author: Thacher, J. Dye, J.

text:
    Twentieth Century Associates, Inc., Appellant, v. Adolph Waldman, Doing Business under the Name of The Ardmore Manufacturing Company, Respondent.
    Argued June 13, 1945;
    decided July 19, 1945.

      Charles Gottlieb, Alexander S. Natanson and Marvin L. Lothstein for appellant.
    I. Insofar as chapter 3 of the Laws of 1945, as amended by chapter 315 of the Laws of 1945, applies to leases executed prior to January 24, 1945, its effective date, it violates section 10 of article I of the Constitution of the United States. The statute impairs the obligations of leases executed prior to January 24,1945. II. The impairment feature of the statute "was not a reasonable exercise of the police power, and therefore not constitutional. (Indiana ex rel. Anderson v. Brand, 303 U. S. 95; Treigle v. Acme Homestead Ass'n, 297 U. S. 189; Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69; Baldwin v. G. A. F. Seelig, 294 U. S. 511; Sturges v. Crowninshield, 17 U. S. 120; Edwards v. Kearzey, 96 U. S. 595; Paterno Investing Corp. v. Katz, 112 Misc. 242, 193 App. Div. 897; Orinoco Realty Co. v. Bandler, 233 N. Y. 24; Sylvan Mortgage Co., Inc., v. Stadler, 115 Misc. 311; People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429; Home Bldg. and L. Assn. v. Blaisdell, 290 U. S. 298.) III. The alleged threat of inflation does not justify the impairment feature of the statute. IV. The statutory impairment of the obligation to pay rentals on preexisting leases cannot be sustained under the legislative excuse that it was designed to “ aid the successful prosecution of the war.” (Hirabayashi v. United States, 320 U. S. 81; People v. Mailman, 182 Misc. 870, 293 N. Y. 887.) V. Chapter 3 of the Laws of 1945, as ¿mended, is unconstitutional, in that it violates the due process clauses of the United States Constitution (14th Amendt., § 1) and of the Constitution of New York State (art. I, § 6). (Nebbia v. New York, 291 U. S. 502; New State Ice Co. v. Liebmann, 285 U. S. 262; Highland v. Russell Car Co., 279 U. S. 253; Buchanan v. Warley, 245 U. S. 60; Block v. Hirsh, 256 U. S. 135.) VI. Chapter 3 of the Laws of 1945, as amended, is unconstitutional in that it violates the equal protection clauses of the United States Constitution (14th Amendt., § 1) and of the New York State Constitution (art. I, § 11). (Smith v. Cahoon, 283 U. S. 553; Skiriotes v. Florida, 313 U. S. 69; People ex rel. Farrington v. Mensching, 187 N. Y. 8.)

      Edwin W. Cooney and Pauline Taylor for City Bank Farmers Trust Company, amicus curiæ, in support of appellant’s position.
    The provisions of the act that completely prohibit the collection of excess rent cannot constitutionally be applied to leases made before the effective date. (Orinoco Realty Co. v. Bandler, 233 N. Y. 24; Nebbia v. New York, 291 U. S. 511; Midland Co. v. K. C. Power Co., 300 U. S. 109; Marcus Brown Co. v. Feldman, 256 U. S. 170; Levy Leasing Co. v. Siegel, 258 U. S. 242; Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398; Worthen Co. v. Kavanaugh, 295 U. S. 56; Gelfert v. National City Bank, 313 U. S. 221; East N. Y. Savings Bank v. Hahn, 293 N. Y. 622; W. B. Worthen Co. v. Thomas, 292 U. S. 426.)

      John C. Crawley and Henry W. Proffitt for The Seamen’s Bank for Savings in the City of New York, amicus curiæ, in support of appellant’s position.

      Martin S. House and Adolph S. Ziegler for Mid-Manhattan Management Corp., amicus curiæ, in support of appellant’s position.
    I. Section 7 of the Bent Control Act violates article I, section 10, of the Constitution of the United States. Begardless of the supposed emergency, the complete annihilation of a contract without recompense to the obligee is beyond the police power of a State. (Sylvan Mortgage Co., Inc., v. Stadler, 115 Misc. 311, 199 App. Div. 965; Highland v. Russell Car Co., 279 U. S. 253; Home Bldg, & L. Assn. v. Blaisdell, 290 U. S. 398; W. B. Worthen Co. v. Thomas, 292 U. S. 426; Louisville Bank v. Radford, 295 U. S. 555; Internat. Steel Co. v. Surety Co., 297 U. S. 657; Gelfert v. National City Bank, 313 U. S. 221; Indiana ex rel. Anderson v. Brand, 303 U. S. 95; Treigle v. Acme Homestead Assn., 297 U. S. 189; Coombes v. Getz, 285 U. S. 434; Central Savings Bank v. City of New York, 279 N. Y. 266; Hirabayashi v. United States, 320 U. S. 81; Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69.) II. Under the New York Emergency Rent Law of 1920, the courts of this State: (1) disavowed the possibility of destruction by a State of accrued contract rights; and (2) refused to recognize a defense of “ oppressiveness ” which was the creature of the statute and would hot have been valid when the contract was made. (Paterno Investing Corp. v. Katz, 112 Misc. 242, 193 App. Div. 897; Sylvan Mortgage Co., Inc., v. Stadler, 115 Misc. 311; 78th Street & Broadway Co. v. Rosenbaum, 111 Misc. 577; Orinoco Realty Co. v. Bandler, 233 N. Y. 24.) III. The. shortage of rentable space does not justify the cancelation of rental obligations under pre-existing leases. (Skiriotes v. Florida, 313 U. S. 69; Health Department v. Rector, etc., 145 N. Y. 32; Fisher Co. v. Woods, 187 N. Y. 90; Paterno Investing Corp. v. Katz, 112 Misc. 242, 193 App. Div. 897; Sylvan Mortgage Co., Inc., v. Stadler, 115 Misc. 311, 199 App. Div. 965.) IV. The State's police power cannot sustain as regulation what is in reality confiscation. (Block v. Hirsh, 256 U. S. 135.)

      Jack Gross for respondent.
    I. Chapter 3 of the Laws of 1945 is a proper exercise of the State police power and covers a proper subject of State concern. (People v. Perretta, 253 N. Y. 305; East New York Savings Bank v. Hahn, 293 N. Y. 622; Barbier v. Connolly, 113 U. S. 27; People ex rel. Durham Realty R. Corp. v. La Fetra, 230 N. Y. 429; Adler v. Deegan, 251 N. Y. 467; Nebbia v. New York, 262 N. Y. 259, 291 U. S. 502; Chamberlain, Inc., v. Andrews, 271 N. Y. 1; Sunshine Coal Co. v. Adkins, 310 U. S. 381; Block v. Hirsh, 256 U. S. 135; Marcus Brown Co. v. Feldman, 256 U. S. 170.) II. Chapter 3 of the Laws of 1945 is not an unreasonable, arbitrary or capricious means of protecting the welfare of the People of the State of New York. (Nebbia v. New York, 291 U. S. 502; Sproles v. Binford, 286 U. S. 374; Carmichael v. Southern Coal Co., 301 U. S. 495.) III. Chapter 3 of the Laws of 1945 is constitutional for it violates neither the Constitution of the United States nor of the State of New York. (People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429; Levy Leasing Co. v. Siegel, 230 N. Y. 634, 258 U. S. 242; Marcus Brown Co. v. Feldman, 256 U. S. 170; Clemilt Realty Co. v. Wood, 230 N. Y. 646; Guttag v. Shatzkin, 230 N. Y. 647; 810 West End Ave. v. Stern, 230 N. Y. 652; People ex rel. Rayland Realty Co. v. Fagan, 230 N. Y. 653; Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69.)

      Nathaniel L. Goldstein, Attorney-General (Orrin G. Judd, Saul A. Shames and Irving I. Waxman of counsel), appearing pursuant to section 68 of the Executive Law in support of constitutionality of the Commercial Rent Law (L. 1945, ch. 3, as amd. by L. 1945, ch. 315).
    I. The statute having been enacted in the face of a public emergency and being designed to aid the war effort, prevent inflation and assist in providing for essential civilian needs, is a valid exercise of the State’s police power, and consequently does not impinge upon any constitutional provisions. (Matter of Fay, 291 N. Y. 198; People ex rel. Henderson v. Supervisors, 147 N. Y. 1; Matter of Murray v. LaGuardia, 291 N. Y. 320; Johnson v. City of New York, 274 N. Y. 411; Rosen v. 370 West 35th St. Corp., 184 Misc. 172; Sissias v. Perlmutter, 184 Misc. 174.) II. The statute is a proper exercise of the State’s police power. (Levy Leasing Co. v. Siegel, 258 U. S. 242; Rosen v. 370 West 35th St. Corp., 184 Misc. 172; 734 Fifth Avenue Corp. v. Kent-Costikyan, Inc., 184 Misc. 12; Old Dearborn Co. v. Seagram Corp., 299 U. S. 183; Matter of Stubbe v. Adamson, 220 N. Y. 459; Carmichael v. Southern Coal Co., 301 U. S. 495; People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429; Veix v. Sixth Ward Assn., 310 U. S. 32.) I'll. The contract clause of the Federal Constitution (art. I, § 10) cannot interfere with the exercise of the police power, and all contracts are made subject to the paramount authority of the State to safeguard the vital interests of its people. (Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398; Stephenson
      v. Binford, 287 U. S. 251; Union Dry Goods Co. v. Georgia P. S. Corp., 248 U. S. 372; Midland Co. v. K. C. Power Co., 300 U. S. 109; Manigault v. Springs, 199 U. S. 473; Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69; People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429.) IV. In the precise field of price-fixing statutes, in which the Commercial Rent Control Law falls, the application of State laws to preexisting contracts has been repeatedly sustained. (Union Dry Goods Co. v. Georgia P. S. Corp., 248 U. S. 372; Midland Co. v. K. C. Power Co., 300 U. S. 109; Stephenson v. Binford, 287 U. S. 251; Dillingham v. McLaughlin, 264 U. S. 370.) V. The efficacy of the police power is further demonstrated by decisions passing on mortgage moratorium laws and kindred legislation. (Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398; Gelfert v. National City Bank, 313 U. S. 221; Honeyman v. Jacobs, 306 U. S. 539; City Bank Farmers Trust Co. v. Ardlea Corp., 267 N. Y. 224; Klinke v. Samuels, 264 N. Y. 144; Norman v. B. & O. R. Co., 294 U. S. 240; Veix v. Sixth Ward Assn., 310 U. S. 32; Sliosberg v. New York Life Ins. Co., 244 N. Y. 482, 275 U. S. 526; Faitoute Co. v. Asbury Park, 316 U. S. 502.) VI. The constitutionality of the Emergency Price Control Act (50 U. S. C. A. App., § 901 et seq.) and regulations issued thererinder have been challenged but have uniformily been sustained. (Bowles v. Willingham, 321 U. S. 503; Yakus v. United States, 321 U. S. 414; Taylor v. Brown, 137 F. 2d 654, 320 U. S. 787; Avant v. Bowles, 139 F. 2d 702; Chatlos v. Brown, 136 F. 2d 490.) VII. The Emergency Housing Act of 1920 (L. 1920, chs. 136-37, as amd. by chs. 942, 953) was sustained against every constitutional objection both by the Supreme Court of the United States and this court. (Levy Leasing Co. v. Siegel, 230 N. Y. 634, 258 U. S. 242; Marcus Brown Co. v. Feldman, 256 U. S. 170; Block v. Hirsh, 256 U. S. 135; People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429, 257 U. S. 665; People ex rel. Rayland Realty Co v. Fagan, 230 N. Y. 653; Guttag v. Shatzkin, 230 N. Y. 647; 810 West End Ave., Inc., v. Stern, 230 N. Y. 652.) VIII. The Commercial Rent Law does not conflict with that provision of the Fourteenth Amendment which declares that no State shall deprive any person of liberty or property without due process of law (Nebbia v. New York, 291 U. S. 502; Hadacheck v. Los Angeles, 239 U. S. 394; Barbier v. Con

      nolly, 113 U. S. 27; People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429; People v. Perretta, 253 N. Y. 305.) IX. The requirement of the equal protection clause is satisfied when the statute applies to all persons similarly circumstanced. (Stebbins v. Riley, 268 U. S. 137; Radice v. New York, 264 U. S. 292; Marcus Brown Co. v. Feldman, 256 U. S. 170; Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283; Northwestern Laundry v. Des Moines, 239 U. S. 486; Chamberlain, Inc., v. Andrews, 271 N. Y. 1.)
   Thacher, J.

Plaintiff appeals from a final judgment of the Municipal Court of the City of New York dismissing its complaint in an action to recover rent under a lease executed prior to January 24, 1945, the effective date of chapter 3 of the Laws of 1945, and seeks to review the constitutionality of said act in its application to such leases. The court below, with the consent of both parties, having construed the statute as retroactively applicable to the plaintiff’s lease, we may determine the sole question of constitutional validity upon the basis of that construction. (N. Y. Const., art. VI, § 7, subd. 2; Civ. Prac. Act, § 588, subd. 4; Doubleday, Doran & Co. v. Macy & Co., 269 N. Y. 272, 281; cf. Matter of Chirillo, 283 N. Y. 417, 421.)

The statute relates to the regulation, control and stabilization of rentals of premises occupied for commercial purposes in cities having more than one million inhabitants. Section 1 thereof contains the following recitals and findings: “ Section 1. Unjust, unreasonable and oppressive leases and agreements for the payment of rent for commercial space in certain cities having been and being now exacted by landlords from tenants under stress of prevailing conditions accelerated by the present war, whereby a breakdown has taken place in normal processes of bargaining and freedom of contract has become an illusory concept, and whereby there have come into existence conditions threatening to obstruct war production and the production and distribution of essential civilian commodities, and to cause inflation, and all of the foregoing situations and conditions being a threat to the successful prosecution of the war and essential civilian activities, and to the public safety, health, and general welfare of the people of the state of New York, it is hereby declared that a public emergency exists, which is increasing in intensity without slackening and without promise of relief so long as present war conditions continue, and that action by the legislature is imperative and will not permit of delay. It is hereby found by the legislature that for the duration of such emergency, the establishment of a maximum rent for commercial space at a level of fifteen per centum above rents charged on March first, nineteen hundred forty-three, or at '& level otherwise determined as provided herein, will curb the evils arising from such emergency and will accomplish the purposes hereby sought to be achieved. This act is declared to be a measure designed to protect and promote the public health, safety and general welfare, to aid the successful prosecution of the war, and essential civilian activities, and to prevent inflation, and is made necessary by an existing public emergency.”

This legislation followed the report of a joint legislative committee appointed pursuant to resolutions adopted in both houses ‘ of the Legislature on March 18, 1944. After exhaustive study and investigation, the committee reported its findings as follows: “ After a careful examination of the facts assembled through the investigations and studies described above, the Committee has concluded that a public emergency existed on March 1, 1943 and still exists because of the exaction and attempted exaction by landlords of unjust, unreasonable and oppressive agreements for the, payment of rent with regard to certain types of commercial real property. The record is replete with illustrations of these practices. It has been found by the Committee that, because of war conditions and the suspension of building construction, there is a serious shortage of premises adapted for manufacturing and merchandising purposes. Moreover, in portions of the City of New York which are heavily tenanted by substantial merchandising establishments, there exists a similar scarcity of space suitable for use as stores. As a result, a breakdown has taken place in the normal processes of bargaining for leases between landlords and tenants of buildings falling within these two categories. Knowing that their tenants cannot obtain space elsewhere, a considerable number of these landlords are demanding, and in many instances have obtained, exorbitant and unjust and unreasonable increases of rent when approached by their tenants for a renewal of existing leases. These demands are in many cases coupled with an insistence that the tenant sign a lease providing for a substantially longer term than that of the current rental agreement and with a reduction of services previously given. In these cases, the landlord’s terms are peremptorily submitted to the tenant in ultimatum form and the latter knows that he must acquiesce or go out of business. As between landlords and tenants in this situation, freedom of contract has become an illusory concept.

“ While the cost of maintaining and operating commercial properties has risen as a result of factors stemming from the war, the increases in rent which many owners of such buildings are exacting and attempting to exact are so excessive and exorbitant as to bear no reasonable relation whatsoever to augmented operating expenses. Furthermore, these increases soar far above the level of a reasonable return on an investment in real estate.” Many graphic illustrations of exorbitant increases of rent contained in new leases already executed were verified by careful inquiry arid set forth in the committee’s report. The effect of these oppressive practices, and resulting business stoppages and migrations, on war production and essential civilian production, it was prophesied, would result in widespread unemployment and farreaching economic dislocations of a most harmful character.

The committee concluded: The Committee is convinced by the facts which have been adduced before it that the health, morals, safety and general welfare of the People of the State of New York, as well as the safety of the Nation, and the successful prosecution of the war and essential civilian activity are menaced by the situation now prevailing in New York City with regard to rentals demanded for manufacturing and store space. It is the Committee’s considered judgment that action by the State Legislature is imperative in order to avert the evils thus threatened. * * * ” Accordingly, the committee recommended this emergency legislation.

At the close of the last war a similar emergency arose in connection with housing conditions in New York City and a group of statutes were enacted to meet the crisis (L. 1920, chs. 136, 942-953). The validity of these laws was considered by this court and by the Supreme Court of the United States and they were sustained as validly enacted in the exercise of the police powers of the State, notwithstanding the impairment of the obligation of the contract of the lessees to surrender possession ” of the leased premises (People ex rel. Durham R. Corp. v. La Fetra, 230 N. Y. 429; Marcus Brown Co. v. Feldman, 256 U. S. 170, 198; Levy Leasing Co. v. Siegel, 258 U. S. 242).

The principle is firmly established today that all contracts are subject to the police power of the State, and, when emergency arises and the public welfare requires modification of private contractual obligations in the public interest, the question is not whether “ legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end ” (Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398, 438; Matter of People [Tit. & Mtge. Guar. Co.], 264 N. Y. 69, 83; East New York Sav. Bank v. Hahn, 293 N. Y. 622).

In the light of the emergency which called into play the police powers of the State in this case, we are unable to say that the measures taken in the public interest were unreasonable or inappropriate to curb the evils arising from the emergency and to accomplish the public purposes declared in the statute. In behalf of the appellant it is argued that the application of the statute to pre-existing leases in no wise tended to accomplish the public ends which the Legislature declared in the statute to be its purposes. This would depend of course upon the volume of unjust, unreasonable and oppressive leases imposed upon tenants before the effective date of the act. Proceeding, as we must in this case, upon the assumption that the Legislature intended the act to be retroactive, we find in the material before the Legislature ample evidence that unjust, unreasonable and oppressive leases and agreements in large volume had been exacted by landlords from tenants under the stress of prevailing conditions accelerated by the war for some time prior to the enactment of the statute. So far as such tenants are concerned, the Legislature was justified in concluding that there was no reality of consent; that their “ freedom of contract ’ ’ had become an illusory concept and that their existing leases had created, and would continue to contribute to, the public emergency. Under these circumstances we may not say that the Legislature, in protecting the grave public interests involved, could not take reasonable means to prevent the enforcement of unjust, unreasonable and oppressive rentals accruing thereafter. Certainly there was nothing arbitrary or unreasonable in the remedy which the Legislature applied, providing, as it did, for arbitration or judicial determination of fair and reasonable rentals in all cases. Under the provisions of section 4 of the act the establishment of “ emergency rent ” at a level of 15% above rents charged on March 1, 1943, could be reviewed either upon application to the Supreme Court or upon submission to arbitration. Judicial determination of a reasonable rent was thus made available to the landlord in every case. No right to recover rents paid prior to the effective date of the act was given to the tenant. Any possible implication of such a right was expressly denied in section 11 as amended (L. 1945, ch. 315, § 2). Furthermore, the evils denounced in the statute flowed, not merely from leases which might thereafter be executed, but even more directly from leases already made, and these evils could not be remedied by regulations purely prospective in their application, although the regulations adopted were only retroactive in that they applied to future payments of rent under pre-existing leases. In the light of the emergency the act seems clearly to prescribe a most reasonable and legitimate remedy, carefully designed as appropriate to the public ends in view and the accomplishment of the legislative purpose to curb serious public evils arising from the emergency.

There was a closely parallel situation which was dealt with under the housing laws of 1920, for in those laws provision was made for reasonable compensation to the landlord during the period after the expiration of a lease when he was prevented from regaining possession notwithstanding the tenant’s obligation to surrender possession at that time. (L. 1920, ch. 136, § 3, renumbered § 4 by L. 1920, ch. 944.) That provision for the payment of reasonable compensation to a landlord who had not even consented to the lease was regarded as reasonable and appropriate to meet the demands of a situation comparable with, but not so serious as, the emergency dealt with by chapter 3 of the Laws of 1945 (Home Bldg. & L. Assn. v. Blaisdell, 290 U. S. 398, 441-442). It should be added that the remedy now prescribed is -temporary, since the operation of the statute is dependent upon the continuance of the emergency and is to continue only until July 1, 1946 (L. 1945, ch. 3, § 14).

Our conclusion that the act was within the police power of the State disposes of the contention that the act violates the due process clause (U. S. Const., 14th Amendt.; N. Y. Const., art. I, § 6). Nor, in the light of the history and purpose of the act, is there any merit in the contention that it is a denial of the equal protection of the laws ” (U. S. Const., 14th Amendt.; N. Y. Const., art. I, § 11; Marcus Brown Co. v. Feldman, 256 U. S. 170, supra).

The judgment should be affirmed, with costs.

Dye, J.

(dissenting). I disagree with the opinion of Thacheb, J. The judgment upholding the constitutionality of the Commercial Rent Law should be reversed.

The retroactive provisions of section 7, chapter 3, of the Laws of 1945, being an unreasonable exercise of the police power, violate article I, section 10, of the United States Constitution.

The domestic rent laws of 1920 were construed as prospective. (Orinoco Realty Co. v. Bandler, 233 N. Y. 24.)

This statute attempts to impair the obligation of contract, legal at inception.

I accordingly vote to reverse the judgment. ,

Lehman, Ch. J., Loughran, Lewis, Conway and Desmond, JJ., concur with Thacher, J.; Dye, J., dissents in separate memorandum.

Judgment affirmed.

       The act was subsequently amended by L. 1945, ch. 315, after the judgment herein appealed from had been entered. No changes were made in section L


source: Caselaw Access Project

author: Per Curiam.

license: Public Domain

text:
    Joseph Glauber et al., Respondents, v. Herman Patof, as President of Weber & Heilbroner Employees’ Benevolent Association, an Unincorporated Association, Consisting of More than Seven Members, Appellant, et al., Defendants.
    Submitted June 12, 1945;
    decided July 19, 1945.

      Seymour Stone for appellant.
    I. The action cannot be maintained unless plaintiffs allege and prove that all the members are liable. (Ostrom v. Greene, 161 N. Y. 353; McCabe v. Goodfellow, 133 N. Y. 89; Schouten v. Alpine, 215 N. Y. 225; Peo. ex rel. Solomon v. Brotherhood of Painters, 218 N. Y. 115; Browne v. Hibbets, 290 N. Y. 459; Harriss v. Tams, 258 N. Y. 229; Hallow v. Hallow, 200 App. Div. 642; Knapp v. Rochester Dog Protective Assn., 235 App. Div. 436.) II. There was no discussion or mention made that plaintiffs had been expelled without notice of the charges and without a hearing. III. The burden of establishing bad faith rests upon plaintiffs and in the absence of proof to indicate that the members knew the law and knew that the expulsion was unlawful, the finding should not have been made that the members acted in bad faith.

      Jerome G. Rosenhaus for respondents.
    The association’s liability for money damages rests upon a finding that there was bad faith on the part of the membership as a whole in countenancing the respondents’ illegal expulsion. (Angelos v. Mesevich, 289 N. Y. 498.)
   Per Curiam.

There was no support in the evidence for the finding that the general membership of the Weber & Heilbroner Employees’ Benevolent Association knew or approved of the irregularity in the expulsion of the plaintiffs or that there was fraud or bad faith on the part of the membership ás a whole. In the absence of such evidence, the court was without power to award a recovery of damages as against an unincorporated association. (General Associations Law, §§ 13, 15, 16, 17; Browne v. Hibbets, 290 N. Y. 459, 467.)

The judgments, so far as appealed from, should be reversed; the fourth and fifth decretal paragraphs should be stricken from the judgment of the Special Term; and the complaint, insofar as it alleges a cause of action for money damages should be dismissed, with costs to appellant in this court.

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

Judgment accordingly.


text:
    " In the Matter of Jennie Kaplan, Respondent. Isaac B. Greenman, Appellant.
    Argued October 1, 1945;
    decided October 5, 1945.

      Benjamin Gassman for appellant.
    I. The Election Law (§ 135) does not require “ personal ” knowledge. (People v. Ryan, 274 N. Y. 149; Shaw v. Railroad Co., 101 U. S. 557; People v. Rosenthal, 197 N. Y. 394; Davenport v. Prentice, 126 App. Div. 451.) II. Special Term erred in invalidating all of the 62 signatures procured by Clasner. (Matter of Davies v. Cohen, 262 App. Div. 452, 286 N. Y. 499.)

      Samuel D. Smoleff for Citizens Union of the City of New York, amicus curiæ, in support of appellant’s position.
    I. Section 135 of the Election Law does not require the witness to a petition to have any acquaintance with the signers. The “ authentication ” provided for in the section is not the technical authentication required by the Real Property Law. (Matter of Travis, 184 App. Div. 505.) II. The conceded facts show that the witness followed a reasonable procedure, which led to a correct and honest result. This form of procedure should be upheld as a valid procedure in obtaining nominating and designating petitions.

      Copal Mintz for Liberal Party of the State of New York, amicus curiæ, in support of appellant’s position.
    I. The word “ know ” is a relative term. It has the same meaning in the affidavit prescribed by section 135 of the Election Law as in affidavits of service of process and in other cognate circumstances. It means no more than “ reasonably believe on the basis of information and circumstance.” (People v. Rosenthal, 197 N. Y. 394; Davenport v. Prentice, 126 App. Div. 451; Madden v. Van Wyck, 35 Misc. 645; Matter of Evans v. Cohen, 264 App. Div. 948, 289 N. Y. 629.) II. The holding by the Appellate Division that on the candidate or his sponsors rests the burden “ to establish ” the subscribing witness’ knowledge of the signers is erroneous, and it unduly burdens and abridges the right of nomination. (Matter of Lefkowitz v. Cohen, 262 App. Div. 452, 286 N. Y. 499; Matter of Ecker v. Cohen, 239 App. Div. 145.)

      Louis Bennett and John T. Power for respondent.
    I. The Election Law requires the subscribing witness to a nominating petition to know personally the persons whose signatures he obtains. (Matter of Whitman v. Cohen, 174 Misc. 1087; Matter of Phillips [Hubbard], 284 N. Y. 152; Matter of Evans v. Cohen, 264 App. Div. 948, 289 N. Y. 629.) II. The decision of the Appellate Division holding as a fact, that the subscribing witness did not “ know ” the signers of the appellant’s petition within the meaning of the statute should be sustained.

      Ignatius M. Wilkinson, Corporation Counsel (William J. Fleming of counsel), for the Board of Elections of the City of New York.
   Per Curiam.

The Appellate Division proceeded upon the assumption, without deciding, that a designating petition may be authenticated as to signatures by a subscribing witness who subscribes to the oath prescribed in section 135 of the Election Law, provided the witness has acted upon information affording him reasonable knowledge as to the identity of the signers. We are satisfied that the subscribing witness may lawfully act upon such information but the finding of the Appellate Division that the witness in this case did not in fact have such information and knowledge is beyond our power of review.

The order should be affirmed, without costs.

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

Order affirmed.


author: Desmond, J.

text:
    Julius Friedrich, Plaintiff, and Julius Friedrich Co., Inc., Appellant, v. Arthur L. Martin et al., as Administrators with the Will Annexed of the Estate of Oliver Costich, Deceased, Respondents, et al., Defendants.
    Argued May 21, 1945;
    decided October 11, 1945.

      James E. Cuff and J. Eugene Goddard for appellant.
    I. Defendants-respondents are estopped from now taking the position that the individual plaintiff and not the corporate plaintiff is the owner of the claim, if any. (Assets Realization Co. v. Roth, 226 N. Y. 370; Schoellkopf v. Coatsworth, 166 N. Y. 77; Houghton v. Thomas, 220 App. Div. 415; Horn v. Bennett, 253 App. Div. 630; Dodds v. McColgan, 222 App. Div. 126; Chauvet v. Ives, 104 App. Div. 303; Credit Alliance Corp. v. Sheridan Theatre Co., Inc., 210 App. Div. 599; McDonald v. Ruggiero, 144 App. Div. 230; Wagner v. Garin, 155 App. Div. 727; Allen v. Clark, 66 Hun 628, 141 N. Y. 584; Dawley v. Brown, 79 N. Y. 390; Sears, Roebuck & Co. v. 9 Ave.-31 St. Corp., 274 N. Y. 388.) II. This action was tried upon the theory that the plaintiff corporation (and not the individual plaintiff) made a contract with one of the defendants and the Appellate Division cannot adopt a new theory for the parties, nor can the respondents abandon upon appeal the theory upon which the action had been tried. (Matter of Whitman, 225 N. Y. 1; Racine v. Morris, 201 N. Y. 240; Phelps-Stokes Estates v. Nixon, 222 N. Y. 93; Caponigri v. Altieri, 165 N. Y. 255; Serviss v. McDonnell, 107 N. Y. 260; Klein-Messner Co., Inc., v. Fair Waist & D. Co., Inc., 217 App. Div. 647; Canaday Cooler Co., Inc., v. Staten Island S. Co., 234 App. Div. 451; Feneran v. Singer Mfg. Co., 20 App. Div. 574; Bigelow v. Woolverton, 144 App. Div. 176.) III. The submission to the jury was made on a charge that the plaintiff corporation was the true party in interest, and since this was not objected to by the respondents, it became “ the law of the case.” (Hayes v. City of New York, 267 App. Div. 535; Wangner v. Grimm, 169 N. Y. 421; Sherman v. Mason & Hanger Co., 147 N. Y. S. 609; Sears, Roebuck & Co. v. 9 Ave.-31 St. Corp., 274 N. Y. 388.) IV. The defense, that the plaintiff corporation was not the real party in interest was not pleaded and therefore is not available to the respondents. (Bleakley Transportation Co. v. Tomkins Cove Stone Co., 224 App. Div. 706; Smith v. Hall, 67 N. Y. 48; Straight v. Shaw, 56 Misc. 426; Shear v. Healy, 208 App. Div. 269; Feinberg v. Allen, 143 App. Div. 866, 208 N. Y. 215; Civ. Prac. Act, § 274; Salmon v. Rochester & Lake Ontario Water Co., 120 Misc. 131; Dodds v. McColgan, 222 App. Div. 126.) V. The cause of action belonged to the plaintiff corporation and not to the individual plaintiff. (Billings v. Shaw, 209 N. Y. 265; People ex rel. Manice v. Powell, 201 N. Y. 194; Holmes v. Willard, 125 N. Y. 75; N. Y. Trust Co. v. American Realty Co., 244 N. Y. 209; Bain v. Brown, 56 N. Y. 285; American Union Line v. Oriental Nav. Corp., 239 N. Y. 207; Rapid T. Subway Constr. Co. v. City of N. Y., 259 N. Y. 472; Lowendahl v. Baltimore & Ohio R. R. Co., 247 App. Div. 144; N. Y. Trust Co. v. American Realty Co., 244 N. Y. 209.) VI. The witness Julius Friedrich having transferred his stock, and having discontinued his action against the defendant, was competent to testify on behalf of the remaining plaintiff, the Friedrich corporation. VII. The assignor, sought to he barred by section 347 of the Civil Practice Act, is one who has assigned the claim which is the subject matter of the suit. (Harrington v. Schiller, 231 N. Y. 278; Lyon v. Snyder, 61 Barb. 172; Abbott v. Doughan, 138 App. Div. 608, 204 N. Y. 223; Crosby v. Nichols, 16 N. Y. Super. Ct. 450; Wilson v. Low, 44 Hun 626, 112 N. Y. 536; Rank v. Grote, 110 N. Y. 12; Howe v. Bell, 143 N. Y. 190; Squire v. Greene, 38 App. Div. 431.) . VIII. The assignor is barred only when he is testifying on behalf of a party to the action who has succeeded to his title or interest, in the subject matter of the action. (Hungerford v. Snow, 129 App. Div. 816; Whitehead v. Smith, 81 N. Y. 151; Bank of Utica v. Smalley, 2 Cow. 770; Stall v. Catskill Bank, 18 Wend. 466; Gilbert v. Manchester Iron Manufacturing Co., 11 Wend. 627; Utica Ins. Co. v. Cadwell, 3 Wend. 296; Mott v. Small, 20 Wend. 212; Kalman v. Reubel, 191 App. Div. 402.) IX. A cause of action was made out against the Oliver Costich estate. (Quaid v. Ratkowsky, 183 App. Div. 428; Monica Realty Corporation v. Bleecker, 229 App. Div. 184; Floral Park Lawns, Inc., v. O’Connell, 250 App. Div. 464.) X. Respondents claim that appellant by failing to disclose all the parties and interest, as set forth by section 19 of the contract, made the contract void as against public policy because of collusion or fraud on the State in misrepresenting the true parties and interest. There is here no basis, pretense or testimony that there was collusion with public officers in connection with this contract or that there was any attempt to restrain, suppress or stifle competition. (Rosasco Creameries, Inc., v. Cohen, 276 N. Y. 274.) XT. Defenses similar to the instant defense have been stricken out. (Bradford v. Durkee Marine Products Corp., 180 Misc. 1049; Rosasco Creameries, Inc., v. Cohen, 276 N. Y. 274; Sajor v. Ampol, Inc., 275 N. Y. 125; Fosdick v. Investors Syndicate, 266 N. Y. 130; New Howard Mfg. Co., Inc., v. Cohen, 207 App. Div. 588.)

      Ira H. Morris for respondents.
    I. The doctrine of estoppel is not involved as appellant had to prove a prima facie case regardless of respondents’ position which it did not do. II. The trial court erred in permitting Julius Friedrich to testify in behalf of the corporation to personal transactions or communications between himself and the decedent. (Civ. Prac. Act, § 347; Abbott v. Doughan, 204 N. Y. 223; O’Brien v. Weiler,
      140 N. Y. 281.) III. A nonsuit should have been granted and the complaint dismissed as to the decedent at the end of the plaintiff’s case. IV. The trial court erred in granting to the individual plaintiff a dismissal of the complaint on the merits. (Wagner Trading Co. v. Radillo, 205 App. Div. 833; Molloy v. Whitehall Portland Cement Co., 116 App. Div. 839; Koewing v. Thalmann, 139 App. Div. 893; Schnerb v. Caterpillar Tractor Co., 24 F. 2d 377.) V. The trial court erred in ruling that Julius Friedrich was qualified to testify as a witness for Julius Friedrich Co., Inc. VI. The contract would be void as against public policy.
   Desmond, J.

Plaintiff Julius Friedrich was a building contractor who owned practically all the stock of the corporate plaintiff Julius Friedrich Co., Inc., and carried on some of his building business through that corporation. Oliver Costich (respondents’ intestate), a friend of Friedrich, was another builder who controlled and used several corporations, among them the nonappealing defendant, Roach-Thompson Co., Inc. This action was brought by Friedrich and his corporation against Costich and his corporation because of an alleged breach of contract. Costich died before trial and his administrators were substituted. The complaint alleged that defendants employed plaintiff Julius Friedrich to perform services for defendants by way of obtaining and performing a certain road-building contract with the State of New York. Friedrich, according to the complaint, agreed to, and did ‘1 secure a person or corporation to submit a bid ” on behalf of defendants, and agreed to, and did, supervise the performance of the contract. For all this, according to the complaint, defendants promised to pay Friedrich half of the profits, including one half of any amounts charged to the job by defendants for equipment and materials furnished by them. The bid was made to the State, and the contract with the State signed, by the corporate plaintiff. The complaint goes on to say that, after the work was done, an accounting was had between plaintiffs and defendants, from which it appeared that there was due to plaintiffs from defendants about $7,400, for which judgment was demanded. (There was in the complaint a second cause of action also, on quantum meruit, but that count did not go to the jury.) We note, as did the Appellate Division, that, strictly construed, the complaint alleges an agreement by, and a promise to, Julius Friedrich individually, not to his corporation, whereas the case was finally submitted by the Trial Justice to the jury, after Julius Friedrich, individually, had submitted to a dismissal as to him, on the theory of an alleged breach of a promise made by defendants to the corporate plaintiff. However, since defendants at the trial did not object to this variance and did not object to the theory on which the court sent the case to the jury, we hold that no error resulted. The Trial Justice during the trial had dismissed the complaint as against the corporate defendant, so the case went to the jury as a simple issue of breach of contract as between the corporate plaintiff: and Costich’s administrators. The verdict was for plaintiff, in the amount of about $6,600.

The Appellate Division by a divided court, reversed on the facts and the law and dismissed the complaint. The majority of that court ruled that no contract with the corporate plaintiff had been pleaded or established. We have discussed above the matter of pleading. As to proof, we find it sufficiently established that the engagement was made by Costich with appellant Julius Friedrich Co., Inc. It seems that Costich, for reasons of, his own, considered it most important that he have control of that particular contract, but, for similar reasons, thought it inadvisable to make the bid or take the contract in his own name or in the name of one of his companies. Therefore, as Friedrich testified and the jury apparently found, Costich, procuring Friedrich to put in the bid (in his corporation’s name) and to do the job, promised to divide the profits equally. As it turned out, Costich, as the jury found on sufficient evidence, got hold of the proceeds and refused to settle with Friedrich. The dealings between Costich and Friedrich were oral and informal and no precise stipulation was made between them that Costich’s promisee was to be the Friedrich corporation, and not Julius Friedrich. However, the bid to the State was made by the Friedrich corporation, the State’s contract was awarded to and signed by that corporation, and the Friedrich corporation borrowed the necessary funds from a bank with Costich’s knowledge and, on occasion, with his help. While the preliminary exchanges were between the two individuals, the enterprise, from its beginning, was carried on in the name of Friedrich’s corporation. Thompson, one of defendants’ witnesses,' testified on behalf of Costich that he (Thompson) agreed with Friedrich that one half the profits were to go to “ The Julius Friedrich Company ”. We see no reason why the jury could not come to the conclusion that the party aggrieved by Costich’s refusal to perform was appellant Julius Friedrich Co., Inc. Indeed, it is at least doubtful whether Julius Friedrich could use his corporation’s name in such a transaction and then take the avails to himself individually. We note, too, although we do not have to apply a “ res judicata ” or “ estoppel ” label, that when Julius Fried-rich, individually, brought an earlier action against Costich and his corporation on the same claim, Friedrich’s individual complaint was dismissed on Costich’s motion and judgment entered against Friedrich, on the ground that the claim, if any, was the property of his corporation.

The Appellate Division ruled also that error was committed, and section 347 of the Civil Practice Act violated, on the trial, when Julius Friedrich was permitted to testify as to his dealings with Costich, who, as above noted, had died before the trial. When Friedrich presented himself as a witness, on behalf of his corporation, his testimony was ruled incompetent under the statute, as being an attempt by a person “ interested in the event” to give evidence as to transactions with a decedent, in a suit against that decedent’s estate. A recess was taken, after which Friedrich returned to the witness stand and testified that he had meanwhile sold his stock in plaintiff Julius Friedrich Co., Inc., to his sister-in-law, taking her note in payment, and that he was no longer an officer or director of the corporation. The Trial Justice then allowed Friedrich to testify, holding that he was no longer “ interested in the event ”. Although there is no decision in this court on the precise question, we find the other courts of this State and the writers in substantial agreement that such a transfer of stock, even during the trial, is effective to remove the disqualifications. When it was proved that the witness had transferred all .his stock, he was then devoid of any interest in the event of the suit, which is the point of inquiry when a witness is presented * * (Gilbert v. Manchester Iron Manufacturing Go., 11 Wend. 627, 628; see Stall v. Catskill Bank, 18 Wend. 466, 473; Bank of Utica v. Smalley, 2 Cow. 770; Kalman v. Reubel, 191 App. Div. 402, 405; Greenfield, Testimony under Civil Practice Act, § 347, p. 132; 1 Greenleaf on Evidence [16th ed.], p. 915; see, also, the historical' survey of the law as to competency of a stockholder’s testimony in Griggs v. Renault Selling Branch, Inc., 179 App. Div. 845, 849). The statute does not ban the testimony of one who has assigned his claim or interest unless, as the statute puts it, he is a person from, through or under whom such a party or interested person derives his interest or title by assignment or otherwise ” (see Harrington v. Schiller, 231 N. Y. 278; Greenfield’s Testimony, etc., supra, at pp. 133-5). It was right, therefore, to let Friedrich, after he had parted with title to the stock, testify on behalf of his corporation which had taken nothing from him by assignment or otherwise.

The majority of the Appellate Division thought, however, that Julius Friedrich, even after disposing of his stock, was still interested in the event ” because it appeared from the proof that if the corporation should lose the suit, Friedrich might be called upon to repay to the corporation the salary it had paid him while the road was being built. But such an interest ” does not disqualify. “ The true test of the interest of a witness is that he will either gain or lose by the direct legal operation and effect of the judgment, or that the record will be legal evidence for or against him in some other action. It must be a present, certain and vested interest, and not an interest uncertain, remote or contingent. (1 Greenleaf on Evidence, section 390.).” (Talbot v. Laubheim, 188 N. Y. 421, 426, see Near-pass v. Gilman, 104 N. Y. 506; Franklin v. Kidd, 219 N. Y. 409.)

We note, also, as did the dissenting Justices in the Appellate Division, that respondents did not put in issue the bona fides of Friedrich’s transfer of his stock. We do not know whether such an attack is possible but, since we are ordering a new trial, we mention that in our opinion, such an issue, if presented, will be for the jury to decide.

Defendants urged as a defense to the suit that the situation disclosed by the record — that is, a contract with the State taken in the name of a corporation which is in fact acting for an undisclosed principal —so far offends against public policy as to put the parties out of court. We hold that the defense was not established on this record.

The judgments should be reversed and a new trial granted, with costs to abide the event.

Loughran, Ch. J., Lewis, Conway, Thacher and Dye, JJ., concur; Lehman, Ch. J., deceased.

Judgments reversed, etc.


author: Loughran, Ch. J.

text:
    In the Matter of the Accounting of New York Trust Company, as Committee of Walter Lewisohn, an Incompetent Person, Now Deceased. Selma Farr, Individually and as Executrix of Walter Lewisohn, Deceased, et al., Appellants; New York Trust Company, Respondent.
    Argued June 11, 1945;
    decided October 11, 1945.

      Nathan L. Miller, George W. Alger and Lewis F. X. Cotignola for appellants.
    I. The mortgage investment was not secured by “ unencumbered real property ” as required by section 21 of the Personal Property Law, hence the investment of trust funds therein was illegal. (Wetmore v. Bruce, 118 N. Y. 319; Forster v. Scott, 136 N. Y. 577; Bull v. Burton, 227 N. Y. 101; Chesebro v. Moers, 233 N. Y. 75; Isaacs v. Schmuck, 245 N. Y. 77; Dieterlen v. Miller, 114 App. Div. 40; Matter of Haydock, 158 Misc. 404; Matter of Bristol v. Buck, 201 App. Div. 100, 234 N. Y. 504.) II. Apart from noncompliance with the provisions of section 21 of the Personal Property Law, the mortgage investment was improvident as a matter of law. (Matter of Dalsimer, 251 App. Div. 385; Delafield v. Barret, 270 N. Y. 43; Matter of Jacobs, 152 Misc. 139; Matter of Randolph, 150 App. Div. 902, 207 N. Y. 685; Durant v. Crowley, 197 App. Div. 540.) III. The trust company owed a duty of undivided loyalty to its cestui que trust. It could not purchase from its president, his wife, or his associates, the mortgage which it participated among its cestuis que trustent. Its position of divided loyalty was aggravated by its acquisition of the mortgage subject to covenants benefiting its president in his ownership of an adjoining parcel dominating the mortgaged premises. (Matter of Ryan, 291 N. Y. 376; City Bank Farmers Trust Co. v. Cannon, 291 N. Y. 125; Albright v. Jefferson County Nat. Bank, 292 N. Y. 31; Meinhard v. Salmon, 249 N. Y. 458; Wendt v. Fischer, 243 N. Y. 439; Munson et al. v. S. G. & C. R. R. Co. et al., 103 N. Y. 58; Ten Eyck v. Craig et al., 62 N. Y. 406; Pyle v. Pyle, 137 App. Div. 568, 199 N. Y. 538; Dutton v. Willner, 52 N. Y. 312; Jackson v. Smith, 254 U. S. 586; Chicago &c. Ry. v. Des Moines &c. R., 254 U. S. 196; 2 Scott on Trusts, pp. 856, p. 73, 877, 909, 910; Scott, Trustees’ Duty of Loyalty, 49 Harv. Law Rev. 521, 541; Restatement of Law on Trusts, § 170, p. 436, comment i; Bogert on Trusts and Trustees
      [1935], § 543.) IV". Respondent has not excused its self-dealing. (Wendt v. Fischer, 243 N. Y. 439; Matter of Ryan, 291 N. Y. 376; Munson v. Syracuse, G. & C. R. R. Co., 103 N. Y. 58; Albright v. Jefferson County Nat. Bank, 292 N. Y. 31.) V. Respondent seeks refuge on the ground that the referee has found as a fact that Mrs. Gibson, and not Mr. Gibson, was the owner' of the two-ninths participation. The evidence overwhelmingly establishes that Mr. Gibson through his holding corporation was in fact the owner of the two-ninths participation. Under those circumstances the finding is not conclusive upon us on this appeal. (Weigand v. United Traction Co., 221 N. Y. 39; Pollock v. Pollock, 71 N. Y. 137; Laidlaw v. Sage, 158 N. Y. 73; Fealey v. Bull, 163 N. Y. 397; Matter of Case, 214 N. Y. 199; Matter of Burnham, 234 N. Y. 475; State Bank v. Siff, 254 N. Y. 627; Matter of Bennett, 238 N. Y. 583; Russ v. Russ, 263 N. Y. 625; Bank of United States v. Manheim, 264 N. Y. 45.) VI. Once the possibility of conflicting interest or divided loyalty is shown, the inquiry is stopped. Equity will not search the transaction to determine whether it was fair. (Wendt v. Fischer, 243 N. Y. 439; Munson v. Syracuse G. & C. Rr. Co., 103 N. Y. 58; Matter of Ryan, 291 N. Y. 376; Albright v. Jefferson County Nat. Bank, 292 N. Y. 31; Matter of Hufnagel, 258 App. Div. 1088, 259 App. Div. 833.) VII. Respondent has not shown that the investment was a legal investment complying with the provisions of section 21 of the Personal Property Law. VIII. The claim of improvidence was litigated below. The record establishes improvidence as a matter of law. IX. The releases and consent to the decree on accounting before vacatur thereof do not bar the appellants on this appeal. (Meinhard v. Salmon, 249 N. Y. 458; Matter of Young, 249 App. Div. 495, 274 N. Y. 543; Matter of Ryan, 291 N. Y. 376; Stewart v. Wyoming Ranche Co., 128 U. S. 383.) X. Matter of Schoenewerg (160 Misc. 819, 277 N. Y. 424) does not aid respondent. XI. The order appealed from should be reversed and an order made directing (a) that the committee be surcharged with the amount expended in purchasing the investments with interest at an equitable rate, (b) denying the committee its commissions on the principal of the mortgage investment and (c) requiring the committee to pay objectants’ counsel fees in the courts below and in the Court of Appeals. (Albright v. Jefferson County Nat. Bank, 292 N. Y. 31; Cook v. Lowry, 95 N. Y. 103; Matter of Rutledge, 162 N. Y. 31; Matter of Caffrey, 254 App. Div. 684; Matter of Flood, 133 Misc. 72; Matter of Hidden, 243 N. Y. 499.)

      Orison S. Marden, Lowell Wadmond and Adolph G. Stahl, Jr., for respondent.
    I. The evidence shows conclusively that the purchases by the trust company as committee of Kellenworth participation's were not tainted by self-dealing. II. The restrictions did not render the mortgage an illegal investment for trust funds. (Personal Property Law, § 21; Bull v. Burton, 227 N. Y. 101; Matter of City of New York [Tunnel Street], 160 App. Div. 29, 212 N. Y. 547; Matter of Stupack, 274 N. Y. 198.) III. The claim of improvidence was not litigated below and is not sustained by the record. (Persky v. Bank of America National Association, 261 N. Y. 212.) IV. In considering this case, the restrictions should of course be looked upon with the eyes of 1923-1928, not of 1945. (Matter of Clark, 257 N. Y. 132.) V. The soundness of the loan is attested by the evidence and the findings. The burden of proving that the committee did not exercise proper care and prudence in acquiring the Kellenworth participations, rested on the objectants. (Matter of Clark, 257 N. Y. 132; Purdy v. Lynch, 145 N. Y. 462.) VI. The referee should have permitted respondent to show that the restrictions had been removed prior to trial. (Matter of Adriance, 145 Misc. 345; Matter of Poillon, 163 Misc. 897; Irving Trust Co. v. Natica, Lady Lister-Kaye, 157 Misc. 32.) VII. A fiduciary seeking to be discharged of liability deals “ at arm’s length ” with the parties beneficially interested, whether such discharge is by judicial accounting or by voluntary release. In the absence of fraud, a release given under such circumstances is conclusive upon the beneficiary, even though the fiduciary would certainly have been surcharged if the beneficiary had actually pressed objections. (Matter of Schoenewerg, 277 N. Y. 424; Matter of James, 173 Misc. 1042, 262 App. Div. 703, 287 N. Y. 645; Matter of Stone, 272 N. Y. 121; Matter of Salomon,
      175 Misc. 264.) VIII. The objectants are hound by the executrix’ consent to the entry of the August 23, 1939, decree. (Fidelity & Deposit Co. v. Queens Co. Trust Co., 226 N. Y. 225; Matter of Sielcken, 162 Misc. 54; Matter of White, 182 Misc. 223, 268 App. Div. 759, 293 N. Y. 767.)
   Loughran, Ch. J.

This proceeding for final judicial settlement of the account of the New York Trust Company as committee of the person and property of Walter Lewisohn, an incompetent person, was brought shortly after Mr. Lewisohn’s death. Objections filed by his estate and by the beneficiaries thereof are aimed at a purchase by the committee of a $277,500 interest in a $375,000 real estate mortgage. The history of the case goes back to 1920.

In that year, a syndicate composed of four men of wealth and business prestige bought 282 acres of land on the north shore of Long Island as a means of enabling each of them to acquire a site for the establishment of a select and spacious country estate. The purchase price was $1,200,000. A down payment of $100,000 cash was made by the syndicate; the seller took back a purchase money mortgage for the balance of $1,100,000; and the syndicate members gave their respective personal bonds for an aggregate equal amount.

After the land had been subdivided and improved, sales of parcels thereof were made to the syndicate members and to others for a total of $623,260, leaving six parcels comprising 182 acres still on hand when, in 1923, the syndicate members decided to convert that remaining area into a golf club premises. Thereupon Kellenworth Corporation — which was organized to own and operate the property as such a club — paid $547,000 for it — $247,000 in cash and the balance of $300,000 by a purchase money mortgage. This $547,000 payment and the $623,260 of proceeds of prior sales supplied to the syndicate members a fund of $1,170,260 for the satisfaction of their several personal liabilities in respect of the $1,100,000 balance of the original purchase price. In 1925, the syndicate paid off that balance and at the same time allotted the $300,000 Kellenworth mortgage among the syndicate members in the form of undivided participations that were proportioned to their respective syndicate contributions.

The maturity of the $300,000 Kellenworth mortgage had been set for July 31, 1928. In January, 1928, the trust company agreed to make to Kellenworth Corporation a first mortgage loan of $375,000. On the closing of that agreement on September 28, 1928, the $300,000 Kellenworth mortgage was acquired by the trust company through the syndicate and was extended for five years after being consolidated with another mortgage which Kellenworth Corporation gave to the trust company to secure a new advance of $75,000.

The trust company did not invest in that, $375,000 consolidated mortgage for its own account. Its purchase thereof was made — as all parties agree — “ for participation among sundry trusts.” At the time of that transaction, the trust1 company was committee of the property of Mr. Lewisohn — a fiduciary engagement which it undertook on September 14,1928. On that date, the scheduled value of Mr. Lewisohn’s property was $406,878.85. On October 3, 1928, the trust company as his committee purchased a $240,000 participation in the $375,000 consolidated mortgage and, as such committee, purchased a further $37,500 participation therein on October. 17, 1928. Notice of the fact of that $277,500 investment was given by the trust company to the parties entitled thereto. Whether the trust company should now be surcharged therefor is the question in difference.

When that investment was made, Harvey D. Gibson was a member of the before-mentioned syndicate, an officer of Kellenworth Corporation and of its golf club and was president of the trust company, — facts that were known at all times to all parties to this litigation. Reference was made above to a distribution of the $300,000 Kellenworth mortgage among the syndicate members. The amount thereby assigned to Mr. Gibson was $66,600. Though Mr. Gibson was still the record holder of that interest at the time of the above-stated transaction of September 28, 1928, the beneficial ownership thereof was then in Mr. Gibson’s wife, for whom an equivalent interest in the $375,000 consolidated mortgage was at once set apart. Mr. Gibson retired from the presidency of the trust company in June, 1929: he was thereafter chairman of its executive committee until January 5, 1931; and at the same time was one of the trustees of the trust company — a post he retained until December 29, 1933.

Mr. Lewisohn, the incompetent, died on July 31, 1938. In the course of the settlement of his affairs, counsel representing his executrix (his former wife) discussed with a then executive official of the trust company the different aspects of Mr. Gibson’s nearness to the transaction whereby $277,500 of the $375,000 consolidated mortgage had been allocated by the trust company to itself as committee for Mr. Lewisohn. Nothing came of that conference, however, except an announcement by •the trust company’s officer of the unreadiness of his principal to rehandle the investment. In that state of affairs, the final account of the trust company as committee of Mr. Lewisohn was judicially settled on August 23, 1939, with the consent of his executrix, whereupon she and his son — as beneficiaries of his estate — became owners in equal parts of the $277,500 participation in the $375,000 mortgage.

Nearly three years later — on April 29, 1941 — Mr. Gibson (who at that time was no longer an officer of the trust company) sought on behalf of the golf club a reduction by the mortgagees of the rate of the interest payable on the same $375,000 consolidated mortgage. The golf club, Mr. Gibson then said, was likely to fold up ” and leave the holders of that mortgage in possession of a large piece of real estate with two small buildings on it. In their turn, financial advisers óf Mr. Lewisohn’s former wife and of his son suggested that the property could be split up in building lots ”; but Mr. Gibson in reply said the property “ could not be split up into small lots ’ ’ because “ very hard restrictions were placed upon it.” The upshot of that disclosure was an order vacating the settlement of the final account of the trust company as committee of Mr. Lewisohn and permitting the filing by his former wife and by his son of the objections that are now before us.

Thus there was brought to the fore a number of restrictions which had been imposed upon the mortgaged property by the syndicate members. These restraints forbade: (1) Any use of the property except as a residential estate or a golf course. (2) Sale of the property or any part of it to any person other than a syndicate member unless and until all syndicate members declined to exercise a continuing option which entitled them or any of them to the right of first purchase. (3) Any future subdivision of the property without the consent of the syndicate members. (4) The erection on the property of any building or the planting thereon of any tree within or adjacent to “ vista lines ” — i.e., lines that marked off space across which a view of Long Island Sound was to be had from the adjoining homes of the syndicate members. Bach of these prohibitions was to run with the land until 1971.

As we come now to the respective contentions of the parties, one or two simplifications are in order. Mr. Lewisohn’s former wife and his son — the objectors to the trust company’s account as committee — are the appellants. We shall speak of them as the trust beneficiaries and of the trust company as the trustee. The transaction in issue is the purchase by the trust company as committee of Mr. Lewisohn of the $277,500 participation in the $375,000 consolidated mortgage. We shall refer to that transaction as the present mortgage investment.

The objections of the trust beneficiaries raise these points: (1) The present mortgage investment was illegal because it was not secured by “ unencumbered real property ” as required by section 21 of the Personal Property Law. (2) Apart from that section, the present mortgage investment was improvident as matter of law. (3) The present mortgage investment was a breach by the trustee of the duty of undivided loyalty that it owed as committee to Mr. Lewisohn as its ward and to the trust beneficiaries as his successors in interest.

The restrictions upon the mortgaged property are the storm center of the controversy. Counsel for the trustee say: “ In considering this case, the restrictions should of course be looked upon with the eyes of 1923-1928, not of 1945.” This expression seems to us to fall short of the fundamentals of the situation in issue. Other things being in order, a proposed investment of trust funds in mortgage securities should always be judged with an eye on the fact that in the event of foreclosure the invested capital is often to be recaptured through a sale of the pledged land or not at all. This precept was as sound in 1923-1928 as it is in 1945, and consequently we do not feel at liberty to look at the contest from any different standpoint.

As to the prohibition against buildings or trees within or adjacent to the so-called vista.lines, the trustee says that the land thereby kept vacant was “ low, marshy, filled-in land ” which was “ unsuitable for building or other similar use.” But property of such little utility would not seem to be an appropriate security for an investment of trust funds. Moreover, the fixed emptiness of such a stretch of view must have been a detriment to the mortgaged property as a whole.

As to the prohibition against subdivision of the acreage, the trustee says: “In 1928 large estates were not unwieldy liabilities.” But the sale in this instance was to be one on foreclosure after default of the mortgagor. The main part of the mortgaged property consisted of three lots — one of 77 acres, another of 58 acres and a third of 41 acres. Hence a foreclosure sale of 176 of the 182 mortgaged acres was to be dependent upon the discovery of a buyer or buyers for three large sections of a former golf course, none of which could be subdivided as matter of right.

As to the pre-emptive option enjoyed by the adjoining syndicate owners, the trustee says: “ It might of course delay a sale somewhat, but it does not go to the value.” But the sale so mentioned was (we say again) to be a foreclosure sale. Bidders would hardly be attracted to a sale of that kind by the prospect that any offer would have to be maintained while the property was being reoffered successively to the four neighboring syndicate members, any one of whom through exercise of his option could upset a prior conditional sale on foreclosure.

As to the prohibition against use of the mortgaged property except as a residential estate or golf course, the trustee says that restrictions against other than residential use of this property are not to be held unusual or unreasonable at least when judged by the standards of the time.” But at this point again, the argument for the trustee loses sight of the fact that incapacity to sell, the property in lots of readily marketable size was to be a disadvantage, to foreclosing mortgagees just as surely as the right to insist upon that disability was at all times to be a benefit to the syndicate owners of the dominant adjoining properties.

Such was the restricted state of the mortgaged property when the $375,000 consolidated mortgage thereon was acquired by the trustee in 1928 for the purposes of its fiduciary commitments. As it happened, the formal decision to take that mortgage for that purpose was left to Mortimer 1ST. Buckner, who was then chairman of the board of the trustee and head of its trust committee. Nevertheless Mr. Gibson straightly says: Naturally, I could not sit in the New York Trust Company right opposite Mr. Buckner and not have had some conversation with him about this mortgage in which everybody was interested, because we were all interested in the club; we were all members of the club * * *. I undoubtedly discussed it, yes. * * * I knew the mortgage was being made.” In that way, Mr. Gibson, as president of the trustee, had his part in the process whereby his principal became possessed of the $375,000 consolidated mortgage for the uses of its trust committee. Nobody asserts any default of Mr. Gibson in the performance of what then, and there was his undoubted official duty to state the facts in respect of the restrictions which he and his syndicate associates had laid upon the mortgaged property. Indeed the inference to the contrary is one of law. (See Constant et al. v. University of Rochester, 111 N. Y. 604; Slattery v. Schwannecke et al., 118 N. Y. 543, 547-548; New York Assets Realization Co. v. Pforzheimer, 158 App. Div. 700, 702-703; 2 Mechem on Agency [2d ed.], §§ 1806, 1808.) Moreover, the text of the same restrictions had theretofore been recorded as part of the deed which the syndicate had delivered to Kellenworth Corporation; so that for one reason or another, the trustee must be taken to have been aware of the existence of the syndicate restraints upon the mortgaged property prior to the date of the origination of the present mortgage investment.

Enough has now been said to show why that investment is denounced by the trust beneficiaries as a breach by the trustee of the duty of undivided loyalty which it owed to the interests that were committed to its care in its office as committee of Mr. Lewisohn. A true discharge of that duty called upon the trustee completely to avoid all occasions for the counteraction of incompatible demands. This stringent measure of trust administration is not one of mere inward integrity or unselfishness. The rule is inflexible that a trustee shall not place himself in a position where his interest is or may be in conflict with his duty (Ten Eyck v. Craig et al., 62 N. Y. 406, 419; Albright v. Jefferson County Nat. Bank, 292 N. Y. 31).

That standard, we think, condemns the present mortgage investment. The interests of the trust beneficiaries required at least that the trustee should be free to negotiate for abatement or mitigation of the hard syndicate restrictions that burdened the mortgaged property. On the other hand, the interests of the trustee’s president and his associates were to be served best by enforcement of the same restraints to their utmost limits. We do not see how the trustee was to stand between such divided allegiances without being subjected — in the persons of its managing officers — to the temptation to be false to its trust. The law permits no trustee to act in such inconsistent relations and this trustee should in consequence be surcharged (Wendt v. Fischer, 243 N. Y. 439; City Bank Farmers Trust Co. v. Cannon, 291 N. Y. 125; Matter of Ryan, 291 N. Y. 376).

At this point, we must go back for a moment to the final account of the trustee which was judicially settled on August 23, 1939, with the consent of Mr. Lewisohn’s executrix. The trustee contends that the trust beneficiaries are now bound by the order of that date. This contention, as we see it, does not take adequate account of several things.

In the first place, the order of August 23, 1939, was vacated and the objections now before us were authorized by an order made on May 19,1942, which, stands unreversed and unmodified. In the second place, the following finding in respect of the order of August 23, 1939, has been affirmed: It cannot be said, on this record, that the objectants were aware of all the facts and were fully apprised of their legal rights ”. In the third place, there is the above-mentioned fact of the interchange that occurred on the death of Mr. Lewisohn between counsel for his executrix and the then executive officer of the trustee. The syndicate restrictions upon the mortgaged property having on that occasion been brought to the notice of that official for the first time, he made of his own motion an inquiry which was designed to show whether “ there was anything that was sufficiently embarrassing to justify our taking some other action that I had already stated we were not willing to take, such as the repurchasing of the participation ”. From that episode, however, as has already been observed, Mr. Lewisohn’s estate learned nothing as to the existence of any restriction against the mortgaged property.

In. that connection, the same officer of the trustee said on the trial: He [counsel for the executrix] didn’t ask me what we had found. I didn’t think it was necessary to report what we had found.” On this item of testimony, the trustee invokes Matter of Schoenewerg (277 N. Y. 424). But the Schoenewerg case was one in which the condition of the there challenged investment was manifest upon the face of an accounting which the trustee had delivered to the objector. In our judgment, the present trustee’s plea of estoppel was rightly overruled.

Since the restrictions against the mortgaged property were matters of public record, the trustee suggests that the trust beneficiaries should be charged with constructive discovery thereof through the rule as to notice under the recording acts. (See Tarbell v. West et al., 86 N. Y. 280.) We reject this contention, because the trust beneficiaries (unlike the trustee) had no duty to search the title of the mortgaged property.

As to whether that property was unencumbered in a legal sense or whether the present mortgage investment was undeniably improvident we express no opinion.

The orders should be reversed, with costs in all courts to the appellants, and the matter remitted to the Special Term for further proceedings not inconsistent with this opinion.

Lewis, Conway, Desmond, Thacher and Dye, JJ., concur; Lehman, Ch. J., deceased.

Orders reversed, etc.


text:
    In the Matter of K. Pascoe Grenfell, Respondent. Gertrude Lawyer, as Chairman of The People’s League for Government American Style, Appellant.
    Argued October 22, 1945;
    decided October 24, 1945.

      McDonald King for appellant.
    I. There is no constitutional prohibition against the incorporation in a municipal local law of the provisions of a general law by reference to said general law instead of by setting forth the provisions in full. (Knapp v. City of Brooklyn, 97 N. Y. 520; Matter of Village of Sing Sing, 98 N. Y. 454; Curtin v. Barton, 139 N. Y. 505; Burke v. Kern, 287 N. Y. 203; People ex rel. Everson v. Lorillard, 135 N. Y. 285; People ex rel. Winfield v. Bruning, 89 Hun 124; Richfield Oil Corp. v. City of Syracuse, 287 N. Y. 234.) II. The proposed local law, in form and phraseology complies with the intent and with all the mandatory provisions of section 19-a of the City Home Rule Law. (Matter of Steinberg v. Meisser, 291 N. Y. 685; Loening v. Seaman, 290 N. Y. 527.)

      Richmond D. Moot for respondent.
    The proposed local law does not comply with the mandatory provision of section 19-a that a local law amending the charter, however extensively, “ shall set forth the new matter to be added to the charter either in italics or underlined' and the matter to be deleted therefrom either in brackets or with lines drawn through it,” and is illegal and void.

      Arlen T. St. Louis, Corporation Counsel, for City Clerk of City of Schenectady.
    The proposed local law does not conform to the requirements of section 19-a of the City Home Rule Law.
   Per Curiam.

We agree with the Appellate Division that if the provisions of the Second Class Cities Law were to be adopted as a city charter, such provisions were required by the statute to be designated specifically in the proposed local law. We pass upon no other question.

The order should be affirmed.

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

Order affirmed.