Schenck v. Barnes

• Decision Date: 07 June 1898
• Citation: 50 N.E. 967,156 N.Y. 316
• Parties: SCHENCK v. BARNES et al.
• Court: New York Court of Appeals Court of Appeals

156 N.Y. 316

50 N.E. 967

SCHENCK

v.BARNES et al.

Court of Appeals of New York.

June 7, 1898.

Appeal from supreme court, appellate division, Second department.

Action by Belle C. Schenck against William D. Barnes and Henry W. Taft, trustee. From an order and interlocutory judgment of the appellate division (50 N. Y. Supp. 1133) reversing an order and interlocutory judgment of the special term sustaining a demurrer to the complaint, defendant Barnes appeals, on leave of the appellate division, which certifies two questions to the court. Affirmed.

Flamen B. Candler, for appellant.

John W. Hutchinson, Jr., for respondent.

BARTLETT, J.

This appeal certifies two questions: ‘First. In case a party, when solvent, executes a deed of trust of real property situate in this state, whereby he conveys the same to a trustee, reserving to himself the payment to him from time to time during his life of the net income from the trust estate, subject to the necessary expenses of the trustee, with a remainder over, and with full power to sell in said trustee, can a party who at the time of the creation of the trust was not a creditor of the creator or beneficiary of the trust, but who subsequently became a creditor, and who thereafter obtained a judgment upon his debt, and issued an execution upon the judgment against the property of the said beneficiary, and had the same returned unsatisfied in an action like the present one, recover any relief or any judgment which will authorize the sale of the right, title, or interest of the beneficiary in the said trust, or a judgment requiring the trustee to pay over to said creditor the entire net income from the said trust estate as it accrues? Second. Whether in such a case an interest reserved for his own benefit by the founder of a trust is subject to the claim of his subsequent creditors; and, if so, to what extent?’

The main question is whether a person can place his property in trust, with remainder over, reserving to himself the beneficial interest for his life, subject to the expenses of the trust, and thereby put the life interest beyond the reach of creditors whose claims arose after the creation of the trust. The special term answered this question in the affirmative, and the appellate division has taken the contrary view. We are of opinion that the appellate division reached the proper conclusion. While it is true that in this and other states the English rule has been modified, which makes the interest of a beneficiary under a trust created for his benefit by a third party subject to the claims of his creditors, yet we have not ignored the general policy of the law, that creditors shall have the right to resort to all the property of the debtor not protected by statute. The provisions of the Revised Statutes, as construed by the courts, render this clear. In 2 Rev. St. p. 173, § 38, is the following provision: ‘Whenever an execution against the property of a defendant, shall have been issued on a judgment at law, and shall have been returned unsatisfied, in whole or in part, the party suing out such execution, may file a bill in chancery against such defendant, and any other person, to compel the discovery of any property or thing in action, belonging to the defendant, and of any property, money, or thing in action, due to him, or held in trust for him; and to prevent the transfer of any such property, money or thing in action, or the payment or delivery thereof, to the defendant, except where such trust has been created by, or the fund so held in trust has proceeded from, some person other than the defendant himself.’ This section has been substantially preserved in Code Civ. Proc. §§ 1871, 1879. It was at first contended that this statute protected absolutely the interest of a debtor in a trust created for his benefit by a third party, but it is now the settled law that this provision must be read with 1 Rev. St. p. 729, § 57, providing that the surplus income of a trust estate shall be liable in equity to the claim of the creditors of the cestui que trust. Williams v. Thorn, 70 N. Y. 270;Graff v. Bonnett, 31 N. Y. 9. The statute quoted (2 Rev. St. p. 173, § 38) clearly implies that a trust created by the debtor, under which he is the beneficiary, does not protect his interest from the pursuit of creditors, as it is, in contemplation of law, property which he has put aside for his own use, and consequently a part of his estate, to which creditors are entitled. This general principle is also recognized by Code Civ. Proc. § 2463. A trust created by a debtor, and under which he is the beneficiary, is not affected by the provision of the Revised Statutes (1 Rev. St. p. 730, § 63) which prohibits a person beneficially interested in a trust for the receipt of the rents and profits of lands from assigning or disposing of the same. The policy of this statute is clear, when applied to trusts created by third parties, but is without force when the debtor creates the trust. The statute is obviously designed to assist the creators of trusts in protecting and caring for the beneficiaries who are the natural objects of their solicitude and care, but it cannot be invoked by a debtor to protect a trust which he has created to serve in time of need as a refuge from his creditors. The defendant Barnes, being out of debt in October, 1893, was at liberty, if he saw fit, to give away all his property, real and personal, to those of his blood, or to strangers. There would be no creditor to complain if he was moved to act in so unusual and improvident a manner. As matter of fact, he did at that time, as to the real estate in question, devest himself of the legal title; reserving under a conveyance, in trust, a beneficial interest in the property for life, with remainder over. The present action in no way challenges the right of Barnes to thus devest himself of the legal title to this real estate; but plaintiff, as a subsequent creditor, seeks to have appropriated to the payment of her judgment such interest as Barnes reserved to himself in the property, and nothing more. It would be a starting and revolutionary doctrine to hold that this reserved interest cannot be reached by the plaintiff, as a creditor. If such is the law, it would make it possible for a person free from debt to place his property beyond the reach of creditors, and secure to himself a comfortable support during life, without regard to his subsequent business ventures, contracts, or losses. In Massachusetts and Pennsylvania it has been held that no such result can be accomplished. Bank v. Windram, 133 Mass. 175; Mackason's Appeal, 42 Pa. St. 330. The prayer of the complaint in the case at bar asks the court to determine the amount of the interest which defendant Barnes reserved to himself in the trust fund, and to order it sold and applied on the judgment. A person for whose benefit a trust is created takes no estate or interest in the lands, but he can enforce the performance of the trust in equity. 1 Rev. St. p. 729, § 60. This right to enforce is a chose in action, and personal property in the hands of defendant Barnes in the case before us, and liable in equity for his debts. Tompkins v. Fonda, 4 Paige, 448;Payne v. Becker, 87 N. Y. 153. It is the settled policy of this state that where property is held in trust for a debtor, and the fund proceeds from a third party, the creditor can only reach the surplus income after providing for the proper support of the cestui que trust; but, if the debtor created the trust, his entire reserved interest is a fund to which his creditors can resort. Graff v. Bonnett, 31 N. Y. 9. Hogeboom, J., in the case last cited (page 14), said: ‘In other words, it was a legislative declaration, in language intended to be explicit, but possibly liable to some misconstruction, that property held in trust for the debtor, when such trust proceeded from himself, was in no case to be protected for his benefit; but, where the trust or the fund proceeded from some other source, the liability of the property to, or its exemption from, judicial seizure, was to depend upon the general provisions of law applicable to trust property.’

We are asked to answer two questions, which may be thus stated: (1) Can this plaintiff, under the circumstances disclosed, recover a judgment which will authorize the sale of the debtor's interest in this trust, or require the trustee to pay over the entire net income as it accrues? (2) Where the founder of a trust reserves an interest for his own benefit, is it subject to the claim of his subsequent creditors; and, if so, to what extent? The second question differs little, if any, from the first, and seems to put the inquiry merely in a changed from. Under section 190 of the Code of Civil Procedure, the jurisdiction of the court of appeals is confined to the review of actual determinations made by the appellate division of the supreme court. The idea that a question may be certified to this court for its decision, whether it arose in the case, and was passed upon by the appellate division, or not, seems to prevail to some extent, at least. It is, however, an erroneous conception of the powers and duties of this court, which has only such jurisdiction as is conferred upon it by statute, wherein is not included the power of determining abstract questions, or those which have not been actually determined by the court certifying them. We have already held that the court will decline to answer any question certified unless it is sufficiently definite to prevent different answers under differing...