow or suffer the obtaining of preferences that it is only the liquidator who may make distribution of company assets and then only with the approval of the Supreme Court; that a broker may not interpose his business practices as paramount to statutory sanction for the orderly liquidation of insolvent properties by the liquidator. Upon insolvency, assets must be equally distributed among general creditors without preference or priority (Bank of United States v. Braveman, 259 N. Y. 65; Gerseta Corp. v. Equitable Trust Co., 241 N. Y. 418; Pink v. Title Guar. & Trust Co., 274 N. Y. 167).

In liquidation, the liquidator for all practical purposes takes the place of the insolvent insurer. The liquidation order terminates the company’s existence. The liquidator takes immediate possession and control of the assets and proceeds to a liquidation of its affairs. The broker is trustee for moneys belonging to his principal which, in the event of termination prior to settlement, is the prorata earned portion of the premium. The company, while a going concern, has no right to the unearned portion. That belongs to the insured. Liquidation does not change the situation and the liquidator should not and may not be placed in a better position than the company he takes over and demand that which is not owed. The relationship existing between liquidator and broker, as we see it, is no different than the relationship existing between company and broker. It does not arise out of mutual debt but by reason of a fiduciary capacity imposed by statute (§ 125). The obligation running between the parties is that of trustee and beneficiary rather than debtor and creditor. When so viewed, the earned portion of the premiums is not held by the broker as an offset to a debt owing but rather as a trust fund for the benefit of its insurer or, as here, the successor in interest, the liquidator. The defendant concedes his obligation in that regard and as to it stands ready, willing and able to pay. Under such a view, we find nothing in the statute warranting or reauiring the broker under the circumstances of this case to turn over the full premium in toto to the liquidator. As we read section 125 in connection with sections 111, 119 and 121 and in light of accepted usage and business practice, it is not intended to treat funds in the hands of a broker — when termination occurs prior to settlement — any differently in liquidation than before. The circumstance of insolvency does not operate to convert the unremitted unearned portion of a premium into an asset for the liquidator. We pass on no other question.

The judgments appealed from should be modified to the extent that the defendant is directed to pay to the plaintiff the earned premium on the subject policies to the date of termination, less commissions, and, as so modified, affirmed, with costs to the defendant in all courts, and the action remitted to the Supreme Court with the direction that a judgment be entered in favor of the plaintiff in accordance with the opinion herein.

Fuld, J.

(dissenting). The Insurance Law contains a comprehensive scheme for the conduct of the insurance business, the regulation of those engaged in it and the liquidation of insurance companies whose solvency is questionable. The decision now being handed down, I very much fear, distorts the legislative pattern, as well as the pre-existing common law, and establishes a new set of rules governing the rights of those affected.

From a very early date, the courts have uniformly held that, when an insurer entrusts a broker with a policy of insurance for delivery to the insured, the broker acts as agent for the insurer in collecting and receiving the first premium and, consequently, that payment to the broker is deemed payment to the insurer. (See, e.g., Minett v. Forrester, 4 Taunt. 541, 544-545, 128 Eng. Rep. 441; Mord v. Hartford Accident & Ind. Co., 245 N. Y. 279, 283-284; Allen v. German Amer. Ins. Co., 123 N. Y. 6, 16; Matter of Leterman v. Pink, 249 App. Div. 164, 168, affd. sub nom. Matter of Ebenstein v. Pink, 275 N. Y. 613; Matter of Sommer, 12 N. Y. S. 2d 47; Maloney v. Rhode Island Ins. Co., 115 Cal. App. 2d 238; Mishiloff v. American Central Ins. Co., 102 Conn. 370, 379; Indiana Ins. Co. v. Hartwell, 123 Ind. 177, 192; Ocean Accident & Guar. Corp. v. Emporia Tel. Co., 139 Kans. 106, 110; Sun Ins. Office v. Mallick, 160 Md. 71, 82-83; Gilbert v. Malan, 231 Mo. App. 469, 482; Arthurholt v. Susquehanna Mut. Fire Ins. Co., 159 Pa. 1, 6; Witt v. Employers Liability Assur. Co., 198 Wis. 561; see, also, 2 Mechem on Agency [2d ed., 1914], §§ 2368, 2369, pp. 1939-1942; 16 Appleman on Insurance Law and Practice [1944], p. 164; 2 Couch’s Cyclopedia of Insurance Law, § 452, p. 1297; and cases collected 1 Couch, loc. cit. [1945 Cum. Supp.], § 452, Note 3, pp. 486-487.) And, in 1939, when New York State revised its Insurance Law, that settled rule was written into the statute as section 121:

“ Any insurer which delivers in this state to any insurance broker a contract of insurance pursuant to the application or request of such broker, acting for an insured other than himself, shall be deemed to have authorized such broker to receive on its behalf payment of any premium which is due on such contract at the time of its issuance or delivery or which becomes due thereon in not more than ninety days thereafter.” (Emphasis supplied.)

The language of section 121 is clear, and clear, too, was the legislature’s purpose to reflect “the general custom of the community * * * that payment to the broker constitutes payment to the insurer ” (Report of Joint Legislative Committee on Revision of the Insurance Laws, N. Y. Legis. Doc., 1939, No. 101, p. 13) and to codify “ the rule of law ” that “ payment to the broker is payment to the [insurance] company.” (1 Public Hearing of Joint Legislative Committee for Recodification of the Insurance Law [1937], p. 161. )

As is evident — indeed, as was made manifest by revision notes, committee hearings, legislative reports and the statute itself — section 121 was designed to relieve the insured from all risks stemming from a broker’s possible dishonesty or insolvency. When, therefore, on March 2, 1951, and April 27, 1951, respectively, appellant’s customers paid him the premiums for their policies, they in effect paid the insurer and obtained insurance coverage for a year. Had an order of liquidation not been entered, the insurer, though it might never have received one penny of those premiums, would, nevertheless, have been liable upon the policies and required to pay any and all losses suffered after May 2,1951, the date of the order. The reason is simple: the broker, when he collected the premiums, is deemed to have received their entire amount as the insurer’s agent and on its behalf.”

The rule is precisely the same, if and when the insurer subsequently becomes insolvent. Indeed, as long ago as 1811 (Minett v. Forrester, supra, 4 Taunt. 541, 128 Eng. Rep. 441; see, also, Goldschmidt v. Lyon, 4 Taunt. 534, 128 Eng. Rep. 438), and as recently as January of last year, 1953 (Maloney v. Rhode Island Ins. Co., supra, 115 Cal. App. 2d 238), courts have held that, since payment to the broker is payment to the insurer, the premium received by the broker belongs to the insurer’s assignee in bankruptcy or its liquidator. In the Minett case (supra, 4 Taunt. 541, 128 Eng. Rep. 441) an insurance broker was sued by the underwriter’s assignee in bankruptcy for premiums received by the broker before the underwriter became insolvent. In the course of his opinion, upholding the assignee’s right, Mansfield, C. J., wrote, in language most apposite (4 Taunt. 544-545):

The broker * * * is agent for the underwriter as to the premium * * * and he is supposed to receive the premium from the insured for the benefit of the underwriter * * *. The insurer, with respect to the insured, is supposed to have received the premium * * *. That being so, there is no doubt that at any time after the premiums have been so received by the broker, the underwriter may call upon him for these premiums and compel immediate payment of them * * * and when he became a bankrupt, Ms rigM to the premium was immediately communicated to his assignees; they had a right to call on the broker, and compel him to pay the premium to them for the benefit of the bankrupt’s estate.”

And in the Maloney case (supra, 115 Cal. App. 2d 238) it was unequivocally decided that the fact that the insurer had become insolvent changed nothing; the broker continued to hold the premiums as agent and fiduciary for the insurer and was required to turn over to the statutory liquidator the unearned as well as the earned portion. The opinion reads in part as follows:

When the broker accepts the policy from the insurer and the premium from the assured, he has elected to act for the insurer to deliver the policy and to collect the preminum. [p. 244]
* * *
Thus the real question is whether or not, when the broker is intrusted with and accepts the policy from the insurer for delivery to the assured, and accepts the premium from the assured for delivery to the insurer, such facts create an actual agency.
“ The English and American cases are uniform in holding that in such cases the broker acts as agent for the insurer, [p. 245]
* * #
Thus it must be held that in the instant case appellants were the agent of Rhode Island [Ins. Co.] to deliver the policy and to collect the premium. Therefore, when the premium was delivered to appellants they owed a fiduciary duty to Rhode Island to transmit it and were the agents of Rhode Island for that purpose, [p. 247] ”

And that is as it should be. If the rule, that payment to the broker is payment to the insurer, applies absent insolvency, not only logic and consistency, but reason and fairness as well, dictate that it apply also if insolvency intervenes before the broker transmits the premiums. Assuming, as we must, that, had the insurer continued solvent, appellant’s customers would have enjoyed the same rights and privileges as policyholders whose payments had actually been turned over to the insurance company, I do not understand how it may be said that, when the company has met financial misfortune, those insured customers of appellant may, by treating their premiums as unpaid, avoid sharing the loss which the other policyholders will have to bear.

• Nor does anything in either section 111, 119 or 125 of the Insurance Law — upon which reliance is placed to reach a contrary result — change the common-law rule or weaken in the slightest the meaning of section 121. Section 119, which lists the requirements — such as age, moral character and education — for the issuance and renewal, for the suspension or revocation, of a broker’s license, does not even remotely touch upon the question before us. Section 111 simply defines a broker as the agent of the insured for the purpose of “ placing risks or taking out insurance,” and there it stops. Not a word about the broker being the agent of the insured or acting on his behalf in receiving or transmitting premiums. And, finally, section 125 does no more than prescribe that the broker is to be responsible “ in a fiduciary capacity ” for any funds received by him as broker. While the language does not specify to whom the “ fiduciary ” duty is owed, it is almost self-evident that, when the broker collects premiums under the circumstances described in section 121, he necessarily becomes a fiduciary for the insurer • — for it is “ on its behalf ” that he receives those funds. A broker may, it is true, serve both insured and insurer, but, in the very nature of things, he cannot be agent for both at one and the same time and with respect to the same transaction. To hold otherwise places an unwarranted gloss on the plain wording of sections 111 and 121.

The legislature has used apt language to deal with a practical situation, and there is nothing recondite or mysterious about the arrangements effected. For the purpose of placing insurance, the broker is the agent of the insured (§ 111); for the purpose of delivering the policy and collecting the premium due upon it, he is the agent of the insurer (§ 121; see, also, Hermann v. Niagara Fire Ins. Co., 100 N. Y. 411, 415; Holskin v. Hurwitz, 211 App. Div. 731, 733; Von Wein v. Scottish Union & Nat. Ins. Co., 20 Jones & Sp. 490, 494; Grace v. American Central Ins. Co., 109 U. S. 278; 2 Mechem, op. cit., § 2368, p. 1939; 2 Couch, op. cit., § 452, p. 1297.) That is what this court wrote in the Hermann case (supra, 100 N. Y. 411, 415), and that is what every other tribunal that has considered the matter has, in a variety of contexts, decided. (See cases cited, supra, pp. 235-236, and cases collected, 1 Couch, op cit., § 452, Note 3, pp. 486-487.) As Couch in his Cyclopedia put it (op. cit., p. 1297), “ In fact, it is said to be a general rule that an insurance broker acts for the insured for the purpose of making the application and procuring the policy, and for the insurer for the purpose of collecting and remitting the premium and delivering the policy.”

It may well be that, when a policy is terminated before settlement of the broker’s accounts with the insurer, it is accepted practice” or general usage,” in the absence of insolvency or an order of liquidation, “ for brokers to deal with such accounts by remitting to the company the prorata premiums earned to date of termination * * * and by refunding to the insured the unearned portion ” (opinion, pp. 232-233). But it does not follow from this that a broker may adhere to his practice once insolvency intervenes or an order of liquidation is entered. When the insurer is fully solvent, and presumably able to pay all claims, nothing turns on the broker’s act, or on the capacity in which he acts, in refunding the unearned premium to the insured. Had the broker not made the refund, the insurer would, of course, have done so; the repayment was handled in the most convenient manner and involved no more than a bookkeeping matter. With the advent of insolvency, however, the rights of creditors must be taken into account, and, for the first time, it becomes important to decide whether the premiums held by the broker belong to the insurer or to the insured. However current or accepted it may be, therefore, the practice of brokers in dealing with the funds of a solvent insurer can throw no light whatsoever on the question presented by this appeal, for it is in no way inconsistent with the rule that payment to the broker is payment to the insurer.

Today’s decision may, on superficial consideration, appear to . protect an innocent insured. However, it is pertinent to inquire at whose expense this protection is being afforded. All policyholders who have paid the insurer directly, or whose brokers have transmitted the collected premiums expeditiously, will have to await the orderly liquidation of the insurer’s affairs, and will receive repayment of only so much of their unearned premium as the company’s assets permit. Not so, though, the customers of the broker who delays his remittals; that broker, under the present decision, may conduct a private liquidation and immediately return to his customers the full amount of the unearned premium. Most strangely, therefore, the broker who remits promptly does a disservice to those who employed him to place their insurance.

Moreover, unless the principles now announced by the court are abandoned when the situation is reversed, and it is the broker who is insolvent, the protection which the legislature intended insured persons to have will be undermined and set at naught. Under the logic and rationale of the present decision, if the insurance broker were to become bankrupt, or if he were to convert the premiums in his hands, the insurer could cancel the policy and throw the loss upon the insured so far as the unearned premium is concerned. That is the other side of the coin, the other “way” — so to speak — that we must travel, if, as Judge Dye puts it (opinion, p. 233), the court is construing the statute as “ a two-way proposition ”. While my views concerning the wisdom of such £ £ a two-way proposition ’ ’ may be irrelevant, the legislature’s plain provision to the contrary, its direction that the broker receives the premium “ in a fiduciary capacity ” on 1 ‘ behalf ’ ’ of the insurer, certainly should not be disregarded.

The judgments of the courts below should be affirmed.

Lewis, Ch. J., Conway and Froessel, JJ., concur with Dye, J.; Fuld, J., dissents in opinion in which Desmond, J., concurs; Van Voorhis, J., taking no part.

Judgment accordingly.

      . A wealth of other legislative history further confirms the statute’s design. For instance, the Insurance Department, which sponsored the recodification, announced that proposed section 121 — numbered section 54.3 in the Department’s draft — “is based upon general principles of the law of agency, as the possession of the policy gives the broker an implied authority to receive the premium” (Insurance Law Revision of State of New York, Tent. Draft, Prepared by Insurance Department of New York [1937], § 54.3, p. 123; see, also, Supp. No. 2 to Second Draft [1938], § 54.3, p. 17), and this the Department underscored by its Note to section 50.2, later enacted as section 111 of the Insurance Law; “Under § 54.3 [present § 121],” the Note stated, “the insurance broker or his agent is deemed an agent of the insurer in collecting or receiving premiums.” (Insurance Law Revision, Tent. Draft, op. cit., § 50.2, pp. 101-102. See, also, 1 Public Hearing of Joint Legislative Committee, op. cit., pp. 160-163; Hearings Before the Senate and Assembly Committee on Insurance Recodification Bill [1939], pp. 119-122, 137-142, 154-155.)

      . Significantly, in its Revision Note to section 111, the Insurance Department, after observing that the definition of “ insurance broker ” does not include such incidental services as “ delivering policies and collecting premiums ”, went on to say that the public is protected without requiring the licensing of persons performing those ministerial duties, “since under § 54.3 [present § 121] the insurance broker or his agent is deemed an agent of the insurer in collecting or receiving premiums” (Insurance Law Revision, Tent. Draft, op. cit., § 50.2, pp. 101-102).

      . I know of no authority for the court's statement (opinion, p. 232) that the broker is allowed ninety days within which to remit the premiums collected. Section 121 of the Insurance Law, to which reference is made, does mention ninety days, but manifestly that ninety-day period is a limit on the authority of the broker to receive premiums from the insured, not a latitude to withhold them from the insurer on whose behalf they were received.