Schenck v. . Barnes

This appeal certifies two questions: "First. In case a party who, 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 *Page 319 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 R.S. p. 174, § 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 *Page 320 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 of Civil Procedure, sections 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 R.S. 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 cestuique trust. (Williams v. Thorn, 70 N.Y. 270; Graff v.Bonnett, 31 N.Y. 9.) The statute quoted (2 R.S. p. 174, § 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 the Code of Civil Procedure (section 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 R.S. 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. *Page 321 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, divest 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 divest 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 startling 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. (Pacific Nat. Bank v. Windram,133 Mass. 175; Mackason's Appeal, 42 Penn. 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 R.S. 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 *Page 322 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 (p. 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 form. 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 circumstances. We *Page 323 have also held that we will not answer abstract questions, nor those that have not been decided by the court below. (Grannan v. Westchester Racing Assn., 153 N.Y. 449; Baxter v.McDonnell, 154 N.Y. 432, 436; Hearst v. Shea, 156 N.Y. 169. ) Following the principle of those cases, it must be held that the questions certified in this case can be reviewed only so far as they actually arose and were determined by the Appellate Division. To that extent we answer them in the affirmative; but so far as they were not determined by that court, we decline to answer them. The learned Appellate Division, in its opinion, uses this language: "In what manner the debtor's life interest shall be appropriated to the plaintiff's claim, whether by collecting the rents and applying the income from time to time upon the judgment, or by a sale of the life estate for a similar object, it is unnecessary to determine. We hold that in some manner or other the debtor's interest is subject to plaintiff's judgment." It is quite possible that the demurrer to the complaint, when strictly construed, entitled the plaintiff to specific directions from the Appellate Division as to the precise manner in which the life estate of defendant Barnes is to be dealt with in the event of final judgment against him. These directions were not given, however, and we confine ourselves to the determination of the Appellate Division. The order and interlocutory judgment appealed from should be affirmed, with costs, and the questions answered as above stated.