Court Opinion

ID: 3598302
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:45:26.829537+00
Date Added: 2024-06-11T13:58:59.324904
License: Public Domain

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 remaindermen 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 *Page 433 
instrument executed before the date of its enactment and (c) to real property acquired by foreclosure of mortgage or real property acquired in lieu of foreclosure before or after the date of its enactment in trusts created or mortgage investments made prior thereto * * *." (Emphasis supplied.) In particular our inquiry goes to that portion of section 17-c to be found in subdivision 2 (a) which in general provides that, regardless of advances made from the principal of a trust for the expense of a foreclosure, or of a conveyance of mortgaged property in lieu of foreclosure, and regardless of the cost of all capital improvements, payments — not subject to recoupment — shall be made to the life tenant from the net income during the salvage operation up to three per cent per annum computed upon the principal amount of the mortgage.
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 trustee here involved; among rights thus affected are those of the life 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; Matterof 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 *Page 434 
matter of grace, as the majority opinion herein seems to hold. It was a rule of property the essential principle of which had long been recognized and applied in this jurisdiction and others, including England. (Meldon v. Devlin, 31 App. Div. 146; affd., 167 N.Y. 573 [1901]; Parsons v. Winslow, 16 Mass. 361,365 [1820]; Veazie v. Forsaith, 76 Me. 172 [1884]; Hagan v.Platt, 48 N.J. Eq. 206, 207, 208 [1891]; Greene v. Greene,19 R.I. 619, 621-624 [1896]; Quinn v. First Nat. Bank,168 Tenn. 30 [1934]; Matter of Nirdlinger, 327 Penn. St. 171, 172, 173 [1937]; Cox v. Cox, L.R. 8 Eq. 343, 344, 345 [1869];Matter of Moore, 54 L.J. Ch. 432 [1885], and see Matter ofMarshall, 43 Misc. 238, 245 [1904].) A classical statement of the underlying principle which runs through the cases cited above was made in Cox v. Cox, supra, page 344 as follows: "The true principle in all these cases is, that neither the tenant for life nor the remainderman is to gain an advantage over the other — neither is to suffer more damage in proportion to his estateand interest than the other suffers — from the default of the obligor." (Emphasis supplied.) This was orthodox doctrine long before the decisions by this court in the Meldon, Chapal andOtis cases, supra.
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 remaindermen 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 *Page 435 
the corpus of the trust preserved unimpaired. * * * Why shouldeach not have exactly his own, so far as it is possible toascertain it?" (Emphasis supplied.)
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 ofPell, 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 remaindermen 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 *Page 436 of Otis, supra (p. 115), that "* * * a general rule for such situations cannot be attained at a bound, that no rule can befinal for all cases and that any rule must in the end be shaped by considerations of business policy." (Emphasis supplied.) Subdivision 2 of the statute attempts to override all this by saying that in every case the life tenant must at all events immediately and finally receive net income at a rate arbitrarily fixed by the statute at three per cent — no matter what may be the cross-equities of the parties and without regard for the business risks of the particular salvage operation. To this extent, subdivision 2 of the statute makes it mandatory that the court shall adjudicate every "pending proceeding or action for an accounting" without affording the parties any opportunity to be heard. The draftsmen of the statute apparently recognized some difficulty on that score, for the statute says: "Only equitable
adjustments and balances as between the parties are intended to be effectuated by the provisions of this subdivision" [2]. (Emphasis supplied.) We have, then, this extraordinary situation: While subdivision 2 of the statute has not changed the law that pending questions of apportionment are to be decided upon equitable principles, yet it declares that such principles must be applied by the courts, not according to the judicial judgment of what is equitable in the circumstances of a pending controversy, but according to a legislative mandate rigidly enjoined for all pending cases.
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 *Page 437 
by pleadings. The Legislature can no more exercise judicial power than our courts can exercise legislative power. (See opinion by RUFFIN, C.J. in Hoke v. Henderson, 25 Amer. Dec. p. 686 [N.C.].) The determination of rights of property inter partes
is always a judicial question. As I view it, subdivision 2 of section 17-c of the Personal Property Law is a void attempt by the Legislature to make such a determination.
I am led by these considerations to dissent and vote for a modification of the Surrogate's decree accordingly.