In re Stupack

• Decision Date: 27 April 1937
• Citation: 274 N.Y. 198,8 N.E.2d 485
• Parties: In re STUPACK.
• Court: New York Court of Appeals Court of Appeals

274 N.Y. 198

8 N.E.2d 485

In re STUPACK.

Court of Appeals of New York.

April 27, 1937.

Proceeding in the matter of the petition of Fannie Stupack to render and settle her account as general guardian of Lillian Stupack, an infant, opposed by Cyrus S. Julien, special guardian. From an order of the Appellate Division (248 App.Div. 740, 290 N.Y.S. 151), affirming a decree of the Surrogate's Court (154 Misc. 759, 278 N.Y.S. 403), surcharging petitioner with a sum invested in certain guaranteed mortgage certificates, petitioner and her surety, the Fidelity & Deposit Company of Maryland, appeal.

Reversed, and matter remitted to the Surrogate's Court for entry of decree in accordance with opinion.

FINCH and RIPPEY, JJ., dissenting. Appeal from Supreme Court, Appellate Division, Second department.

Thomas E. White, R. Elliott Davis, and Frederick E. Zvirin, all of New York City, for appellants.

Wilkie Bushby, Edwin W. Cooney, Albert B. Maginnes, John C. Pirie, Edward L. Hunt, Jr., and Leonard Blue, all of New York City, for New York State Bankers Association, amicus curiae.

John F. Kavanagh, amicus curiae.

Cyrus S. Julien, special guardian in pro per.

LEHMAN, Judge.

Upon the accounting of Fannie Stupack, as general guardian of her daughter, Lillian Stupack, the fiduciary was surcharged with the sum of $27,500 which she had invested in guaranteed mortgage certificates, Series F-1, of New York Title & Mortgage Company. The Surrogate held that such certificates are not legal investments for trust funds. The general guardian contends that such investments are authorized by section 111 of the Decedent Estate Law (Consol. Laws, c. 13) (made applicable to investments of general guardians by section 85 of the Domestic Relations Law [Consol. Laws, c. 14]).

Prior to 1918, section 111 of the Decedent Estate Law provided that ‘an executor, administrator, trustee or other person holding trust funds for investment may invest the same 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.’ By amendment to this section, made by chapter 544 of the Laws of 1918 (section 1), specific authority was added for investment in shares or parts of mortgages. Some unimportant changes in the language of that section were made thereafter, and in 1929 and 1930, when the guardian made the investments which have been held to be unlawful, the section (as amended by Laws 1928, c. 362, § 2) expressly authorized investment ‘in shares or parts of such bonds and mortgages provided that any share or part of such bond and mortgage so held shall not be subordinate to any other shares thereof and shall not be subject to any prior interest therein, and provided further that bonds and mortgages in parts of which any fiduciary may invest trust funds together with any guaranties of payment, insurance policies and other instruments and evidences of title relating thereto shall be held for the benefit of such fiduciary and of any other persons interested in such bonds or mortgages by a trust company, a bank authorized to conduct a trust department or title guaranty corporation organized under the laws of this state, or a national bank located in this state and duly authorized to act as a trustee therein, and that a certificate setting forth that such corporation holds such instruments for the benefit of such fiduciary and of any other persons who may be interested in such bond and mortgage among whom the corporation holding such instruments may be included, be executed by such corporation and delivered to each person who becomes interested in such bond and mortgage.’ The question presented upon this appeal is whether the certificates of Series F-1 of New York Title & Mortgage Company fall within the scope of that section.

These certificates are guaranteed ‘First Mortgage Certificates' and are issued in varying amounts. Each provides, among other things, that New York Title & Mortgage Company ‘hereby sells and assigns to the registered holder hereof an undivided co-ordinate share of the same amount in the principal sum * * * secured to the Company in the bonds and mortgages deposited, or which may hereafter be deposited, by the Company with the American Trust Company (hereinafter called ‘the Depositary’), as Depositary under the terms of an agreement dated February 21, 1927, * * * subject to which agreement this Certificate is issued, and to the terms of which the holder hereof does hereby assent and agree, together with a corresponding share, at the rate of five and one-half per cent. per annum, in the interest on the said principal sum, the duplicate original of which agreement is open to the inspection of all registered holders of Certificates, at the office of said Depositary or of the New York Title and Mortgage Company, during business hours.

‘This certificate is one of a series of certificates of interest of like tenor issued by the Company to an amount not exceeding in the aggregate the principal sum secured by the bonds and mortgages deposited, or which may hereafter be deposited, under the terms of the agreement hereinabove referred to, wherein the Company covenants and agrees, among other things, and hereby agrees to and with each and every holder of this certificate, as follows: That there shall be no preference or priority in favor of any share in the deposited bonds and mortgages, or of any certificate of interest;

‘That each deposited mortgage shall be accompanied by a policy of title insurance, issued by the New York Title and Mortgage Company under its corporate seal, insuring that such mortgage is a valid first lien for the amount therein specified, with interest, upon the real property covered thereby, which shall be only real property improved for business or residence purposes, and situated within the limits of the City of New York, as the same now are, or may hereafter be, fixed by law, and by a sworn certificate of the Company's expert appraiser, showing the appraised value of the property covered thereby, which shall be at least fifty per cent. greater than the principal sum so secured.’

Annexed to each certificate is the agreement with the depositary and a ‘certification’ by the depositary, which reads as follows: ‘This is to certify that the within is one of the Certificates of Series F-1, issued by New York Title and Mortgage Company, and that there have been deposited with the Undersigned the bonds and mortgages and other instruments mentioned herein, and the same are held by the Undersigned in accordance with the agreement herein recited.’

It is plain that the certificates were intended to represent ‘shares or parts' of bonds and mortgages in which trustees might lawfully invest trust funds in accordance with the provisions of the statute. Each purports to be an assignment of a ‘share or part’ of bonds and mortgages which have been deposited with a trust company. They contain a covenant against priority of interest in favor of any other share in the deposited bonds and mortgages. The difficulties in this case arise from additional provisions in the certificate and in the agreement with the depositary ‘subject to which the Certificate is issued.’

The primary difficulty is that under those provisions New York Title & Guarantee Company retains an interest in the bonds and mortgages. It guarantees to the registered holder of the certificate ‘payment of the principal and interest of the deposited bonds and mortgages to an extent sufficient to pay the principal and interest of all certificates issued under said agreement,’ but it may exercise certain powers over these bonds and mortgages including the power to ‘withdraw from deposit deposited bonds and mortgages and to substitute other first mortgages, accompanied by policies of title and certificates of fire insurance and certificates as to appraisal, in their place, to such an amount that the principal sum of all deposited bonds and mortgages shall never be less than the principal sum of the outstanding certificates of interest.’ In consequence of those and other provisions, the interest acquired by those who invest in the certificates is, at most, an incomplete or conditional share in the bonds and mortgages. Indeed, in Matter of People, by Van Schaick (Title & Mortgage Guarantee Co. of Buffalo), 264 N.Y. 69, at page 88, 190 N.E. 153, 159, 96 A.L.R. 297, this court in an opinion which I wrote said: ‘Certainly the holder acquires, prior to default, no rights in the mortgages other or greater than the rights of a holder of collateral security and the guaranty company retains at least the rights of an owner who has cumbered his title with a lien.’

In that case our task was to determine the jural relations and rights created by the written agreement embodied in the participation certificates. We were free to disregard the labels applied by the parties to the agreement and to provide our own description and classification of these rights and obligations based, not on the labels, but on the nature of the obligations and the rights granted. These jural relations, we pointed out, were not accurately described in the certificates. In form, each certificate purported to assign a share in a group of mortgages. In fact, the holder of the certificate did not become the owner of a share in the group of mortgages deposited with the bank or trust company, for the insurance company retained a right to substitute other mortgages for the mortgages so deposited. We found that the rights of certificate holders are more nearly analogous to the rights of a holder of collateral security than to the rights of an owner of a part or share in the mortgages deposited. Even so, by purchase of a certificate, the investor acquired a fractional interest in,...