Case Name: Belle C. Schenck, Respondent, v. William D. Barnes, Appellant, Impleaded with Henry W. Taft, Trustee
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1898-06-07
Citations: 156 N.Y. 316
Docket Number: 
Parties: Belle C. Schenck, Respondent, v. William D. Barnes, Appellant, Impleaded with Henry W. Taft, Trustee.
Judges: 
Reporter: New York Reports
Volume: 156
Pages: 316–327

Head Matter:
Belle C. Schenck, Respondent, v. William D. Barnes, Appellant, Impleaded with Henry W. Taft, Trustee.
1. Trust Created by Beneficiary—His Interest Subject to Claims of Subsequent Creditors. A person cannot place his property-in trust, with remainder over, reserving to himself the beneficial interest for his life, subject to the expenses of the trust, and thereby put the life interest beyond the reach of creditors whose claims arose after the creation of the trust.
2. Rights of Judgment Creditors—2 R. S. 174, § 88. The provision of the Revised Statutes empowering j udgment creditors to compel discovery of property (2 R. S. 174, § 38) implies that a trust created by the debtor, and under which he is the beneficiary, does not protect his interest from the pursuit of creditors.
3. Trust for Rents and Profits of Land — 1 R. S. 730, § 63. The provision of the Revised Statutes which prohibits a person beneficially interested in a trust for the receipt of the rents and profits of land from assigning or disposing of the same (1R S. 730, § 63) does not affect a trust created by the debtor, and under 'which he is the beneficiary, as against creditors, even though he was solvent when he created the trust and the creditors’ claim arose thereafter.
4. Appeal— Certified Question. Questions certified to the Court of Appeals can be reviewed only so far as they actually arose and were determined by the Appellate Division.
Sclienck-Y. Barnes, 25 App. Div. 153, affirmed.
(Argued April 19, 1898;
decided June 7, 1898.)
Appeal, by certification, from an order and interlocutory judgment of the Appellate Division of the Supreme Court in the second judicial department, entered respectively January 21 and January 26,1898, reversing an order and interlocutory judgment of the Special Term sustaining a demurrer to the complaint.
This action was brought by a judgment creditor to reach the interest of the judgment debtor in a trust fund of real property created by himself, in which he reserved to himself a life interest.
The questions certified are stated in the opinion.
Flamen B. Candler and Robert W. Candler for appellant.
The complaint does not state facts sufficient to constitute a. cause of action. (Holmes v. Little, 86 Hun, 226; Howe v. Striker, 5 Misc. Rep. 309; L. 1896, ch. 547, § 78; Kilroy v. Wood, 42 Hun, 636; Bunnell v. Gardner, 4 App. Div. 321; Card v. Meincke, 72 Hun, 299; Tolles v. Wood, 99 N. Y. 616; 1 R. S. 729, § 60; 1 R. S. 730, § 63; Noyes v. Blakeman, 6 N. Y. 567; Douglas v. Cruger, 80 N. Y. 15; Lent v. Howard, 89 N. Y. 169; Cuthbert v. Chauvet, 136 N. Y. 326; Matter of Vanderbilt, 20 Hun, 520; 2 R. S. 135, § 1; Rome Ex. Bank v. Eames, 4 Abb. Ct. App. Dec. 83; Powers v. Bergen, 6 N. Y. 358.) The conclusion of the Appellate Division was erroneous. (Graff v. Bonnett, 31 N. Y. 13; Rome Ex. Bank v. Eames, 4 Abb. Ct. App. Dec. 83.)
John W. Hutchinsox, Jr., and Walter S. Newhouse for respondent.
Prior to the Revised Statutes, plaintiff would have been entitled to the relief sought under the common law. (Bryan v. Knickerbocker, 1 Barb. Ch. 409; Hadden v. Spader, 20 Johns. 554; Graff v. Bonnett, 31 N. Y. 25; Nichols v. Levy, 5 Wall. 441; Rome Ex. Bank v. Eames, 4 Abb. Ct. App. Dec. 99; Gray’s Rest, on Alien. 82; Wait on Fraud. Conv. & Creditors’ Bills, § 360; Edmeston v. Lyde, 1 Paige, 641; Eager v. Price, 2 Paige, 336; Bank v. Windram, 133 Mass. 175; Jackson v. Von Zedlitz, 136 Mass. 342; Warner v. Rice, 66 Md. 436; Lackland v. Smith, 5 Mo. App. 153; Ghormley v. Smith, 139 Penn. St. 584; Mackasor's Appeal, 42 Penn. St. 330; Frazier v. Barnum, 19 N. J. Eq. 316; Crosby v. Ferguson, 3 J. J. Marsh. [Ky.] 264.) The provisions of the Revised Statutes and the Civil Code, relative to this proceeding, were framed for, and do provide, exactly the relief sought. (Code Civ. Pro. § 1871; Craig v. Hone, 2 Edw. Ch. 568; Hadden v. Spader, 20 Johns. 554; Chaplin on Trusts, § 705; Chautauque Co. Bank v. White, 6 N. Y. 236; Chautauque Co. Bank v. Risley, 19 N. Y. 369; Scoville v. Holliday, 16 Abb. [N. C.] 43; Farnham v. Campbell, 10 Paige, 598; McArthur v. Hoysradt, 11 Paige, 495; Scoville v. Shed, 21 Wkly. Dig. 389; 1R. S. 729, § 60; Tompkins v. Fonda, 4 Paige, 448; Payne v. Becker, 87 N. Y. 153; Le Roy v. Rogers, 3 Paige, 236; Hallett v. Thompson, 5 Paige, 586; Bramhall v. Ferris, 14 N. Y. 41; Graff v. Bonnett, 31 N. Y. 9; Campbell v. Foster, 35 N. Y. 366; Williams v. Thorn, 70 N. Y. 270; Tolles v. Wood, 16 Abb. [N. C.] 25.)

Opinion:
Bartlett, J.
This appeal certifies two questions :
"First. In case a party who, when solvent, executes a deed of trust of real property situate in this state, whereby he conveys the same to a trustee, reserving to himself the payment to lmn from time to time during his life of the net income from the trust estate, subject to the necessary expenses of the trustee, with-a remainder over, and with full power to sell in said trustee; can a party, who at the time of the creation of the trust was not a creditor of the creator or beneficiary of the trust, but who subsequently became a creditor, and who thereafter obtained a judgment upon his debt and issued an execution upon the judgment against the property of the said beneficiary, and had the same returned unsatisfied, in an action like the present one, recover any relief or any judgment which will authorize the sale of the right, title or interest of the beneficiary in the said trust or a judgment requiring the trustee to pay over to said creditor the entire net income from the said trust estate as it accrues ?"
c' Second. Whether in such a case an interest reserved for his own benefit by the founder of a trust is subject to the claim of his subsequent creditors, and if so, to what extent ? " The main question is whether a person can place his property in trust, with remainder over, reserving to himself the beneficial interest for his life, subject to the expenses of the trust, and thereby put the life interest beyond the reach of creditors whose claims arose after the creation of the trust? The Special Term answered this question in the affirmative, and the Appellate Division has taken the contrary view.
We are of opinion that the Appellate Division readied the proper conclusion.
While it is true that in this and other states the English rule has been modified, which makes the interest of a beneficiary under a trust created for his benefit by a third party, subject to the claims of his creditors, yet we have not ignored the general. policy of the law that creditors shall have the right to resort to all the property of the debtor not protected by statute.
The provisions of the Revised Statutes, as construed by the courts, render this clear.
In 2 R. S. p. 114, § 38, is the following provision: " Whenever an execution against the property of a defendant, shall have been issued on a judgment at law, and shall have been returned unsatisfied, in whole or in part, the party suing out such execution, may file a bill in chancery against such defendant, and any other person, to compel the discovery of any property or thing in action, belonging to the defendant, and of any property, money, or thing in action, due to him, or held in trust for him; and to prevent the transfer of any such property, money or thing in action, or the payment or delivery thereof, to the defendant, except where such trust has been created by, or the fund so held in trust has proceeded from some person other than the defendant himself."
This section has been substantially preserved'in Oode of Civil Procedure, sections 1871,1879. It was at first contended that this statute jn'otected absolutely the interest of a debtor in a trust created for his benefit by a third party, but it is now the settled law that this provision must be read with 1 R. S. p. 729, § 57, providing that the surplus income of a trust estate shall be liable in equity to the claim of the creditors of the cestui que trust. (Williams v. Thorn, 70 N. Y. 270; Graff v. Bonnett, 31 N. Y. 9.)
The statute quoted (2 R. S. p. 174, § 38) clearly implies that a trust created by the debtor under which he is the beneficiary, does not protect his interest from the pursuit of creditors, as it is, in contemplation of law, property which he has put aside for his own use, and, consequently, a part of his estate to which creditors are entitled.
This general principle is also recognized by the Code of Civil Procedure (section 2463).
A trust created by a debtor, and under which he is the beneficiary, is not affected by the provision of the Revised Statutes (1 R. S. p. 730, § 63) which prohibits a person beneficially interested in a trust for the receipt of the rents and profits of lands from assigning or disposing of the same.
The policy of this statute is clear, when applied to trusts created by third parties, but is without force when the debtor creates the trust.
The statute is obviously designed to assist the creators of trusts in protecting and. caring for the beneficiaries Avho are the natural objects of their solicitude and care, but it cannot be invoked by a debtor to protect a-trust which he has created to serve in time of need as a refuge from his creditors.
The defendant Barnes being out of debt in October, 1893, was at liberty, if he saw fit, to give away all his property, real and personal, to those of his blood or to strangers.
There would be no creditor to complain if he was moved to act in so unusual and improvident a manner.
As matter of fact he did at that time, as to the real estate in question, divest himself of the legal title, reserving under a conveyance, in trust, a beneficial interest in the property for life, with remainder over.
The present action in no way challenges the right of Barnes to thus divest himself of the legal title to this real estate, but plaintiff, as a subsequent creditor, seeks to have appropriated to the payment of her judgment such interest as Barnes reserved to himself in the property and nothing more. It would be a startling and revolutionary doctrine to hold that this reserved interest cannot be reached by the plaintiff as a creditor. If such is the law it would make it possible for'a person free from debt to place his property beyond the reach of creditors, and secure to himself a comfortable support during life, without regard to his subsequent business ventures, contracts or losses.
' In Massachusetts and Pennsylvania it has been held that no such result can be accomplished. (Pacific Nat. Bank v. Windram, 133 Mass. 175; Mackason's Appeal, 42 Penn. St. 330.)
The prayer of the complaint in the case at bar asks the court to determine the amount of the interest which defendant Barnes reserved to himself in the trust fund, and to order it sold and applied on the judgment. A person for whose benefit a trust is created takes no estate or interest in the lands, lmt he can enforce the performance of the trust in equity. (1 R. S. 729, 60.) This right to enforce is a chose in action, and personal property in the hands of defendant Barnes in the ease before us, and liable in equity for his debts. (Tomkins v. Fonda, 4 Paige, 448; Payne v. Becker, 87 N. Y. 153.)
It is the settled policy of this state that, where property is held in trust for a debtor and the fund proceeds from a third party, the creditor can only reach the surplus income after providing for the proper support of the cestui que trust, but if the debtor created the trust his entire reserved interest is a fund to which his creditors can resort. (Graff v. Bonnett, 31 N. Y. 9.) Hogeboom, J., in the case last cited (p. 14), said : " In other words, it was a legislative declaration, in language intended to be explicit, but possibly liable to some misconstruction, that property held in trust for the debtor, when such trust proceeded from himself, was in no case to be protected for his benefit; but where the trust or the fund proceeded from some other source, the liability of the property to, or its exemption from judicial seizure, was to depend'upon the general provisions of law applicable to trust pro¡ierty."
We are asked to answer two questions which may be thus stated: (1) Can this plaintiff, under the circumstances disclosed, recover a judgment which will authorize the sale of ' the debtor's interest in this trust, or require the trustee to pay over the entire net income as it accrues %
' (2) Where the founder of a trust reserves an interest for his own benefit, is it subject to the claim of his subsequent creditors, and if so, to what extent %
The second question differs little, if any, from the first, and seems to put the inquiry merely in a changed form.
Under section 190 of the Code of Civil Procedure, the jurisdiction of the Court of Appeals is confined to the review of actual determinations made by the Appellate Division of the Supreme Court.
The idea that a question may be certified to this court for its decision, whether it arose in the case and was passed upon by the Appellate Division or not, seems to prevail' to 'some extent at least. It is, however, an erroneous conception of the powers and duties of this court, which has only such jurisdiction as is conferred xipon it by statute, wherein is not included the power of determining abstract questions, or those which have not been actually determined by the court certifying them.
We have already held that the court will decline to answer any question certified, unless it is sufficiently definite to prevent different answers under differing circumstances. We have also held that we will not answer abstract questions, nor those that have not been decided by the court below. (Grannan v. Westchester Racing Assn., 153 N. Y. 449; Baxter v. McDonnell, 154 N. Y. 432, 436; Hearst v. Shea, 156 N. Y. 169.)
Following the principle of those cases, it must be held that the questions certified in this case can be reviewed only so far as they actually arose and were determined by the Appellate Division. To that extent we answer them in the affirmative; but so far as they were not determined by that court, we decline to answer them.
The learned Appellate Division, in its opinion, uses this language : " In what manner the debtor's life interest shall be appropriated to the plaintiff's claim, whether by collecting the rents and applying the income from time to time upon the judgment, or by a sale of the life estate for a similar object,- it is unnecessary to determine. We hold that in some manner or other the debtor's interest is subject to plaintiff's judgment."
It is quite possible that the demurrer to the complaint, when strictly construed, entitled the plaintiff to specific directions from the Appellate Division as to the precise manner in which the life estate of defendant Barnes is to be dealt with in the event of final judgment against him. These directions Avere not given, however, and Ave confine ourselves to the determination of the Appellate Division.
The order and interlocutory judgment appealed from should be affirmed, with costs, and the questions answered as above stated.
Gray, J.
I think that this judgment should be affirmed upon the broad ground that the Revised Statutes of this state have only changed the common-law rule, which subjected the interest of the beneficiary of a trust to the claims of his creditors, so far as to protect that interest when under a trust created by another than the beneficiary. The statutory provision, relied upon as affording a general protection to all beneficiaries, irrespective of the manner of the creation of the trust, does not when fairly read, imply a trust founded by the beneficiary himself. That " no person, beneficially interested in a trust for the receipt of rents and profits of land, can assign, or, in any manner, dispose of, such interest" not only imports, by the language, that the founder of the trust and the-beneficiary are two different persons; but such is the meaning required by the policy of "the law. The changes, effected by the adoption of our Revised Statutes in the rules of the common law, proceeded upon a sound policy and principle, and not arbitrarily. Botli policy and principle were opposed to granting immunity to a beneficiary against the claims of his creditors, if his interest was one reserved in a trust created by himself for his own benefit. The principle, which underlay the statutory provision, malting the interest of the beneficiary in a trust created by another inalienable, was that of affording protection to a provision, which, in theory of law, had been made for the helpless, the unfortunate, or the improvident. That is a just principle and one which the policyof the'law sanctions. The creditor cannot complain, if he is unable to reach the estate of his debtor, under a trust created in the property of a third person. But neither principle, nor policy, can justify the protection of the debtor's estate against the claims of his creditors, when it is one of his own creation. Although, as in the present case, a person may have placed the legal title to his property in another; nevertheless, if he has in the conveyance reserved to himself a life interest in the enjoyment of the rents and profits, it is clear that he has not divested himself of anything more than the legal title and the power of disposition. He still has that interest which made the legal possession of the property valuable; namely, the enjoyment of the income. In other words, what the appellant sought to do, in this case, was to place his own property in such a legal situation that, while he might enjoy its income, his creditors could have no resort to it in order to satisfy the debts which he might incur. Sound public policy condemns such a proposition. As it is clearly shown, in the opinion of Justice Cullen, it was never contemplated by the authors of the Revised Statutes that the section, above quoted and relied upon, was intended to apply to a case where a debtor himself created the trust. I think that we may safely rest the affirmance of this judgment upon that broad ground, and without resort to other provisions of the statutes to make clear the conclusions reached, that one may not secure to himself the enjoyment of a life interest in his own property, which shall be beyond the reach of the just claims of his creditors.