Case Name: PIERSON v. DREXEL
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1882
Citations: 11 Abb. N. Cas. 150
Docket Number: 
Parties: PIERSON v. DREXEL.
Judges: 
Reporter: Abbott's New Cases
Volume: 11
Pages: 150–162

Head Matter:
PIERSON v. DREXEL.
N. Y. Supreme Court, Third Department, Third District ; Special Term,
1882.
Deposit by Insurance Company fob Protection of Policy-holders.—Effect of withdrawal of Part.—Trust.—Preference. —Action for Distribution.—Parties.—-Reference to State Accounts and Take Proof of Claims.—Confirmation of Report.—Recommendation as to Costs. —Allowance to Depositary of Fund.
A life insurance company, as a condition to using the name of its . bankers in its advertisements, made a deposit with them to create a credit for that amount for the payment of claims arising in Europe, and advertised that it would maintain such credit at that amount. Held, that no trust or lien or claim to preference was thereby created in favor of such claims, but that the dominion of the property was reserved to the depositor.
A. subsequent withdrawal by the company of the excess of such deposit over the amount of outstanding European claims, accompanied by a resolution reciting the establishment of the European branch, the deposit, and the advertisement that it was for the “protection” of European policy-holders, the discontinuance of the branch and the advertisement, and the amount of outstanding claims,—Held, not to create such trust.
In an action by a receiver of the company against the agent of the bankers’ firm, to whom the fund had been transferred, to recover the amount, where it appeared that due advertisement for claims had been made, and no appearance made or claim presented by such bankers, that one of the members of the firm was examined as a witness, and a claim for their compensation in respect to the fund interposed by their agent, defendant,—Held, that the action might be maintained and the fund distributed without making them parties. Upon a reference to hear and determine the questions arising upon the pleadings after an interlocutory judgment,and to report the allowance which should be made for costs, where the order contemplates a confirmation and order for judgment, the report as to costs and allowances is a recommendation only.
In an action by a receiver of a life insurance company for the recovery of securities placed in defendant’s hands, involving the determination, as between plaintiff and sundry policy-holders, who might present and file claims, of the right to the fund, where the defendants had no interest except to see the fund paid over to the proper parties,—Held, that an allowance out of the fund .to plaintiff of his costs and an extra allowance, and to defendants for their payments to counsel, was proper; but otherwise as to the unsuccessful claimants to the fund.
Motion to confirm the report of a referee.
Henry R. Pierson, receiver of the North American Life Insurance Company, sued defendants, Brexel, Mor gan <& Co., a banking firm in New York city, to recover certain securities, which the company put in their hands as the agents and representatives of J. S. Morgan & Co., a banking firm in the city of London.
The answer admitted the deposits, but claimed they were to be held for the security of certain policies issued abroad.
By consent, an interlocutory order or judgment was entered in the action on February 25, 1878, and was amended December 6, 1879.
By such order it was referred to Silas B. Brownell, of the-city of New York, counselor-at-law, to ascertain what securities had been deposited with the defendants, to state the accounts of defendant, and of the firm of J. S. Morgan & Co., with reference to such securities, and to take proof of the claims of all parties upon said fund, who might present the same under the notice to be given by said referee, as provided in such order.
The referee was “directed to hear and determine, upon the evidence adduced before him, all questions involved in the pleadings herein, in respect of the terms upon which the defendants, Drexel, Morgan & Co., received the funds now in their hands, and now hold the same, or any portion thereof, and the interests, if any there be, of the said policy-holders therein ; and that in hearing and determining the said questions no statement nor any other matter or thing contained therein, shaE be deemed or taken as evidence or adjudication thereof.” ■
The referee was also directed to “report to the court the allowances for costs, which should be made to the various parties out of the fund.”
The order also provided for a confirmation of the report and an application for final judgment.
The referee made his report, by which he found that there was no lien or trust created in behalf of foreign policy-holders by the deposit with the defend ants, and that consequently all claims in their behalf, in preference to general creditors, were disallowed ; that the plaintiff was entitled to the costs of action, and an extra allowance of $2,000, to be paid ont of the fund ; that the defendants should be allowed to retain ont of the fund in their hands sundry payments made to their counsel, amounting in the aggregate to $5,000, and that costs and allowances should be made to the; attorneys and counsel presenting claims, although such claims were disallowed.
The essential parts of the report of the referee, with respect to the legal questions involved, are as follows ;
Silas B. Brownell, Referee.—For the claimants it is insisted that the deposit of the securities with the defendants for J. S. Morgan & Co., upon the agreement entered into between the company and J. S. Morgan & Co„ at the time of the deposit, and the publication and advertisements made by the company with the assent, of J. S. Morgan & Co., created a lien or claim upon the whole deposit in favor of such claimants, as against the company and the plaintiff; that even if no such lien or claim was created in their favor by the original terms of the deposit and the advertisements, the contents of the létters and resolutions and agreements of January and February, 1873, under which the $55,000 was surrendered to •the company, were sufficient to create an interest in or lien upon the remaining securities in favor of the claimants.
The defendants insist that the interests of all parties holding claims upon said securities may be ascertained, and their rights determined and adjudged, and the defendants discharged, and their own and J. S. Morgan & Co.’s charges satisfied.
The plaintiff contests all the claims, and insists that he is entitled to the securities or their value from the defendants; that the company, being a mutual company, had no power to create a trust or lien for the benefit or security of a portion of its policy-holders to the exclusion of the others ; that the transaction between the company and J. S. Morgan & Co. and the agreements actually entered into by the company in respect to the securities, were not intended to, and did not create any valid or effectual lien on. the securities as against the plaintiff: nor did the advertisements or publications made by the company with the assent of J. S. Morgan & Co., nor the transaction under which the $55,000 was surrendered to the company, create any interest or lien on the remaining securities in favor of any of the claimants.
The question underlying all the claim is : does any trust, or lien, or claim to preference exist in favor of any of the claimants. " In order to sustain such lien or preference in their favor, it must be raised by some agreement, or assignment, or act of the company.
None of the letters or papers put in evidence profess on their face to create or raise any such preference of lien ; nor do they indicate that the company intended to create any preference. They seem to contemplate only a credit for the convenience of the company and its foreign agents in making prompt payments or claims arising in Europe.
The advertisement issued by the company as proposed by the company to J. S. Morgan & Co., and approved by them, states the name of J. S. Morgan & Co., that the deposit had been made with them to create a credit for that amount for the payment of claims arising in Europe, and that this credit will be maintained at the full amount.
The whole tenor of the advertisement shows that the use of the deposit and credit was for the prompt payment by the company of claims arising in Europe, and therefore that no trust or lien upon the securities or credit was intended, for if a trust or lien was created ,on the credit or securities, it must have been in favor of certain persons or certain classes of claims, and in that case the credit could not have been made use of by the company from time to time in payment of claims arising in Europe, generally, which the advertisement declared was the object of the deposit and credit; the advertisement itself shows that the company retained dominion and control over the securities deposited and the credit thereby created.
The statement that the credit would be maintained at the full amount, while it tended to give confidence in the company’s policies, was notice that the agreement provided for the use of the deposit by the company at its will and is entirely inconsistent with any renunciation by the company of dominion or control over the securities and credit. The agreement in respect to the advertisement and deposit was made by the company with J. S. Morgan & Co., and not with the policyholders; their rights in the fund, whatever they are, rest upon the transactions between the company and J. S. Morgan & Co., and the advertisements made by the company with their assent.
Upon the application of the company to J. S. Morgan & Co. for permission to use their name in the advertisements of the company, J. S. Morgan & Go. seem to have insisted upon the deposit by the company with the defendants for them as the foundation of a credit, as a condition of consenting to the company making' advertisements including their name ; and while J. S. Morgan & Company did not intend to accept a trusteeship of those securities in respect to the policy-holders of the company, they were willing to allow the company to make the proposed advertisement, relying upon their own possession of the securities as their justification and security.
I do not see anything in the agreement between the company and J. S. Morgan & Co., under which the consent to the publication of the advertisement was given, nor in the advertisement, which would prevent the company drawing a draft for £20,000 in payment of any claim arising in Europe, created by the company, no matter where, nor how, nor for what purpose, and requiring its acceptance and payment by J. S. Morgan & Co. It would be no defense for J. S. Morgan & Co. to answer to an action against them for refusing to accept such a draft, that the company had agreed, or advertised, that this credit was to be maintained at the full amount.
The effect, therefore, of the advertisement under the agreement, was to notify the public at large and dealers with the company, that the company had sufficient property deposited with responsible parties of established reputation in England, by, and out of which the company could have prompt payment of claims.
But it is claimed that if no preference was created under the circumstances of the original deposit, nevertheless, upon the agreement or representation contained in the papers connected with the surrender of the $55,000 by the defendants to the company, by the order of J. S. Morgan & Co., on February 13, 1873, including the affidavit of the president of the company, and the contents of the agreement executed by the company on such surrender, a lien or preference upon the remaining securities was created and arose in favor of the European policy-holders. The contents of those papers do not sustain such claim.
These statements are as follows:—Letter from J. S. Morgan & Co., January 9th, 1873 : “0ar only wish in the matter is that the representations made by you to the public with our acquiescence, that £20,000 had been deposited with us for the protection of European policy-holders, shall be kept good.”
Company’s resolution of February 33th, 1873: ‘ ‘ Whereas, the corporation, the Worth Ameri can Life Insurance Company, heretofore did establish an European branch, and issue life insurance policies in Europe, and did also deposit divers securities with the firm of J. S. Morgan & Co., of London, amounting to £20,000 sterling, and did also advertise and give notice that said sum was so deposited for the protection of said European holders of said corporation’s policies; and whereas, said corporation has informed said firm, that said corporation has discontinued its agency for procuring business in Europe, and that it intends to issue no more policies through said branch, or otherwise in Europe, and that said corporation has ceased to advertise for business in Europe or to use the name of said firm, and that the whole amount of said company’s policies issued through said branch and now remaining in force is $44,300, gold.”
If the strongest words are taken most strongly against the parties using them, namely, the Company and J. S. Morgan & Co., they will not create a trust.
These words are quoted from the letter of January 9th, 1873, and the resolution and agreement of February 13th, 1873, taken together, are a statement, not that the deposit had been made for the protection of European policy-holders, but that the company had so advertised with the acquiescence of J. S. Morgan & Co. It is to be observed that there is no other evidence that any such advertisement was ever made ; but assuming that it was made, the word “protection” does not necessarily or by reasonable implication mean protection by way of trust. That expression is fully satisfied by the existing facts, namely, that this £20,000 was actually in the hands of J. S. Morgan & Co., to create a credit for that amount for the payment of claims arising in Europe. In other words the protection intended was an opportunity to have prompt payment of claims by drafts by the company upon J. S. Morgan & Co., or by levy upon this deposit in case of failure by the company to pay. _____
If we construe this word “protection ” into a trust for the benefit of policy-holders, then it must be a trust for all the European policy-holders. No single claimant could attach it or enforce payment of his claim out of it; nor could he enforce a draft of the company upon J. S. Morgan & Co. in his favor, upon it. He could only enforce his claim by a suit in equity for an accounting and winding up of the trust, and a distribution of the fund among all the European policyholders.
The intent to create a trust is negatived by the terms used by the company and J. S. Morgan & Co., when the deposit was made, since, as has been shown, the terms upon which the deposit was made and received, contemplated and provided for the use of the deposit at the will and draft of the party making the deposit. I have not been able to find an authority adjudging a trust upon a transaction wherein the dominion and absolute disposition of the property discharged of the trust, was reserved to the creator of the supposed trust.
The case of Martin v. Funk (75 N. Y. 134), goes farthest in this direction.
In that case a party made a deposit in a savings bank in the name of herself, in trust for the plaintiff, and retained the bank-book, and did not communicate the fact to the plaintiff, the cestui que trust. The court sustained the trust in favor of the plaintiff.
But in that case the trust was sustained because the dominion and disposition of the fund deposited in the bank was adjudged / to be gone. The fund had been lodged in the savings bank in trust for the' plaintiff, and the bank-book, taken by the depositor and retained in her control, was not the fund, but only evidence of the deposit.
I think the transaction between J. S. Morgan & Co. and the company were within the powers of the company and not invalid as ultra vires, and that all claims filed (excepting that of Annie C. Prescott) upon valid annuities and policies, whether held in Great Britain, the Continent of Europe, or the East Indies, were included in the terms “ claims arising in Europe and “ European policy-holders,” and were equally within the intention of J. S. Morgan & Co. and the company.
But the conclusion I have reached, that no trust was constituted nor any preference created in favor of any class of policy-holders, renders a critical examination of these questions unnecessary. The report, however, in accordance with the judgment, will contain a finding in respect to all the claims filed and their surrender value, so that the decision of the court may be taken on a motion for confirmation, without the delay and expense of an appeal.
A question of difficulty remains, arising out of the •fact that the securities are deposited with the defendants as the agents and representatives of J. S. Morgan & Co., to whom the defendants, Drexel, Morgan & Co. have responsibilities as well as to the company, and the plaintiff as receiver of its property.
The defendants have interposed in their answer the defense that J. S. Morgan & Co. are necessary parties to the action. The reference, since the order recently made for amendment nuno pro tuno, is in effect a reference to hear and determine, and if the defendants had insisted upon this defense at the. special term and upon the trial, I do not see how judgment could have been given for the plaintiff without bringing them in as parties defendant; but as the advertisement directed by the court has been made, and J. S. Morgan & Co. have not appeared or made any claim upon the fund, I am inclined, though with a good deal of hesitation, to hold that the fund may be distributed in this action without the further delay of bringing them in and making them parties, the rather, as Mr. Samuel E. Peabody, one of the firm of J. S. Morgan & Co., was examined as a witness upon the trial, and a claim is set up by Drexel, Morgan & Co. that J. S. Morgan & Co. are entitled to a compensation in respect of their, connection with this fund, and the use of their name in the advertisement of the company.
In respect of the fund in the possession of the defendants, it is plain that they hold .it as depositories for J. S. Morgan & Co. and the Insurance Company,, or the plaintiff as receiver; and since they have no claim to the fund in their own behalf, but only for the settlement and distribution of it to the various parties entitled to it, they are entitled to be indemnified for all expenses and liabilities incurred by them in respect to the custody and preservation of the fund.
[The portion of the opinion relating to costs and allowances is covered by the opinion'of the court.]
The receiver’s counsel objected to the allowances to counsel of defendants and policy-holders, and the defendants and policy-holders objected to the conclusion that there was no trust in favor of foreign policy -holders.
Peckham, & McNamara, for plaintiff.
Mr. Tracy; for defendants.
Mr. O'Gorman, Chambers Boughton & Prentiss, C. E. & D. B. Ogden and Martin A. Smith, for policyholders.
Compare Fullerton v. National Burglar, &c. Ins. Co., 10 Abb. N. C. 364. In Watts v. Shipman, 21 Hun, 598, the existence of a trust was sustained on the ground that the claimants held checks drawn on the fund. See also Attorney-General v. Continental Life Ins. Co., 71 N. Y. 325; S. C., 27 Am. R. 55, reversing 10 Hun, 604; Matter of Le Blanc, 4 Abb. N. C. 221.

Opinion:
Westbrook, J.
[After stating facts as above.]—The papers in the case are very voluminous, and I content myself with stating conclusions, as the referee has written an exhaustive opinion'upon both the facts and the law of the case.
First. The order of reference directed the referee, to hear and determine the issues of the action, but the order contemplates a confirmation of.the report, and an order by the court for final judgment. Upon the question of costs and allowances his report was a recommendation only.
Second. The conclusions of the referee upon the al leged trust in behalf of foreign policy-holders are confirmed for the reasons stated in the opinion of the referee, which opinion accompanies the report.
Third. The character of this action is substantially equitable. It was brought, it is true, to recover for securities placed in the hands of the defendants, but preliminary to its determination there were many complicated questions of law and fact to be determined. These questions concerned individuals who made claims upon the property, and such questions had to be decided by using this action as a means to bring such claimants before the court. It was really a proceeding to determine, as between the plaintiff, and sundry policy-holders, who might present and file claims, and who were unknown until the claims were made, their right to the fund. The defendants really had no interest in the action except to see the fund paid over to the party or parties entitled thereto. It was not an action, therefore, in which the plaintiff was entitled to costs as of course, and the referee properly exercised his discretion in directing the costs of the plaintiff to be paid out of the funds. No point was made by either party; that the allowance of the referee was unreasonable, and this part of his recommendation is confirmed.
Fourth. The decision of the referee as to the payments made by the defendants, to their counsel, is, though with some hesitation, confirmed. The confirmation is upon the ground stated by the referee in his opinion, that the defendants, as depositaries of the fund In question, are entitled to be indemnified for all the expenses incurred by them in the protection and distribution of the fund;" and also upon the further ground, that as the circumstances attending the deposit of the securities with the defendants, rendered a hearing of all parties necessary, prior to a distribution of the avails thereof through the receiver, and the court, by consent of parties, availed itself of this action for the purpose of making suck inquiries, and thus subjected the defendants to the costs and expenses thereof, it is just and equitable that they should be indemnified against such expenditure.
"It was proper," the referee also states, "to employ counsel as well with respect to the various and difficult questions of fact and law arising in connection with their trust, as with respect to their accounting and the proceedings necessary for that purpose. No effort was made to show that the amounts paid by the defendants to their counsel were more than the services were worth, and considering the amounts involved, the difficulties of the questions discussed, the nature and extent of the services the counsel have rendered, and the industry and thoroughness exhibited in their preparation and presentation of the case, I think their employment was necessary, and that the sums paid them are not more than should be allowed to the defendants."
The referee who has given the foregoing opinion, is an excellent lawyer, chosen by the parties. His opportunities to form an estimate of the value and need of the services of counsel are superior to those of the court, and his report in this particular is therefore also confirmed.
Fifth. It is not seen, however, upon what ground the allowances made to counsel for claimants upon the fund can be sustained. They have established no right to any part of the securities in the hands of the defendants, nor any lien thereupon, and the recommendations of the referee in this particular must be overruled.
It is due to the referee, however, to state that in his opinion he concedes there is no legal ground upon which this recommendation can be upheld, and that he only makes it "in order that the question may be presented to the court upon the confirmation of the report."
Sixth. The plaintiff is entitled to judgment in conformity with the views herein expressed, which will be settled on notice.