In re People

On August 14, 1933, an order was made and entered in the Supreme Court authorizing and directing the Superintendent of Insurance of the State of New York “ forthwith to take possession of the property of the Title and Mortgage Guarantee Company of Buffalo and to conduct the business thereof in such manner and take such steps towards the removal of the causes and conditions which make necessary the granting of this order, as the Superintendent of Insurance shall consider wise, subject to the directions of the court, pursuant to the provisions of Article XI of the Insurance Law of the State of New York.” The order contained the usual provisions directing the said company, its officers, directors, depositories, trustees, agents, servants and employees and all other persons, having any property or records belonging to the said company, to deliver them to the Superintendent of Insurance and restraining the waste of assets by any person, the prosecution of actions at law, suits in equity, special or other proceeding against the company or the Superintendent of Insurance and restraining all persons from making or executing any levy upon the assets of the corporation, or from “ in any way interfering with the Superintendent of Insurance of the State of New York or his successors in office in his or their possession, control and management of the property of said corporation.”

The Marine Trust Company of Buffalo holds in its possession bonds and mortgages in the name of Title and

The depositary has appealed directly to this court from each of said orders pursuant to the provisions of section 588, subdivision 3, of the Civil Practice Act on the ground that the statutory provisions authorizing these orders are invalid under the Constitutions of the State and of the United States. fUpon this appeal “ only the constitutional question shall be considered and determined by the court??

The attack is not directed against the provisions of the Insurance Law (Cons. Laws, ch. 28) which authorize the court, in proper case, to direct the Superintendent of Insurance to take possession of the property of a corporation, organized under the Insurance Law, and to conduct its business for the purpose of rehabilitating or liquidating such company. The Superintendent becomes a statutory receiver; the property of the corporation is brought into the protective arm of the law and the receiver is subject

That law, as amended by chapter 780 of the Laws of 1933, applies to “ mortgage investments ” which are defined therein to “ include all interest in bonds, notes and other evidence of indebtedness of individuals, partnerships, associations or corporations, secured by mortgage or mortgages or deeds of trust or similar. evidence of interest in real estate upon real property, guaranteed by a guaranty corporation, and all collateral trust bonds or notes of a guaranty corporation which are secured by pledge of any such interests; but shall not include any such bond, note or other evidence of indebtedness when the same shall be held entirely by only one person, firm or corporation or any such collateral trust obligations when all of them having the same security are held entirely by only one person, firm or corporation.”

The statutory definition covers many forms of “ interest ” in bonds, notes and other evidence of indebtedness, but every “ interest ” must, from its nature, arise from contract and be defined by contract and must attach to the obligation of a contract. It attaches to the obligation of the debtor and to the obligation embodied in the mortgage, deed of trust or pledge which secures it. It attaches, too, to the guaranty of the guaranty corporation. fThe Legislature has decreed that the rights of the holders of such interests shall not be enforced in strict accordance with the letter of the contract. To that extent it has impaired the obligations of contrae^ The statute and the orders of the court granted pursuant thereto are. assailed on that ground. The prohibition,

These general principles must guide the court in the determination of whether in a particular case an attempted exercise of the reserved power of the State transcends the limitation placed by the Constitution upon that power. No unchanging yardstick can be fashioned applicable at all times and under all circumstances by which the validity of each statute may be measured and determined. “ Every case must be determined upon its own circumstances.” (Von Hoffman v. City of Quincy, 4 Wall. [U. S.] 535, 554.) “ Mechanical concepts of jurisprudence make easy a decision on the strength of seeming authority.” (People v. Nebbia, 262 N. Y. 259 , 270.) Authority may establish the criteria to be applied in the ever-changing conditions of a complex economic civilization, they do nothing more.

The decisions of the United States Supreme Court do certainly establish these criteria: [''Legislation which impairs the obligation of a contract or otherwise deprives a person of his property can be sustained only when enacted for the promotion of the general good of the public, the protection of the lives, health, morals, comfort and general welfare of the people and when the means adopted to secure that end are reasonable] Both the end sought and the means adopted mustre legitimate, i. e., within the scope of the reserved power of the State construed in harmony with the constitutional limitation on that power. Even “ the economic interests of the State may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.” (Home Building & Loan Assn. v. Blaisdell, supra.)

The statute now attacked contains a legislative declaration of the facts which, in the opinion of the Legislature, create “ the existence of a public emergency affecting the

Without reciting these facts at length, it is sufficient to say that mortgage investments are widely held by investors through ownership of “ certificates ” of an interest in particular mortgages, guaranteed by guaranty companies. Owing to a sudden change in economic conditions many owners of real estate are unable at the present time to meet the obligations of the mortgages on their property. Defaults are numerous and immediate liquidation of a substantial amount of these mortgages through foreclosure or other court proceedings “ would so demoralize the general real estate market that there might be realized on such bonds, mortgages or other security substantially less than the face amount thereof and substantially less than would be realized if they were disposed of in an orderly manner over a reasonable period of time.” Free liquidation now of such obligations would result “ in such unprecedented demands upon the resources of the guaranty corporations that their resources would be sufficient only to pay a relatively small portion of such demands.”

It cannot be doubted that the free liquidation of great amounts of indebtedness secured by mortgages would result in widespread ruin to real estate owners and in probable widespread damage to investors. That situation affects the economic welfare of the community and affects the vital interests of the comunity. ¿^Legislation intended to relieve that situation is directed towards a legitimate end. Further discussion of that question is forestalled by the recent decision of the Supreme Court of the United States in Home Building & Loan Assn. v. Blaisdell (supra). The question remains whether the means adopted by the Legislature are also legitimate and reasonable.

The Legislature has, by other statutes, recently adopted,

The statute now under attack may properly be regarded as a supplement to these statutes. It affects only the holders of interests in contractual obligations which are held by more than one person, firm or corporation and which are guaranteed by a guaranty corporation. Where more than one person has an interest in a contractual obligation it is evident that there can be no voluntary agreement for change in the contractual obligations' unless all consent and conversely there can be no enforcement of the contractual obligation except by a common agreement or by a person authorized to act in accordance with the terms of the original obligation or contract or by a person appointed in his stead. Ordinarily the holder of certificates of an interest in guaranteed mortgages has no rights or duties in connection with the mortgage at least as long as the guaranty company is doing business and complies with its own undertakings. The guaranty company under its contract with the holder of the certificate may decide whether to foreclose or extend the mortgage, to waive or to resort to a remedy for any default. It assumes the risk of ultimate deficiency in

The Schackno Act provides that the Superintendent, who has taken over a guaranty corporation for rehabiliation, or liquidation, “ shall be authorized with respect to any bonds, mortgages or other security held by such guaranty corporation or otherwise, against -which any mortgage investments have been issued, to do by himself or by his authorized agent, any of the following:

“ (a) To receive, collect and sue for the interest and principal of the bonds, mortgages and other security held by such guaranty corporation or otherwise, or to bring any foreclosure action on the same and take title to the property sold under such action in such name or names as he may determine;

“ (b) To deduct from any sum so obtained a reasonable amount to cover the costs and expenses of any such collection, suit, or foreclosure action, or any other functions performed by him pursuant to this act;

“ (c) To distribute the balance of such sums so collected to the holders of such mortgage investments or, at the election of the superintendent, (1) to withhold, for such time as he deems expedient or desirable, all or any part thereof from distribution, or, (2) in his discretion, to apply

We find no substantial basis for any claim that any of such provisions are invalid. It is said that the certificate holders are the owners of the mortgages underlying the certificates and that the statute permits the Superintendent of Insurance to take over and liquidate their property without, even, making provision for notice to the holders of the certificates and thus deprives them of their property without due process of law. Though the certificate states that the company “ assigns to the registered holder hereof an undivided, coordinate share of the same amount in the principal sum secured by the bonds and mortgages deposited or which may hereafter be deposited by the company with the Marine Trust Company of Buffalo, * * * as depositary under the terms of an agreement bearing date June 10, 1927, subject to which this ■ certificate is issued, together with interest thereon at the rate of h\% per annum,’’¿jan analysis of all the terms of the certificate and of the contract, to which it is subject, discloses that the guaranty company has entered into an unconditional promise to pay, ten years from the date of the certificate, the principal sum secured and accrued interest and has transferred to the holder only an interest in the deposited mortgages as collateral security for its debtjZ(Certainly the holder acquires, prior to default, no rights in the mortgages other or greater than the rights of a holder of collateral security and the guaranty company retains at least the rights of an owner who has cumbered his title with a lien.X True the certificate provides that the guaranty company shall exercise these rights as “ agent ” for the holder of the certificate, but we construe the contract in accordance with its substance and effect, not with its form. [go construed, the guaranty company is a primary debtor, assigning the mortgages only as collateral security for the debt.

The Statutory receiver of a corporation, subject to the provisions of the Insurance Law, may certainly administer the property of such corporation even though a creditor ' has a hen on some of such property, at least where the corporation itself has power of administration. We recognize that there may be forms of interest covered by the statute where all property in mortgage investments has been transferred from the guaranty corporation or which confer upon a third person power to administer such investments. No such forms have been called to our attention. “ It does not matter that there are, or may be, individual cases of another aspect. The Legislature was entitled to deal with the general or typical situation.” (Home Building & Loan Assn. v. Blaisdell, supra.) Even if the corporation had a right to administer the investments only as fiduciary or agent, the investments could not be abandoned and the Superintendent might be empowered to administer them at least until they were claimed by the owners or some person authorized to represent the owners. A statute may be unconstitutional which, without notice to an owner, bars reclamation by the owner of property in the hands of a receiver or liquidator (Matter of International Milling Co., 259 N. Y. 77 ), but this statute has no such effect. Where the administration of property is the duty and part of the business of a corporation, taken over by a liquidator or rehabilitator, then the continued administration by him is merely an incident of the liquidation or rehabilitation proceedings and deprives those interested in such property of no rights. Only where there is a deprivation of rights is notice and opportunity to be heard in opposition necessary.

It is said that in some minor particulars the powers of administration accorded to the Superintendent of Insurance are greater than the authorized powers exercised by

What we have said here applies with equal force to the provisions of the statute which authorize the Superintendent to withhold for a time distribution of moneys collected or to apply them for the protection of the interests of such certificate holders. These are powers which are, in true sense, incidental to the power of administering the mortgage investments. They deprive neither the group of persons who have an interest in such investments nor any individual member of that group of any right which they or he was given by contract. Rather, they constitute a remedy in a condition where the original contract failed to provide remedy.

These powers vested in the Superintendent must, indeed, be regarded as provisions for safeguarding the interests of groups of holders of mortgage investments until a plan can be devised for permanent administration of these investments. Pending action by the group the fund must be conserved. Provision for such conservation is made by the statute. So, too, provision is made for the adoption of a plan for permanent administration. The powers vested in the Superintendent of Insurance extend no further than to conserve the fund and as incident thereto, to bring actions to enforce the contractual obligations which constitute the fund until a plan is adopted for the permanent administration of the fund; to charge upon the fund the expenses of this administration of the fund; and in bis discretion and for the

The essential purpose of the statute is, however, to provide for the adoption of a plan for the permanent administration of the mortgage investments in which groups of investors are interested. All else is subsidiary. If the provisions for the adoption of such plan transcend the Kmitations of the legislative power, then the statute fails of its purpose. Each holder of a certificate is, under his contract, entitled to insist upon the enforcement of the bond, mortgages and other security in which he has an interest and to a pro rata share of the moneys collected. Foreclosure at the present time may be beset by insurmountable obstacles for there may be no money available to pay the expenses of necessary action. Foreclosure may destroy the investment of the other holders of certificates of the same series; for the property, at the present time, may, at a forced sale, bring no more than the amount of the tax hens. Foreclosure may ruin the owner of the equity of redemption. General foreclosure of the vast amounts of mortgages in which groups of certificate holders are interested might so demoralize the real estate market that the value of all mortgages would be diminished and the credit of insurance companies and savings banks destroyed. In spite of all this the owner of a single certificate in a series has a contractual right to insist upon the enforcement of every contractual obligation in which he is interested and to refuse to accede to any impairment of such obligation by agreement. The statute was intended to meet that situation.

It does so by providing that after a hearing upon a proposed plan or agreement for the readjustment, modi

¿The fairness of these provisions is evident. They do not give to a majority in interest, however large, the ; power to coerce another holder to accede to any plan of ‘ reorganization by the majority. They do not give the court power to coerce a single holder to accede to any plan of which the court approves. They do give the • court authority, after a hearing, to approve a reorganization plan which is consented to by two-thirds in amount; of those interested and to declare such plan effective;

We may assume that except for this statute a certificate holder might stand upon his contractual rights and refuse to accede to any plan of reorganization of the' rights of the holders of the mortgage investment, however advantageous the plan of reorganization might be. We may even assume that the Legislature could not pass a law which would compel a single holder to accede to such a plan though approved by the court and consented to by a majority in amount of all the holders of interest in an investment, if only the rights of the parties j to the contract were involved. ¡Here, as we have said, 'j much more is involved. Unreasonable insistence on j contractual rights may work serious injury to the economic j welfare of all the people^ The statute must be judged ! in the light of that factX Under conditions as they exist j at present, the vital interests of the community call for legislation by which the investments of great numbers of

It has been said that “ while emergency does not create power, emergency may furnish the occasion for the exercise of power.” (Home Building & Loan Assn. v. Blaisdell, supra.) Extraordinary conditions may call for extraordinary remedies. Whether an emergency exists or not, the test in each case is whether a situation exists which calls for the exercise of the reserved power of the State and whether the remedy adopted by the State is reasonable and legitimate. /An individual may not justly complain of a reasonable'" legislative invasion of his usual rights or a reasonable legislative restriction of his usual liberty for the purpose of averting an immediate danger which threatens the safety and welfare of the community. /

To secure the foundations of credit and good faith in the performances of obligations, to prevent the adoption by the States of laws for the defeat of creditors and invasion of contractual obligations, the constitutional limitation was placed upon the States’ “ power of changing the relative situation of debtor and creditor, of interfering with contracts.” (Ogden v. Saunders, 12 Wheat. [U. S.] 213, 354.) Here the Legislature has not attempted to change the relative situation of debtors and creditors or provided that any obligation of a contract shall be impaired without the consent of two-thirds in amount of the holders of an interest in such obligations. Perform

Impairment of the obligation of contracts to that extent and under analogous safeguards is not without precedent even in normal conditions. Analogy might be drawn between the provisions of the statute and the provisions of the Bankruptcy Law in regard to composition agreements. So, too, analogy may be found in decrees of courts of equity providing for corporate reorganizations. We do not press these analogies; distinctions might be pointed out. We recognize, of course, that they have not arisen from the invocation of the reserved power of the State. We refer to them only as an indication that in appropriate conditions it is not unreasonable to give effect to a plan which an informed court, after hearing, has approved as fair to the entire group interested and to all the individuals in that group and to which a majority of that group consent. When a State decrees that in order to meet threatened danger to the community plans adopted with such safeguards may be declared binding on all, the law is not unreasonable. It does not destroy credit or undermine confidence in private faith. It does not take one man’s property or contractual rights for the benefit of others. It does not deprive any one of a substantial right even for the benefit of a community:.

True, when normal conditions are restored, when strict enforcement of the obligations of mortgage investments

At times postponement of the enforcement of contractual obligations or their temporary impairment may be the means reasonably adopted to meet a temporary condition. Indefinite postponement of remedy might in effect be a deprivation of right, and permanent impairment might be an unreasonable remedy. If the Legislature exceeds the limitation of its reserved powers then the statute is invalid. In such case these factors may be decisive. ¡ That is not true here. There is no postponement here of the enforcement of the obligation of contracts and such permanent impairment as may result from the application of the statute is subject to safeguards which reasonably protect all substantial rights; deprives no one unreasonably of rights and is adopted to secure a legitimate end.

Other objections are also urged. We have considered them and found them without substance. We refer briefly to only one further objection. We are told that the Legislature has delegated to the Superintendent of Insurance legislative powers. The statute which is directly attacked does not itself contain any provision which might be regarded as giving to the Superintendent any such power. We are referred, however, to the provisions of chapter 40 of the Laws of 1933, which provide that

“ Such rule or regulation may be inconsistent with existing law, and in such event, shall supersede such existing law inconsistent therewith.” (§3.)

//Even assuming that these provisions transcended the power of the Legislature, they cannot affect the validity of every administrative act performed by the Superintendent or of statutes giving the Superintendent administrative powers. No exercise of legislative powers conferred by chapter 40 of the Laws of 1933 upon the Superintendent of Insurance is essential in the administration of mortgage investments. Moreover, the provisions of chapter 40 of the Laws of 1933 have been ] amended, since so as to remove possible attack on such ground./

b find that economic conditions create an immediate danger to the economic welfare and the vital interests of the community. We find that the Legislature in the exercise of its reserved power has adopted a remedy which is reasonably calculated to meet such conditions. No impairment of contract which results will substantially injure any person. The statute merely furnishes a

The orders should be affirmed, without costs.

Pound, Ch. J., Crane, Hubbs and Crouch, JJ., concur; O’Brien, J., concurs on the authority of Home Building & Loan Assn. v. Blaisdell ( 290 U. S. 398 ) and Nebbia v. People ( 291 U. S. 502 ); Kellogg, J., not sitting.

Orders affirmed.