In re the Estate of West

The question presented for decision is the constitutionality and construction of the provisions of subdivision -2 of section 17-c of the Personal Property Law (L. 1940, ch. 452, effective April 13, 1940; Cons. Laws, ch. 41) in so far as the same modify retroactively the rules relating to mortgage salvage operations.

The new statutory rules allot to the life tenant out of the net income earned from the operation of real estate in salvage, an annual

The validity of this statute has been put in issue upon this proceeding for an intermediate accounting by the trustee under the will of Henry C. West. By the terms of the testator’s will, his residuary estate was devised to a trustee to apply the net income therefrom to the use of his wife during her life or until her remarriage. Upon the termination of the life estate, the trust was directed to be divided and continued upon certain shares for the benefit of a nephew and niece of the testator, with remainders over.

At the time of his death in 1934, the testator’s residuary estate included, among various other assets, certain wholly owned guaranteed mortgages. Nine of these mortgages went into default after the death of the testator, and the estate acquired title to the real properties either by foreclosure or by deed in lieu of foreclosure prior to April 13, 1940; two of the properties were sold before that date, the income and proceeds therefrom, however, being retained in the hands of the trustee.

In the present proceeding the special guardian for the infant remaindermen contends, first, that the entire subdivision 2 of section 17-e is unconstitutional because it is expressly made retroactive in operation, and that, second, if constitutional, it does not apply, as a matter of construction, to the proceeds of the two properties which were sold before the statute became effective.

When a mortgage in default is foreclosed and title to the property is acquired by the trustee, the original mortgage investment is at an end and a salvage operation is initiated. (Matter of Otis, 276 N. Y. 101 , 111, 112.) The real property thus acquired is substituted for the mortgage in the hands of the trustee and takes on the character of personalty. (Lockman v. Reilly, 95 N. Y. 64 , 71.) The trustee holds this real property so acquired and must administer it as an asset of the trust estate for the benefit of the life tenant and the remaindermen. Like the mortgage, it is “ security not for principal alone but for income as well.” (Matter of Chapal, 269 N. Y. 464 , 472.) With respect to the mortgages which the testator owned at the time of his death and with respect to any real property which might be acquired by the trustee following default in any of these mortgages, the testator as creator of the trust gave no express directions except the general direction of what is commonly understood by the use of the words “ income ” and “ principal.” After the initiation of the salvage operation, as before, both the life tenant and the remaindermen could compel the trustee to administer the trust and to apportion to each his just share of the income and principal, but not that of any particular asset of the trust. (Lockman v. Reilly, 95 N. Y. 64 , 71; Bennett v. Garlock, 79 N. Y. 302 , 320.) Although the rule requiring apportionment as between income and principal, of the proceeds of such sale has been long established (Meldon v. Devlin, 31 App. Div. 146 ; affd., 167 N. Y. 573 ), the rules relating specifically to mortgage salvage operations were speeded in the process of formulation by the courts with the coming of the economic depression of the 1930’s. In Matter of Chapal ( 269 N. Y. 464 ) this court said: “ We have another problem — that of the liquidation of real estate acquired of necessity because of default on a mortgage investment.” Concerning these rules thus worked out to meet the emergency resulting from widespread foreclosures, in Matter of Otis, supra, at page 112, we said:

Moreover, we expressly said in the Otis case that the rules laid down were tentative only and not intended to be final. At page 115 it was said: “ Perhaps it should be added that a general rule for such situations cannot be attained at a bound, that no rule can be final for all cases and that any rule must in the end be shaped by considerations of business policy. Accordingly, we have here put aside inadequate legal analogies in the endeavor to express fair, convenient, practical guides that will be largely automatic in their application. Only the sure result of time will tell how far we have succeeded.” It was also carefully pointed out that no hard and fast rule was laid down to guide the trustee in the disposition of net income earned during the salvage operation, but the disbursement of net income to the fife beneficiary was left to the discretion of the trustee. In the Otis case we said at page 115: “ * * * the trustee may distribute such surplus income in its discretion. (269 N. Y. at p. 470). This discretion, moreover, should be exercised with appropriate regard for the fact that unless a life tenant gets cash he does not get anything in the here and now.” The Legislature has found, however, that trustees through fear of surcharge have accumulated surplus with the result that undue hardship has been visited upon life beneficiaries. Taking heed of this hardship at the request of the executive committee of the Surrogate’s Association of the State of New York, the Legislature has declared its purposes in the statute itself. In part it reads: “ The purpose of the enactment of this subdivision is declared to be the simplification of the rules of procedure in mortgage salvage operations and the ehmination of present complications which work to the disadvantage of the fife tanant * * * by depriving him of a fixed right to the actual payment of any net income earned by the property. Such fixed right is granted in lieu of

In thus formulating a rule that is final against recoupment for distribution of income received in excess of carrying charges, it does not appear that the Legislature has done more than direct a trustee to do what under the decisions of this court he has discretionary power to do. (Matter of Otis, supra.) Before the enactment of this statute, the life tenant could not have demanded as of right the payment to him during liquidation of more of the surplus income than he will receive under the statute. Neither does it appear that the remaindermen could properly have insisted that the trustee should be surcharged if in the exercise of his discretion he had paid to the fife tenant the amount which the statute now directs. A statutory rule of administration which requires the trustee to apportion income in accordance with a fixed standard which in the exercise of administrative discretion the trustee would even without the statute have power to adopt does not, in our opinion, constitute a taking of property. The principle is applicable that “ The mere fact that the statute is retroactive does not bring it in conflict with the Federal Constitution. * * * Nor has a

As already noted, the rules of administration heretofore set forth were tentatively stated and expressly recognized as subject to change. Before a judicial declaration, thus tentatively stated, becomes a rule of property, it must have become permanently fixed and long continued. (United States v. Standard Oil, 20 Fed. Supp. 427, 458; affd., 107 F. [2d] 402, cert. den. 309 U. S. 673 .) In that case the court said: “ However, before setting up a judicial declaration as a rule of property, we should require, at least, that it be fixed, long-continued, and relied upon by persons acquiring property, so that its repudiation would amount to a denial of due process.” Nor can the statute in the case at bar be said to be arbitrary or capricious, but on the contrary, it is fair and reasonable and protects the interest of both income beneficiaries and remaindermen. As was said in Thompson v. Siratt (95 F. [2d] 214, 217): “ To hold that subsection (n) is repugnant to the Fifth Amendment requires a finding that its provisions are arbitrary and ■unreasonable.”

We have, therefore, in the case at bar, no taking of property, no contract right involved and no impairment of due process. This statute, therefore, cannot be held to be unconstitutional. (Robertson v. deBrulatour, 188 N. Y. 301 ; Brearley School, Ltd., v. Ward, 201 N. Y. 358 .)

The sole remaining question is whether or not the statute is applicable in cases where the liquidation was complete before the date when the statute became effective, the income and proceeds of property being still undistributed in the hands of the trustee. We concur in the construction placed upon the statute by the learned Surrogate, namely, that its scope is limited to cases where liquidation of real property acquired is incomplete. This is in accord with the language of the statute, which provides that net income “ during the salvage operation ” shall be paid to the life tenant. Even in a “ pending proceeding ” or “ action for an accounting,” the language of the statute confines its application to cases where liquidation is incomplete and where “ during the salvage operation ” a trustee has acted in accordance with the discretion at that

The order should be affirmed, with costs to the respondent trustee and one bill of costs to the infant-appellants, William J. Demorest, Jr., Ann Demorest and Charles Demorest, payable out of the fund.

(dissenting). The infant-appellants, by their special guardian, challenge the constitutionality of section 17-c, subdivision 2, of the Personal Property Law (Cons. Laws, ch. 41). The problem relates to the apportionment, between an income beneficiary and remaindermen, of income realized by a trustee from operations undertaken to salvage defaulted mortgages held by it as fiduciary. In this instance the mortgages in default.were nine in number. The title to each mortgaged property came into the trustee either by foreclosure or by deed in lieu of foreclosure prior to April 13, 1940. Two of the properties were sold prior to that date, the avails of the sale being retained by the trustee.

The date last mentioned is important to our inquiry because it fixes the time when there became effective chapter 452 of the Laws of 1940 which added section 17-c to the Personal Property Law. It is the effect upon the rights of a life tenant and remainder-men of the retroactive provisions of subdivision 2 of that statute which has prompted the present challenge to its constitutionality.

Section 17-c of the Personal Property Law (added by L. 1940, ch. 452, effective April 13, 1940) provides rules for the administration of that portion of a trust fund in which is a real estate mortgage, held for the benefit of one or more tenants for life or a limited term with remainder over, where title to the mortgaged property has been acquired by the trustee by foreclosure or by conveyance in lieu of foreclosure. We are not here concerned with subdivision 1 of section 17-c which applies only to estates of persons dying, or trusts created, after its enactment and to mortgage investments made thereafter by a trustee of an existing trust. The challenge is to the constitutionality of subdivision 2 of section 17-c, the terms and rules of which “ apply specifically (a) to the estates of persons dying before its enactment and (b) to mortgages on real property held by a trustee under a deed of trust or other

Clearly subdivision 2 of section 17-c is retroactive. By its terms it presumes to affect acts which occurred, and rights which accrued, prior to April 13, 1940 — the effective date of the statute. Among acts thus affected was the execution on December 14, 1928, of the testamentary trust here involved; among rights thus affected are those of the Ufe tenant and the remaindermen in the proceeds from transactions undertaken by the trustee as a means of salvaging mortgages which were a part of that trust — mortgages which, as we have said, were “ security not for principal alone but for income as well.” (Matter of Chapal, 269 N. Y. 464 , 472.)

In the case last cited this court ruled that, upon a sale had in the course of a similar salvage operation (p. 472) — “ * * * the proceeds should be used first to pay the expenses of the sale and the foreclosure costs and next to reimburse the capital account for any advances of capital for carrying charges not theretofore reimbursed out of income from the property. Then the balance is to be apportioned between principal and income in the proportion fixed by the respective amounts thereof represented by the net sale proceeds. In the capital account will be the original mortgage investment. In the income account will be unpaid interest accrued to the date of sale upon the original capital.” (And see Matter of Otis, 276 N. Y. 101 , 111; Matter of McManus, 282 N. Y. 420 , 425.)

When the properties here involved came into the hands of the trustee, the rule of apportionment last quoted above was not a

In accord with that rule of property there had vested in the income beneficiary and the remaindermen respectively, prior to the effective date of section 17-c, subdivision 2, a proprietary interest in each of the properties acquired by the trustee. (Matter of McManus, supra, p. 426.)

Although the basis adopted by the courts for computing the item of interest involved differs in the various jurisdictions which have considered the question, there is a basic principle, as we have seen, which runs throughout the decisions cited above — viz., that, in the income from salvage operations incidental to the administration of a trust estate, both life tenant and remainderman have a proprietary interest and both are entitled to be paid their proportionate shares thereof.

The comment made in Matter of Rogers ( 22 App. Div. 428 ; affd., 161 N. Y. 108 ), by Mr. Justice Cullen — later Chief Judge of this court — applies with equal force in the case at hand where the rights of remaindermen are at stake (p. 436) —“ The equities of a life tenant to receive the whole income that may accrue during his tenancy are every whit as great as that of the remaindermen to have

A marked difference should be noted between the provisions of section 17-c, subdivision 2, with which we are here concerned, and subdivision 1 of the same section. Unlike subdivision 2, the Legislature was careful in subdivision 1 to make its mandates in effect prospective — not retroactive. It also employed language by which its mandates would in no event conflict with any contrary intention which might be expressed by the creator of the trust.

The resultant effect of section 17-c, subdivision 2, is to transfer, without the right of recoupment, from the principal account of a trust to the income account, an amount — fixed arbitrarily and without regard to the demands of justice and equity in the circumstances at three per cent per annum computed upon the principal amount of each salvaged mortgage. Such a mandatory transfer to the life tenant of property rights which had become vested in the remaindermen under a rule of property which antedated the exactment of section 17-c, subdivision 2, transcends the Legislature’s power. “ Legislation which impairs the value of a vested estate is unconstitutional.” (Matter of Pell, 171 N. Y. 48 , 52, 53; People v. O’Brien, 111 N. Y. 1 , 57-59; Westervelt v. Gregg, 12 N. Y. 202 , 212.) As I view the statute it authorizes, without due process of law, the taking of property rights which became vested in the remainder-men under an established rule of property prior to the effective date of the statute." To that extent it violates the Fourteenth amendment to the Federal Constitution and article 1, section 6, of the Constitution of the State of New York.

I pass now to a phase of the problem which I think cannot be ignored. The questions of apportionment with which subdivision 2 of the statute attempts to deal are essentially judicial questions. This subject was examined by Story in his Equity Jurisprudence. ([2d ed.] vol. 1, § 489 et seq.) Stressing the “ beneficial operations of courts of equity * * * upon this confessedly intricate subject,” he said: “ Without some proceedings, in the nature of an account before a Master, there would be no suitable elements upon which any court of justice could dispose of the merits of such cases.” In like vein it was said by Judge Loughran writing for this court in Matter

The Legislature has no power so to declare the law “ for the information and government of the courts in the decision of causes before them.” (Kent, Ch. J., in Dash v. Van Kleeck, 7 Johns. 477 , 508, 509.) In this connection it should be observed that subdivision 2 of the statute is not emergency legislation; it invokes neither the general welfare nor any other consideration of public policy. In the only opinion written below, it is said: “ The Legislature has done no more in formulating a modification of existing rules than the courts themselves could do. * * *.” ( 175 Misc. 1044 , at p. 1050.) Such a proposition is not free from risk. Nobody knows what economic chaos may follow the present war. I am not prepared to say that as to all pending cases the Legislature may do at one stroke whatever courts of justice may do in accord with their tradition to proceed only in a particular controversy and only after taking evidence at a hearing held upon issues defined

I am led by these considerations to dissent and vote for a modification of the Surrogate’s decree accordingly.

(dissenting). I add a few words to the dissenting opinion of Judge Lewis in which I concur entirely.

The crux of the prevailing opinion is this striking sentence: “A statutory rule of administration which requires the trustee to apportion income in accordance with a fixed standard which in the exercise of administrative discretion the trustee would even without the statute have power to adopt does not, in our opinion, constitute a talcing of property.” I cannot assent to so free an appraisal of the retroactive mandate of the Legislature.

No authority is cited to show that it was always open to trustees of their own motion to pay net income to a life tenant at such a “ fixed standard,” in peremptory disregard of the recoupment rights of remaindermen. Indeed the general understanding of the profession appears to have been the other way, seeing that the Surrogates who devised the statute have vouchsafed us one reason alone for its enactment, viz., “ Trustees have hesitated to pay such net income because in the case of overpayment to the life tenant, the trustee might be surcharged with that amount.” (See L. 1940, p. 1182.)

This recognition by trustees of the conflicting rights of remainder-men was not without justification. It is true that hitherto a trustee for a fife tenant and remaindermen was entitled to distribute surplus income in his discretion. (Matter of Otis, 276 N. Y. 101 , 115.) But that discretion was always to be exercised by a trustee with reasonable judgment and with an even hand between the life tenant and the remaindermen in the particular circumstances. (See Carrier v. Carrier, 226 N. Y. 114 , 125, 126; 28 Halsbury’s Laws of England [1st ed.] 123, 124; 2 Scott on The Law of Trusts, § 187; 4 Pomeroy on

There is no occasion now for examination of the real nature of the equitable right of a trust beneficiary. At least the beneficiary owns the obligation of the trustee — a thing which is as truly the subject-matter of property as any physical object. (See Ames, Lectures on Legal History, p. 262. Cf. 1 Scott on The Law of Trusts, § 130.) Consequently I see no warrant for the view that the respective interests of beneficiaries of a discretionary trust are not rights of property in the constitutional sense. (See Pritchard, v. Norton, 106 U. S. 124 , 132.)

Lehman, Ch. J., Rjppey, Conway and Desmond, JJ., concur with Finch, J.; Lewis and Loughran, JJ., dissent in separate opinions in which both concur.

Order affirmed, etc.