In re Baudouine

• Decision Date: 14 September 1899
• Citation: 96 F. 536
• Parties: In re BAUDOUINE.
• Court: U.S. District Court — Southern District of New York

96 F. 536

In re BAUDOUINE.

United States District Court, S.D. New York.

September 14, 1899

Edward Van Ingen, for the motion.

Shearman & Sterling, Charles F. Halsted, and John A. Garver, opposed.

BROWN District Judge.

By a codicil to the will of Charles A. Baudouine, executed in September, 1893, a large amount of real estate situated in the state of New York was left to his executors in trust to apply one-quarter of the rents, issues, profits and income thereof to the use of his grandson John F. Baudouine, the bankrupt above named, during his life. One other quarter was given to his grandson Charles A. Baudouine, and those two grandsons were also made executors and trustees of the will. Subsequent to the death of his grandfather, the above-named John F. Baudouine filed his voluntary petition in bankruptcy in this court on March 31, 1899, and on the 25th of April following was adjudged a bankrupt. A trustee in bankruptcy was subsequently appointed on June 5th. In his schedules the bankrupt states that he 'is a beneficiary under the will of his grandfather and entitled to one-quarter of the income of the trust estate created by said will, and has a contingent interest in other shares of said income now vested in other beneficiaries, but as he is advised by counsel and verily believes both said vested and contingent interest are inalienable and cannot be affected by this proceeding.'

By section 60, art. 2, tit. 2, c. 1, pt. 2, Rev. St. N.Y concerning uses and trusts (page 729), a trust like that created by this will, vests the whole estate in the lands 'in the trustees in law and in equity, subject only to the execution of the trust. ' The persons for whose benefit the trust is created, it is declared 'shall take no estate or interest in the lands, but may enforce the performance of the trust in equity.'

Section 63 declares:

'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.'

Section 57 declares:

'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 for the education and support of the person for whose benefit the trust is created, shall be laible in equity to the claims of the creditors of such person in the same manner as other personal property which cannot be reached by an execution at law.'

The trust under the above will is of the simple character referred to in the sections above quoted. There is no direction for any accumulation, nor is there any provision making the payment of the income to the beneficiary dependent upon any discretion of the trustees, nor any provision for any different application of the income in case of the insolvency or bankruptcy of the beneficiary, such as is sometimes associated with similar trusts. Numerous decisions of the court of appeals and of other courts of the state of New York, leave no question that though the interest in such trust is inalienable by the beneficiary, the surplus beyond what is necessary for his support may be appropriated to the claims of creditors. Williams v. Thorn, 70 N.Y. 270; Schenck v. Barnes, 156 N.Y. 316, 50 N.E. 967; Moore v. Hegeman, 72 N.Y. 376; Tolles v. Wood, 99 N.Y.616, 1 N.E. 251; Id., 16 Abb.N.C. 1; Schuler v. Post, 18 A.D. 374, 46 N.Y.Supp. 18.

Upon the examination of the bankrupt it appeared that his income from his vested one-quarter interest in the estate during the year previous was about $30,000, or $2,500 per month, and that he had additional income in his receipts from commissions on the estate and otherwise; and that he is a widower and has a family of three children, the oldest of whom is 8 years of age. Upon a petition setting forth these and other facts, the trustee applies for an order directing the referee in charge to inquire and report what is the amount of the income of the bankrupt from said estate, and what portion thereof is necessary for his support, with a view to having the surplus applied to the claims of creditors through the trustee in bankruptcy.

Several objections are raised both to the right to the surplus income in bankruptcy, and to the proceeding by petition to reach it.

1. The income sought to be reached is that accruing since the filing of the bankrupt's petition and the adjudication in bankruptcy; and it is urged that such income is after-acquired property, not available in bankruptcy. But under this will the bankrupt's interest in the income during his life is a vested interest; as such it was a present property right existing at the time when the adjudication was made, although the amounts due under it become payable to him from time to time afterwards. Except for the provision of the statute making this interest inalienable by the bankrupt's own acts, it could have been assigned and transferred by him like any other species of property; and such an assignment would have carried all future payments. The objection, therefore, that the bankrupt's interest was not a present property right at the time of the adjudication and that the subsequent payments of income would be after-acquired property, cannot be sustained. Future payments are available to pay present debts. Wetmore v. Wetmore, 149 N.Y. 520, 530, 44 N.E. 169; Williams v. Thorn, supra. In the language of Mr. Justice Swayne in Nichols v. Levy, 5 Wall. 433, 441:

'It is a settled rule of law that the beneficial interest of the cestui que trust, whatever it may be, is liable for the payment of his debts.'

2. It is further objected that a beneficial interest of this nature is not such a property interest as is authorized to be taken by the trustee in bankruptcy under the provisions of the bankrupt law of 1898, inasmuch as it is not literally included in any of the clauses of section 70 stating what property shall vest in the trustee. By that section, the trustee is vested by operation of law with the title of the bankrupt as of the date he was adjudged a bankrupt, (1) to documents relating to his property; (2) to interest in patents, etc.; (3) to beneficial powers; (4) to property transferred in fraud of creditors; (5) to property which the bankrupt could by any means have transferred or which might have been levied upon and sold under judicial process against him; (6) to rights of action arising upon contracts or from the unlawful taking of property; with the further right (e) to avoid any transfer by the bankrupt which any creditor might have avoided. The above clause 5 manifestly does not literally embrace this trust interest, inasmuch as by the law of this state the trust income could not be transferred by the bankrupt nor levied on or sold under judicial process.

The bankruptcy act, however, cannot be construed so narrowly as to exclude any vested interest constituting an asset available to creditors, merely on the ground that this asset is not expressly enumerated in section 70. Other provisions of the bankrupt act show that the act is designed to cover all the property and estate of the bankrupt and all assets that can in any manner be legally made available for the payment of his debts, and to distribute all those assets equally among his creditors. As an incident to this complete distribution of assets, it further provides for the bankrupt's discharge from his debts. A discharge in bankruptcy upon any other condition than the complete appropriation of every known asset legally available to creditors, would be not only a glaring wrong to creditors but contrary to every conception of a just system of bankruptcy. Here there is presumably a considerable surplus income, which under the will and the law of this state is expressly made available to...