author: Kaye, J. Jasen, J. Dissenting opinion per Jasen, J.

text:
    In the Matter of Samuel J. Knox, Jr., as Guardian ad Litem of Robert D. Tyler, an Infant, Appellant. Columbia Banking Federal Savings and Loan Association, Respondent.
    Argued February 11, 1985;
    decided March 28, 1985

      POINTS OF COUNSEL

      Samuel J. Knox, Jr., appellant pro se.

    Columbia was negligent in failing to inquire as to limitations upon the fiduciary and, therefore, liable for the misuse of the infant’s funds. (Bradford Trust Co. v Citibank, 60 NY2d 868; Clarke v Public Natl. Bank & Trust Co., 259 NY 285; Matter of Leftridge, 113 Misc 2d 689.)

      John J. Darcy for respondent.
    In the absence of actual knowledge or bad faith, Columbia is not liable for the misuse of the infant’s funds. (Manufacturers & Traders Trust Co. v Sapowitch, 296 NY 226; First Natl. Bank v Fazzari, 10 NY2d 394; Bradford Trust Co. v Citibank, 60 NY2d 868; Clarke v Public Natl. Bank & Trust Co., 259 NY 285.)
   OPINION OF THE COURT

Kaye, J.

A bank that allows a fiduciary to negotiate a check payable to him as fiduciary without first establishing his authorization to do so will not, without more, be liable to the beneficiary when the fiduciary exceeds his powers by negotiating the check.

In 1978, Robert Daniel Tyler, aged four, was injured while he and his family lived in Kentucky. His father, Paul E. Tyler, brought suit on his behalf, which was settled in October 1979 for $25,000. When the family relocated to New York, Paul retained a local attorney to assist in obtaining the settlement proceeds from Kentucky. On December 20,1979, Surrogate’s Court, Steuben County, appointed Paul Tyler general guardian of his son’s property. The letters of guardianship directed him “to collect, receive and hold all moneys received of the infant jointly with Columbia Savings Bank, Bath, New York, subject to the provisions of the SCPA 1708 and [ordered that] the guardian’s bond be dispensed with.” No provision was made for giving notice of these restrictions, and there is no evidence that either Paul Tyler or the bank received a copy of the letters of guardianship or knew of their contents.

On January 9, 1980, the Kentucky court ordered that the money be transferred to Paul Tyler as general guardian, and a check for $14,849.23 (the net recovery) was issued to the order of “Paul E. Tyler, Sr., Guardian of Property of Robert Daniel Tyler.” On February 13, 1980, Paul negotiated the check at the Painted Post, New York, branch of respondent Columbia Banking Federal Savings and Loan Association (“Columbia”). He deposited $11,000 of the cash he received into an account in his own name at Columbia’s Bath branch and purchased a car with the remaining $3,849.23. He then proceeded to spend the $11,000 for a house and other family expenses, in his words, to “give Robert as well as the rest [of the family] the same kind of normal life that any family enjoys.”

Paul failed for two years to file the required annual accountings under SCPA 1719. An investigation ordered by the Surrogate discovered that all but $27.99 of the settlement fund had been spent. This proceeding was commenced on October 19, 1982, by Samuel Knox, appointed guardian ad litem for Robert, seeking a judgment of joint and several liability against Paul Tyler for misappropriation of the funds, against counsel for failure to advise Paul of his duties and to explain the restrictions on his use of the funds, and against Columbia for its negligence in having negotiated the settlement check without first having determined the scope of the guardian’s powers. Service of process was never made on counsel.

On May 25, 1983, the Steuben County Surrogate held Paul Tyler and Columbia jointly and severally liable for the full amount of the settlement fund, removed Paul as guardian and appointed Samuel Knox in his stead (119 Misc 2d 750). On Columbia’s appeal, the Appellate Division unanimously reversed, finding no legal basis for the imposition of liability against the bank (101 AD2d 998), and this appeal followed. We agree with the court below that in the circumstances the bank is not liable for Paul’s misappropriation, and we therefore affirm the dismissal of the proceeding as against Columbia.

In Bradford Trust Co. v Citibank (60 NY2d 868), we held that “there is no requirement that a check payable to a fiduciary be deposited to a fiduciary account, and the fact that the instrument was not so deposited may not, without more, be relied upon as establishing a wrongful payment on the part of the depositary bank” (60 NY2d, at p 870; see, Uniform Commercial Code § 3-304 [2]). Our decision was grounded upon the Uniform Commercial Code which provides that “[a]n instrument made payable to a named person with the addition of words describing him * * * as [a] fiduciary for a specified person or purpose is payable to the payee and may be negotiated, discharged or enforced by him” (Uniform Commercial Code § 3-117 [b]; see also, Litchfield v Flint, 104 NY 543, 550; Davis v Garr, 6 NY 124, 133), and that mere knowledge that the “person negotiating the instrument is or was a fiduciary” does not of itself give the purchaser of a negotiable instrument notice of any claims or defenses (Uniform Commercial Code § 3-304 [4] [e]). The conduct with which Columbia is charged — having negotiated a check payable to Paul Tyler in a fiduciary capacity without requiring deposit of the check in a fiduciary account — is thus permissible.

In general, a bank may assume that a person acting as a fiduciary will apply entrusted funds to the proper purposes and will adhere to the conditions of the appointment (see, Clarke v Public Natl. Bank & Trust Co., 259 NY 285, 288-289; see also, Bischoff v Yorkville Bank, 218 NY 106, 111, 113; Brady, Bank Checks § 12.1, at 12-2 [Bailey 5th ed]). A bank is not in the normal course required to conduct an investigation to protect funds from possible misappropriation by a fiduciary, unless there are facts — not here present — indicating misappropriation (see, Grace v Corn Exch. Bank Trust Co., 287 NY 94, 102-103; Aetna Cas. & Sur. Co. v Lafayette Natl. Bank, 35 AD2d 137, 141, affd mem 30 NY2d 638). In this event, a bank may be liable for participation in the diversion, either by itself acquiring a benefit, or by notice or knowledge that a diversion is intended or being executed (see, Bischoff v Yorkville Bank, 218 NY 106,112-113, supra; Raymond Concrete Pile Co. v Federation Bank & Trust Co., 288 NY 452, 458, adhered to on rearg 290 NY 611; Brady, Bank Checks § 12.2, at 12-4 [Bailey 5th ed], supra). No facts are before this court suggesting that Columbia had notice that Paul Tyler intended to, or did in fact, use the settlement proceeds for improper purposes. Consequently, Columbia cannot be charged with the misappropriation.

The dissent, ignoring Bradford, rests on the following premises, which are faulty: that there was an unscrupulous guardian who misused the funds for his personal interest; that the majority “in an unwarranted departure from stare decisis, disarms and displaces the protections accorded to infants by [Liffiton v National Sav. Bank, 267 App Div 32, affd mem 293 NY 799]”; and that the statutory provisions designed to safeguard trust funds for infants are thus defeated.

The picture painted of a unscrupulous guardian is without factual basis. More to the point, nothing in the nature of the transactions alerted the bank that Paul Tyler was misappropriating funds. And irrespective of his unquestioned good faith, there is a judgment against Paul Tyler in the full amount of his son’s fund, which he has undertaken to restore by salary deductions.

In concluding that the bank is not the fiduciary’s guarantor, the majority ignores neither controlling statutes nor case law. The dissent rests on Liffiton v National Sav. Bank (267 App Div 32, affd mem 293 NY 799) and Banking Law § 237 (l). Liffiton is the only reported decision in this State which cites Banking Law § 237 (1) (then § 237 [2]). Significantly, neither party raised the case or the statute, and neither court below considered the case or the statute.

It is understandable that no reference has been made to Liffiton, which is distinguishable. In Liffiton, a bank failed to assure itself of a trustee’s authority to deal with trust funds, but it did so in disregard of information contained in its own records and notices to its officers that the trustee was dishonest. As the court concluded, the bank’s conduct actually facilitated the trustee’s embezzlement of the entire trust fund, which he had accomplished through 101 separate withdrawals payable to cash. While the court cited section 237 (1) (then § 237 [2]) of the Banking Law, it can hardly be said that liability was predicated on the statute. The common law provided the remedy. In view of the continuous, egregious course of conduct of the trustee, of which the bank was ‘aware, the court stated that it had “no hesitation in arriving at the conclusion that [the bank] joined with [the trustee] in a diversion of the trust funds with actual notice and knowledge of such diversion” (267 App Div, at p 38).

Nor should the statute be applied here for the first time to entitle a beneficiary to damages. The fact that a bank acts in violation of a regulatory statute does not of itself engender liability to beneficiaries for fiduciary misappropriations (see generally, New York Metro Corp. v Chase Manhattan Bank, 52 NY2d 732; Aetna Cas. & Sur. Co. v Lafayette Natl. Bank, 35 AD2d 137, affd mem 30 NY2d 638, supra). There is no indication that by section 237 the Legislature intended, in establishing guidelines for bank operations, to provide for private damage actions to recover moneys spent by fiduciaries in contravention of their powers. (See, Burns Jackson Miller Summit & Spitzer v Lindner, 59 NY2d 314, 324-332.)

Viewed with the clarity of hindsight, inquiry by the bank might have been simple, reasonable, effective or even customary in the industry — none of which has been established factually. But even such considerations would not serve to impose upon the bank a duty for which damages are recoverable.

Accordingly, we affirm the order of the Appellate Division, dismissing the petition against the bank, without costs.

Jasen, J.

(dissenting). By its holding today, the majority effectively defeats statutory provisions which operate to safeguard funds held in trust on behalf of infants against unauthorized actions of guardians.

In 1978, Robert D. Tyler, an infant, sustained serious injuries when bitten by a dog while residing with his family in Kentucky. The infant’s family retained an attorney to pursue the personal injury action and, prior to settlement, moved to New York. The settlement of the Kentucky action in the sum of $25,000 produced a net award to the infant in the amount of $14,849.23. The infant’s father, Paul E. Tyler, was appointed guardian of his son’s property pursuant to an order of the Surrogate’s Court, Steuben County, dated December 20, 1979, and letters of guardianship were issued which stated, in pertinent part, that “the Guardian be directed to collect, receive and hold all moneys received of the infant jointly with Columbia Savings Bank, Bath, New York, subject to the provisions of SCPA 1708 and the guardian’s bond be dispensed with.”

Subsequent to his appointment as guardian, Paul Tyler received a check in the amount of $14,849.23 from the infant’s Kentucky attorney. The check represented the net settlement proceeds, and was made payable to “Paul E. Tyler, Sr., Guardian of the Property of Robert Daniel Tyler”. Paul Tyler indorsed the check in his capacity as guardian: “Paul E. Tyler, Guardian of Property of Robert Daniel Tyler”, and cashed the check at a branch of Columbia Banking Federal Savings and Loan Association in Painted Post, New York. The record does not disclose whether Paul Tyler was a customer of Columbia Banking Federal Savings and Loan in Painted Post, nor whether Paul Tyler maintained sufficient funds on account to protect the bank in the event the instrument was dishonored. With the proceeds of the settlement in hand, Paul Tyler purchased a car with $3,849.23, and deposited $11,000 in an account in his own name at another branch of Columbia Banking Federal Savings and Loan Association in Bath, New York. Paul Tyler regularly drew on the account containing the settlement proceeds to finance his, and his family’s, living expenses. On March 31, 1982, the balance in the account was $27.99.

Upon examination of guardian accounts by the Surrogate’s Court, it was discovered that the guardian had failed to file accounts as required by SCPA 1719. On March 5,1982, the court appointed Attorney Samuel J. Knox, Jr., as guardian ad litem for the infant. Knox discovered a misappropriation of the settlement proceeds by the original guardian, Paul E. Tyler. Thereafter, this action was commenced by petitioner Knox , seeking removal of Tyler as guardian, and recovery of the misappropriated funds from both Tyler and Columbia Banking Federal Savings and Loan Association. The Surrogate’s Court in the County of Steuben ordered, inter alia, that petitioner have judgment for damages in the amount of $14,821.24, with interest, against Paul E. Tyler and Columbia Banking Federal Savings and Loan Association, and that Tyler be removed as guardian. The Appellate Division reversed the decree of Surrogate’s Court and dismissed the petition as to respondent bank, finding no basis for liability against Columbia Banking Federal Savings and Loan Association. For the following reasons, I would reverse the order of the Appellate Division and reinstate the order of the Surrogate’s Court, Steuben County.

The case of Liffiton v National Sav. Bank (267 App Div 32, affd 293 NY 799) is controlling upon the instant action. In Liffiton, one Halpen, acting in the capacity of a testamentary trustee, opened two trust accounts at the National Savings Bank of City of Albany (Albany Bank) for two infants, Anne C. Halpen (Liffiton) and Ursula C. Halpen (Moreland). The Albany Bank received $1,742.48 for deposit to an account, clearly designated as a trust for Anne, upon transfer of funds by the apparent fiduciary Halpen. Between April 1932 and March 1934, the Albany Bank paid Anne’s entire trust fund to Halpen through numerous separate transactions. It was conceded that Halpen never qualified as a testamentary trustee as required by Surrogate’s Court Act § 167 (now SCPA 1503).

The Liffiton court charged the Albany Bank with knowledge of Surrogate’s Court Act § 167 and Banking Law § 237 (2), and found the Bank liable for the conversion of funds held in trust for Anne. Banking Law § 232 (2) provided that no savings bank shall accept any deposit for any credit to any trustee named in a will or appointed by a court unless a certified copy of the will, order or decree of the court authorizing such deposits or appointing such trustee, or a certificate of such appointment is filed with the savings bank. Surrogate’s Court Act § 167 required a testamentary trustee to file with the court a certified copy of the order of appointment and of the trustee’s bond, and was intended to prevent a fiduciary from dealing with the funds of the trust until the cestui, or beneficiary, was adequately protected. Accordingly, the Liffiton court charged the appellant Albany Bank with knowledge of the foregoing statutory provisions, and held:

“Appellant’s failure to assure itself of Halpen’s authority directly deprived the cestui of the protection the statute was designed to give. It would have been impossible for Halpen to have robbed his niece if appellant had exercised that modicum of care and caution customarily exercised by all fiduciaries, namely, to assure itself of his bona fide representative capacity. The simplest inquiry would have disclosed that the alleged trustee was not legally constituted as such and that he was lacking any authority to handle and administer the funds of the trust.

* * *

“We have no hesitation in arriving at the conclusion that appellant joined with Halpen in a diversion of the trust funds with actual notice and knowledge of such diversion. Appellant’s officers, if they had exercised ordinary care, had facts before them which should have aroused their suspicion, put them on their guard, and required them to exercise a degree of care commensurate with the evil to be avoided. They should have suspected, they should have inquired and hence are chargeable with the knowledge which the proper inquiry would have disclosed. (Bischoff v. Yorkville Bank, 218 N. Y. 106; Fidelity & Deposit Co. v. Queens County Trust Co., 226 N. Y. 225; Employers’ Liability Assurance Corp., Ltd., v. Hudson River Trust Co., 250 App. Div. 159, affd. as modified 276 N. Y. 542.)
“Banks are uniformly held liable for participating in diversions of those acting in a fiduciary capacity, when such actors are without authority.” (Liffiton v National Sav. Bank, 267 App Div, supra, at p 38.)

Liffiton stands for the proposition that where a bank credits a fiduciary with the proceeds of an account or instrument which is unequivocally designated as a fund held in trust for another, and said fund is transferred to the fiduciary in a manner contrary to governing law, the bank will be held jointly and severally liable with the dishonest representative for the misappropriation.

In this case, the Painted Post branch of Columbia Banking Federal Savings and Loan Association (Columbia), upon presentment of an instrument payable to Paul Tyler in his representative capacity, ignored the safeguards of both Banking Law § 237 (1) and SCPA 1708, and handed Tyler $14,849.23 in cash over the counter. Under Banking Law § 383 (13), savings and loan associations such as Columbia may receive deposits subject to the same restrictions applicable to savings banks pursuant to Banking Law § 237 (see, 3 NYCRR Legal Interpretation LI 4; 4.18). Banking Law § 237 (1) provides: “No savings bank shall accept any deposit for credit to any executor, administrator, trustee, committee, conservator or guardian, named in a will or appointed by a court of competent jurisdiction, unless a certified copy of the will, order or decree of the court authorizing such deposits or appointing such executor, administrator, trustee, committee, conservator or guardian, or a certificate of such appointment is filed with the savings bank.” Since the cashing of an instrument payable to a guardian is the functional equivalent of accepting a deposit for credit to the guardian, Columbia acted unlawfully by cashing the check payable to Tyler as guardian without receipt or knowledge of the letters of guardianship.

SCPA 1708 was similarly disregarded by Columbia. SCPA 1708 (1) provides: “The court may dispense with a bond wholly or partly and direct that the guardian jointly with a person or depositary designated collect and receive the moneys and other property of the infant as directed by order and that such moneys and property as it directs be deposited in the name of the guardian, subject to the order of the court, with a bank, savings bank, trust company, industrial bank or safe deposit company designated in the order or invested in the name of the guardian, subject to the order of the court, in the shares of a savings and loan association or the savings account of a federal savings and loan association designated in the order, provided that no deposit of the funds of any one infant in any single bank, savings bank, trust company or industrial bank shall exceed the maximum amount insured by the federal deposit insurance corporation and no investment of the funds of any one infant in any single savings and loan association or federal savings and loan association shall exceed the maximum amount insured by the federal savings and loan insurance corporation. Such deposit or investment shall be withdrawn or removed only on the order of the court.” Absent a bond, a guardian may not withdraw or remove a deposit or investment from a savings and loan association without court order. The function of this section is to protect and insure an infant’s property in the event of dishonest conduct by his or her guardian, and to place a bank on notice that negotiation of instruments representing funds held in trust is to be insured by fiduciary bond in the absence of a court order authorizing the withdrawal or removal.

On authority of Liffiton, Columbia is charged with knowledge of Banking Law § 237 (1) and SCPA 1708 (1) and, thus, properly held accountable for the misappropriation at issue. (See also, Matter of Weis Secs., 425 F Supp 212, affd 605 F2d 590, cert denied sub nom. Grossman v Redington, 439 US 1128.) Had Columbia complied with and heeded Banking Law § 237 (1), Tyler’s lack of authority, as defined and limited by the letters of guardianship, would have been instantly manifest. Moreover, Columbia should have been apprised of its status as joint holder of the infant’s property and Tyler’s lack of legal authority to negotiate the check due to SCPA 1708 (1). Notwithstanding the fact that Columbia had clear notice of the fiduciary character of the negotiable instrument, and that no funds could lawfully be credited to Tyler without display of his letters of guardianship, Columbia failed to ascertain whether the fiduciary was either bonded or authorized by court order to negotiate the check.

The majority, in an unwarranted departure from stare decisis, disarms and displaces the protections accorded to infants by Liffiton. I believe the decision of this court in Liffiton reflects a proper concern for the necessity of ensuring a bank’s observance of governing statutes upon receipt of funds held in trust and should be followed. Moreover, Liffiton equitably fashions a remedy which places the duty of care, and loss proximately resulting from a breach thereof, upon the only entity capable of detecting the fraud, rather than upon the wholly innocent cestui

In support of our holding in Liffiton, it has been cogently noted that “the bank must make some investigation of power to indorse, since, if such power is in fact lacking, the bank is clearly liable. Thus, in cases in which the very actions of the principal or the very documents which create and evidence the agent’s authority also prescribe the limits of that authority, it may seem reasonable to hold that the bank has constructive notice of all facts it would have discovered on investigation.” (Note, Banks and Banking, 60 Harv L Rev 645, 646; see also, Scott, Participation in a Breach of Trust, 34 Harv L Rev 454, 458, 463.) Under these circumstances, I would hold that the generalized interest of avoiding burdens upon the free transfer of negotiable instruments is most decidedly outweighed by the necessity of according infants the full force of statutory and common-law protections against dishonest fiduciaries.

The Uniform Commercial Code does not compel a contrary result. The Code provides that a fiduciary may negotiate instruments representing the funds entrusted to him in his representative capacity (UCC 3-117 [b]), and a purchaser is not charged with notice of a defense or claim based upon the fiduciary status of a party (UCC 3-304 [4] [e]). The threshold question, however, is not whether a fiduciary may freely negotiate instruments, nor whether the bank has notice of a claim or defense. Rather, before a fiduciary or bank may avail itself of protective provisions of the Uniform Commercial Code, it must be determined whether the signature of the fiduciary was authorized (UCC 3-403) or unauthorized (UCC 3-404). It is only from the signature of the fiduciary on the face of the instrument that the protections of Uniform Commercial Code § 3-117 (b); § 3-304 (4) (e) flow. If the fiduciary’s signature is unauthorized, it is deemed “wholly inoperative” (UCC 3-404 [1]). An unauthorized signature “means one made without actual, implied or apparent authority and includes a forgery” (UCC 1-201 [43]). An authorized signature “may be made by an agent or other representative, and his authority to make it may be established as in other cases of representation” (UCC 3-403 [1]). The definition of representative clearly embraces a fiduciary or guardian (UCC 1-201 [35]). Thus, it is necessary to determine whether the fiduciary’s signature in the first instance was authorized, to determine the authority with which the fiduciary had actually been clqthed. The authority of a person to indorse a check in a representative capacity is governed by the general principles of the law of agency. (Hutzler v Hertz Corp., 39 NY2d 209, 213; Brady, Bank Checks § 3.5 [Bailey 5th ed].)

It is the law of New York that “[b]anks are uniformly held liable for participating in diversions of those acting in a fiduciary capacity, when such actors are without authority.” (Liffiton v National Sav. Bank, 267 App Div 32, 38, affd 293 NY 799, supra; Wen Kroy Realty Co. v Public Natl. Bank, 260 NY 84.) While it is true that the mere fact that a fiduciary deposits in his individual account paper entrusted to him in his fiduciary capacity is insufficient to charge the bank with notice of misapplication (Clarke v Public Natl. Bank & Trust Co., 259 NY 285), this does not relieve a bank from ascertaining the authority of the fiduciary to negotiate the instrument. If a negotiation of an instrument occurs in the name of a trustee or guardian, it is universally held that the bank is charged with notice that the funds are received in a fiduciary capacity, but not with notice of the misapplication or infirmity of title. (UCC 3-117 Comment 2; Wen Kroy Realty Co. v Public Natl. Bank & Trust Co., 260 NY 84, supra; Fowler v Firth, 253 App Div 146,150 [per Lewis, J.], affd 278 NY 683; Blackmon v Hale, 1 Cal 3d 548, 556, 463 P2d 418,422 [Traynor, J.]; State ex rel. Davis v Farmers & Merchants Bank, 112 Neb 840, 201NW 897; Allen v Fourth Natl. Bank, 224 Mass 239, 112 NE 650; Mott Grain Co. v First Natl. Bank & Trust Co., 259 NW2d 667, 671 [ND]; Wolffe v State, 79 Ala 201; Beecher v Buckingham, 18 Conn 110; Henshaw v State Bank, 239 I11 515, 88 NE 214; State v Jahraus, 117 La 286,41 S 575; Davis v Henderson, 25 Miss 549; Howey Co. v Cole, 222 Mo App 1200,4 SW2d 861; Bank v Looney, 99 Tenn 278, 42 SW 149; Petrie v Clark, 11 Serg & Rawle 377 [27 Pa]; United States Fid. & Guar. Co. v Adoue, 104 Tex 379,138 SW 383; Dollar Sav. & Trust Co. v Crawford, 69 W Va 109, 70 SE 1089; see, 5A Michie, Banks and Banking § 208.) A bank is under a duty of reasonable inquiry as to a representative’s actual perimeter of authority when a fiduciary or other seeks to invoke apparent authority. (Collision Plan Unlimited v Bankers Trust Co., 63 NY2d 827, 830.) By failing to conduct a simple inquiry as to the terms of the letters of guardianship, when on notice of a fiduciary relationship and of an issue as to apparent authority, the bank never determined whether the signature of the fiduciary was authorized. The threshold question as to the authorization of the fiduciary was never addressed. If the bank had conducted a reasonable inquiry and simple investigation as to the authority of the fiduciary, as required by the law of agency, the limits upon his power would have been obvious. (See, Fidelity & Deposit Co. v Queens County Trust Co., 226 NY 225, 233.) A guardian should not be entitled to negotiate an infant’s check unless and until his signature as a guardian is determined by the bank to be authorized.

Barring exceptional circumstances, it has been held that failure of a bank to inquire, when a fiduciary negotiates a check made to a payee other than the representative and deposits the funds in the fiduciary’s personal account, is an unreasonable banking practice as a matter of law. (See, National Bank v Refrigerated Transp. Co., 147 Ga App 240, 248 SE2d 496; Sherriff-Goslin Co. v Cawood, 91 Mich App 204, 283 NW2d 691; Aetna Cas. & Sur. Co. v Hepler State Bank, 6 Kan App 2d 543, 630 P2d 721.) Moreover, industry custom supports the foregoing view. It has been advised that “persons dealing with fiduciaries beyond their power or authority must always return to the principal or beneficiary whatever they have received in the transaction and, since any act done by the fiduciary beyond his power is void, the third party can make no claim for loss against the principal. Under these circumstances, it is always proper for one dealing with a fiduciary to demand and receive full evidence of the authority and power under which he acts”. (Beutel & Shroeder, Bank Officer’s Handbook of Commercial Banking Law § 27-20, at 458-459 [5th ed 1982].)

The instant case represents a not uncommon situation where, due to the unfettered control of the guardian (father) exercised over the property and affairs of the infant ward (son), the fiduciary’s personal interest was directly implicated by his conduct with relation to the trust. This court has held that:

“[i]t is an acknowledged principle of the law of agency that a general power or authority given to the agent to do an act in behalf of the principal, does not extend to a case where it appears that the agent himself is the person interested on the other side.
“If such a power is intended to be given it must be expressed in language so plain that no other interpretation can rationally be given it, for it is against the general law of reason that an agent should be entrusted with power to act for his principal and for himself at the same time.” (Bank of N. Y. Natl. Banking Assn. v American Dock & Trust Co., 143 NY 559, 564 [citations omitted; emphasis added].)

Dissenting opinion per Jasen, J.

Where the bank is on notice of a trust relationship with an interested fiduciary, as it was here, it would seem grossly negligent and a breach of reasonable banking practices to hand $14,849.23 in cash to the fiduciary without inquiring as to his actual authority. (See, Banking Law § 383 [13]; § 237 [1]; SCPA 1708 [1].)

The case of Clarke v Public Natl. Bank & Trust Co. (259 NY 285, supra) is distinguishable. In Clarke, this court stressed that the deposit by the fiduciary of trust funds in his personal account was lawful, and accorded the bank no notice of misapplication. In the instant case, while the fiduciary may negotiate an instrument payable to the fiduciary in the name of another (UCC 3-117 [b]), the cashing of the check by the fiduciary was unauthorized under SCPA 1708 (court order necessary to withdraw moneys deposited by fiduciary in a savings account maintained in a Federal savings and loan association). The bank’s conduct was also unlawful under Banking Law § 237 (1), since the fiduciary was credited with trust proceeds without receipt of the letters of guardianship. Moreover, the Clarke decision was premised upon the practical consideration that the representative could have converted the fund even if deposited in accordance with instructions, whereas here, if the instructions contained in the letters of guardianship were observed, the funds would not have been subject to withdrawal from the account due to SCPA 1708. Indeed, while it was lawful in Clarke to credit the fiduciary with funds held in trust, that result is expressly unauthorized absent a bank’s receipt of documentation attesting to the authority of the representative. (Banking Law § 237 [1].) Clarke should control only in those situations where the fiduciary’s conduct was expressly authorized by law.

Chief Judge Wachtler and Judges Meyer, Simons and Alexander concur with Judge Kaye; Judge Jasen dissents and votes to reverse in a separate opinion.

Order affirmed, without costs.

      . In a letter to the guardian ad litem (appellant), Paul wrote of the hopeless, impoverished condition he, his wife and four children lived in before receipt of the money. He listed the purchases made and offered to repay the funds over time. The items set forth in footnote 1 of the dissent, such as bedroom furniture, an electric blanket and clothes, were purchased for Robert only; the house, the trip, television set, carpeting and heating stove were for the family.

      . The dissent in addition cites authorities from the law of agency, as well as procedures dealing with unauthorized signatures, neither of which are apposite. There is no question of apparent authority in this case, since the infant could not be a principal, and no question that Paul Tyler’s signature was genuine.

      . No contention is made that private liability for damages to the infant could derive from SCPA 1708 (1).

      . The incomplete record indicates that, in addition to the automobile purchased upon cashing the check on February 13, 1980 for $3,849.23, Tyler allegedly expended the substantial remainder of the settlement proceeds upon the following items: Stereo and Records — $50; Bedroom Suite — $350; Electric Blanket — $42; Horse — $150; Saddle and Bridle — $100; Miscellaneous Toys — $1,000 approximately; Clothes — $1,000; Aquarium and Fish — $100; Flock of Banty Chickens — $35; Radio — $25; Trip to Marineland, Canada — $1,500; Bicycle — $96; Color Television — $600; Carpeting — $500; Heating Stove (wood) — $250; House (undisclosed amount).

      . The legislative history of Banking Law § 237 (1), which is derived from an omnibus amendment of the banking laws in 1914 (L 1914, ch 369) is silent as to the intent of the provision barring a bank from crediting the account of a fiduciary without receipt of documents defining the authority of the fiduciary.

      . Liffiton v National Sav. Bank was cited with approval by this court, for the view that “[t]he banks owed plaintiff a reasonable degree of care in the supervision of his accounts” held in trust for another. (Kopinsky v Green Point Sav. Bank, 29 NY2d 700, revg on dissenting opn of Justice M. Henry Martuscello 35 AD2d 977, 978.)

        . The majority attempts to distinguish the misappropriation in Liffiton from Tyler’s conduct in the instant case, on the basis that Liffiton involved 101 separate withdrawals payable to cash. The manner of converting funds in this case is no less egregious than that in Liffiton; it is simply more efficient. Bradford Trust Co. v Citibank (60 NY2d 868), relied upon by the majority, implicated neither Banking Law § 237 (1) nor SCPA 1708 (1) and, thus, provides little guidance as to the proper standard of care to be exercised by a bank upon receipt and payment of fimds held by a guardian in trust for an infant.


source: Caselaw Access Project

author: Lynch, J.

license: Public Domain

text:
    United Commodities-Greece, Plaintiff, v Fidelity International Bank et al., Respondents, et al., Defendant, and Pillsbury Company, Appellant.
    Argued February 14, 1985;
    decided April 4, 1985

      POINTS OF COUNSEL

      Peter W. Flanagan, Richard H. Webber and John H. Allen for appellant.
    I. The Pillsbury letter of guarantee was in strict compliance with the letter of credit. (Eximetals Corp. v Pinheiro Guimaraes, S.A., 73 AD2d 526, 51 NY2d 865; Laudisi v American Exch. Natl. Bank, 239 NY 234; Fair Pavilions v First Natl. City Bank, 19 NY2d 512; American Bell Intl. v Islamic Republic of Iran, 474 F Supp 420; Bank of U. S. v Seltzer, 233 App Div 225;
      Dixon, Irmaos & CIA v Chase Natl. Bank, 144 F2d 759; 67 Wall St. Co. v Franklin Natl. Bank, 37 NY2d 245; Chase Manhattan Bank, N.A. v Mehlman, 59 AD2d 694.) II. Under the doctrines of estoppel and waiver defendant-respondent Fidelity International Bank is liable to Pillsbury under its confirmed letter of credit. (Voest-Alpine Intl. Corp. v Chase Manhattan Bank, 707 F2d 680; Barclays Bank D. C. O. v Mercantile Natl. Bank, 481 F2d 1224; Horne v Radiological Health Servs., 83 Misc 2d 446, 51 AD2d 544.) III. The trial court applied the proper measure of damages. (De Sousa v Crocker First Natl. Bank, 23 F2d 118, 27 F2d 462; Foglino & Co. v Webster, 217 App Div 282, 244 NY 516; Doelger v Battery Park Natl. Bank, 201 App Div 515; East Girard Sav. Assn. v Citizens Natl. Bank & Trust Co., 593 F2d 598; West Virginia Hous. Dev. Fund v Sroka, 415 F Supp 1107; United States v Sun Bank, 609 F2d 832; Pringle-Associated Mtge. Corp. v Southern Natl. Bank, 571 F2d 871; Bossier Bank & Trust Co. v Union Planters Natl. Bank, 550 F2d 1077; Asociacion de Azucareros de Guatemala v United States Natl. Bank, 423 F2d 638; Federal Deposit Ins. Corp. v Vogel, 437 F Supp 660.)

      Stephen Lew for Fidelity International Bank, respondent.
    I. The court below and the trial court correctly found that the documents presented by Pillsbury did not strictly conform with the letter of credit. (Fair Pavilions v First Natl. City Bank, 19 NY2d 512; Eximetals Corp. v Pinheiro Guimaraes, S.A., 73 AD2d 526, 51 NY2d 865; Bounty Trading Corp. v S.E.K. Sportswear, 48 AD2d 811; Old Colony Trust Co. v Lawyers’ Tit. & Trust Co., 265 US 585; Anglo-South Am. Trust Co. v Uhe, 261 NY 150; American Bell Intl. v Islamic Republic of Iran, 474 F Supp 420; 67 Wall St. Co. v Franklin Natl. Bank, 37 NY2d 245; Chase Manhattan Bank, N.A. v Mehlman, 59 AD2d 694, 46 NY2d 802.) II. The record shows that page one documents were also required for payment; that the trial court correctly found those documents also did not conform; but that it also erroneously found that only warehouse receipts and a bank guarantee were required. III. The court below correctly found that Fidelity did not waive its right to strict compliance. (Flagship Cruises v New England Merchants Natl. Bank, 569 F2d 699; Wing On Bank v American Natl. Bank & Trust Co., 457 F2d 328; Lam-born v Cleveland Trust Co., 29 F2d 46; U. S. Indus. v Second New Haven Bank, 462 F Supp 662; Werking v Amity Estates, 2 NY2d 43; S. & E. Motor Hire Corp. v New York Indem. Co., 255 NY 69; Miller v Greyvan Lines, 284 App Div 133, 308 NY 853; Parsons v Lipe, 158 Misc 32, affd sub nom. Parsons v First Trust & Deposit Co., 243 App Div 681, 269 NY 630; United Bank v

      Cambridge Sporting Goods Corp., 41 NY2d 254; Prutscher v Fidelity Intl. Bank, 502 F Supp 535.) IV. The trial court erroneously admitted various documents and improperly relied on them in making its finding of waiver. (Rifkin v Stuyvesant Ins. Co., 240 App Div 540; Metropolitan Life Ins. Co. v Childs Co., 230 NY 285.) V. Assuming Pillsbury is entitled to damages, any judgment to be awarded Pillsbury must be reduced by the amount of the expenses that Pillsbury did not incur. (United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254; O’Meara Co. v National Park Bank, 239 NY 386.)

      Mark P. Zimmett and Joanna Shally for Trade Development Bank (France), respondent.
    I. The order of the court below unanimously affirming the trial court’s judgment in favor of Trade Development Bank should not be reviewed by the Court of Appeals. (Dalrymple v Shults Chevrolet, 39 NY2d 795; Ritto v Goldberg, 27 NY2d 887; New York Trap Rock Corp. v Town of Clarkstown, 299 NY 77; Sirlin Plumbing Co. v Maple Hill Houses, 20 NY2d 401; Behren v Papworth, 30 NY2d 532.) II. Trade Development Bank is not liable for payment because the bank guarantee, a concededly necessary document to be presented for payment, does not strictly conform to the terms of the letter of credit. (Eximetals Corp. v Pinheiro Guimaraes, S.A., 73 AD2d 526, 51 NY2d 865; Anglo-South Am. Trust Co. v Uhe, 261 NY 150; Marino Indus. Corp. v Chase Manhattan Bank, N.A., 686 F2d 112; Fair Pavilions v First Natl. City Bank, 19 NY2d 512; Farr v Newman, 14 NY2d 183; People ex rel. Scarpetta v Spence-Chapin Adoption Serv., 28 NY2d 185, cert denied sub nom. DeMartino v Scarpetta, 404 US 805; Boer v Garcia, 240 NY 9.) III. Trade Development Bank is not liable for payment because the documents listed on page one of the letter of credit are necessary and nonconforming. (Town of Massena v Niagara Mohawk Power Corp., 45 NY2d 482; 67 Wall St. Co. v Franklin Natl. Bank, 37 NY2d 245; Chase Manhattan Bank, N.A. v Mehlman, 59 AD2d 694, 46 NY2d 802.) IV. Trade Development Bank is not liable for payment because the documents presented for payment are false. (Sztejn v Schroder Banking Corp., 177 Misc 719; United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254; Prutscher v Fidelity Intl. Bank, 502 F Supp 535; Marine Midland Grace Trust Co. v Banco Del Pais, S. A., 261 F Supp 884; Banco Tornquist, S. A. v American Bank & Trust Co., 71 Misc 2d 874; Old Colony Trust Co. v Lawyers’ Tit. & Trust Co., 265 US 585; Rice v Santa Fe Elevator Corp., 331 US 218.) V. If the judgment in favor of Trade Development Bank is reversed, Pillsbury’s damages must be reduced to $224,727, the difference between the resale price of the corn and the unpaid contract price, together with any incidental damages, but less expenses saved in consequence of United Commodities-Greece’s alleged breach. (Doelger v Battery Park Natl. Bank, 201 App Div 515; Foglino & Co. v Webster, 217 App Div 282, 244 NY 516.)
   OPINION OF THE COURT

Lynch, J.

Defendant Pillsbury Company contracted to sell to the plaintiff 50,000 metric tons of corn destined for shipment from a Gulf of Mexico port to a Black Sea port and resale to the Soviet Union. To provide payment, plaintiff obtained two letters of credit, one by the defendant Trade Development Bank with the defendant Republic National Bank as advising bank, the other by Banque de la Mediterranee with the defendant Fidelity International Bank, the confirming bank. Payment on the letters has been refused. The propriety of this refusal has been raised by cross and counterclaims in this action in which United Commodities-Greece ultimately withdrew its complaint. The trial court found that the documents submitted by Pillsbury to trigger payment did not conform to the requirements of the letters. It ruled against Pillsbury and in favor of Republic and Trade Development Banks. It held, however, that Fidelity had waived any claim of nonconformity and it awarded judgment for Pillsbury against it, with judgment over to Fidelity against United Commodities. The Appellate Division modified by striking the judgment against Fidelity and the judgment over, and granting judgment in Fidelity’s favor, holding that there had been no waiver on its part. We affirm.

Trade Development Bank seeks to raise as a threshold question whether that provision of the Appellate Division’s order unanimously affirming the judgment in its favor may be appealed by Pillsbury. We decline to entertain the question since it has previously been decided (see, United Commodities-Greece v Fidelity Intl. Bank, 62 NY2d 884).

Page one of each letter of credit specified the documents to be presented for payment, presupposing the loading of the corn on a vessel nominated by United Commodities prior to November 30, 1976. Following these requirements was a “Special Conditions” clause, activated by a failure to so nominate a vessel. It provided: “[BJeneficiary may draw, not before December 10, 1976, against this letter of credit upon presentation of a warehouse or dock receipt issued to order accompanied by a bank guarantee that beneficiary will load the goods on first demand of orderer and remit to the negotiating bank, free of charges, the covering Bill of Lading.” The letters were to expire on December 15,1976. United Commodities failed to nominate a vessel prior to November 30th.

Both respondent banks, Fidelity and Trade Development, argue that presentation of the page one documentation was required by the letters even though payment was sought under the eventuality provided for in the “Special Conditions”. The trial court did not agree and neither do we. The letters are unambiguous. They express alternative payment procedures, the page one documents to be provided upon loading on a vessel nominated prior to November 30th, the “Special Conditions” documents to be triggered by the failure to nominate a vessel. If the parties intended the page one documents to be applicable to the “Special Conditions” eventuality, they could readily have included the necessary language. It is not the function of the court to insert such a provision (see, Janos v Peck, 21 AD2d 529, 533, affd 15 NY2d 509; Frankel v Tremont Norman Motors Corp., 21 Misc 2d 20, 22, affd 10 AD2d 680, affd 8 NY2d 901).

New York requires strict compliance with the terms of a letter of credit (see, Anglo-South Am. Trust Co. v Uhe, 261 NY 150; Eximetals Corp. v Pinheiro Guimaraes, S.A., 73 AD2d 526, affd 51 NY2d 865), rather than the more relaxed standard of substantial compliance (see, 6 Hawkland, Uniform Commercial Code Series § 5-114:03). The rule finds justification in the bank’s role in the transaction being ministerial (see, Eximetals Corp. v Pinheiro Guimaraes, S. A., supra) and to require it to determine the substantiality of discrepancies would be inconsistent with its function. Strict compliance means that “the papers, documents and shipping directions must be followed as stated in the letter” (Anglo-South Am. Trust Co. v Uhe, supra, at pp 156-157). “No substitution and no equivalent, through interpretation or logic, will serve. Harfield, Bank Credits and Acceptances (5th Ed. 1974), at p. 73, commends and quotes aptly from an English case: ‘There is no room for documents which are almost the same, or which will do just as well.’ Equitable Trust Co. ofN. Y. v. Dawson Partners, Ltd., 27 Lloyd’s List Law Rtps. 49, 52 (1926).” (Courtaulds North Am. v North Carolina Natl. Bank, 528 F2d 802, 806; see also, Eximetals Corp. v Pinheiro Guimaraes, S. A., 73 AD2d, at p 527, supra.) Applying these standards, we hold that the bank guarantees provided by Pillsbury were fatally nonconforming to the “Special Conditions” because they omitted any obligation arising from a Pillsbury failure to “remit to the negotiating bank, free of charges, the covering Bill of Lading.”

When United Commodities failed to nominate a vessel, Pillsbury, on December 6,1976, delivered to Republic National Bank and Fidelity International Bank drafts on the letters of credit, warehouse receipts postdated to December 10, and a draft of a proposed bank guarantee which notably imposed an obligation for Pillsbury’s failure to remit the covering bill of lading, free of charges. This “preview” was to allow the banks an opportunity to review the documents before they were formally presented on the first due date. On December 8, Republic claimed the documents were nonconforming. Fidelity made no comment. On December 9, United Commodities commenced this action against Fidelity and Republic, but did not allege nonconformity because the executed bank guarantees were not yet submitted. It claimed that the validity of the letters hung on the corn’s shipment to the Soviet Union, which was rendered impossible by that Nation’s refusal to issue an import license. On the same day the plaintiff obtained a temporary order restraining payment of the letters pending its motion for a preliminary injunction.

On December 10, Pillsbury submitted the formal documentation. The bank guarantees omitted the obligation regarding a failure to remit to the negotiating bank, free of charge, the bill of lading, Republic persisted in its claim of nonconformity. Fidelity made no response directly to Pillsbury but, on December 13, its executive vice-president, Grayson, in an affidavit opposing United Commodities’ motion for a preliminary injunction, stated that Pillsbury’s papers were in “substantial compliance” and that the bank would have paid on the letter had it not been for the temporary restraining order. On December 14, Pillsbury submitted further documentation but the bank guarantees were substantially the same as those submitted on December 10. An attorney for Pillsbury testified that he talked to Grayson on the evening of December 14 and was told that Pillsbury’s papers were in order. Grayson recalled no such conversation. On December 15, Fidelity sent a telex to the issuing Banque de la Mediterranee that it had “accepted” the bank guarantee and quoted its language. United Commodities thereafter amended its complaint, with Pillsbury named as an intervening defendant, alleging the nonconformity of Pillsbury’s documents. Fidelity then answered the amended complaint and cross-claimed against Pillsbury, putting conformity into issue for determination by the court.

It appears that, from December 10 to the amendment of United Commodities’ complaint alleging nonconformity, Fidelity mistakenly believed there was'strict conformity. We hold, as did the Appellate Division, that this cannot constitute a waiver of the right to strict conformity. Since there is no proof that Fidelity knew the guarantee did not strictly conform to the “Special Conditions” and elected not to take advantage of this knowledge (see, Glenesk v Guidance Realty Corp., 36 AD2d 852), there has been no “ ‘intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it’ ” (Werking v Amity Estates, 2 NY2d 43, 52, quoting Whitney on Contracts, at 273 [4th ed 1946]). This is not a case in which, for example, a bank, knowing that documents were nonconforming, nonetheless, and after so informing the presenter, accepted the documents and paid on the letter, thus intentionally and knowingly relinquishing its right to strict compliance.

Alternatively, Pillsbury contends Fidelity should be es-topped from asserting the nonconformity of the guarantee. To take advantage of estoppel, Pillsbury would have to prove that it relied to its detriment on a misleading representation of the bank (see, Werking v Amity Estates, supra, at p 53). The record contains no evidence of any representation on which Pillsbury relied to its detriment. The telex from Fidelity to Banque de la Mediterráneo was not a representation to Pillsbury; it did not know of it. Pillsbury did not rely on the Grayson affidavit of December 13 that its documents were in substantial compliance because it submitted further documentation the next day.

There remains the alleged conversation on the evening of December 14 between Grayson and Pillsbury’s attorney. Pillsbury claims that it relied on Grayson’s statement that its papers were in order and consequently was lulled into inactivity the following day, the expiration date of the letter. The trial court, however, did not find this conversation ever occurred, nor did the Appellate Division. Assuming the conversation did occur, Pillsbury cannot be held to have relied on the statement because it failed to introduce any evidence that it would have been able, in the day remaining, to have cured the defect in the guarantee had Fidelity brought it specifically to its attention.

For the reasons stated, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Wachtler and Judges Jasen, Meyer, Simons and Kaye concur; Judge Alexander taking no part.

Order affirmed, with costs.

       Designated pursuant to NY Constitution, article VI, § 2.


author: Meyer, J. Jasen, J.

text:
    Alco Gravure, Inc., et al., Appellants, v The Knapp Foundation, Respondent.
    Argued January 10, 1985;
    decided March 28, 1985

      POINTS OF COUNSEL

      Joseph Calderon and Robert C. Harris for appellants.
    I. Defendant Foundation must apply its income and principal to those charitable purposes specified in its organizing enactment. (Sherman v Richmond Hose Co., 230 NY 462; St. Joseph’s Hosp. v Bennett, 281 NY 115; Lefkowitz v Lebensfeld, 51 NY2d 442; Matter of Kittinger, 36 Misc 2d 385; Matter of Kraetzer, 119 Misc 2d 436; People v National Cancer Hosp., 6 AD2d 61, 5 NY2d 709.) II. The uncontroverted facts entitle plaintiffs to summary judgment. III. Plaintiffs’ motion for a preliminary injunction should be granted to restore the status quo.

      John S. Siffert for respondent. I.
    Appellant Aleo is precluded from prosecuting its claims by the doctrine of collateral estoppel and on the ground that an action is pending for the same relief in New Jersey. (Gilbert v Barbieri, 53 NY2d 285; Matter of American Ins. Co. [Messinger — Aetna Cas. & Sur. Co.], 43 NY2d 184; American Home Assur. Co. v Flushing Sav. Bank, 68 AD2d 170, 52 NY2d 1010; Hancock Natl. Bank v Farnum, 176 US 640; Israel v Wood Dolson Co., 1 NY2d 116.) II. The court below correctly rejected on the merits plaintiffs’ claims and properly granted summary judgment in favor of the Foundation. (Matter of Crohn v Firemen’s Benevolent Fund Assn., 79 Misc 2d 536.) III. Plaintiffs’ motion for summary judgment must be denied because there are material issues of fact as to their claims. IV. Plaintiffs are not entitled to any preliminary relief. (Schneider v Miller, 132 App Div 852; Harte v Adelphi Univ., 63 Misc 2d 228; Hartford v Resorts Intl., 43 AD2d 828.)
   OPINION OF THE COURT

Meyer, J.

Because the Not-For-Profit Corporation Law (N-PCL) provisions governing a Type B corporation expressly incorporate a quasi-cy pres principle with respect to both the administration and use of its assets (§ 513 [b]; § 522) and the transfer of its assets on dissolution (§ 1005 [a] [3] [A]; § 1008 [a] [15]), section 804 of that law, which permits amendment of the certificate of incorporation of such a corporation, cannot be construed to authorize an amendment inconsistent with the purposes for which funds were given to the corporation without compliance with such quasi-cy pres principles. The order of the Appellate Division should, therefore, be modified and, as so modified, should be affirmed, with costs to plaintiffs.

I

The Knapp Foundation is a nonprofit corporation established in 1923 by act of the Legislature (L 1923, ch 21, as amended by L 1927, ch 607). The Foundation was organized “for the purpose of receiving and maintaining a fund or funds, administering the same and applying the principal and income thereof, and either of them, to render aid and assistance to promote the social, physical or economic welfare and efficiency of such persons as have been, or at any time in the future shall be, employed in any printing, publishing or lithographing corporation of which Joseph P. Knapp has been or shall hereafter be a stockholder, director or officer, or in any corporation which shall be a successor corporation thereto * * * and to render aid and assistance to the families of the persons so employed by such agencies and means as from time to time shall be found appropriate therefor” (id., § 1). The corporation was granted the power to take and hold real or personal property and to invest and reinvest the principal and income thereof and to “deal with and expend the principal and income of the corporation in such manner as in the judgment of the trustees will best promote its objects” (id., § 2). In 1927, the 1923 act was amended to insert a new section 1-a, providing that any unused income not required for the corporation’s stated purposes may be used to be helpful to others in whatever ways seem wise to the trustees. As authorized by N-PCL 103 and 113, on or about August 22, 1973, the Foundation filed a certificate of type designating it as a Type B corporation, the effect of which is to make the N-PCL applicable in all respects to the Foundation (103 [a]; 113 [d]).

The Foundation’s primary purpose was thus to assist employees of the founder’s corporations and their families. Applications by such persons were decided upon by the trustees in their absolute discretion and, when approved, usually took the form of a loan. In recent years, however, the number of such applications has declined; only one such request has been made since 1978. As a consequence, the Foundation has utilized its income, as authorized by section 1-a of its charter, to benefit a broader class of charitable purposes, making contributions to numerous charities and nonprofit organizations. Because of its employee-oriented primary purpose, however, the Foundation’s income is not exempt from Federal tax.

In light of the absence of individual applications and its continued liability for Federal income tax, the Foundation’s trustees resolved that the original intent of the founder would best be served by the dissolution of the Foundation and the transfer of its assets to The Knapp Foundation (North Carolina), founded by Joseph Knapp in 1929, which is tax exempt and the trustees of which are the same persons as govern defendant Foundation. The North Carolina Foundation makes contributions to recognized tax-exempt organizations qualified to receive such contributions but does not provide assistance to individuals. On January 10,1983, the New York Foundation executed a certificate of amendment of its certificate of incorporation authorizing the trustees “in their absolute discretion” to apply principal and income of the Foundation to any other charitable organization founded by Joseph P. Knapp, including the North Carolina Foundation. The Attorney-General noted no objection to the amendment, and on February 2,1983 it was approved by a Supreme Court Justice, who consented that it be filed.

The present action was begun in March 1983. Plaintiffs are a corporation claiming to be a “successor corporation” within the meaning of the 1923 act, whose employees are intended beneficiaries of the Foundation, as well as two individual employees of the corporate plaintiff. In their first cause of action, they seek a declaration that employees of the corporate plaintiff are beneficiaries of the New York Foundation and an accounting by the trustees; in the second, they ask that the 1983 certificate of amendment be declared invalid and that the Foundation be enjoined from transferring its assets and from dissolving its corporate existence.

Plaintiffs moved for a preliminary injunction against the proposed transfer of assets and for summary judgment on each of their claims. Defendant cross-moved to dismiss the complaint and for summary judgment. Special Term dismissed the complaint as to the corporate plaintiff on the ground that the dismissal for lack of standing of its prior New Jersey action against the Foundation for the same relief barred maintenance of the instant action and, as against the individual plaintiffs, granted defendant’s motion for summary judgment, concluding that amendment of the certificate of incorporation and dissolution of the Foundation were within the discretionary authority of the trustees. The Appellate Division affirmed, without opinion. We conclude (1) that the New Jersey dismissal is not res judicata and that both the corporate and the individual plaintiffs have standing to maintain the action and (2) that the amendment of the certificate of incorporation without passing upon quasi-cy pres considerations as required by the Not-For-Profit Corporation Law was improper. We, therefore, modify the Appellate Division’s order of affirmance to deny both defendant’s motion to dismiss and its motion for summary judgment, but because the courts below did not pass on the status of plaintiff as “a successor corporation” under the 1923 act and its status as such is disputed in the papers before us, we are in accord with the Appellate Division’s affirmance of the remaining provisions of Special Term’s order.

II

The res judicata argument stems from the New Jersey action brought by the corporation alone against defendant Foundation. That action was dismissed by New Jersey’s Superior Court for lack of standing and the dismissal was affirmed by the Appellate Division of that court. That ruling should not be accorded res judicata effect, however, because a dismissal for lack of standing as applied by New Jersey courts is not a dismissal on the merits (Restatement [Second] of Judgments § 20 [2]; 5 Weinstein-Korn-Miller, NY Civ Prac ¶ 5011.11, at 50-87; 50 CJS, Judgments, §§627, 633 [d]; 46 Am Jur 2d, Judgments, §§ 479, 508), any more than would be a dismissal for prematurity (Moloney v Nelson, 158 NY 351; Converse v Sickles, 146 NY 200). In any event, the prior action involved only the application of New Jersey’s policy in relation to standing, not whether as a matter of New York law and policy the corporation had standing.

As a matter of New York law, both the individual and the corporate plaintiffs have standing to maintain the action. As to the individual plaintiffs, no case squarely in point has been found but on analogy to trust law they should be accorded standing. The general rule is that one who is merely a possible beneficiary of a charitable trust, or a member of a class of possible beneficiaries, is not entitled to sue for enforcement of the trust (Lefkowitz v Lebensfeld, 68 AD2d 488, 495, affd 51 NY2d 442; Matter of James, 22 Misc 2d 1062,1067-1068; Revici v Conference of Jewish Material Claims Against Germany, 11 Misc 2d 354, 357; Matter of Herman [Ten Broeck Free Academy], 177 Misc 276, 280-281; Bogert, The Law of Trusts and Trustees § 414, at 436 [2d rev ed]). Instead, the Attorney-General has the statutory power and duty to represent the beneficiaries of any disposition for charitable purposes (EPTL 8-1.1 [f]; 8-1.4; see, Lefkowitz v Lebensfeld, 51 NY2d 442, supra; Trustees of Sailors’ Snug Harbor v Carmody, 211 NY 286, 300).

There is an exception to the general rule, however, when a particular group of people has a special interest in funds held for a charitable purpose, as when they are entitled to a preference in the distribution of such funds and the class of potential beneficiaries is sharply defined and limited in number (see, Restatement [Second] of Trusts § 391 comment c; 4 Scott, The Law of Trusts § 391, at 3008-3009 [3d ed]; Bogert, The Law of Trusts and Trustees § 414 [2d rev ed]). Iii the present case there is a class of beneficiaries which is both well defined and entitled to a preference in the distribution of defendant’s funds prior to the disputed amendment, viz., the employees of corporations in which Joseph P. Knapp was involved and the employees of successors to such corporations.

Furthermore, the policy reasons for limiting standing in this area are not applicable in this case. Normally, standing to challenge actions by the trustees of a charitable trust or corporation is limited to the Attorney-General in order to prevent vexatious litigation and suits by irresponsible parties who do not have a tangible stake in the matter and have not conducted appropriate investigations (Bogert, The Law of Trusts and Trustees § 414, at 436, supra). However, the present action concerns not the ongoing administration of a charitable corporation, but the dissolution of that corporation and the complete elimination of the individual plaintiffs’ status as preferred beneficiaries of the funds originally donated by Joseph Knapp. The individual plaintiffs, therefore, have standing.

There is authority for according standing to the corporate plaintiff as well (see, Walton v Collins, 38 App Div 624, affd 167 NY 538; cf. Matter of Jones, 191 Misc 617, 619) and doing so appears consistent with the views on standing expressed in cases such as Matter of Douglaston Civic Assn. v Galvin (36 NY2d 1) and Matter of National Org. for Women v State Div. of Human Rights (34 NY2d 416). In view of the direction for notice to the Attorney-General in N-PCL 522 (b) (see also, EPTL 8-1.1 [f ]) and on analogy to general trust law relating to enforcement of a charitable trust (Restatement [Second] of Trusts § 391, at 2b0; Bogert, The Law of Trusts and Trustees § 414, at 436, supra; 4 Scott, The Law of Trusts § 391, at 3009, supra), notice should, however, be given to the Attorney-General before the matter proceeds further.

Ill

Defendant’s argument on the merits, accepted by the courts below, is that the amendment to the Foundation’s charter not having been objected to by the Attorney-General and having been approved by a Supreme Court Justice pursuant to N-PCL 804, that ends the matter. While a corporation created by special act of the Legislature is authorized to amend its charter in the manner provided by N-PCL article 8, and the article does not differentiate between the various types of not-for-profit corporations with respect to the procedure for amendment, the law must be read so as to harmonize its various provisions (McKinney’s Cons Laws of NY, Book 1, Statutes §§ 97, 98). So to read the law does not give the directors the unlimited power of amendment for which defendant argues, for the powers of the directors of a Type B corporation, both as to how its assets are administered and as to its dissolution, and the power of a Supreme Court Justice when approving the certificate of dissolution of a Type B corporation, are expressly limited by quasi-cy pres considerations under provisions of articles 5 and 10 of the N-PCL.

Thus, section 513 (a) provides that a Type B corporation “shall not be deemed a trustee of an express trust” of assets “given * * * or otherwise vested in such corporation in trust for, or with a direction to apply the same to, any purpose specified in its certificate of incorporation,” but subdivision (b) of the same section imposes its own limitation upon the directors, requiring that: “Except as may be otherwise permitted under article eight of the estates, powers and trusts law or section 522 (Release of restrictions on use or investment), the governing board shall apply all assets thus received to the purposes specified in the gift instrument and to the payment of the reasonable and proper expenses of administration of such assets.” EPTL article 8 authorizes the Supreme Court or, as to a disposition by will, the Surrogate’s Court, to direct how charitable funds shall be administered when tne purpose for which originally given or bequeathed becomes “impracticable or impossible” (EPTL 8-1.1 [c], [d]), and N-PCL 522 (which is a modified version of the Uniform Management of Institutional Funds Act, see, 1978 McKinney’s Session Laws of NY, at 1774) incorporates similar provisions in that law. Subdivisions (b), (c) and (d) of the latter section provide, so far as pertinent, that:

“(b) If written consent of the donor cannot be obtained by reason of his death, disability, unavailability, or impossibility of identification, the governing board may apply in the name of the corporation (i) to the supreme court of the judicial district wherein the corporation has its office or principal place of carrying out the purposes for which is was formed, or (ii) where the applicable gift instrument is a will, to the surrogate’s court in which such will is probated, for release of a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund. The attorney general shall be notified of the application and shall be given an opportunity to be heard. If the court finds that the restriction is obsolete, inappropriate, or impracticable, it may by order release the restriction in whole or in part * * *
“(c) A release under this section may not allow a fund to be used for purposes other than the purposes of the corporation.
“(d) This section does not limit the application of the doctrine of cy-pres.”

There can be no question, therefore, that the transfer of principal from the defendant Foundation to The Knapp Foundation (North Carolina), as authorized by the amended certificate of incorporation, required more than the pro forma approval of the amendment that was obtained. To permit the corporation by a charter amendment such as here adopted to change the purpose for which funds given to it are required to be held would short-circuit completely the limitations imposed by sections 513 and 522 and permit the Foundation trustees to exercise a power given specifically and only to a Supreme Court Justice as concerns property received by the corporation by inter vivos gift.

Similar limitations are imposed with respect to the dissolution of a Type B corporation. N-PCL 1001 authorizes the board of a not-for-profit corporation to adopt a plan of dissolution, but section 1002 (d) requires that as to a Type B corporation the plan be approved by a Justice of the Supreme Court on verified petition and on notice to the Attorney-General; section 1005 (a) (3) (A) mandates that the assets of a dissolved Type B corporation “be distributed to one or more domestic or foreign corporations or other organizations engaged in activities substantially similar to those of the dissolved corporation pursuant to a plan of distribution adopted * * * as ordered by the court to which such plan is submitted for approval under section 1002” and that “such disposition [to the acquiring corporation] shall be devoted by the acquiring corporation or organization to the purposes intended by the testator, donor or grantor”; and section 1008 (a) (15) authorizes the Supreme Court to “suspend or annul the dissolution * * * and * * * make all such orders as it may deem proper in all matters in connection with the dissolution” of a Type B corporation where the distribution of its assets is to be made to a corporation “engaged in activities substantially similar to those of the dissolved corporation”. Clearly, thereforé, the simple process of amending the corporate charter as provided in N-PCL article 8 is legally insufficient to authorize either the transfer of assets or the distribution on dissolution that has here been attempted (cf. N-PCL 804 [d]).

Although, as noted above, there is pending a separate proceeding by the corporation seeking approval of its dissolution, the demand for relief in plaintiffs’ complaint in the present action expressly asked that dissolution of the Foundation be enjoined. Furthermore, the amendment of the Foundation’s certificate of incorporation was only the initial step in carrying out the resolution of its trustees, adopted some time prior to October 19, 1982, which recited the judgment of the trustees that the Foundation had “substantially accomplished the purposes set forth by its Founder” and that his original intent “would best be served by * * * dissolution of The Knapp Foundation and the transfer of its assets to The Knapp Foundation, Inc. (N.C.) * * * for the purpose of furthering the good works of that organization” and authorized the legal representatives of the Foundation “to institute proceedings with the Attorney General of the State of New York for the dissolution of The Knapp Foundation and the transfer of its remaining assets * * * to The Knapp Foundation, Inc. (N.C.) to be used for such purposes as the Board of Trustees of that organization may deem proper”. That the amendment of the certificate of incorporation was but a step “in carrying out the aforesaid Resolution” is attested by the affidavit of William Horton, New Jersey counsel for the Foundation and thus one of the legal representatives so authorized. It is borne out also by the resolution of the trustees adopted March 8,1983, adopting a plan of dissolution. It is these actions of the trustees which Special Term held to be decisions “made within the discretionary authority granted to the Trustees by law.”

It is, thus, apparent that the amendment of the certificate of incorporation approved February 2, 1983, the transfer of the bulk ($700,000) of the Foundation’s assets to the North Carolina Foundation, leaving it with but $211,000, and the decision in the present case have all been arrived at without consideration of the quasi-cy pres limitations incorporated in the N-PCL sections discussed above. It is still possible, of course, for the court in the dissolution proceeding to consider whether the North Carolina Foundation is “engaged in activities substantially similar to those of” defendant Foundation. But the issue before us is the propriety of granting defendant summary judgment dismissing the complaint in the present action. As to that we conclude that an amendment of the charter of a Type B corporation which changes the purpose to which funds received by it for a limited purpose may be applied is not within the discretionary authority of the trustees alone; rather, such a change must be reviewed by a Justice of the Supreme Court under the quasi-cy pres provisions discussed above before such an amendment can be approved. Defendant’s motion for summary judgment should, therefore, have been denied.

We do not reach or decide whether, upon such review, the amendment sought to be made by the trustees should be approved, that question being one which normally involves a large measure of discretion (City Bank Farmers Trust Co. v Arnold, 283 NY 184, 195; Sherman v Richmond Hose Co., 230 NY 462, 473; Matter of Richmond County Socy. For Prevention of Cruelty to Children, 11 AD2d 236, 239, affd 9 NY2d 913, appeal dismissed and cert denied 368 US 290).

For the foregoing reasons the order of the Appellate Division should be modified as above set forth and, as so modified, affirmed, with costs to plaintiffs.

Jasen, J.

(dissenting). The theory advanced by the majority,

that a not-for-profit corporation lacks authority to amend its corporate charter to change its corporate purpose, eviscerates the policy of the Not-For-Profit Corporation Law according charitable organizations broad latitude in corporate self-governance.

The facts are not substantially in dispute. Joseph Palmer Knapp established The Knapp Foundation (Foundation) in 1923 by act of the Legislature (L 1923, ch 21) as a membership corporation to provide assistance, in its trustees’ absolute discretion, to employees of companies owned or controlled by Mr. Knapp. The Foundation’s corporate charter was amended in 1927 by act of the Legislature (L 1927, ch 607), and again in 1983. During the years subsequent to its establishment, the number and amounts of loans sought from the Foundation declined as public assistance became more readily available. Since 1978, only one request for assistance was submitted by an individual to the Foundation, and the request was denied.

Pursuant to Not-For-Profit Corporation Law (N-PCL) article 8, on January 10,1983, the Foundation executed a certificate of amendment of the certificate of incorporation of The Knapp Foundation, which added the following sentence to the corporate charter: “Notwithstanding the foregoing provisions of this Section 1, the trustees, in their absolute discretion, are authorized and empowered to apply the principal and income of The Knapp Foundation, including any part or all of said principal and income, to any other charitable organization founded by or in the memory of Joseph Palmer Knapp, including without limiting the generality of the foregoing, The Knapp Foundation, Inc., a North Carolina corporation, and an exempt organization described in Section 501 (c) (3) of the Internal Revenue Code of 1954, as amended.”

On January 24,1983, the Attorney-General noted no objection to the granting of judicial approval of the amendment, and waived required statutory notice. On February 2, 1983, Honorable Donald J. Sullivan, a Justice of Supreme Court, approved the amendment and consented that it be filed. Relying upon the authority granted the trustees of the Foundation by the amendment of the certificate of incorporation, as approved by a Justice of the Supreme Court, on February 28,1983, the trustees transferred $700,000 of its total assets of $946,687 to Knapp, N.C., a North Carolina charitable corporation founded by Mr. Knapp.

Thereafter, plaintiffs, two employees of a successor corporation of a Knapp corporation and said successor corporation, instituted this action by an order to show cause dated March 9, 1983, in which they moved for an order enjoining the transfer of assets by the Foundation during the pendency of the action. Supreme Court, New York County, dismissed the complaint, and the Appellate Division, First Department, unanimously affirmed, without opinion.

At the outset, it is important to consider the background of the N-PCL in New York. The N-PCL in general, and article 8 in particular, were intended to resemble corresponding provisions under the Business Corporation Law (see, Explanatory Memoranda preceding the N-PCL, McKinney’s Cons Laws of NY, Book 37, p XX). Indeed, the N-PCL was designed to parallel the New York Business Corporation Law “as closely as the subject matter permitted”. (Henn, Statutory Trends in the Law of Nonprofit Organizations: California, Here We Come!, 66 Cornell L Rev 1103, 1114.) The N-PCL, like the Business Corporation Law, manifests an emphasis upon “enabling”, rather than “regulating” corporate affairs. (See, Fuld, New York’s New Business Corporation Law, 19 NYCLA B Bull 52.) As will be demonstrated, the majority’s approach fosters a paternalistic approach toward not-for-profit corporations which is wholly incongruous with clear statutory authority dictating broad latitude in corporate self-governance.

To discern the scope of a not-for-profit corporation’s power to amend its charter under N-PCL article 8, it is necessary to review the power of a charitable corporation to amend its charter under the Membership Corporations Law (repealed L 1969, ch 1066, eff 1970) upon which the N-PCL is based. The Membership Corporations Law provided that a membership corporation created under or by a general or special law may “extend, limit or otherwise change its purposes and powers or other provisions of its certificate or act of incorporation” provided “that no corporation organized by or under special law shall change the general character of its business as authorized by such special law” (Membership Corporations Law § 30 [A]; § 30 [7] [c]). Thus, pursuant to the law which formerly governed such charitable corporations as The Knapp Foundation, the power of a membership corporation was strictly limited so as to bar an amendment of the legislative charter which would change the corporate purpose or general corporate character. This limitation upon the power of a charitable organization, however, was deleted from the N-PCL.

Not-For-Profit Corporation Law § 801 (b) (2) specifically provides that any corporation may, “without limitation * * * enlarge, limit or otherwise change its corporate purposes” (emphasis added). The N-PCL explicitly extends such power to corporations such as The Knapp Foundation by providing “[a] corporation created by special act may accomplish any or all amendments permitted in this article, in a manner and subject to the conditions provided in this article”. (N-PCL 801 [c].) The limitation upon the power of membership corporations to change its corporate purpose (Membership Corporations Law § 30) was not continued upon the adoption of the N-PCL, although article 8 of the N-PCL was expressly based upon, inter alia, Membership Corporations Law § 30. (See, Explanatory Memoranda, McKinney’s Cons'Laws of NY, Book 37, Not-For-Profit Corporation Law, art 8, p XX.) Basic rules of statutory construction declare that any material change in the language of the original act is presumed to indicate a change in legal rights. (1A Sutherland, Statutory Construction § 22.30 [4th ed]; Lamport v Smedley, 213 NY 82.) Accordingly, based upon the fact that the N-PCL accords all corporations created by special act unfettered power to change their corporate purpose, and since the broad power to amend the corporate charter established by the N-PCL is in marked contrast to the restricted powers of membership corporations under prior law, the Foundation was legally authorized to amend its certificate of incorporation to change its corporate purpose.

We are thus presented with a clear conflict between the provision of the N-PCL granting the Foundation the power to change its corporate purpose, and the restrictive provision of the statutory corporate charter. Not-For-Profit Corporation Law § 103 (c) is designed to address and resolve such conflicts, and provides: “(c) If any provision in articles one to thirteen inclusive of this chapter conflicts with a provision of any subsequent articles or of any special act under which a corporation to which this chapter applies is formed, the provision in such subsequent article or special act prevails. A provision of any such subsequent article or special act relating to a matter referred to in articles one to thirteen inclusive and not in conflict therewith is supplemental and both shall apply. Whenever the board of a Type B corporation, formed under a special act, reasonably makes an interpretation as to whether a provision of the special act or this chapter prevails, or both apply, such interpretation shall govern unless and until a court determines otherwise, if such board has acted in good faith for a purpose which it reasonably believes to be in the best interests of the corporation, provided however, that such interpretation shall not bind any governmental body or officer.” This provision was enacted on recommendation of the Joint Legislative Committee to Study Revision of Corporation Law. (L 1972, ch 961.) The legislative history of Not-For-Profit Corporation Law § 103 (c) sets forth the intended function of the section: “The bill would amend section 103(c) to provide that if the board of directors of a corporation formed under a special act reasonably and in good faith makes an interpretation as to whether such act or this chapter prevails, such interpretation shall govern unless and until a court determines otherwise but shall not bind a governmental body or officer.” (Bill Jacket for L 1972, ch 961, p 11 — Explanatory Memorandum on An Act to Amend the Not-For-Profit Corporation Law and the Benevolent Order Law, in Relation to Certain Technical Amendments Thereof; Submitted by: Joint Legislative Committee to Study Revision of Corporation Laws.)

In the instant case, the Foundation, a Type B corporation formed under a special act, made a determination that provisions of the Not-For-Profit Corporation Law § 801 (b) (2); (c), authorizing it to change its corporate purpose by certificate amendment, prevailed over a restriction upon use of the corporation’s principal funds as contained in the special act of the Legislature (L 1923, ch 21). Not-For-Profit Corporation Law § 103 (c) provides that where the corporate board reasonably makes an interpretation as to whether a provision of the special act or the Not-For-Profit Corporation Law prevails, “such interpretation shall govern unless and until a court determines otherwise, if such board has acted in good faith for a purpose which it reasonably believes to be in the best interests of the corporation” (emphasis added). Section 103 (c) recognizes that the reasonableness of the transaction is determined by the corporation’s subjective finding that its action is in the best interests of the corporation. Bearing in mind that the certificate amendment was determined to be lawful by a Justice of the Supreme Court and the Attorney-General, the principal has been dormant for a number of years while still subject to Federal taxation, and there has been no allegation of bad faith on the part of the board of directors, it can hardly be said that the Foundation acted for a purpose which, from the perspective of the board of directors, was contrary to the best interests of the corporation or otherwise unlawful. Under the circumstances, I believe it is improper to hold the Foundation’s actions unreasonable, as a matter of law, where it acted pursuant to clear statutory authority. (N-PCL 801 [b] [2]; 801 [c].)

N-PCL 522, which is primarily relied upon by the majority to invalidate the charter amendment permitting transfer of the corporate assets to a sibling corporation, does not apply to this case. The legislative history of N-PCL 522 unequivocally establishes that its so-called “quasi-cy pres” principles are wholly inapplicable to the instant case. Section 522 was enacted by Laws of 1978 (ch 690). In a report attached to the sponsor’s memorandum for chapter 690, it was stated that the proposed act “is * * * inapplicable to any interests held for private beneficiaries, even though a not-for-profit corporation may be a remainderman.” (Legislative Bill Jacket, L 1978, ch 690, Report, p 2 [emphasis added].) It was the clear intent of the draftsmen of the N-PCL that Type B corporations were not to administer interests held for private beneficiaries. (Note, New York’s Not-For-Profit Corporation Law, 47 NYU L Rev 761, 777; Internal Revenue Code [26 USC] § 501 [c] [3].) As it can hardly be denied that the individual plaintiffs are “private beneficiaries”, in contrast to those members of the general public who could be said to derive benefits from other charitable organizations, the “quasi-cy pres” principles of N-PCL 522 are inapplicable to the instant case.

Moreover, in terms of a conceptual, sequential application of N-PCL 522, 513, the first step is to identify the corporate purpose. If the applicable gift instrument is consistent with the terms of the corporate purpose, no release or reformation is needed. The purpose of N-PCL 513 is to bring the administration of assets received by a not-for-profit corporation under the umbrella of corporation law, rather than trust law. (Note, New York’s Not-For-Profit Corporation Law, 47 NYU L Rev 761, 785; Explanatory Memoranda, McKinney’s Cons Laws of NY, Book 37, Not-For-Profit Corporation Law, art 5, p XXX.) The problems inherent in the application of trust principles to charitable corporations have been well documented. (Taylor, A New Chapter in the New York Law of Charitable Corporations, 25 Cornell LQ 382.) The starting point of analysis under N-PCL 513, 522 is the “purpose specified in its certificate of incorporation”, and if “the purposes specified in the gift instrument” are deemed to be inconsistent with the said corporate purpose, only then are the “quasi-cy pres” principles invoked. It is clear, from an analysis of the totality of the legislative scheme, that where, as here, donative intent is consistent with the lawfully achieved corporate purpose, resort to cy pres is unnecessary. To hold otherwise would be to remove not-for-profit corporations from under the umbrella of corporation law, and place such entities within the scope of trust law which rigidly places primary emphasis upon the terms of the gift instrument.

The anomalous results which would obtain under an analysis which deprives a not-for-profit corporation of the power to change its corporate purpose is well exemplified by an application of N-PCL 522 (c). Section 522 (c) provides that “[a] release under this section may not allow a fund to be used for purposes other than the purposes of the corporation”. Even if the Foundation utilized the “quasi-cy pres” principles of section 522 and achieved release from the limitation upon transfer of the principal recognized in the original legislative charter, the release would not enable the funds to be used for purposes other than the stated purposes of the corporation. (N-PCL 522 [c].) This result is clearly unintended by the N-PCL.

Scholarly commentary supports the view that amendment of the corporate charter by the trustees of a charitable corporation, in an effort to change a corporate purpose, is a legitimate alternative to the cy pres doctrine. It has been said, “[w]hen there is a general statutory authority allowing amendment of a corporate charter, the corporation and its board of trustees are the proper parties to institute the amendment process * * * [Where there exists charitable intent], and where performance on the original terms is either impractical or illegal, amendment may be merely an exercise of the power of cy pres. And even though the situation inviting change is not extreme enough to make possible a rationalization on cy pres principles, it would seem that amendment, where reasonably necessary, should be allowed though contrary to terms of a gift that may have been fixed by a donor living in a different age”. (Note, The Charitable Corporation, 64 Harv L Rev 1168, 1178-1179; see also, Scott, Education and the Dead Hand, 34 Harv L Rev 1, 17.)

Inasmuch as there exists express authority to permit a not-for-profit corporation created by statute to change its corporate purpose, the N-PCL embraces a policy against governmental interference within “reasonable” corporate practices, and application of cy pres principles to not-for-profit corporations with private beneficiaries was not contemplated by the drafters of N-PCL 522,1 would hold the Foundation has lawfully changed its corporate purpose and is free to transfer property consistent with its statutorily authorized and court-approved corporate purpose.

One final point deserves mention. The Attorney-General, who is accorded broad supervisory powers over the administration of not-for-profit corporations and charities, would have been a proper, if not necessary, party to the instant action. The benefit of the independent counsel of the Attorney-General, as to the applicability of N-PCL article 5 to interests held for private beneficiaries, which was neither argued nor briefed before this court, and whether approval of corporate amendments by the Attorney-General and a Justice of Supreme Court are merely “pro forma” exercises as urged by the majority, would have been appropriate. I would set this case down for reargument to explore the two foregoing premises of the majority, with full participation of the Attorney-General.

Chief Judge Wachtler and Judges Simons and Kaye concur with Judge Meyer; Judge Jasen dissents and votes to order reargument in a separate opinion; Judge Alexander taking no part.

Order modified in accordance with the opinion herein and, as so modified, affirmed, with costs to plaintiffs.

      . Type B corporations “may be formed for any one or more of the following non-business purposes: charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals” (N-PCL 201 [b]).

      . A further ground for dismissal as to the corporate plaintiff was that the New Jersey decision having been appealed, there was another action pending. The parties’ briefs inform us that dismissal of the New Jersey action was affirmed on August 6,1984 and do not indicate that a further appeal ensued. Accordingly, we deem the other action pending ground moot.

      . The Foundation’s petition for approval of its plan of dissolution and the distribution of its assets begun by order to show cause served upon plaintiffs and the Attorney-General and returnable October 5, 1983, remains pending, apparently awaiting determination of the present appeal. In light of the conclusion reached by us, consolidation of that proceeding with this action would appear to be in order.

      . Giving such notice appears particularly appropriate in view of the interrelationship between the charter amendment and the dissolution and would facilitate consolidation of the dissolution proceeding with this action.

      . Defendant does not dispute that its funds, obtained by inter vivos gift from Joseph Knapp, were to be used only for the purposes stated in the special act by which it was created in 1923, as amended in 1927 (see, Lefkowitz v Lebensfeld, 51 NY2d 442, 446; Sherman v Richmond Hose Co., 230 NY 462).

      . This is the statutory codification of cy pres (see, Greenfield, Practice Commentary, McKinney’s Cons Laws of NY, Book 17B, EPTL 8-1.1,1984-1985 Pocket Part, pp 167-169; 18 NY Jur 2d, Charities, § 48, at 232).

      . The apparent contradiction between section 513 (a)’s direction that the corporation “shall not be deemed a trustee of an express trust” and the incorporation of cy pres doctrine in the N-PCL appears to be explained by the January 13, 1969 Memorandum of the Joint Legislative Committee to Study Revision of Corporation Laws (reprinted in McKinney’s Cons Laws of NY, Book 37, Not-For-Profit Corporation Law, p XV): “The case law giving charitable corporations full ownership of property received by them in trust for a corporate purpose is codified * * * The board is under a duty to apply such funds in accordance with the directions of the donor, but within the framework of the corporation law rather than the trust law.” The case law referred to is St. Joseph’s Hosp. v Bennett (281 NY 115, 123), which held that, “The charitable corporation is not bound by all the limitations and rules which apply to a technical trustee. It may not, however, receive a gift made for one purpose and use it for another, unless the court applying the cy pres doctrine so commands.” That this was the legislative intent see Legislative Studies and Reports (McKinney’s Cons Laws of NY, Book 37, Not-For-Profit Corporation Law §513, p 162) which states: “This section codifies St. Joseph’s Hospital v Bennett, 281 N.Y. 115, 22 N.E.2d 305 (1939), but goes beyond that decision in providing the framework for administration of such assets within the principles of the corporation law rather than the trust law. Even if trust language is used in the conveying instrument, the receiving corporation acquires full ownership of the fund or property, subject to the duty of the directors to follow the directions of the donor.”

      . The January 13, 1969 Memorandum of the Joint Committee to Study Revision of Corporation Laws (reprinted in McKinney’s Cons Laws of NY, Book 37, Not-For-Profit Corporation Law, p XXII) states that, “This is a codification of the ‘cy-pres’ doctrine”; the March 8,1969 Memorandum of the Joint Committee (reprinted in McKinney’s Cons Laws of NY, Book 37, p XXXIII) states that: “The ‘cy-pres’ provision in section 1004 (a) (3) (A) [szc, should read 1005] of the proposed bill has been clarified to apply to assets received and held by the corporation for a purpose specified as Type B in paragraph (b) of section 201 or which are legally required to be used for a particular purpose (section 1005 (a) (3) (A)). These purposes would normally be of a charitable or trust character. A similar adjustment has been made in section 1008 (a) (15) which vests cy-pres power in the supreme court”; and the comment in the annotation to section 1005 under Legislative Studies and Reports (McKinney’s Cons Law of NY, Book 37, pp 425-26) refers to assets held for a Type B purpose or which are legally required to be used for a particular purpose as “ ‘cy-pres’-type assets.”

      . Thus the dissent is simply in error in suggesting that we have held “the Foundation’s actions unreasonable, as a matter of law” (dissenting opn, p 475) or deprived “a not-for-profit corporation of the power to change its corporate purpose” (p 476). It also errs in that (1) by express provision of N-PCL 103 (c) that section insulates the interpretation of applicable law by the board of a Type B corporation only “unless and until a court determines otherwise”; (2) the instant case does not involve an interest “held for private beneficiaries” of which a not-for-profit corporation is a remainderman, but rather is one in which the only fund', ui the corporation were received by it as a present gift subject to the limitation that they be used for the benefit of a specified and limited class of persons; (3) N-PCL 522 (c) only limits a use that would be ultra vires; it does not foreclose a use permissible under an amended charter which is within the donor’s original purpose, or, though beyond that original purpose, has been made permissible by application of cy pres (522 [d]); (4) nothing in the statute or its legislative history indicates an intent, as suggested in footnote 1 of the dissent, to apply sections 513 and 522 only to gifts subsequent to the original gift; and (5) if, as the dissent argues, a charter amendment can authorize a dissolution which entirely frees the donor’s funds of his stated purpose, the provisions of N-PCL 1005 (a) (3) (A) and 1008 (a) (15), which limit use of such funds in the hands of the acquiring corporation unless a New York court in the exercise of its cy pres function authorizes otherwise, are rendered meaningless.

      . N-PCL 513, 522 would continue to play an important role in the administration of Type B corporations. Gifts or other transfers to corporations, subsequent to the initial grant under the legislative charter, would be administered in accordance with N-PCL 513, 522.

      . In footnote 9 of its opinion, the majority demonstrates a general misapprehension of the arguments set forth in the dissent. N-PCL 103 (c) provides that “[wjhenever the board of a Type B corporation, formed under a special act, reasonably makes an interpretation as to whether a provision of the special act or this chapter prevails, or both apply, such interpretation shall govern unless and until a court determines otherwise” (emphasis added). A fair construction of this provision indicates that a reasonable interpretation will govern unless and until a court determines “otherwise”, to wit: that the interpretation was unreasonable. In view of the approval of the specific amendment at issue by a Justice of the Supreme Court, we are presented with an affirmed finding of fact that the amendment was reasonable, and thus lawful. By reversing the determination of reasonableness by two courts below, the majority holds the Foundation’s actions unreasonable as a matter of law. The majority curiously misreads the legislative history of N-PCL 522. As previously stated (ante, p 475), the Laws of 1978 (ch 690), by which section 522 became law, “ ‘is*** inapplicable to any interests held for private beneficiaries, even though a not-for-profit corporation may be a remainderman.’ ” The majority reformulates this legislative history by asserting “the instant case does not involve an interest ‘held for private beneficiaries’ of which a not-for-profit corporation is a remainderman.” Contrary to the view of the majority, section 522 is inapplicable to any interests held for private beneficiaries, including, but not limited to, interests held for private beneficiaries of which a not-for-profit corporation is a remainderman. Tlie majority’s strained application of section 522 (c) is unauthorized. N-PCL 203 (a) provides that no act of a corporation shall, if duly approved or authorized by a Judge, court or administrative department or agency as required, be deemed ultra vires. As the amendment in question was approved by a Justice of the Supreme Court and the Attorney-General, resort to the doctrine of ultra vires is wholly inappropriate.