author: Kellogg, J.

text:
    Marine Transit Corporation, Appellant, v. Switzerland General Insurance Company of Zurich, Respondent.
    (Argued October 6, 1933;
    decided December 5,1933.)

      Courtland Palmer for appellant.
    The courts below erred in holding that the issue under the policy of insurance involved in this action was finally determined adversely to appellant by a court of competent jurisdiction in the decree of the United States District Court, and is, therefore, res judicata. (Reynolds v. Ætna Life Ins. Co., 160 N. Y. 635; Donahue v. New York Life Ins. Co., 259 N. Y. 98; General Investment Co. v. N. Y. C. R. R. Co., 271 U. S. 228; Elgin Nat. Watch Co. v. Illinois Watch Co., 179 U. S. 665; Schuykill Fuel Corp. v. Nieberg Realty Corp., 250 N. Y. 304; Embury v. Conner, 3 N. Y. 511; Pray v. Hageman, 98 N. Y. 351; Hollenbeck v. Ætna Life Ins. Co., 215 App. Div. 609; Mehlhop v. Central Union Trust Co., 235 N. Y. 102; Becherer v. Keefe, 259 N. Y. 301; Steinbach v. Relief Fire Ins. Co., 77 N. Y. 498; Cromwell v. County of Sac, 94 U. S. 351; West v. Imbrie, 216 N. Y. Supp. 337.)

      Loring R. Lecraw and Forrest E. Single for respondent.
    The courts below did not err in holding that the question of the right of appellant to recover upon the policy and certificate of insurance was determined adversely by the decree of the United States District Court, since the issue in this action was necessarily determined in the suit in' the Federal court and, therefore, was res adjudicata. (Schuykill Fuel Corp. v. Nieberg Realty Corp., 250 N. Y. 304; Blair v. Bartlett, 75 N. Y. 150.)
   Kellogg, J.

The plaintiff undertook to carry a cargo of pig lead from Newark, N. J., to the American Metal-Company at Bridgeport, Conn. It agreed with the consignee to procure insurance on the cargo against loss or damage through the perils of the sea. It obtained a policy from the Switzerland General Insurance Company, the defendant, insuring the cargo in the value of $53,500 on board the barge New Haven at and from Newark, N. J., to Bridgeport, Conn., the loss, if any, payable to the American Metal Company. The policy likewise insured the plaintiff against all risks of loss or damage, and for the cargo’s proportion of any general average contribution. It contained provisions to the effect that in case of loss or misfortune it would be lawful for the assured to labor in and about the safeguarding and recovery of the cargo; that no act of the assured or of the insurer in recovering, salvaging and preserving the cargo should constitute a waiver on the part of either; that any such act should be regarded as done in the interests of all concerned without prejudice to any; that to the charges whereof the said company will contribute in such proportion as the sum herein insured bears to the whole value of the property.” The cargo of lead, loaded upon the barge New Haven, arrived at Bridgeport, Conn. There, while alongside the docks, the barge sprang a leak and sank. Thereupon the plaintiff, acting pursuant to the provisions of the policy, employed the Merritt-Chapman and Scott Corporation to raise the barge and salvage the cargo. That company performed the necessary services; the barge was raised and the cargo, in its entirety, was recovered. For the services rendered, the Merritt-Chapman company, in libel proceedings in the Federal court, recovered a judgment against this plaintiff for the sum of $2,308.18. The plaintiff, having paid the judgment, brought this suit to recover from the defendant its proportionate share of the amount adjudged due.

The foregoing facts were set forth in the plaintiff’s complaint, and, while many of them met with a formal denial in the defendant’s answer, none of them were disputed by its proof upon the trial. The defendant relied entirely upon two affirmative defenses. The first defense was that the claim in suit was released by a written document executed by the parties, constituting a general release of all claims which each held against the other. The second defense alleged was that of res adjudicata in that the defendant was a party to the libel proceedings brought by the Merritt-Chapman company against the plaintiff, having become such through the service by the plaintiff of a .petition to interplead it, and that in such proceedings it was adjudged that the plaintiff’s claim against the defendant should be dismissed. As to the first defense, the question whether or not the general release comprehended the claim now in suit, through contradictory proof, consisting of documents and testimony received in evidence, became a sharply contested question of fact. The trial court, acting by stipulation as the trier of both fact and law, did not determine the question. However, the defense of res adjudicata was upheld by the court which directed a verdict for the defendant, stating in its opinion: “ In view of the fact that the plea of res adjudicata raised by the defendant has been sustained, it is unnecessary to consider the defense of release of the claim.” The Appellate Division affirmed, two of the justices dissenting, and the case comes here for our decision. The sole question presented is whether or not the judgment in the libel proceedings estops the plaintiff and bars a recovery in this action.

The libel in the Federal court proceedings against this plaintiff asserted the performance of work by the libelant Merritt-Chapman and Scott Corporation, at the request of the respondent therein, the present plaintiff, in pumping out and raising the barge New Haven when sunk in the harbor at Bridgeport, Conn., and salvaging the cargo, all of which was of the reasonable value of $2,308.18. The respondent, in its answer, admitted the performance of the services and the value thereof, as alleged in the libel. Further, it alleged that in directing the services to be performed it was acting not for itself but as the agent of. the Switzerland General Insurance Company, the present defendant; that such company was the insurer of the cargo; that it had directed the respondent to procure the services to be performed; that the respondent had advised the libelant of these facts and disclosed, in giving its orders to the libelant, that its principal, the Switzerland General Insurance Company, was responsible therefor. The answer also advised the libelant that the respondent was then filing a petition under the 56th Rule in Admiralty interpleading the Switzerland General Insurance Company as defendant. In its petition to interplead, served upon the Switzerland General, the respondent asserted that the Switzerland General had insured the cargo of the barge New Haven; that such barge sprang a leak and sank at the Bridgeport docks; that the Switzerland General had instructed the respondent to engage the services of the Merritt-Chapman company to raise the barge and salvage the cargo; that these services had been performed by the Merritt-Chapman company; that the Switzerland General was primarily liable to pay the charges therefor. The Switzerland General, thus interpleaded, filed an answer to the libel in which it denied information and belief as to the sinking of the barge and the services performed in raising the same, and further denied that such company had been employed by it to perform the services. It likewise served an answer to the petition for interpleader wherein it denied any information or belief as to the services performed by the Merritt-Chapman company, and denied that such services were rendered under directions given by it. It also set up, as a general defense to any claim made by the respondent for a recovery over against it, the same general release which it has asserted in this action.

Viewing the pleadings as they stood at the opening of the trial in the libel proceedings, It is apparent that after formal proof had been given establishing that the libelant, Merrit-Chapman company, at the request of the respondent, Marine Transit Corporation, had performed the services alleged, and that their reasonable value was as stated, the only issue remaining would have been whether or not the respondent’s request for their performance was made on its own behalf, or as agent on behalf of the impleaded respondent, Switzerland General. If the former were the case, the libelant would recover judgment against the respondent; if the latter were the case, recovery would proceed against the interpleaded respondent. Such did not continue to be the case, for the pleadings in this actioD, through an assertion by the defendant and an admission by the plaintiff, establish that during the course of the libel trial, the respondent amended its petition for interpleader to set up a cause of action upon the policy of insurance for a recovery over against the impleaded respondent. Moreover, on the trial of this action, counsel expressly admitted that all the issues litigated herein, including the issue whether or not the general release covered the claim nowin suit, were litigated in the libel proceedings. The question remains whether the court in that proceeding determined the question of fact involved in the defense of the general release. The minutes of the proceedings so had are not in evidence here, so that our judgment must be based exclusively upon the findings made and the opinion written by the Federal judge who conducted the trial.

The findings of fact made determine that the three interested parties were duly organized as corporations; that Merritt-Chapman company, at the request of the present plaintiff, Marine Transit Corporation, performed services in raising the barge New Haven and salvaging its cargo; that the reasonable value of the services was $2,308.18; that in requesting the performance of the services the respondent Marine Transit Corporation acted on its own behalf and not as agent for the impleaded respondent, Switzerland General. These findings disposed of all the issues between the parties, leaving only the issue of fact involved in the defense of the general release. It will be observed that the fact that the Switzerland was an insurer of the salvaged cargo is not stated; that the terms of the policy, upon which alone a recovery by the Marine Transit against the Switzerland General could have been based, are not set forth. Especially will it be observed that no finding of fact is made concerning the general release. Yet, assuming that the proof in the Federal court was similar to that given here, as we must in view of the stipulation that the same issues were litigated, the binding force of the release there, as here, depended upon an issue of fact. If the Federal court intended to take jurisdiction of the claim made by the now plaintiff against the now defendant upon the insurance policy, the only defense thereto, available to the interpleaded respondent, after the court’s decision that the services of the libelant were recoverable, was the defense of a general release. As that defense involved a question of fact, and no finding of fact was made, the conclusion seems irresistible that the validity of the claim upon the merits was not determined. This view is strengthened by the opinion rendered in that proceeding. The opinion omits any reference to the issue, and the only issue, drawn between the insurer and the insured, on the question of liability under the policy, namely, the issue of fact concerning the general release; it merely directs that both libel and petition against the insurer be dismissed. The disputed point, and apparently the only disputed point, decided is, that “ respondent acted in its own behalf and not as agent for the respondentimpleaded ” when it ordered the work to be done.

The conclusions of law found by the Federal court are to the same effect. They assert that the services were performed at the request of the Marine Transit Company, acting for itself and not as agent; that the recovery of Merritt-Chapman company against that corporation and not against the Switzerland General should accordingly follow.. They do, however, embody this conclusion: “ The respondent is not entitled in this cause to a decree against the respondent-impleaded, by way of remedy over, contribution or otherwise, nor should the libelant’s recovery in this cause be against the respondent-impleaded, by way of remedy over, contribution or otherwise.

The 56th Rule of the Rules of Practice, promulgated by the Supreme Court to govern the practice of the Admiralty courts, provides that the respondent in any suit shall be entitled to bring in any person who may be partly or wholly hable to the libelant, or the respondent, by way of remedy over, contribution or otherwise, growing out of the same matter.” It was under the authority óf this rule that the present plaintiff brought in the present defendant as a party to the libel proceedings. It may well be thought that the court which presided in the libel proceedings, rightly or wrongly, deemed that the recovery sought for by the respondent, as against the impleaded respondent, so far as based upon the insurance policy, was not a recovery by way of remedy over, contribution or otherwise ” within the meaning of rule 56th. In any event, the absence of a finding of fact upon the sole issue between the parties, as to the liability of the defendant to the plaintiff on the policy, viz., the release of the claim by the plaintiff, persuades us to the belief that the trial court was disinclined, whether for lack of power or otherwise, to assume jurisdiction and determine the insurance claim, and so by its order of dismissal intended none other than a nonsuit of the claim.

This is not a case where the cause of action has such a measure of identity ” with the causes of action involved in the libel proceedings, that a different judgment here would destroy or impair rights or interests established ” by the prior judgment. (Schuylkill Fuel Corp. v. Nieberg Realty Corp., 250 N. Y. 304, 307.) The judgment previously had merely determined that the plaintiff here is indebted to the Merritt-Chapman company for services performed in an amount stated, and dismisses a claim of this plaintiff for reimbursement or contribution at the hands of this defendant. A judgment here, entitling the plaintiff, which paid the former judgment, to obtain reimbursement from this defendant will not in the least “ destroy or impair rights or interests ” established by the former judgment. The case is, therefore, one where the “ estoppel is limited in such circumstances to the point actually determined.”- (Schuylkill Fuel Corp. v. Nieberg Realty Corp., supra.) It is one where “ the judgment in the prior action operates as an estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered.” (Cromwell v. County of Sac, 94 U. S. 351, 353.) “ It is final only as to facts litigated and decided.” (Reynolds v. Ætna Life Ins. Co., 160 N. Y. 635, 652.) “It is not enough that a matter was in issue, but it must clearly appear to have been adjudicated.” (2 Freeman on Judgments, § 689.) The burden rested upon the defendant to establish that the precise question here raised was determined, as well as litigated, in the libel proceedings. (Bell v. Merrifield, 109 N. Y. 202.) This it has not done, for it has failed to show, and the record does not disclose, that the only issue between the parties, as to the liability of the defendant to the plaintiff under the terms of the policy, was ever determined. Clearly the provisions of section 482 of the Civil Practice Act do not apply, since we are considering not the force and effect of a judgment rendered by a State court, but the nature of a judgment rendered in libel proceedings by a Federal court. We think the defense of res adjudicata was not made out.

The judgment of the Appellate Division and that of the Trial Term should be reversed and a new trial granted, with costs in all courts to the appellant to abide the event.

Pound, Ch. J., Crane, Lehman, O’Brien, Hubbs and Crouch, JJ., concur.

Judgments reversed, etc.


source: Caselaw Access Project

author: Hxjbbs, J. Crouch, J.

license: Public Domain

text:
    Florence L. Holmes, Plaintiff, v. Mariana I. Gravenhorst, Appellant, Impleaded with Another. Eugene M. Travis, as Receiver, Respondent.
    (Submitted October 11, 1933;
    decided December 5, 1933.)

      Robert Abelow and John E. Sexton for appellant.
    In the absence of agreement between the parties to the mortgage a court of equity is without power to require the owner in possession to pay occupational rent prior to sale under judgment of foreclosure. (Prudence Co. v. 160 W. 73d Street Corp., 260 N. Y. 205; Abrams v. Thompson, 251 N. Y. 79; Sun P. & P. Assn. v. Remington P. & P. Co., 235 N. Y. 338; Graf v. Hope Building Corp., 254 N. Y. 1; Jefferson County Nat. Bank v. Dewey, 181 N. Y. 98.)

      Chester Mayer for Jackson Heights Taxpayers Association, Inc., et al., amici curice.

    The method of obtaining possession of premises from an owner in a foreclosure action has been-prescribed by the Legislature. (Public Bank of New York v. London, 159 App. Div. 484; Broadview Traders, Inc., v. Ramdee Really Corp., 131 Misc. Rep. 385; Sancourt Realty Corp. v. Dowling, 220 App. Div. 660; City of Rochester v. Rochester Gas & Electric Co., 233 N. Y. 39; Austin v. Ahearne, 61 N. Y. 6; Prudence Co. v. 160 W. 73rd St. Corp., 260 N. Y. 205; Metropolitan Life Ins. Co. v. Childs Co., 230 N. Y. 285.)

      Irving C. Moltz for respondent.
    Upon his appointment the receiver became entitled to possession of the mortgaged premises as against the owner of the fee. (Selkirk v. Wood, 9 Civ. Prac. Rep. 141; Bank of Ogdensburgh v. Arnold, 5 Paige, 388; Sea Ins. Co. v. Stebbins, 8 Paige, 565; Hollenbeck v. Donnell, 94 N. Y. 342; O’Mahoney v. Belmont, 62 N. Y. 133; Chautaugue County Bank v. White, 6 Barb. 589; Booth v. Clark, 58 U. S. [17 How.] 322; Porter v. Williams, 9 N. Y. 142; Curtis v. Leavitt, 15 N. Y. 1; U. S, Trust Co. v. N. Y., West Shore

      & Buffalo R. R. Co., 101 N. Y. 478; Stewart v. Fairchild Baldwin Co., 91 N. J. Eq. 96; Title Guarantee. & Trust Co. v. 457 Schenectady Ave., Inc., 260 N. Y. 119; Davis v. Gray, 83 U. S. 203.) The owner-mortgagor occupying the mortgaged premises, or a portion thereof, can be compelled to attorn to the receiver, pay occupational rent, or deliver up possession to the receiver. (Public Bank of New York v. London, 159 App. Div. 484; Citizens Sav. Bank v. Wilder, 11 App. Div. 63; Astor v. Turner, 3 How. Pr. 225; Fleischer v. Terker, 232 App. Div. 822; Van Pelt v. Russell, 134 Ark. 236; Jarmulowsky v. Rosenbloom, 125 App. Div. 542; Title Guarantee & Trust Co. v. 457 Schenectady Ave., Inc., 260 N. Y. 119.)
   Hxjbbs, J.

This is an action to foreclose a mortgage on a dwelling house in the city of Brooklyn, owned and occupied by the mortgagor. The mortgage contained the following clause: “ That the holder of said mortgage, in any action to foreclose it, shall be entitled (without notice and without regard to the adequacy of any security for the debt) to the appointment of a receiver of the rents and profits of said premises.”

A receiver appointed upon application of the mortgagee to collect all rents due and unpaid, or hereafter to become due,” applied at Special Term for an order fixing the reasonable value of the use and occupation of the premises by the mortgagor and directing her to forthwith pay the rental so fixed, in default of which an order be made directing the sheriff to oust and evict her from possession.

The Special Term denied the motion made by the receiver, basing its determination upon its interpretation of the effect of our decision in Prudence Co. v. 160 W. 73rd Street Corp. (260 N. Y. 205).

The Appellate Division, interpreting our decision in that case, has, in answering the question presented on this appeal, reversed the Special Term and granted the motion. It, however, has certified to us the question involved in the following language: “ On the facts shown in the record, was the receiver entitled to an order fixing the occupational rent of the mortgagor-owner in the absence of facts indicating that the motion should have been denied as a matter of discretion? ”

We have, therefore, squarely presented the question as to whether, upon the appointment of a receiver in an action brought to foreclose a mortgage containing the covenant heretofore quoted, a mortgagor-owner may be required to pay rent to the receiver or be evicted from the premises prior to a sale under a judgment of foreclosure and sale.

While the precise question here involved has apparently not heretofore been presented to this court for determination, it has been frequently before the intermediate courts of this State as indicated in the opinion delivered at the Appellate Division, and it has been held that the court has power, under circumstances similar to those presented in this record, to fix the value of the occupational use by the owner and compel its payment under penalty of eviction. The opinion at the Appellate Division gives a statement of the law governing the rights of a mortgagor-owner to possession during foreclosure as it existed and was interpreted by intermediate courts prior to our decision in the Prudence case. Since that case dealt with the question of whether co-operative owners who were in possession of an apartment house under an agreement to pay a fixed maintenance charge could be required to pay to the receiver the difference between the agreed maintenance charge and the reasonable value of use and occupation contrary to the terms of their agreement with the mortgagor-rather than with the question as to whether the owner may be required to pay any rent, it is not surprising that the Appellate Division should be unwilling to accept that decision as intending to change the rule as to the liability of an owner as previously established by decisions of that court.

Although the Prudence case did not present the exact question involved on this appeal, what was there said as to the right of an owner in possession we deem applicable under the facts in this case. We cannot subscribe to the doctrine enunciated in Citizens Sav. Bank v. Wilder (11 App. Div. 63), to the effect that with the receivership goes the right to take full possession of the premises from the owner who is required to surrender his possession.

A mortgage of real property in the absence of an express agreement conferring the right of possession in the event of default upon the mortgagee originates a contract relationship which continues until final judgment in the foreclosure action. (Trimm v. Marsh, 54 N. Y. 599, 605; Metropolitan Life Ins. Co. v. Childs Co., 230 N. Y. 285.) The method by which the purchaser at the sale may acquire possession is specified in section 985 of the Civil Practice Act. Right of possession is an incident of title which, in the absence of contract, may be divested only under the method prescribed by law. Where sale is made under a judgment, or for unpaid taxes, possession may not be obtained until a prescribed statutory period of redemption has expired. Likewise, in ejectment and other actions determining title or right of possession, the statute prescribes when and how possession may be obtained. There is no statutory authority for holding that a mortgagor in possession may be evicted from the mortgaged premises prior to a sale under a judgment of foreclosure and sale.

Where, however, the mortgagor is not in possession during the foreclosure of a mortgage thereon of all or a portion of the premises and the premises are occupied by tenants or others not having title to the premises a receiver may be appointed in a proper case to take possession of the premises, collect the rents and apply them to the payment of the carrying charges on the property and the reduction of the mortgage debt.

It seems to us that there is no inconsistency in holding, in the absence of an express agreement in the mortgage to that effect, that while a mortgagor-owner in possession during the pendency of a foreclosure action of the premises may not be disturbed in his possession or required to pay rent which he was not theretofore obligated to pay, when he has relinquished that possession to others and is receiving an income from the premises which might be applied to the payment of carrying charges and the reduction of the mortgage debt, a receiver upon a proper showing may be required to take possession and control of the promises and so apply the revenue. Under the law governing the relation of mortgagor and mortgagee of real property as now firmly established in this State, a mortgagee himself has no right of possession by virtue of a mortgage pending its foreclosure, and he does not acquire such a right by applying for and having appointed a receiver, except in those cases where the right grows out of facts extrinsic to the mortgage contract or where there is a clause in the mortgage expressly giving him that right. The right of possession given to a receiver is incidental to the purpose for which the receiver is appointed, namely, the collection of the rents and profits, and if there be no rents and profits because actual possession is in one having the right of possession inherent in his ownership, no right of possession exists which may be conferred upon a receiver.

It is conceivable that a receiver might find applicable to the maintenance of the property and reduction of the mortgage debt an income from property wholly in the actual possession of the mortgagor-owner, as where the mortgagor-owner in full possession of the premises is receiving income therefrom. As illustrative of this possible situation, we might suggest a case where the exterior walls of a dwelling house are used for the display of advertising matter not connected with the business of the mortgagor-owner in possession and for which a rental is being paid or could be collected. Bight of possession, beyond the extent of its existence in the lessee of the advertising space, would not thereby be conferred upon the receiver. While he undoubtedly would be entitled to collect such rental for advertising space, his right would not extend to the use in that manner of premises where advertising space was not theretofore in use, as to accord to him possession of premises not theretofore so used for such a purpose would be to interfere with the actual possession of the owner.

It should be borne in mind that we are here dealing with the question of the rights and authority of a receiver appointed under an agreement contained in the mortgage, a contract right, and not with those of a receiver appointed under the general equity jurisdiction of the court to maintain and preserve the property and income therefrom pending a foreclosure. In the case at bar the question for determination is what rights accrued under the agreement of the parties contained in the mortgage. In the other case, the question always is what jurisdiction a court of equity has under facts extrinsic to the mortgage; for instance, is the mortgagor committing waste or is the appointment of a receiver necessary to preserve the premises?

Under the mortgage here involved, and the facts before the court, the mortgagor cannot be deprived of any rights which he possesses as owner or the mortgagee allowed rights greater than those granted by the terms of the mortgage.

In this jurisdiction a mortgage on real property constitutes only a hen on the premises mortgaged.

Title remains in the mortgagor and those claiming under or through the mortgagor until the hen is foreclosed. Foreclosure of the hen does not take place upon the commencement of a foreclosure action, but upon a sale under a judgment of foreclosure. Though, during the pendency of the action, a court of equity has power to issue interlocutory orders for the protection of an asserted lien, such orders must be auxiliary to the right to foreclose the hen, and cannot deprive any party of a title or a right, which though subordinate to the hen of the mortgage, survive and are valid until the hen is foreclosed by a sale under a judgment of foreclosure.” (Prudence Co. v. 160 W. 73rd St. Corp., supra, 211.)

Concededly, before default in payment of the mortgage debt, the right to possession of the mortgaged premises remains in the mortgagor and that right continues until after a sale of the premises under a judgment of foreclosure and sale unless the mortgage,' by its terms, expressly gives the right to have a receiver appointed with authority to take possession of the premises from the mortgagor or unless a receiver is given that authority for reasons extrinsic to the agreement contained in the mortgage. In this case there are no facts extrinsic to the mortgage justifying or even suggesting a basis for the granting of such authority to the receiver.

The right, if it exists, must rest upon the clause heretofore quoted which gives only the right to the appointment of a receiver of the rents and profits of said premises.” There are no rents and profits. To authorize the receiver to evict the mortgagor and take possession of the premises in order to create rents and profits, or to compel the mortgagor to pay rent, would be to deprive the mortgagor of a vested right to possession which she had not contracted away.

In the Prudence case, Judge Lehman, writing for a unanimous court, said, as heretofore quoted: “ Though, during the pendency of the action, a court of equity has power to issue interlocutory orders for the protection of an asserted hen, such orders must be auxiliary to the right to foreclose the hen, and cannot deprive any party of a title or a right, which though subordinate to the hen of the mortgage, survive and are vahd until the hen is foreclosed by a sale under a judgment of foreclosure.” That statement was not limited to the parties claiming under the mortgagor but referred to any party. In that case the rights of the holders under the “ co-operative ownership plan ” were derived from the mortgagor. We held that those rights could not be destroyed by means of a mortgage foreclosure receivership. If they could not be so destroyed, it would seem to follow that the rights of those from whom such rights are derived cannot be so destroyed. Distinction cannot be made between a tenant in possession under a lease from the mortgagor and a mortgagor himself in possession as owner.

The facts in this case bring it under the basic principle decided in the Prudence case.

The order of the Appellate Division should be reversed, and the order of the Special Term affirmed, with costs in the Appellate Division and in this court, and the question certified answered in the negative.

Crouch, J.

(dissenting). The receivership clause in question, being the statutory form, must be construed as meaning that “ the mortgagee * * * shall be entitled * * * to the appointment of a receiver of the rents and profits of the premises covered. by the mortgage; and the rents and profits in the event of any default * * * are assigned to the .holder of the mortgage as further security for the payment of the indebtedness.” (Heal Prop. Law; Cons. Laws, ch. 50, § 254, subd. 10.)

The pledge of rents and profits becomes operative when a receiver is appointed; and the extent of the receiver’s authority rests in the discretion of the court. (Sullivan v. Rosson, 223 N. Y. 217, 224.) He is appointed, as the majority opinion here says, to take possession of the premises, collect the rents and apply them to the payment of the carrying charges on the property and the reduction of the mortgage debt.” If the premises are vacant in whole or in part, the court may authorize the receiver to let the vacant space. Although he takes no title, he is in possession of the premises substantially as the mortgagor was. (U. S. Trust Co. v. New York, W. S. & B. Ry. Co., 101 N. Y. 478, 483.) Broadly speaking, what the mortgagor could have done, the receiver when so authorized can do. What the mortgagor could not have done, the receiver cannot do; and in that category is included the act which was attempted by the receiver in the Prudence Company case. As long as the mortgagor is in possession, he may make a valid lease. That lease is subject to the provisions of the mortgage and, therefore, subject to the right of the receiver when appointed to take possession and to impound the rents reserved; but it is a valid contract and can be cut off only by the sale.

It is said, however, that where the mortgagor is in actual occupancy of the premises, his pledge of the rents and profits means nothing. Unquestionably, the mortgagor, in the absence of equitable considerations, is entitled to possession until the lien is cut off by sale. But it is equally without question that a court of chancery may take possession to itself when equity demands it. The actual basis of the decision in the Prudence Company case, as it seems to me, was not the stern logic of the doctrine of possession, but rather the equitable consideration that the asserted right of the receiver to get occupational rent, when that was higher than the reserved rent, was not paralleled by a reciprocal right in the tenant to pay only occupational rent when that was lower than the reserved rent. (Cf. Markantonis v. Madlan Realty Corp., 262 N. Y. 354.)

We are dealing here with a contract between the mortgagor and'mortgagee. No third party rights are involved. In the end the question is merely as to the intent of the parties, for if that intent was in effect to pledge not only the actual reserved rents, if any, but also the rentable value, if no leases were in existence, then equity may give effect to that intent through a receivership. A mortgagor personally occupying the premises is by virtue of that occupancy in receipt of a benefit in all respects equivalent to rent and profits. In effect, the mortgagor-occupant charges himself with the value of the space occupied as rent and credits himself with this amount as income. With the appointment of a receiver, the income credit — like the income from any other tenant —1 goes to the receiver. He continues to charge himself with rent, but he pays it to the receiver instead of to himself. He loses nothing since the rent goes to the receiver’s fund to carry the property (a duty resting on him), and thereafter to meet a deficiency, if there be one, otherwise to himself. (Cf. 3 Brooklyn LawReview, p. 104.) In the language of the Prudence Company Case (p. 212), the owner (mortgagor) is not deprived of any rights or the mortgagee accorded rights beyond the stipulations of the mortgage.” To hold otherwise pushes the doctrine of possession to a logical extreme and disregards the immemorial power and practice of chancery. Neither law nor common morality permits a mortgagor by personal occupancy to frustrate the clear purpose of his grant.

The order appealed from should be affirmed.

Pound, Ch. J., Lehman, Kellogg and O’Brien, JJ., concur with Hubbs, J.; Crouch, J., dissents in opinion, in which Crane, J., concurs.

Ordered accordingly.


author: O’Brien, J. Hubbs, J.

text:
    Chemical Bank and Trust Company, as Successor Trustee, Appellant, v. Thomas Streat, Individually, et al., Respondents, and Thomas Streat, as Administrator of the Estate of Bertha Streat, Deceased, et al., Appellants.

      (Submitted October 6, 1933;
    decided December 5, 1933.)

      Charles C. Parlin, Paxton Blair and Aláis H. Wurts for plaintiff, appellant.
    The rights reserved in the deed of trust to qualify or alter the cestui que trust’s right to the income expired with the settlor. (Kissam v. Dierkes, 49 N. Y. 602.) The legal effect of the deed is to make an unconditional gift to the cestui que trust of all income accruing after the settlor’s death, The construction adopted by the court below contravenes the statute against accumulations and should be avoided. (Equitable Trust Co. v. Miller, 197 App. Div. 391; 233 N. Y. 650; Matter of Hoyt, 116 App. Div. 217; 189 N. Y. 511; Crawford v. Dexter, 178 App. Div. 764; 224 N. Y. 586; Bloodgood v. Lewis, 209 N. Y. 95; Matter of Keogh, 112 App, Div. 414; 186 N. Y. 544; Curtis v. Curtis, 184 App. Div. 274; Matter of Bavier, 164 App. Div. 358, 363; Matter of Megrue, 170 App. Div. 653; 217 N. Y. 623; Hill v. Guaranty Trust Co., 163 App. Div. 374; Matter of Meyer, 140 Misc. Rep. 1.)

      Charles Fwrnald Smith for Thomas Streat, as administrator of the estate of Bertha Streat, deceased, appellant.
    Where a trust is created for a life beneficiary, with restrictions or conditions as to the time or circumstances of the payment of income for the use or benefit of the life beneficiary, the income is nevertheless the absolute property of the life beneficiary. (Bloodgood v. Lewis, 209 N. Y. 95; Matter of Hoyt, 116 App. Div. 217; Curtis v. Curtis, 185 App. Div. 391; Matter of Lamb, 182 App. Div. 180; 224 N. Y. 577; Crawford v. Dexter, 178 App. Div. 764; 224 N. Y. 586; Matter of Bavier, 164 App. Div. 358; Hill v. Guaranty Trust Co., 163 App. Div. 374; Matter of Meyer, 140 Misc. Rep. 1.) The holding that the distinctly personal right of the settlor to withdraw the trust income passed on his death to his residuary legatee is unsupported by law. (Kissam v. Dierkes, 49 N. Y. 602; Matter of Wainman, 121 Misc. Rep. 318; Matter of Grant, 122 Misc. Rep. 491; Flynn v. McDermott, 183 N. Y. 62.)

      Harold A. Donegan, Hersey Bgginton and T. R. Iserman for Chemical Bank and Trust Company et al., as committee of Bertha Streat, an incompetent person, appellant.
    The Appellate Division erred in holding that the right of the beneficiary to the income under the trust was subject to certain conditions precedent. (Curtis v. Curtis, 185 App. Div. 391; Bloodgood v. Lewis, 209 N. Y. 95.) Any construction of the trust agreement which would sustain the residuary legatee’s claim to the trust income would necessarily invalidate the entire trust agreement and would conflict with the decisions. (Kissam v. Dierkes, 49 N. Y. 602; Croker v. Croker, 117 Misc. Rep. 558; Pray v. Hegeman, 92 N. Y. 508; Matter of Hoyt, 116 App. Div. 217; Matter of Meyer, 140 Misc. Rep. 1; Matter of Keogh, 112 App. Div. 414; Bloodgood v. Lewis, 209 N. Y. 95; Hill v. Guaranty Trust Co., 163 App. Div. 374;
      Matter of Bavier, 164 App. Div. 358, 363; Crawford v. Dexter, 178 App. Div. 764; 224 N. Y. 586; Curtis v. Curtis, 184 App. Div. 274; 185 App. Div. 391.)

      William A. Young for Herbert G. Streat et al., appellants.
    The accumulated income in the possession of the trustee and the surplus in the possession of the committee should be paid to the administrator of the estate of the beneficiary, and by him distributed among her next of kin. (Matter of Meyer, 140 Misc. Rep. 1; Matter of Hoyt, 116 App. Div. 217; Crawford v. Dexter, 178 App. Div. 764.) That the beneficiary had funds of her own sufficient for her support is immaterial in the construction of the trust agreement. (Gasquet v. Pollock, 1 App. Div. 512; 158 N. Y. 734; Pray v. Hegeman, 92 N. Y. 508.)

      Joseph Larocque and William H. Crawford for Thomas Streat, individually, respondent.
    The gift of testator’s whole residuary estate to his brother carried with it, not only all the tangible property of the decedent which remained after the payment of administration expenses and bequests and the purchase of the annuity, but also all intangible property, including the right to all the income of the trust fund, subject only to the contingent charge in favor of the beneficiary. (Matter of Hunt, 207 App. Div. 127; 237 N. Y. 613; Hadcox v. Cody, 213 N. Y. 570; Matter of Knapp, 122 Misc. Rep. 346; Mayer v. American Security & Trust Co., 222 U. S. 295; Riker v. Cornwell, 113 N. Y. 115; Matter of Miner, 146 N. Y. 121; Matter of Allen, 151 N. Y. 243; Seibert v. Miller, 34 App. Div. 602; Matter of Vanderbilt, 229 App. Div. 574; Matter of Arnolt, 127 Misc. Rep. 579.)
   O’Brien, J.

James Streat, a bachelor nearly eighty years of age, and his sister Bertha, a spinster of seventy, resided together in New York city. The brother possessed a competence and the sister had an annual income amounting to $8,000 or $9,000. In March, 1924, Miss Streat was stricken with apoplexy and in the following month her brother established a trust fund of approximately $100,000 which, under certain conditions, was to be for her benefit. The Chemical National Bank, predecessor of this plaintiff, was made trustee. In December of the same year the settlor died. By his will, executed three months subsequent to the establishment of the trust and six months prior to his death, he directed his executors to purchase an annuity for his sister sufficient to insure payment of $20,000 per annum, and this direction was obeyed. His will also provided that in the event that the trust agreement should be in force at the time of his death, it should remain in force during the lifetime of his sister, and that upon her death all funds subject to that agreement should become part of his residuary estate. His brother Thomas was made the residuary legatee.

After the settlor’s death his sister was adjudged incompetent, and in May, 1925, the Chemical National Bank and another were appointed a committee of her person and property. The committee received the annuity as well as the income from the incompetent’s individual estate. Exclusive of income from the trust fund, therefore, the sum of $28,000 or $29,000 per annum became available for Miss Streat’s maintenance. The committee never expended more than $15,000 in any one year toward her support and this sum is found to be all that was-reasonable and proper. Nevertheless the trustee paid over to the committee between December, 1925, and February, 1927, the sum of $7,408.76 from the income of' the trust fund. In November, 1930, Bertha Streat died intestate and Thomas Streat was appointed her administrator. At the time of the death of the beneficiary, the trustee had in its possession the sum of $17,012.76, accrued income from the trust fund.

The Appellate Division has decided that the $7,408.76 was improperly paid over to the committee and has surcharged the trustee with that stun and has held that it, together with the $17,012.76 accrued income, belongs to the residuary legatee of the settlor, rather than to the estate of the conditional beneficiary of the trust,

.Unless, the settlor made a present unqualified gift of the income to the beneficiary, the judgment is correct. Supported by evidence is , the finding by the Appellate Division That James’ purpose in executing the deed of trust was, not to increase Bertha’s income but it was to insure her against a loss of income in case she should be unable to collect the income from her own property, and also the finding that before making payments, from the trust fund the fact must appear to the trustee either that Bertha was in need of funds for her maintenance or for any other purpose or that the need arose from lack of availability of her own funds or from her inability to take the steps necessary to procure payment of such funds.

During the lifetime of the settlor the gift was, by the terms of the trust agreement, certainly no more than conditional. The right retained by the settlor to receive the income under certain conditions prevents the conclusion that the gift was absolute. The agreement recites James Streat’s purpose to provide a fund which may be available for his sister’s maintenance either when her individual income is insufficient for her needs, or when she is unable to obtain prompt payment thereof, whether by reason of her own physical disability, or otherwise.” It authorizes and directs the trustee, whenever in its judgment the sister is in need of funds and such need arises from lack of availability of her own funds or from her inability to. take steps necessary to procure payment to her of such funds,” in its discretion to pay out in a spirit of the broadest liberality such amounts, if necessary even from the principal, as may be proper in its judgment adequately to maintain her. James reserves the right to receive and retain any and all income from the securities constituting the trust fund and to revoke the agreement at any time, and he directs, in case of the termination of the trust by his sister’s death subsequent to his own death, that the trust securities shall be turned over by the trustee to his estate. By the terms of his will, the agreement “ shall remain in force during the lifetime of my said sister.” Also appears the provision for the purchase of a $20,000 annuity. There is no language in either instrument indicating an intent to transform, after the settlor’s death, the qualified gift into an absolute one. Whatever conditions, not exclusively personal, existed during his life were to remain in force after his death.

Not only the whole tenor of the trust agreement but the specific verbiage employed in that instrument manifests the clearest intent on the part of the settlor to withhold an absolute gift. The provision made for the sister’s maintenance was expressly held in reserve until such a time as drafts upon it might become necessary. During the lifetime of the conditional donor not one cent was ever expended from this trust fund for the benefit of the sister. It was all received and retained by him. The referee and the unanimous Appellate Division have held as matter of law that such right is a property rather than a personal right and we agree. A property right of course is transferable by will. That at some time necessity might require the use of part or even all of the income and the principal was a contingency clearly recognized by the settlor. Protection of his aged, shattered sister from want, safeguarding her every comfort, convenience and even luxury, appear both in the trust agreement and in the will to have been his dominant purpose. This object he accomplished without drawing upon either the principal or the income of the trust fund which had been designed by him to constitute only the last possible defense. The income from his sister’s individual estate added to the annuity amounted to nearly twice the sum deemed necessary by the trustee to be expended for her support. The conditions prescribed in the deed of trust never arose. The provisional beneficiary was, therefore, not entitled, under the terms of the trust agreement, to the income from the trust fund during the settlor’s life.

Since Bertha was not entitled absolutely during her brother’s life to any income from the trust, conditions were not changed by his death. Inasmuch as she possessed no unqualified property interest her estate derived no larger benefit. The settlor, if he had so elected, might have revoked the deed of trust, but so long as he refrained from the act of revocation the deed remained in full force, with all its conditions, until the death of Bertha. Irrespective of the question whether the property right to receive and retain any or all of the income which the settlor reserved to himself passed, during Bertha’s .life, to the residuary legatee by virtue of the settlor’s will, in any event it was not transferred to Bertha, for the contingencies mentioned in the agreement never happened. Moreover, while that instrument stood unrevoked, the settlor himself and his successor in interest were shackled by the conditions which he imposed. His own right to the income was not unrestricted. It was no more free from limitations than his sister’s, but it was subject to her necessities. To hold that James’ intent was to provide a fund available for her maintenance, if in the reasonable judgment of the trustee it should be required, and at the same time to retain an absolute right to compel the trustee to pay over the income to him even if his sister’s necessities were dire, would lead to such an inconsistent result as could follow only from an indefensible interpretation. Always, while the trust was in existence, the trustee was empowered, in the exercise of a reasonable interpretation of the conditions in the deed of trust and even against the consent of the settlor or the residuary legatee, to expend the whole or any part of the income and the principal for the maintenance of the conditional beneficiary.

Even though the trustee never was impelled by its judgment to draw upon the trust fund either during the life of the settlor or after his death, there would be no illegal accumulation. The trust deed did not direct an accumulation of income. It contemplated the probability that it would not be needed for Bertha's support yet also recognized the possibility, in the event of her inability to secure sufficient revenue from her individual investments during his life and the conceivable failure of the annuity after his death, that income from the trust might become indispensable. Such income as might remain uncollected by James or the residuary legatee and unexpended at any particular time by the trustee for Bertha's needs was not intended to exist as a dormant accumulation awaiting the termination of the trust for the benefit of some remainderman. The purpose can fairly be interpreted as a right belonging to the settlor and to the residuary legatee with the trustee’s consent either to receive and retain the income or to allow it to accrue into a reserve to be expended for Bertha in an emergency. At any time it might be called into active service.

The principle in Matter of Hoyt (116 App. Div. 217; affd., 189 N. Y. 511) is entirely different. In that case the courts decided that the entire income was intended absolutely to be devoted to the use of the beneficiary. The same is true in respect to Matter of Keogh (112 App. Div. 414; affd., 186 N. Y. 544). Also in Bloodgood v. Lewis (209 N. Y. 95) an absolute gift was made which was qualified only by the manner of payment. The rule in Cochrane v. Schell (140 N. Y. 516) that, in the absence of an express direction for the accumulation of surplus income, a direction may sometimes be implied is rendered inapplicable by the provision in this trust agreement that the settlor retains the right to eolleet all the income and by the fair interpretation that such conditional property right, subject to the necessities of • the provisional beneficiary, passes after the death of the settlor and before the termination of the trust to the residuary legatee. An implied direction leading to an invalid result must if reasonably possible be avoided. (Equitable Trust Co. v. Miller, 197 App. Div. 391; affd., 233 N. Y. 650.) By the settlor’s testamentary disposition, not only the corpus but “ all funds then subject to said agreement ” became part of his residuary estate. These funds necessarily include the accrued income undisbursed by the trustee for the benefit of Bertha-and uncollected under the terms of the trust by the settlor and his nominee, the residuary legatee. This provision negatives any idea of an absolute gift to Bertha.

The use of the words “ all funds' then subject to said agreement ” in the will is in marked contrast to such phraseology employed in the trust agreement as -was intended to describe merely the'-principal of the trust. In no other instance in either document does the settlor and testator utilize a single phrase to express a combination of principal and income. In the deed of trust appear such verbiage as “a fund,”, “-the securities;” “ said fund,” “ securities constituting- the trust fund,-” “ principal of the trust fund,’-’ all of which must in reason be deemed to apply only to the corpus. Again in thé trust agreement is used, in contradistinction to the -idea of principal, the term- “ accumulated income of the trust fund,” thus, in the deed of trust,' marking as emphatic a separation as is conceivable between the corpus and the product yielded from the principal. In the will James disposes into his residuary estate not alone the principal or the fund or the securities or said fund or the securities constituting the trust fund, but he directs that “ all funds then subject to said agreement ” shall go to his brother Thomas as residuary legatee. To refuse to recognize this distinction would be-- to ignore plain language and to thwart the intent of the settlor and testator.

The judgment should be affirmed, with costs to each appellant filing a brief payable out of the principal of the trust fund.

Hubbs, J.

(dissenting). James Streat, a bachelor, who for many years had resided with a sister, Bertha Streat, on April 10, 1924, made a trust agreement in which she was named as cestui que trust and plaintiff was named as trustee. The sister owned property which, under ordinary conditions, would provide an income of from $8,000 to $9,000 per year. About a month prior to the execution of the trust agreement, she was stricken with apoplexy with resulting paralysis which rendered her almost entirely helpless, physically, and caused impairment of her mentality. James Streat, the settlor, also had suffered one stroke of apoplexy and his state of health was precarious. A solicitous interest in the welfare of his sister is evidenced not only by the previous relationship of the parties and their physical impairments at the time, but as well by the language and provisions of the trust agreement, the material parts of which read as follows:

“ Whereas the first party desires at all times to fully provide for the care, maintenance, and support of his sister, Miss Bertha Streat, and although his said sister owns a considerable amount of cash, securities and property, neverthless, at times her physical health is such that she is unable to perform the acts necessary to collect the income therefrom so as to provide her with needed funds,

Now therefore, for the purpose of providing a fund which may be available for and applied to the care, maintenance, and support of his said sister, Bertha Streat, either when her individual income is insufficient for her needs, or when she is unable to obtain prompt payment thereof, whether by reason of her own physical disability, or otherwise, the first party does hereby assign, transfer and set over unto the second party the securities set forth in Schedule ‘ A ’ hereto annexed. Said fund is to be held by the second party until the death of Miss Bertha Streat, the sister of the first party, or the revocation of this instrument by the first party, whichever event shall first happen.

“ The first party reserves the right from time to time to change or alter the securities constituting the trust fund and to receive and retain any and all income that may have been collected thereon.

“ The second party is authorized and hereby directed at any time it may be made to appear to it that Miss Bertha Streat, first party’s said sister, is in need of funds for care, maintenance, or support, or for any other purpose, and such need arises from lack of availability of her own funds or from her inability to take steps necessary to procure payment to her of such funds, to pay out for the care, maintenance, and support of the said sister of the first party, or for any other similar purpose, such amounts as may be proper in its judgment to adequately care for, maintain, and support her. In exercising such discretion it is the desire of the first party that the broadest liberality be shown. Such payments to be made out of the accumulated income of the trust fund, if there be sufficient on hand, and if such income be insufficient, then out of the principal of the trust fund.

The first party reserves the right to revoke this agreement at any time and to retake and repossess himself of the securities constituting the trust fund. In case of the termination of this agreement by the death of the first party’s said sister, Miss Bertha Streat, then the securities constituting the trust fund, or so much thereof as may remain, shall be turned over by the second party to the first party, or to his estate, if he be not then living.”

From the time of the execution of the agreement to the date of his death on December 21, 1924, James Streat, the settlor, exercised the right reserved in the third paragraph quoted to take the income collected by the trustee from the trust fund.

On July 2, 1924, less than three months after signing the trust agreement, James Streat executed a will in which he directed his executors to purchase annuities amounting to $20,000 per year for his sister, Bertha Streat, and directed that if the trust agreement should still be in force at the time of his death, the same should remain in force during the lifetime of his sister, and that upon her death all funds then subject to said agreement be disposed of as provided as to bis residuary estate. The use of the words all funds ” does not indicate that he had in mind or referred to accumulated income as those are the very words which he repeatedly used in the trust deed as meaning the principal of the trust. He devised and bequeathed his residuary estate to his brother, Thomas Streat.

After Mr. Streat’s death, Bertha Streat was found to be incompetent to manage her affairs and a committee of her person and property was appointed. The executors of the will of James Streat purchased for Bertha Streat annuities sufficient to insure her an annual income of $20,000, and payments were thereafter made by them to the committee of Bertha Streat at that rate down to the time of her death.

Following the death of James Streat, the trustee made certain disbursements for the account of Bertha Streat to her, to Thomas Streat and to others. After the appointment of the committee, the trustee adopted the practice of paying over income to the committee and between December 16, 1925, and February 28, 1927, paid over income amounting to $7,408.76. On or about the latter date, Thomas Streat, the residuary legatee, notified the trustee that he objected to the payment of income to the committee, and thereafter no payments were made.

On November 25, 1930, the date of the death of Bertha Streat, the amount of the income of the trust fund held by the trustee amounted to $17,012.76. This action was instituted by the trustee for the settlement of its account and for advice as to the proper distribution of the balance of income remaining in its hands.

. The action was tried before á referee who approved the accounts with minor corrections, and held that the deed of trust made a present valid gift of the' entire income from and after the death of the settlor to Bertha Streat, that, the income in the amount of $7,408.96 paid to her committee during her life was properly paid, and that Thomas Streat, as administrator of her- estate, was entitled to receive all income remaining in the hands of the trüstee as of the date of the death of Bertha - Streat.

The judgment of the Supreme Court entered upon the report of the referee was modified by the Appellate Division by surcharging the trustee with the amount of the payments made to the committee of Bertha Streat; by directing that all accumulated income be paid to the defendant Thomas Streat individually, and by surcharging the committee with the further sum of $606.98, interest on the accumulations of income in its hands. The important question for determination is whether Bertha Streat became entitled to the entire income from the trust fund from the date of the death of James Streat during the remainder of her lifetime despite the conditions contained in the trust agreement as to payment and disbursement of such income for her benefit.

We believe a proper construction of the trust agreement requires an affirmative answer to that question.

It is a general rule, well supported by authority, that instruments creating trusts under which the trustee is directed to pay.' over such income as may be necessary for the care, süpport and maintenance of a designated beneficiary vest in the designated beneficiary the entire income and not merely such portion as the trustee finds is; actually ¡necessary for the- care 'and support of the beneficiary, and that an unexpended part of income becomes a part of the estate of the beneficiary. (Bloodgood v. Lewis, 209 N. Y. 95; Matter of Keogh, 112 App. Div. 414; affd., 186 N. Y. 544; Matter of Megrue, 170 App. Div. 653; affd., 217 N. Y. 623.)

The fact that the majority of the cases supporting the rule involve the construction of testamentary trusts is due rather to the greater frequency with which the question has been presented in the construction of testamentary trusts than to any difference in principle.

The two conditions upon the happening of which the trustee was authorized to pay out the income of the trust fund for the benefit of the sister were not conditions precedent to her right to receive the income, but were conditions which attach only to the paying out of the income. The income was absolutely appropriated by the terms of the trust and the limitation was on the distribution of such income. There is a broad distinction between ownership of an income held in trust and the right to receive such income under the terms of the trust. The trustee was, under the terms of the trust deed, the custodian and conserver of the income of the trust fund with a discretion as to when and how it should be paid out for the benefit of the sister. (Matter of Hoyt, 116 App. Div. 217; affd., 189 N. Y. 511.)

Nor does the fact that James Streat, the settlor, reserved the right to change the securities in the trust and have the income paid to him during his lifetime make necessary the application of a different rule. The right reserved was personal. No grant of such a right to another upon his death is contained in the trust deed. That he intended to make the trust provision for his sister and to so limit the grant as to give to another the right to defeat the entire purpose of the trust is not to be presumed.

It is contended that unless the right to receive the accumulated income be held to pass under the will of deceased, the trust must be held void because violative of the statute against perpetuities. Since we hold that the gift was of the entire income not paid to the settlor under the right reserved, no question of a possible unlawful accumulation is presented.

The object of the statute is to prevent postponement of the vesting of title to property beyond the prescribed period and not to make it unlawful to place restrictions upon the time of payment or application of the property in fulfillment of the purposes of the trust. The securities were placed in the hands of the trustee for the sole propose of the protection of the sister Bertha. No restriction is placed upon the title to the income; no gift over is made in the event that the trustee shall not find it necessary to pay to or for Bertha Streat, and the direction as to what is to be done upon the death of his sister is limited specifically to the securities constituting the trust fund or so much thereof as may remain, which securities are directed to be turned over to his estate.

That he meant that the principal and not accumulated income should be turned over to his residuary estate is indicated by the fact that the instrument recites the assignment to the trustee of the securities set forth in Schedule A ’ hereto annexed. Said fund is to be held by the second party, * *

That it was intended that the accumulated income should at all times be'available for use in the care of bis sister and that it was contemplated that the income would accumulate in the hands of the trustee, is evidenced by the provision in the agreement reading as.follows: such payments to be made out of the accumulated income of the trust fund, if there be sufficient on hand, and if such income be insufficient, then out of the principal of the trust fund.”

There is nothing inconsistent with this purpose or indicating any different intent on the part of James Streat in the fact that he created an annuity for his sister under his will. He recognizes in his will the existence of the agreement. He says in that will: “ If the agreement heretofore entered into by me, under date of May 10, 1924, with the Chemical National Bank of the City of New York, shall still be in force at the time of my death, I direct that the same shall remain in force during the lifetime of my said sister, Bertha Streat, and that upon her death all funds then subject to said agreement shall be disposed of as hereinafter provided as to my residuary estate.”

The funds which he had in contemplation when that clause was inserted in the will is indicated in the trust agreement where direction is given as to the disposition of the principal of the trust fund. Nothing in the deed of trust, in the will or the relation of the parties indicates an intent on the part of the settlor that the income in question should go to any one other than his sister Bertha.

Doubtless the settlor at the time he executed the trust deed and placed therein the clause reserving the right from time to time to change or alter the securities constituting the trust fund and to receive and retain any and all income that may have been collected thereon,” had in mind that as long as he lived he could and would look personally after the welfare and financial interests of his sister. He, therefore, reserved to himself the right to the income from the trust fund as long as he lived. He then provided for the payment of the income to his sister after his death. His purpose is unmistakable. It was to place with the trustee securities that would provide an income which the trustee might expend as and when needed by the sister, such payments to-be made out of the aecummulated income of the trust* fund, if there be sufficient on hand, and if such income be insufficient, then out of> -the principal of the trust fund.”

At that time no one knew what the needs of the sister might be. In a certain year she might not need any of the income or only a part of it. Another year she might need more than the income for that year. If so, the trustee was "empowered to use accumulated income and part of the principal if necessary. The provision is inconsistent with the notion that the residuary legatee, under the settlor’s will, might draw the income which the -testator had expressly provided in the trust fund should be used for his sister.

We must look at the situation as the settlor looked at it at the time of executing the. trust deed. What was his intent at that time? The fact that it afterwards happened that the sister did not need the entire income has no bearing upon the question of the settlor’s intent. He was not going, to take any chances that she should ever be in need. It was to prevent that very possibility that the trust was established. At that time his will had not,been executed. We cannot know that at the time of the execution of the trust deed he even contemplated providing an annuity for his sister by will.

During the interval of about three months between the date of the trust deed and the execution of the will, there was in existence no provision disposing of any surplus income from the trust fund after the death of the sister.. The terms of the trust deed did not make any such provision.. It only provided that the securities should be turned over by the trustee upon the death .of the sister. The will did not change the situation.

Since there is no express direction as to disbursement of the accumulated income upon the death-, of Bertha Streat, it must be held to pass to her estate in accordance with the general principle above set forth. It, therefore, follows ..jihat since the income vested in the beneficiary subject";to the restriction placed upon the trustee in paying it out, -it acted in a proper exercise of its discretion in making, payments to the legally-.appointed committee of the cestui qui trust and should not be surcharged with the amount- of such payments. Likewise, it should pay over- to the legal representative of her estate the accumulated income which accrued prior to her death, with interest thereon at clearing house rates from February 28, 1922, to November 25, 1930, as specified in the judgment entered upon the report of the referee.

We think the allowances made to counsel were excessive, and should be reduced in accordance with the judgment of the Appellate Division.

The judgment of the Appellate Division should be modified in accordance with this opinion and as modified affirmed, with costs in this court to each appellant filing a brief, payable out of the principal of the trust fund.

Pound, Ch. J., Lehman and Kellogg, JJ., concur with O’Brien, J.; Hubbs, J., dissents in opinion in which Crane and Crouch, JJ., concur.

Judgment affirmed, etc.


author: Pound, Ch. J.

text:
    David A. Brown, Appellant and Respondent, v. Walter E. Bedell et al., Appellants, and Lester Alexander et al., Respondents.

      (Argued November 21, 1933;
    decided January 9, 1934.)

      Edmond B. Butler and Claude V. Pallister for Walter E. Bedell, defendant-appellant.
    The syndicate agreement did not constitute a Massachusetts trust. (Hawley v. Keeler, 53 N. Y. 114; Newton v. Porter, 69 N. Y. 133; Farmers Loan & Trust Co. v. Winthrop, 238 N. Y. 477.)

      David Sleekier and Edmund B. Hennefeld for Myer Davidow, defendant-appellant.
    An association such as at bar is a partnership or joint venture where the power of ultimate control is in the members- and the members possessing such power are liable ■ as copartners for the association’s debts whether or not they actually exercise their power of control. (Byrnes v. Chase Nat. Bank, 225 App. Div. 102; Simson v. Klipstein, 262 Fed. Rep. 823; Neville v. Gifford, 242 Mass. 124; Howe v. Chmielinski, 237 Mass. 532; Frost v. Thompson, 219 Mass. 360; Williams v. Milton, 215 Mass. 1.) The ultimate control must be held to be in the beneficiaries of an association such as at bar, where they possess the power, whether exercised or not, either to change the personnel of the managers -or trustees; or to change the terms of the authority granted to the managers or trustees; or to terminate the trust. (Hoadley v. County Comrs., 105 Mass. 519; Gleason v. McKay, 134 Mass. 419; Whitman v. Porter, 107 Mass. 522; Phillips v. Blatchford, 137 Mass. 510; Bicker v. American L. & T. Co., 140 Mass. 346; Mayo v. Maritz, 151 Mass. 481; Williams v. Boston, 208 Mass. 497; Williams v. Milton, 215 Mass. 1; Frost v. Thompson, 219 Mass. 360; Horgan v. Morgan, 233 Mass. 381; Dana v. T. & B. General, 227 Mass. 562; Priestley v. T. & B. General, 230 Mass. 452; Sleeper v. Park, 232 Mass. 292; Howe v. Chmielinski, 237 Mass. 532; Neville v. Gifford, 242 Mass. 124; Flint v. Codman, 247 Mass. 463; Bouchard v. First People’s Trust, 253 Mass. 351; Jones v. Gould, 209 N. Y. 419; Neary v. Gould, 228 N. Y. 533; Byrnes v. Chase Nat. Bank, 225 App. Div. 102; 251 N. Y. 551.) The power of ultimate control of the pool at bar was in the members, and they are liable for the pool debts, if any. (McCausey v. Burnet, 50 Fed. Rep. [2d] 491; Ing. v. Liberty Nat. Bank, 216 Ky. 467; Mooney v. Nagel, 34 Ohio Cir. Ct. Rep. 119; Heckscher v. Edenborn, 203 N. Y. 210; Terwilliger v. Ontario C. & S. R. R. Co., 149 N. Y. 86; Knapp v. Alvord, 10 Paige Ch. 205; Horgan v.

      Morgan, 233 Mass. 385; Williams v. Milton, 215 Mass. 1; Williams v. Boston, 208 Mass. 497; Culp v. Robey, 294 S. W. Rep. 647.)

      Edmund B. Hennefeld and David I. Shapiro for Louis Eisenberg, defendant-appellant.

      Abraham Benedict and Gustavus A. Rogers for plaintiff-appellant and respondent.
    The syndicate agreement did not create a Massachusetts trust. It lacks all the elements requisite to such trust. (Jones v. Gould, 209 N. Y. 419; Neary v. Gould, 228 N. Y. 533; Byrnes v. Chase Nat. Bank, 225 App. Div. 102; 251 N. Y. 551; Gates v. Megargel, 266 Fed. Rep. 811; Nowland Realty Co. v. Commissioner of Internal Revenue, 47 Fed. Rep. [2d] 1018; McCausey v. Burnet, 50 Fed. Rep. [2d] 491; Tyrrell v. Washburn, 6 Allen, 466; Hoadley v. County Commissioners of Essex, 105 Mass. 519; Whitman v. Porter, 107 Mass. 522; Phillips v. Blatchford, 137 Mass. 510; Ricker v. American Loan & Trust Co., 140 Mass. 346.) The life of the syndicate was tacitly extended beyond the date of the loan made by the plaintiff. This is demonstrated by undisputed evidence. (Bollen v. Potter, 251 N. Y. 224; Foreman v. Foreman, 251 N. Y. 237; Olney Canning Co. v. State, 230 N. Y. 351; Murray Co. v. Lidgerwood Mfg. Co., 241 N. Y. 455; Bowery Bank v. Gerety, 153 N. Y. 411; Second Nat. Bank v. Weston, 172 N. Y. 250; First Nat. Bank v. City of Hartford, 273 U. S. 548; Adler v. Zimmerman, 233 N. Y. 431; Mawhinney v. Milbrook Woolen Mills, 231 N. Y. 290; Drilling v. New York Life Ins. Co., 234 N. Y. 234; Young v. U. S. Mtge. & Trust Co., 214 N. Y. 279; Corr v. Hoffman, 256 N. Y. 254; Mason v. Partridge, 4 Hun, 621; 66 N. Y. 633; Horgan v. Morgan, 233 Mass. 381.) The plaintiff was not charged with knowledge of the terms of the syndicate agreement; but even if otherwise, or if he knew the terms, they were in themselves insufficient to limit the liability of any of the defendants and are ineffective to shield the defendants from such liability; (Williains v. Boston, 208 Mass. 497; Williams v. Milton, 215 Mass. 1; Neville v. Gifford, 242 Mass. 124; Tradesmen’s Bank v. Astor, 11 Wend. 87; Hawken v. Bourne, 8 Man. & W. 703; Walburn v. Ingleby, 1 M. & K. 51; Walden v. Sherburne, 15 Johns. 409; Skinner v. Dayton, 19 Johns. 513; Bank of Rochester v. Monteath, 1 Den. 402; National Union Bank v. Landon, 45 N. Y. 410; Mason v. Partridge, 66 N. Y. 633; Woodruff v. Germansky, 233 N. Y. 365; Jones v. Gould, 209 N. Y. 419.) There is no ground upon which a new trial can be ordered as against the three managers. It was error to strike out the first count as against the defendant Winston. (Sharp v. Hutchinson, 100 N. Y. 533; Rochester Ry. Co. v. Robinson, 133 N. Y. 242; Grossman v. Schenker, 206 N. Y. 466; California Packing Corp. v. Kelly Storage Co., 228 N. Y. 49; McKee v. Jessup, 62 App. Div. 143; Ranken v. Probey, 131 App. Div. 328.)

      Edward T. McLaughlin for Lester Alexander et al., defendants-respondents.
    The • syndicate agreement created a common-law or business trust under which the managers became the trustees and the participants became the beneficiaries • or cestuis que trustent. The managers were principals and the participants were free from any liability for the principals’ acts. (Jones v. Gould, 209 N. Y. 419; Byrnes v. Chase Nat. Bank, 225 App. Div. 102; 251 N. Y. 551; Frost v. Thompson, 219 Mass. 360; Williams v. Milton, 215 Mass. 1; Mayo v. Moritz, 151 Mass. 481; Gutelius v. Stanbon, 39 Fed. Rep. [2d] 621; Hutchison v. Birdsong, 211 App. Div. 316; Clark v. Rumsey, 59 App. Div. 435; Darling v. Buddy, 1 S. W. Rep. [2d] 163; Hamilton v. Young, 116 Kan. 131; Taylor v. Davis,, 110 U. S. 330; Schumann-Heink v. Folsom, 159 N. E. Rep. 250.) Plaintiff’s knowledge of the existence of the syndicate, as disclosed by his own testimony, was sufficient to charge him with the duty of inquiry as to the terms of the agreement and the limitations therein. (Porges v. U. S. Mortgage & Trust Co., 203 N. Y. 181; Craighead v. Peterson, 72 N. Y. 279;
      Martin v. Farnsworth, 49 N. Y. 555; Nixon v. Palmer, 8 N. Y. 398; Greenwood v. Spring, 54 Barb. 375.)

      Edward D. Bryde for T. Markoe Robertson, defendant-respondent.
    The syndicate agreement created a common-law or business trust under which the managers became the trustees and the participants became the beneficiaries or cestuis que trustent. The managers were principals and the participants were free from any liability for the principals’ acts. (Jones v. Gould, 209 N. Y. 419; Byrnes v. Chase Nat. Bank, 225 App. Div. 102; 251 N. Y. 551; Williams v. Milton, 215 Mass. 1; Mayo v. Moritz, 151 Mass. 481; Bouchard v. First People’s Trust, 253 Mass. 351; Gutelius v. Stanbon, 39 Fed. Rep. [2d] 621.) Irrespective of whether the syndicate agreement be deemed a partnership, joint venture, common-law trust or business trust, the plaintiff had knowledge of its terms and was bound by them. These terms stated distinctly the expiration period of the agreement and the limited liability of each participant. (Porges v. United States Mortgage & Trust Co., 203 N. Y. 181; Craighead v. Peterson, 72 N. Y. 279.)

      Melvin Kleeblatt and Samuel R. Gerstein for Ralph M. Simon, defendant-respondent. The agreement constitutes a trust. (Jones v. Gould, 209 N. Y. 419.)

      George P. Halperin for Norman K. Winston, defendant-respondent.
    The first cause of action set forth in the complaint was properly dismissed against Winston. (Booth v. New Process Cork Co., 196 App. Div. 376; Bandler v. Globe & Rutgers Fire Ins. Co., 205 App. Div. 515; Goodtnan Bros. v. Ashton, 211 App. Div. 769; Almirall & Co. v. McClement, 207 App. Div. 320; Peerrot v. Mt. Morris Bank, 120 App. Div. 247; Tate v. American Woolen Co., 114 App. Div. 106; Sampson v. Grand Rapids School Furniture Co., 55 App. Div. 163; Dukas v. Hennessy Realty Co., 178 N. Y. Supp. 420; Mitchell v. Dunmere Realty Co., 60 Misc. Rep. 563; Cash v. American

      Specialty Tailoring Co., 157 App. Div. 729; Melenky v. Melen, 189 App. Div. 342; Sparks v. Ducas, 123 App. Div. 507; Babcock v. Anson, 122 App. Div. 73; American Exchange Nat. Bank v. Coubert, 135 App. Div. 371; Davis v. Wilson, 150 App. Div. 704.)
   Pound, Ch. J.

The action is to recover the balance due on a promissory note or the same balance due for money lent. It. involves the construction of a pooling or syndicate agreement which reads as follows: “ The undersigned hereby form a syndicate for the purpose of dealing in the capital stock of the Broadway National Bank & Trust Company of New York. The syndicate shall be dissolved and terminate sixty days-from the date hereof, but it may be terminated in the discretion of the managers prior thereto. Walter E. Bedell, chairman, Myer Davidow and Louis -Eisenberg are hereby appointed as managers and they shall- have sole management in the conduct of the business and affairs of the syndicate with all usual and customary powers including the right to make or procure loans and to pledge any of said stock and/or the obligar tions of the participants hereunder; to pay all commissions and expenses of every nature, and for the account of the syndicate, to. purchase, sell, sell short, repurchase, resell or hold shares of the capital stock of the Broadway National Bank & Trust Company to such amount, at such prices -and in such manner as they may deem advisable, and generally to act in all respects as in their opinion may be to the best interests of. the syndicate. The maximum commitment of the participants herein shall at no time exceed the sum of five thousand ($5,000) dollars. The manágérs hereof, as such, shall in no wise be hable for an error of judgment or mistake of law or fact. Said managers may participate in this syndicate and as such, with respect to their participation, shall enjoy all the rights, benefits and privileges and be subject to all the liabilities, debts and obligations hereby respectively granted' to' and imposed upon any other of ' this participants. This shall be binding upon the respective participants, their successors, executors, administrators and assigns, but no partnership relation shall arise therefrom. The liability of a participant in this syndicate shall not be increased by default of any other participant, the maximum individual liability being limited to the sum of five thousand ($5,000) dollars; At the termination period hereinbefore mentioned', the managers shall distribute to the participants herein pro rata, in the respective proportions which their respective participations bear to the total participations herein, the shares or cash remaining in their hands and the participants shall share pro rata in the said shares, in the profits or losses of the syndicate after deducting the expenses incurred by the managers in conducting the transaction and the apportionment and distribution by said managers of the said shares, profits or losses shall be final and conclusive upon the participants. Dated, New York, July 10, 1929.”

The signatures and seals of the subscribers then follow, together with the signed acceptance by the managers: The undersigned hereby accept the office of Managers specified in the instrument herein upon the terms and conditions therein set forth. Dated, July 10th, 1929.”

The note reads as follows:

“ $25,000.00. September 17, 1929.
Sixty days after date we promise to pay to the order of David A. Brown Twenty-five thousand 00 /100 Dollars at Broadway National Bank and Trust Company. Value received.
“ No. Due.
“ BROADWAY NATIONAL BANK AND TRUST CO. SYNDICATE,
Walter E. Bedell, Chairman.”

The courts below have held that the instrument constitutes a trust .agreement, creating what is commonly known as a business or Massachusetts trust; that the trastees are the owners as well as the managers of the money put into the pool; that the subscribers are mere beneficiaries and that the promissory note for borrowed money, signed by the chairman of the syndicate, created a legal liability against the managers only and not against the subscribers to the agreement.

The exemption of the members of a business trust from personal liability for its debts has been recognized in New York. (Jones v. Gould, 209 N. Y. 419; Byrnes v. Chase Nat. Bank, 225 App. Div. 102; affd., 251 N. Y. 551.) The leading Massachusetts case (Williams v. Inhabitants of Milton, 215 Mass. 1) is cited with approval in Crehan v. Megargel (234 N. Y. 67, 79) for the proposition that business trusts may be utilized as substitutes for corporations and that such trusts raise an “ insurmountable barrier ” (Hiscock, Ch. J., in Crehan v. Megargel, supra, p. 79) between the subscribers and the creditors.

The business trust as a device whereby to gain substantially all the advantages of incorporation and to escape the disadvantages of legislative regulation has not gained favor in all jurisdictions. It is, however, sustained by the great weight of authority. (Warren, “ Corporate Advantages without Incorporation,” p. 383; Stevens, “ Limited Liability in Business Trusts,” 7 Cornell Law Quarterly, 116; Darling v. Buddy, 318 Mo. 784; 58 A. L. R. 493.) The true test of such a trust seems to be to determine whether the relation between the parties is that of principal and agent or trustee and beneficiary; whether the subscribers are separated from direct interest ownership and control of the property and affairs of the trust. A trustee is a principal, not an agent in the management of the trust property. (Taylor v. Davis, 110 U. S. 330, 335.) The trustees should, therefore, be a self-perpetuating body, owning the property of the syndicate, with all powers of control over it. The shareholders should have no rights except to receive dividends and to share in the final distribution when the business is wound up. Full-paid and non-assessable shares may be issued and sold to those who care to invest therein. The shares thus become an attractive form of investment when investments are eagerly sought by the public. The trust becomes a quasi corporation, separate and distinct from its members.

The agreement is one of joint adventure when the subscribers retain some degree of ownership and control over the property which they put into the pool.

A typical investment trust exists where the trustees invest and reinvest the fund paid in to them in payment for shares and pay the income to the certificate holders and at the termination of the trust divide the fund among them, thus giving them a status like that of shareholders in a corporation. (Williams v. Inhabitants of Milton, supra.)

Although the test is plain, the difference is not always entirely clear between agreements where the subscribers are associated together by the terms of their agreement as principals owning their contributions to the pool or trust, and giving to their agents mere power to act for them, and agreements whereby the property becomes the property of the trustees and the subscribers have no rights except aright to have the property managed for their benefit. (Williams v. Inhabitants of Milton, supra, p. 8; Bouchard v. First People’s Trust, 253 Mass. 351.)

Whether the syndicate is the one or the other depends upon the wáy in which the trustees are to conduct the affairs committed to their charge. If they act as principals, owners of the sums subscribed, free from the control of the subscribers, a trust is created; but if the trustees are subject to the control of the subscribers as co-owners of a business for profit (Partnership Law, § 10; Cons. Laws, ch. 39), a partnership or joint -undertaking exists as to third parties, although otherwise specified as to the subscribers among themselves.

Applying the test to this case, we have the formation of a syndicate, not in terms the creation of a trust, to deal in the capital stock of the Broadway National Bank and Trust Company of New York, to last for sixty days, ■unless sooner terminated by the managers. The stock thus acquired was to be transferred to a corporation to be formed. The managers were to have sole management in the conduct of the business and affairs of the syndicate, but there is no transfer of title to the managers. They were instructed, on account of the syndicate, to purchase, sell, sell short, repurchase, resell or hold shares in the capital stock of the bank, the maximum commitment of the subscribers being five thousand dollars. Does this agreement make the managers agents of a mutual pooling arrangement or does it make them trustees properly so called, who own the property of the association and are masters of it? We think the managers were agents of the subscribers and not owners of the amounts subscribed and paid in.

It is observed, first, that the agreement on its face provides for managers and not for trustees. This, of course, is not conclusive (Byrnes v. Chase Nat. Bank, supra), but it is not without significance. The agreement seeks to limit liability to five thousand dollars each, but it provides that, at the termination of the period of its existence, the participants shall share pro rata in the profits or losses of the syndicate. What is this but a pooling agreement whereby a fund is intrusted to managers to use for the syndicate purposes as they shall deem to be for the best interests of the syndicate in buying and selling the shares of the bank? The participants put five thousand dollars each into a pool. They also seek to limit their liability among themselves to that amount and to provide that no partnership relation shall arise therefrom. Plaintiff is charged with knowledge of the terms of the agreement and he is bound thereby. (Craighead v. Peterson, 72 N. Y. 279, 283; Jones v. Gould, supra, p. 425.)

A partnership is a joint undertaking wherein the partners agree to share in profits and losses. A business trust, like a corporation, has its own profits and losses. The subscribers as such, like stockholders, have none. Yet here the subscribers agree to share personally in the profits and losses of the syndicate. The managers act as agents of the subscribers, subject to an accounting to them.

The court should be solicitous to gather the object and purposes of the parties from the language of their contract rather than from formulas applied to other cases. Such formulas must not mislead us into the belief that the essential thing to be determined is the question of management. It should not be solicitous to give corporate advantages without incorporation (Eliot v. Freeman, 220 U. S. 178), or to extend the Massachusetts business trust doctrine of exemption from liability beyond properly defined lines, We conclude that the subscribers created a pooling agreement or agency and did not create a quasi legal entity, apart from such subscribers, which became an insurmountable barrier between them and the creditors of the syndicate. A business trust is something separate and apart from the members who compose it. We find nothing of the kind here.

The law has not crystalized in all matters to be included in making the test of a business trust, but on the essentials we have abundance of authority to sustain our position.

The trial court has found that the lapse of the sixty-day period did not put an end to the business of the pool and also that Bedell was properly intrusted by his co-managers with the whole management and control, but this was only as against the syndicate managers, Davidow and Eisenberg. (Jones v. Gould, supra.) We think that the evidence justifies these conclusions as against them.

Many of the other legal questions raised were not considered nor decided when the subscribers, other than the managers, were let out. These questions should be tried out and decided in relation to the individual rights and liabilities of the other defendants severally.

The judgments below should be reversed and a new trial granted, with costs to abide the event, and the order dismissing the first count of the complaint as to defendant Winston reversed with costs.

Crane, Lehman, Kellogg, O'Brien, Hubbs and Crouch, JJ., concur.

Judgments reversed, etc.