Williams v. Thorn

This action is brought by a judgment creditor of the defendant Butterfield, after the return of an execution unsatisfied, to reach the surplus income of a trust estate, of which the judgment debtor is the beneficiary.

The trust estate consists of real and personal property, which was given by the will of the father of the defendant Butterfield to the defendants Thorn and others, in trust, to receive the rents and profits of the real estate and the income of the personal estate, and to pay over the rents of the real estate and the income of the personal property to the defendant Butterfield during his life.

The complaint alleges that the income of the trust estate

Proof was given on the trial to the effect that the gross rental value of the real estate was about $4,000 per annum,, and that the income of the personal property was $600 per annum, out of which taxes and insurance were to be deducted. Some of the real estate was occupied by the defendant Butterfield, and some was not let. The judge,, however, did not pass upon the question whether there was any surplus, but decided, 1st. That the plaintiff was entitled to have the amount fixed, which should be a reasonable allowance for the support and maintenance of the debtor and those dependent upon him, with the right to the debtor to apply for a modification, if his circumstances should thereafter change.. 2d. That the surplus over and above, such allowance, whether accrued or hereafter to accrue, should be paid to the plaintiff, or a receiver to be appointed, until the debt of the plaintiff and his costs should be paid. 3d. That the plaintiff had the right to have ascertained what amount, if any, of accrued income belonging to the debtor was in a certain undivided fund referred to in the complaint, and that such surplus, if any, should vest in said receiver, and be applicable on said debt when collected by him; and 4th. That a referee should be appointed to ascertain and report what amount would be the reasonable allowance above referred to, and piso as to the above surplus, and that on the coming in of his report a final decree be made.

The defendants excepted to this decision, and made a motion, under § 268 of the Code, for a new trial on a case and exceptions. This motion was denied at General Term, and from that order the defendants appeal to this, court.

By 1 R. S., 729, § 57, it is provided that “where a trust is created to receive the rents and profits of lands, and no valid direction for accumulation is given, the surplus of such rents and profits beyond the sum that may be necessary

This provision is very plain, and there can be no question that the surplus income of the real estate, if there be any such surplus, is liable to be reached in some form by the creditors of the beneficiary. Most of the cases on the subject expressly hold this section equally applicable to a trust to receive and pay over the income of personal property, and no point is made on this appeal based upon any distinction between the two sources of the income in question.

The right of a creditor to maintain an action of this description in cases of trusts of personal, as well as real estate has been recognized since an early period after the adoption of the Revised Statutes. In Hallett v. Thompson (5 Paige, 586) it is observed by the Chancellor that as a general rule it is contrary to sound policy to permit a person to have the ownership of property for his own purposes and to be able at the same time to keep it from his creditors. That the Revised Statutes have made one exception to this rule to the extent of a provision for education and necessary-maintenance merely, but that in that case the beneficial owner is himself deprived of the power of aliening or encumbering the property or his interest ■ in the rents and profits as cestui que trust, and the surplus income, beyond what is necessary for his support, is in equity subject to the claims of his creditors. And that by the analogy which courts of justice have always endeavored to preserve between estates or interests in land, or the income thereof, and similar interests in personal property, the right of a judgment creditor to reach the surplus rents and profits of land, beyond what is necessary for the support and maintenance of the debtor and his family, entitles him to maintain a creditor’s bill which will reach a similar interest of the debtor in the surplus income of personal property held by another for his use and

The right to maintain such an action as the present, was also sustained by V. C. Sandford in Rider v. Mason (4 Sandf. Chy. Rep., 351), where § 57 of 1 R. S., 729, is applied indiscriminately to the income of real and personal property, and in Sillick v. Mason ( 2 Barb. Ch., Rep., 79 ), wherein the Chancellor made a decree allowing the defendant to receive out of the income of a trust fund, accrued and to accrue, a specific sum fixed by the Chancellor as sufficient for his support, and directing the surplus to be retained for the benefit of the creditor.

In Bramhall v. Ferris ( 14 N. Y., 41 ), the remedy of the creditor to reach such a surplus by bill in equity, was also conceded, though that case was 'disposed of on the grounds that there was no allegation or proof that the income was larger than necessary for the support of the debtor and his family, and also that there was a provision in the will that the interest of t-lie cestui que trust should cease on the recovery by creditors of a judgment to reach it, which provision was held to be valid. The same right is also conceded in Scott v. Nevius ( 6 Duer, 672 ) and in Graff v. Bonnett ( 31 N. Y., 9 .)

It is contended, however, that the case of Campbell v. Foster ( 35 N. Y., 361 ) is an authority for the position that no part of the interest of the cestui que trust in such income can be reached, and it is true that Wright, J., in that case, stated it to be his individual opinion that it could not. His argument is, that §§ 38 and 39 of 2 R. S. 173, except froip. operation of creditors’ bills funds held in trust for the debtor, when the trust proceeds from a third person. That § 63 of 1 R. S., 730, which provides that no person beneficially interested in a trust for the receipt of the rents and profits of lands, can assign or in any manner dispose of such interest, renders the interest of the beneficiary in a trust to receive and apply the income of personal estate inalienable, and therefore it cannot pass to creditors. But he says it is

That is the only point decided in Campbell v. Foster. 'The action was brought by a receiver of the property of the judgment debtor appointed in supplementary proceedings. The complaint set out a trust of personal property, created hy the father of the judgment debtor, to pay the income to .her, that it was more than sufficient for her support, and prayed that out of the surplus income derived, and to be ■derived from the trust estate, there be paid to the plaintiff as receiver a sum sufficient to satisfy the judgment. A demurrer to this complaint was sustained. Judge Wright rests his •opinion on two grounds: First. That under sections 38 and 39 (2 R. S., 174), the income is absolutely exempt; but, second. If he is wrong in that, the interest of the cestui que trust is inalienable under \ 63, and cannot pass as property of the judgment debtor to a receiver. In this latter holding he only followed the decision of this court in Graff v. Bonnett ( 31 N. Y., 9 ), where it was held in a similar action that it would not pass to a receiver until it has actually become.due and payable, and perhaps not until it has been in some way determined that there will be a surplus. The same point was decided in Scott v. Nevius ( 6 Duer, 672 ), but in both of those cases the right of the creditor in a proper action to have the amount necessary for the support of the debtor ascertained, and to compel the application of the surplus, is fully recognized.

in his opinion in Scott v. Nevius, holding that an interest of the beneficiary in such a trust cannot pass-to a receiver in supplementary proceedings, says: “If there-was already an accumulation in the hands of the executors, it might doubtless be reached by an order in this proceeding or by a proceeding under § 294. But it has -been held, that it cannot be anticipated. But this does not import that on a proper bill, filed, such surplus may not, by proper directions, be secured to the creditor. On the contrary, the court may order a reference, to ascertain and fix the amount necessary for his support, and direct the executor to pay over the surplus for the satisfaction of the judgment.”

Locke v. Mabbett (2 Keyes, 457, and S. C., 3 Abb., Ct. of Ap. Dec., 68), also decides that the surplus income cannot be reached by supplementary proceedings, but expressly leaves open the question whether it can be reached by action in equity. The learned judge, in Campbell v. Foster, while holding that § 63, which renders the income inalienable, applies to trusts of personal estate, fails to advert to the fact that, if § 63 applies,, § 57 must also, by the same reasoning, be applicable, and that that section expressly enacts that the surplus income shall be liable to the claims of creditors.

The argument of Judge Wright, that §§ 38 and 39 absolutely exempt the whole income from the claims of creditors, has been answered in many cases. It is obvious that the construction which he gives them would make them practically repeal section 57. Such a construction is by no means-necessary. By section 38 jurisdiction is conferred upon the Court of Chancery in creditors’ suits, to compel the discovery of any property belonging to the judgment debtor or held in trust for him, and to prevent the delivery or payment thereof to him. If the section had ended there, it is obvious that-a literal interpretation of it would enable a creditor to stop all the income of a beneficiary under one of these trusts.

The exception is therefore added: “ Except when such trust has been created by, or the fund so held -in trust has proceeded from, some person other than the defendant him

That these sections (38 and 39) do not present any obstacle to reaching surplus income under § 57, has been held in all the cases, except Campbell v. Foster, ever since the adoption of the Revised Statutes. In Craig v. Hone ( 2 Edw. Ch., 569 , 70), V. C. McCoun, says, the object of § 38 was to prevent express trusts proceeding solely from the bounty of some third person, from being overthrown by these creditors’ bills. It' was enough to say that all beyond necessary support should be liable to the creditors of the cestui que imst. In Hallett v. Thompson (5 Paige, 583), the Chancellor ■says, that § 38 was intended to protect the beneficial interest of the cestui que trust only to the extent of a fair support out of the trust property. In Rider v. Mason, V. C. Sandford says, that §§ 38 and 39 are to be taken in connection with the Statute of uses and trusts, and thus construed, limited to the portion of the trust fund necessary for the support of the debtor and his family. In Sillick v. Mason (2 B. Ch., 79) these sections were not considered an obstacle to a decree in favor of the creditor for satisfaction out of the surplus income arising from real and personal property. In Scott v. Nevius ( 6 Duer, 672 ), Judge Woodruff says, that § 38 forms no impediment to such a decree. In Graff v. Bonnett ( 31 N. Y., 9 ) the right of creditors to reach the surplus is expressly recognized, and Hogeboom,. J., in the prevailing opinion, construing §§ 38 and 39, holds that they do not conflict with that right. In Campbell v. Foster the report of the case states that six judges affirm on the ground that the

The case of Wetmore v. Truslow ( 51 N. Y. 338 ) does not touch the present case. It was not a suit to reach surplus income, but the whole, on the ground that the beneficiary was also a trustee.

My conclusion is, that as to the income of the real estate,, the surplus income, beyond what is necessary for the suitable-support of the debtor and those dependent upon him, in the-manner in which they have been accustomed to live, is clearly applicable, under § 57, to the claims of his creditors. That, as to the surplus income of the personal property, it is likewise so applicable. If it is alienable by the debtor, the cases, concede that it can be reached. If inalienable, it is so only by virtue of § 63; and if § 63 applies to trusts of personalty,, then § 57 also applies and subjects the surplus income to the-claims of creditors.

The further point is made, that conceding the surplus-income to be so applicable, no action can be maintained for its application until after it has accumulated in the hands-of the trustees.

I find no authority for this proposition, except a single-Special Term decision (Hann v. Van Voorhis, 15 Abb. Pr. [N. S.], 79), nor any reasonable ground upon which it can be sustained. It is only where the surplus is sought to be reached, as property of the debtor, or as a debt due from a third person, by supplementary proceedings, that such doc

The order should be affirmed with costs.

All concur.

Order affirmed.