In re Smith

• Decision Date: 10 January 1939
• Citation: 279 N.Y. 479,18 N.E.2d 666
• Parties: In re SMITH. In re MORAN.
• Court: New York Court of Appeals Court of Appeals

279 N.Y. 479

18 N.E.2d 666

In re SMITH. In re MORAN.

Court of Appeals of New York.

Jan. 10, 1939.

Proceeding in the matter of the application of Margaret Moran, committee of the estate of George Smith, an incompetent exservice man for leave to resign as committee and for leave to file a final account of proceedings and for the discharge of her bond, etc., wherein objections were filed by Frank T. Hines, administrator of Veterans' Affairs, and Otto A. Rebhun, special guardian of George Smith, incompetent, to the investment by the committee of moneys received from the Veterans' Bureau in certificates of participation in mortgages. From an order of the Appellate Division, Second Department, 254 App.Div. 740, 3 N.Y.S.2d 991, modifying a decree of the Supreme Court, Kings county, settling and approving the final account of proceedings of the committee, the committee and the United States Fidelity & Guaranty Company appeal.

Order of the Appellate Division reversed and that of the Special Term affirmed.

RIPPEY, J., dissenting. Appeal from Supreme Court, Appellate Division, Second department.

William J. McArthur and C. O. Donahue, both of New York City, for appellant United States Fidelity & Guaranty Co.

C. Edward Scotti and S. Bertram Friedman, both of New York City, for appellant Margaret Moran.

James A. Clark and William A. Gillcrist, both of New York City, for respondent Veterans' Administration.

Otto A. Rebhun, of New York City, special guardian, in pro. per. respondent.

LEHMAN, Judge.

Margaret Moran was appointed in 1922 the committee of the estate of her brother George Smith, an incompetent, honorably discharged war veteran. In the course of her administration she received monthly disability compensation payments from the United States Veterans' Bureau. In September, 1929, she invested the sum of $2,500 in a guaranteed certificate of participation in a mortgage upon improved real property in the borough of Manhattan, New York City. In 1931 she invested the sum of $1,000 in a similar certificate of participation in a mortgage upon real property in the borough of Queens. The committee has voluntarily petitioned the Supreme Court for leave to resign and for the settlement of her final account. Objections were filed to the investment by the committee of moneys received from the Veterans' Bureau in these certificates of participation in mortgages, on the ground that such investments are not authorized by statute. The objections were overruled at Special Term but the Appellate Division has held that these investments are illegal and has directed that the committee be surcharged in the amount of $3,500.

‘Proceedings Relative to Incompetent Veterans and Infant Wards of the United States Veterans' Bureau’ are regulated by the provisions of article 81-A of the Civil Practice Act, added by chapter 340 of the Laws of 1929, in effect July 1, 1929. ‘Every guardian shall invest the funds of the estate in the same kind of securities as those in which savings banks of this state are by law authorized to invest the money deposited therein, and the income derived therefrom, and in bonds and mortgages on unincumbered real property in this state worth fifty per centum more than the amount loaned thereon.’ Art. 81-A, § 1384- l. In the statute the Legislature has specified ‘those types of investments which to the Legislature seem to afford a maximum of safety.’ If a fiduciary ‘invests in securities other than those of the permitted class, he cannot set up the statute as supporting either his good judgment or good faith. If loss results, he must bear the loss.’ Delafield v. Barret, 270 N. Y. 43, 48, 49, 200 N. E. 67, 69, 103 A.L.R. 941. Upon this appeal we must determine whether the ‘permitted class' includes investments in certificates of participation in bonds and mortgages as well as investments in whole ‘bonds and mortgages.’

The provisions of article 81-A are generally in accordance with the ‘Uniform Veterans Guardianship Act’ proposed by the National Conference of Commissioners on Uniform State Laws. In section 1384- l the Legislature, however, departed from the formula proposed by the Conference, which read: ‘Every guardian shall invest the funds of the estate in such manner or in such securities, in which the guardian has no interest, as allowed by law or approved by the court.’ Section 120. (See 1928 Handbook of the National Conference of Commissioners on Uniform State Laws, p. 538.) The Legislature defined specifically the ‘permitted class' of investments, instead of placing upon a committee the burden of searching through the statute books and judicial decisions of the State in order to determine what investments are ‘allowed by law.’ Its definition is binding upon the Supreme Court and upon a committee appointed by the court. In formulating that definition the Legislature adopted the language of section 21 of the Personal Property Law, Consol.Laws, ch. 41, and of section 111 of the Decedent Estate Law, Consol. Laws, ch. 13, in its original form prior to the amendment of these statutes by chapter 544 of the Laws of 1918. By that amendment, fiduciaries authorized to invest trust funds in bonds and mortgages on unincumbered real property in this State worth fifty per centum more than the amount loaned thereon, received for the first time in express terms authority to invest trust funds also ‘in shares or parts of such bonds and mortgages.’ No such authority is conferred in express terms upon a committee of an incompetent veteran by section 1384- l of the Civil Practice Act. The question is whether it should be read into the statute by implication.

This court held in Matter of Union Trust Co. of New York, 1916, 219 N.Y. 514, 114 N.E. 1057, that a trustee even before the amendment of the statute in 1918 had power to combine several trust funds in an investment in a single bond and mortgage, held by the trustee in its own name, provided that the transaction was carried out in manner there described, which would adequately protect the rights and interests of the beneficiary of the trust fund. We did not there hold that a trustee might purchase a certificate of participation in a bond and mortgage held and controlled by another person or trust company. Such an investment would have violated long-established rules governing the form of investments by trustees, and before the amendment of 1918 no trustee could safely disregard these rules. A court would not have been justified in reading into the statute by implication a power to invest trust funds in parts of shares of bonds and mortgages when such investment was not in accord with established practice or established rules.

The statute of 1918 changed not only the rule but the practice of investment by trustees. Guaranteed certificates of participation in bonds and mortgages became a very usual form of investment. Undoubtedly investments in such certificates were generally regarded as ‘mortgage investments.’ The Legislature in statutory definitions of the words ‘bonds and mortgages' or ‘mortgage investments' has in unambiguous language indicated that at least for some purposes and in some statutes these terms are intended to include shares, parts or interests in bonds and mortgages. Cf. General Construction Law, Consol.Laws, ch. 22, § 25-b, added by Laws of 1933, ch. 317; also an ‘Act to provide for the protection of holders of mortgage investments,’ popularly known as the Schackno Act, Laws of 1933, ch. 745, § 2, and the Mortgage Commission Act, Laws of 1935, ch. 19, art. 3, § 3, subd. 2. The courts have recognized that in common speech investments in ‘bonds and mortgages' would include investments in parts or shares of such bonds and mortgages evidenced by certificates of participation. So the courts have held that the authority given by a testator in his will to a trustee to invest in mortgages includes, by plain implication, authority to invest in guaranteed mortgage participation certificates. Matter of Weinroth, ...