In re the Accounting of Gruner

There is presented to us the question, among others, of the extent to which an equitable lien may be imposed upon a New York Stock Exchange seat and the remedy available for its enforcement by the assignee.

One Otto Harry Gruner on May 6, 1929, made an assignment to the New York Trust Company (hereinafter referred to as trust company) as security for a loamof $212,000, of all his right, title and interest in and to his membership and seat upon the New York Stock Exchange (hereinafter referred to as the exchange) in words which were in part as follows: “ Said Otto H. Gruner hereby transfers, assigns and sets over to The New York Trust Company free and clear of any claims, liens or encumbrances whatsoever all his right, title and interest, legal and equitable, in and to a full membership and seat upon the New York Stock Exchange. This assignment, though absolute, is nevertheless an assignment as collateral and security for the demand note of said Otto H. Gruner in the amount of Two hundred and twelve thousand Dollars made simultaneously herewith.

“ The intent hereof is to transfer to The New York Trust Company said membership and seat and to confer upon the New York Trust Company full right and power in its absolute discretion to dispose of said seat at any time without any notice to me and without advertisement by sale, public or private, or at auction, to be credited upon said note and any surplus over the amount due on said note and the expenses of sale to be-paid to me. * * * ”

Later, on April 21, 1933, but as of May 6, 1929, Gruner assigned the proceeds of the sale -of the seat in words which were in part as follows: ‘1 Said Otto H. Gruner hereby transfers, assigns and sets over to The New York Trust Company, free and clear of any claims, liens or encumbrances whatsoever, all his right, title and interest in and to the proceeds of a

“ The intent hereof is to assign and transfer to The New York Trust Company the full proceeds of said membership and seat to be credited upon said note and any surplus over the amount due on said note and the expenses of sale to be paid to the undersigned.”

In each of those assignments there were the following clauses: “ I agree to pay all dues and charges of every kind and character and to do everything necessary to keep said membership one in good standing and to suffer no obligations of any kind in favor of other members of the Stock Exchange, or any firm of which any member of the Stock Exchange may be a member, ever to take precedence over the rights of The New York Trust Company hereunder.

“ I agree to maintain said membership and seat free of claim and liability for the payment of any obligation to any other member of the New York Stock Exchange or any firm to which any member of the New York Stock Exchange belongs or to anyone else.”

On May 17, 1933, the trust company advised the exchange of the assignment and the exchange acknowledged receipt of its letter. Nothing turns upon the difference in the wording of the two assignments.

At the time of the death of Gruner in December, 1942, there was due the trust company $59,201.93 and on that day the seat had a value of $29,000. There were no charges against it in favor of the exchange, the members of the exchange, or customers of the decedent. The exchange sold the seat in March, 1944, for $49,000 and that sum was turned over to Gruner’s ‘administratrix c.t.a. under a stipulation that such action should be without prejudice to the rights of the trust company. The questions involved herein are presented upon the final accounting of the administratrix rather than in an action which had originally been brought by the trust company against the exchange and Katharine D. Gruner, individually and as administratrix, and which has been discontinued.

We come then to the question of sale. The constitution of the exchange provides that upon a transfer of membership, the proceeds of the sale of the seat shall be applied by the exchange to payments of the following: (1) sums due the exchange (2) sums due the Stock Clearing Corporation (3) sums due other members or member firms arising from losses upon the closing out of member contracts (4) sums, in the discretion of the board of governors, which represent any unusual expenses incurred by the exchange in connection with litigation over the disposition of the proceeds of the seat. Provision is then made that the surplus of the proceeds shall be paid directly to the person whose membership is transferred or to his legal representative. The constitution of the exchange as it existed in 1929 is' the applicable one here and it is therefore unnecessary to consider changes made by the constitution adopted in 1941. There is no provision in that constitution, which has been called to our attention, providing for the sale of a member’s seat by a nonmember creditor. Nor has any rule or practice of the exchange been called to our attention under which the exchange may

When we come to the question of the proceeds of the sale, a different question is presented. Each member of the exchange has a right to the proceeds of the sale of his seat and that right may be assigned. (See Field v. City of New York, 6 N. Y. 179 ; Hinkle Iron Co. v. Kohn, 229 N. Y. 179 .) After the sale of the seat has been consummated, no provision of the constitution or rule of the exchange stands in the way of the assignee. The

The lien of the trust company here was an inchoate equitable lien which did not become perfected under the circumstances disclosed until the proceeds of the sale of the seat became available after the claims of the exchange and its members were satisfied. (Ketcham v. Provost, supra; United States v. Texas, 314 U. S. 480 , 488.)

The cases relied upon by the respondents are not controlling. Benedict v. Ratner ( 268 U. S. 353 ) involved an assignment, as collateral, of accounts receivable under which the debtor was permitted to apply moneys paid upon such accounts to his own uses until demand was made by the assignee. The assignment was held to be fraudulent and void as to creditors because dominion was continued in the debtor “ inconsistent with the effective disposition of title and creation of a lien ” (p. 363). In the instant case there was not the reservation of a dominion which permitted the diminishing of the value of the membership

That brings us to the next questions presented which involve the claims of the United States for $21,409.88 for income taxes for the years 1933 and 194-1, and of the State of New York for $2,295.36 for income taxes for the years 1933 and 1937. We shall consider first the claim of the United States.

Section 3466 of the United States Revised Statutes (U. S. Code, tit. 31, § 191) reads as follows: “ Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.”

The statute does not create a lien in favor of the government (Bramwell v. U. S. Fidelity Co., 269 U. S. 483 , 488). It simply provides for a priority in payment. The purpose of the statute is “to secure adequate public revenues to sustain the public burden.” (United States v. Emory, 314 U. S. 423 , 426.)

The trust company urges that its lien was created before there were any Federal tax claims against the decedent. In other words, that when the lien became perfected there was relation back to the time of its creation. That contention has been held to be without merit, in New York v. Maclay ( 288 U. S. 290 , 293): “ Against mortgagees and purchasers a lien perfected after-wards may take effect by relation as of the date of the inchoate lien through which mortgagees and purchasers became chargeable with notice. The doctrine of relation will not divest the United States of the preference that accrued when receivers were appointed.”

The right of the United States to its statutory priority under section 3466 arose at the moment of the death of the assignor,

Perhaps it should be pointed out to avoid misunderstanding that, even if the lien had been perfected prior to decedent’s death, it still might not be a “ specific ” lien within the meaning given to that term by the Federal courts when dealing with the priority of the United- States under section 3466 over the statutory lien of State taxes, where no specific property has been seized and appropriated to the satisfaction of the lien or set apart from the general property of the debtor. (United States v. Texas, [Byrnes, J.], supra, 487, 488; New York v. Maclay, supra; United States v. Waddill Co., 323 U. S. 353 ; Matter of Lincoln Chair & Novelty Co. [Lehman, J.], 274 N. Y. 353 , 357-359.) Thus, in United States v. Texas (supra) in referring to a provision of a State statute that all gasoline taxes due by any distributor to the State “ shall be a preferred lien, first and prior to any and all other existing liens, upon all of the property of any distributor, devoted to or used in his business as a distributor * * * ”, the court said that the lien created was nothing more than an inchoate and general lien, and “ did not • of its own force divest the taxpayer of either title or possession. It could not become specific until the exact amount of the taxes due had been determined, and it could not be enforced without the assistance of the courts ” (pp. 484, 488). The court was referring to a statutory lien for taxes which did not become specific, as against the United States under section 3466, even though its amount were determined, until by appropriate action specific property was appropriated and set apart and the taxpayer divested of title or possession of it by the sovereign. Only then might the statutory priority of the United States under section 3466 be avoided. (Matter of Lincoln Chair & Novelty Co., supra, pp. 358, 359.) Thus, even the lien. of a judgment has been held not to be such a specific lien as would deprive the United States of its priority under section 3466. (Thelusson v. Smith, 2 Wheat. [U. S.) 396.) There was also, of course, a common-law possessory specific lien for indebtedness for services performed on the specific chattel upon

When we come to the claim of the State for the income taxes of 1933 and 1937, different principles apply. This State, unlike the United States, has no general statutory priority as to debts due it. By our State Constitution of 1777, section XXXV, it was provided that “such parts of the common law of England, and of the statute law of England and Great Britain, and of the acts of the legislature of the colony of New York, as together did form the law of the said colony on the 19th day of April, in the year of our Lord one thousand seven hundred and seventy-five, shall be and continue the law of this state, subject to such alterations and provisions as the legislature of this state shall, from time to time, make concerning the same. * * * ”

The State has succeeded to the Crown’s prerogative right of priority. (Matter of Carnegie Trust Co., 206 N. Y. 390 , 396, 397; Marshall v. New York, 254 U. S. 380 , 383, 384.) In Matter of Carnegie Trust Co. (supra) it was said (Haight, J.), at p. 396: “We think it clear that at common law the king was entitled to preference in the payment of debts due to him from an insolvent before that of a subject. This is stated in 1 Coke on Littleton (131b). Under the statute (33 Hen. VIII, ch. 39, § 74) it was enacted that the king’s debt shall, in suing out execution, be preferred to that of. every other creditor who has not obtained judgment before the king commenced his suit. This apparently has remained the law of England down through and since the American Revolution. (Giles v. Grover, 9 Bing. 128.) * * * Inasmuch, therefore, as the claims or moneys due the king, for the support and maintenance of the government, whether derived from taxes or other sources of income, were preferred over the' claims of others, it follows that under the first subdivision of the provision of the Constitution of 1777, quoted, such preference became a part of the common law of our state, and is so continued under our present Constitution.”

As pointed out in the Marshall case (supra, at p. 386) the right of priority has been likened to an equitable lien. Here the parties were in a court of equity — the Surrogate’s Court. Action was brought by the trust company against the exchange and the administratrix c.t.a., but discontinued by stipulation by which consent was given to the payment of the proceeds of the sale of the seat to. the administratrix. Prior to the sale of the seat and the attachment of the equitable lien to the proceeds of sale, the sovereign State had not “ sought to enforce his

* * * ” (Pomeroy’s Equity Jurisprudence [5th ed.], § 168, р. 221). Where, as in this instance, the chose in action was turned into money and became available in the hands of the exchange for payment to the assignor’s administratrix, the equitable liem attached to it immediately and equitable ownership of the fund passed to the trust company, needing but the action of a court of equity to enforce its right to payment. At that moment, the lien of the trust company, which was greater in amount than the proceeds of the sale of the seat, and of all the assets of the estate, became capable of perfection and so was perfected, and the trust company became a secured creditor. Prior to that time when, upon- Gruner’s death, his administratrix с. t.a. became the owner of the property in the seat and membership in the exchange (Powell v. Waldron, supra), as distinguished from the proceeds of the sale to which the trust company’s lien later attached, section 3466 became applicable because the estate ovas insolvent, and such property in the seat and membership was thereafter subject to the rights of the United States under that statute.

(dissenting in part.) I agree with Judge Conway’s opinion except that I think the State, for its unpaid income taxes, is entitled to priority over the New York Trust Company. It is undisputable that the State of New York, as a sovereign, has a common-law right of priority, with respect to the payment of taxes, over all other creditors of the taxpayer except the United States (Matter of Smith v. Meader Pen Corp., 255 App. Div. 397 , 399, aifd. 280 N. Y. 554 ; N. Y. Terminal Co. v. Gaus, 204 N. Y. 512 ; Central Trust Co. v. N. Y. C. & N. R. R. Co., 110 N. Y. 250 , 259; Matter of Century Steel Co. of America, 17 F. 2d 78 ; Matter of Lincoln Chair & Novelty Co., 274 N. Y. 353 , 356; Matter of Carnegie Trust Company, 206 N. Y. 390 , 399). This prerogative right of the State does not depend on statutes and so we do not have to examine into the difference between, for instance, section 219-c of the Tax Law (as to franchise taxes) and section 377 of that Law (with respect to income taxes). Nor can the State be defeated by reference to section 380 of the Tax Law, which provides for the filing of a warrant, etc.

Even if it be the law that this sovereign right of the State must give way to a perfected lien of another creditor, I do not see how the trust company’s lien can be considered to have been perfected as against the State of New York any more than against the United States of America. Both the' trust company and the State came into the Surrogate’s Court to assert their alleged priorities to payment out of a fund which was in the hands of the adminstrator of the debtor’s estate. Neither the State nor the trust company had reduced the property to possession, and no part of the property had been set off to either. The trust company had no “ specific prior lien ”, by attachment, execution or otherwise (see Wise v. Wise Company, 153 N. Y. 507 , 511). Even if the trust company’s equitable lien could be considered to have been “ perfected ” when the proceeds of the sale of the seat became available, that time was subsequent to the accrual of the State’s tax claim. Thus we had an insol

Loughran, Ch. J., Lewis and Thacher, JJ., concur with Conway, J.; Desmond, J., dissents in part in memorandum; Dye and Fuld, JJ., taking no part.

Ordered accordingly.