The question presented for decision is the constitutionality and construction of the provisions of subdivision 2 of section 17-c of the Personal Property Law (L. 1940, ch. 452, effective April 13, 1940; Cons. Laws, ch. 41) in so far as the same modify retroactively the rules relating to mortgage salvage operations.
The new statutory rules allot to the life tenant out of the net income earned from the operation of real estate in salvage, an annual *Page 427 amount up to three per cent of the face value of the mortgage investment. Such right is granted in lieu of the discretion vested in the trustee under the heretofore existing rules of trust administration to pay net income or any portion thereof to the life tenant, a discretion which has not been exercised generally by trustees through fear of possible surcharge. Such payment of net income is made payable from the beginning of the salvage operation and is declared to be final and not subject to recoupment, either from the life tenant, or from the trustee or executor by way of surcharge. With the exception of the aforesaid modification, the previously existing rules governing salvage operations are continued except that annual net income in excess of the maximum sum payable to the life beneficiary, is directed to be held and further equitable adjustments upon the apportionment are also provided for, in order to insure to the remainderman that any unpaid advances from principal must be first repaid upon the final liquidation of the investment.
The validity of this statute has been put in issue upon this proceeding for an intermediate accounting by the trustee under the will of Henry C. West. By the terms of the testator's will, his residuary estate was devised to a trustee to apply the net income therefrom to the use of his wife during her life or until her remarriage. Upon the termination of the life estate, the trust was directed to be divided and continued upon certain shares for the benefit of a nephew and niece of the testator, with remainders over.
At the time of his death in 1934, the testator's residuary estate included, among various other assets, certain wholly owned guaranteed mortgages. Nine of these mortgages went into default after the death of the testator, and the estate acquired title to the real properties either by foreclosure or by deed in lieu of foreclosure prior to April 13, 1940; two of the properties were sold before that date, the income and proceeds therefrom, however, being retained in the hands of the trustee.
In the present proceeding the special guardian for the infant remaindermen contends, first, that the entire subdivision 2 of section 17-c is unconstitutional because it is expressly made retroactive in operation, and that, second, if constitutional, it does not apply, as a matter of construction, to the proceeds of the two properties which were sold before the statute became effective. *Page 428 The learned Surrogate sustained the constitutionality of the statute, but held as a matter of construction that it applied only to salvage operations uncompleted at the date of its enactment and hence was inapplicable to the two properties sold before it became effective. Upon appeal, the Appellate Division unanimously affirmed.
When a mortgage in default is foreclosed and title to the property is acquired by the trustee, the original mortgage investment is at an end and a salvage operation is initiated. (Matter of Otis, 276 N.Y. 101, 111, 112.) The real property thus acquired is substituted for the mortgage in the hands of the trustee and takes on the character of personalty. (Lockman v.Reilly, 95 N.Y. 64, 71.) The trustee holds this real property so acquired and must administer it as an asset of the trust estate for the benefit of the life tenant and the remaindermen. Like the mortgage, it is "security not for principal alone but for income as well." (Matter of Chapal, 269 N.Y. 464, 472.) With respect to the mortgages which the testator owned at the time of his death and with respect to any real property which might be acquired by the trustee following default in any of these mortgages, the testator as creator of the trust gave no express directions except the general direction of what is commonly understood by the use of the words "income" and "principal." After the initiation of the salvage operation, as before, both the life tenant and the remaindermen could compel the trustee to administer the trust and to apportion to each his just share of the income and principal, but not that of any particular asset of the trust. (Lockman v. Reilly, 95 N.Y. 64,71; Bennett v. Garlock, 79 N.Y. 302, 320.) Although the rule requiring apportionment as between income and principal, of the proceeds of such sale has been long established (Meldon v.Devlin, 31 App. Div. 146; affd., 167 N.Y. 573), the rules relating specifically to mortgage salvage operations were speeded in the process of formulation by the courts with the coming of the economic depression of the 1930's. In Matter of Chapal (269 N.Y. 464) this court said: "We have another problem — that of the liquidation of real estate acquired of necessity because of default on a mortgage investment." Concerning these rules thus worked out to meet the emergency resulting from widespread foreclosures, in Matter of Otis, supra, at page 112, we said: *Page 429 "Both capital account and income account, as described in theChapal case, are fictions * * *. If, then, the remaindermen are to participate in the apportionment on the feigned basis of unimpaired principal, the share of the life tenant should be computed on the same assumption. The invention of the `original investment' is no more valid than the invention of `unpaid interest' thereon. Indulgence in both fictions keeps the balance even between the respective parties in interest."
Moreover, we expressly said in the Otis case that the rules laid down were tentative only and not intended to be final. At page 115 it was said: "Perhaps it should be added that a general rule for such situations cannot be attained at a bound, that no rule can be final for all cases and that any rule must in the end be shaped by considerations of business policy. Accordingly, we have here put aside inadequate legal analogies in the endeavor to express fair, convenient, practical guides that will be largely automatic in their application. Only the sure result of time will tell how far we have succeeded." It was also carefully pointed out that no hard and fast rule was laid down to guide the trustee in the disposition of net income earned during the salvage operation, but the disbursement of net income to the life beneficiary was left to the discretion of the trustee. In theOtis case we said at page 115: "* * * the trustee may distribute such surplus income in its discretion. (269 N.Y. at p. 470). This discretion, moreover, should be exercised with appropriate regard for the fact that unless a life tenant gets cash he does not get anything in the here and now."
The Legislature has found, however, that trustees through fear of surcharge have accumulated surplus with the result that undue hardship has been visited upon life beneficiaries. Taking heed of this hardship at the request of the executive committee of the Surrogate's Association of the State of New York, the Legislature has declared its purposes in the statute itself. In part it reads: "The purpose of the enactment of this subdivision is declared to be the simplification of the rules of procedure in mortgage salvage operations and the elimination of present complications which work to the disadvantage of the life tenant * * * by depriving him of a fixed right to the actual payment of any net income earned by the property. Such fixed right is granted in lieu of *Page 430 the discretion now given to the trustee to pay net income or any part thereof to the life tenant. * * * Only equitable adjustments and balances as between the parties are intended to be effectuated by the provisions of this subdivision." Thus the Legislature has substituted in place of the discretion in the trustee permitting disbursement of surplus income, another more definite rule requiring some, albeit modest, payment of surplus income to the life beneficiaries. At the same time the Legislature has provided that additional income over and above the modest rate of payment shall be held until final adjustment, thus providing for equitable adjustments and balances as between life beneficiaries and remaindermen upon final liquidation, and safeguarding, so far as reasonably possible, the rights of all interested parties. The statute provides: "Any payment of net income heretofore or hereafter made to the life tenant up to such three per centum per annum shall be final and shall not be subject to recoupment from the life tenant or as a surcharge against the trustee or executor. The amount of all such payments shall be taken into account, however, in the apportionment of the proceeds of sale and shall be charged against the share of the life tenant.
In thus formulating a rule that is final against recoupment for distribution of income received in excess of carrying charges, it does not appear that the Legislature has done more than direct a trustee to do what under the decisions of this court he has discretionary power to do. (Matter of Otis, supra.) Before the enactment of this statute, the life tenant could not have demanded as of right the payment to him during liquidation of more of the surplus income than he will receive under the statute. Neither does it appear that the remaindermen could properly have insisted that the trustee should be surcharged if in the exercise of his discretion he had paid to the life tenant the amount which the statute now directs. A statutory rule of administration which requires the trustee to apportion income in accordance with a fixed standard which in the exercise of administrative discretion the trustee would even without the statute have power to adopt does not, in our opinion, constitute a taking of property. The principle is applicable that "The mere fact that the statute is retroactive does not bring it in conflict with the Federal Constitution. * * * Nor has a *Page 431 person a vested interest in any rule of law entitling him to have the rule remain unaltered." (Preston Co. v. Funkhouser,261 N.Y. 140, 144; Munn v. Illinois, 94 U.S. 113.)
As already noted, the rules of administration heretofore set forth were tentatively stated and expressly recognized as subject to change. Before a judicial declaration, thus tentatively stated, becomes a rule of property, it must have become permanently fixed and long continued. (United States v.Standard Oil, 20 F. Supp. 427, 458; affd., 107 F. [2d] 402, cert. den. 309 U.S. 673.) In that case the court said: "However, before setting up a judicial declaration as a rule of property, we should require, at least, that it be fixed, long-continued, and relied upon by persons acquiring property, so that its repudiation would amount to a denial of due process." Nor can the statute in the case at bar be said to be arbitrary or capricious, but on the contrary, it is fair and reasonable and protects the interest of both income beneficiaries and remaindermen. As was said in Thompson v. Siratt (95 F. [2d] 214, 217): "To hold that subsection (n) is repugnant to the Fifth Amendment requires a finding that its provisions are arbitrary and unreasonable."
We have, therefore, in the case at bar, no taking of property, no contract right involved and no impairment of due process. This statute, therefore, cannot be held to be unconstitutional. (Robertson v. deBrulatour, 188 N.Y. 301; Brearley School,Ltd., v. Ward, 201 N.Y. 358.)
The sole remaining question is whether or not the statute is applicable in cases where the liquidation was complete before the date when the statute became effective, the income and proceeds of property being still undistributed in the hands of the trustee. We concur in the construction placed upon the statute by the learned Surrogate, namely, that its scope is limited to cases where liquidation of real property acquired is incomplete. This is in accord with the language of the statute which provides that net income "during the salvage operation" shall be paid to the life tenant. Even in a "pending proceeding" or "action for an accounting," the language of the statute confines its application to cases where liquidation is incomplete and where "during the salvage operation" a trustee has acted in accordance with the discretion at that *Page 432 time vested in him. The apportionment of the proceeds of the property, both income and principal, where liquidation was completed before the statute became effective must be determined in accordance with the rules heretofore formulated by the court.
The order should be affirmed, with costs to the respondent trustee and one bill of costs to the infant-appellants, William J. Demorest, Jr., Ann Demorest and Charles Demorest, payable out of the fund.