
    Matter of the Judicial Settlement of the Accounts of Charlotte McKay, as Administratrix, etc., of Inez McKay, Deceased.
    
      (Surrogate’s Court, Steuben County,
    
    
      March, 1902.)
    Equitable Conversión—Discretionary Power of Sale—Moneys Representing Realty of an Infant Remain Realty—Election to Convert Realty Into Personalty—A Subrogate Cannot Distribute the Proceeds of Realty.
    Moneys, representing realty, declared by the Supreme Court to represent an infant’s share in real estate as heir-at-law, remain real estate while in the hands of her guardians, are such until after her own death where she dies before majority, are still real estate when, in the hands of her administratrix, and are not affected as to their nature by a decree of a Surrogate’s Court improperly treating them as personalty.
    The exercise of a discretionary power of sale given to the executor of her ancestor does not equitably convert the proceeds of the realty he sold into personalty.
    In order to convert into personalty the proceeds of realty they must have reached the hands of a person who has the whole beneficial interest and has legal capacity to elect.
    Such qualifications are not possessed by an infant nor by her guardians or by her administratrix and therefore neither the acts, entries or investments of them or any of them can change the character of the fund.
    The surrogate has no jurisdiction to inquire into or settle the rights-of heirs-at-law in real estate or its proceeds or to divide the proceeds according to the laws of descent.
    Where the infant’s administratrix had included them in her account the surrogate ordered them struck out and refused her commissions upon them.
    Modified, 75 App. Div. 78.
    
      Proceedings upon the judicial settlement of the accounts of an administratrix.
    D. M. Darrin, for Charlotte McKay individually and as administratrix, etc.; E. C. Smith, special guardian of infant parties; R. R. Lyon, special guardian of Murray McKay, an incompetent person.
   Wheeler,S.

In these proceedings the administratrix has filed her account and among other things has charged herself with the proceeds of the sale of real estate, to wit: With proceeds of real estate, $3,637.68, and interest thereon from September 25, 1898, $593.40; total, $4,231.08; also with another item of proceeds from the sale of real estate of $2,235.39, and interest thereon, $67.06; total, $2,302.45. It is claimed and urged on the part of counsel for the administratrix that these two items and interest thereon are still real estate; and that the amounts thereof should he distributed by this court according to the law of descent; and the counsel for the administratrix claims that this court has the power to decree the division of such proceeds as real estate according to the law of descent.

Mr. R. R. Lyon, special guardian and committee of Murray McKay, and Mr. E. 0. Smith, special guardian of the minor parties herein, claim and argue that these two items and the interest thereon are personal property, and that this court should distribute the same in accordance with the law of distribution of assets. They admit, and the evidence clearly shows, that these proceeds are the avails of the sale of real property-belonging to the said Inez McKay, and which she became the owner of while she was a minor, and that she died before her arrival at the age of twenty-one years; but they claim that by the terms and provisions of the last will and testament of Hiram' McKay, deceased, and by the exercise of the power of sale therein given to the executor of the said will, the said proceeds, under the- rules of equitable conversion, became personal property and were such when they reached the hands of the administratrix. And they further claim that if the said will, and the exercise of the power of sale, did not so convert the proceeds into' personal property, then the nature of it was changed by the act of the guardians of the property of the infant land also by the act of the said administratrix, and also from the effect of a certain decree made by this court, which [will be hereafter mentioned.

In order to get a clear understanding of this case, a brief review of the facts as they appear from the record evidence will be necessary.

Hiram C. McKay died at Addison, N. Y., November 18, 1889, leaving his last will and testament, naming Chas. W. Gillett as his executor .and trustee thereof. This will was duly proven and admitted to probate as a will of real and personal property on January 4, 1890, by this court, and Charles W. Gillett was duly appointed executor in pursuance of said will, and duly qualified and entered upon the discharge of his duties as such on January 4, 1890. Thereafter an action was brought by the said Chas. W. Gillett, as executor, etc., in the Supreme Court to obtain a construction of said will, and the parties to this proceeding and the said Inez McKay were made parties to that action. It appears that -in said action a judgment and decree were duly made and entered May 19, 1890, construing said will; and said judgment became binding upon all of the parties to said action and has never been set aside, modified or reversed. The said will attempted to make a trust. By the judgment in that action for the construction of said will it was adjudged, among other things, that all the real estate owned by the said Hiram McKay at the time of his death, except the homestead, upon his death vested in his heirs-at-law, IT. K. McKay, Murray McKay and Inez McKay, each one-fourth thereof; and Prudence McKay .and Carrie McKay, each one-eighth thereof; all subject to the dower of Charlotte McKay and subject to the power of sale given to the executor. And by the eighth paragraph of said judgment the power of sale to the executor and -'another was sustained; but the trust therein attempted to be created was declared null and void and practically cut out of the will.

After this judgment was entered; in pursuance of the terms of said will the said Ohas. W. Grillett, as executor, etc., sold some of the real estate of said Hiram C. McKay, deceased, and thereafter and on November 11, 1895, the said executor made an accounting of the proceeds of the sale of the said real estate; and a decree was duly entered by this court distributing such proceeds and decreeing that said Inez McKay was the owner of, and awarding to her, the sum of $3,637.68 of the said proceeds. At this time Lattimer & Winton, of Addison, H. Y., were the general guardians of the property of the said Inez McKay, and this sum of $3,637.68 was paid over to the said guardians on January 6, 1896, and was by them invested in bonds and mortgages for the benefit of their said ward, Inez McKay. And while the said guardians were in office and holding the said bonds and mortgages the said Inez McKay died intestate and under the age of twenty-one years, to wit: On

September 25, 1898, she being at the time of her death under the age of eighteen years. Thereafter and on December 20, 1898, the said Charlotte McKay was duly appointed administratrix, etc., of Inez McKay, deceased, and the said Lattimer & Winton transferred the said bonds and mortgages to the said Charlotte McKay as such administratrix; the said guardians evidently considering that the same were personal property; and the said administratrix now has in her' hands the said bonds and mortgages, which have never been mixed with other funds iand are separate and distinct, and are solely to secure the proceeds from the said real estate proceeds.

Thereafter and on the 27th day of December, 1899, the said Chas. W. Gillett, as such executor, rendered a final accounting of the proceeds, of the sale of the other real estate, and a decree was made on that day by this court whereby there was- awarded the sum of $2,235.39 as the share of the said Inez McKay’s estate therein, and the same was directed to be paid to the said Charlotte McKay as such administratrix. The question does not appear to have been raised at all upon this accounting as to the propriety or impropriety of making this payment to the administratrix. It seems to have been done as a matter of course, and the question as to whether it was real or personal property was not raised, so far as the evidence in this proceeding or the records produced in evidence show. Charlotte McKay received the same on January 12, 1900, and placed the same in >a certificate of deposit on that day, made payable to her as such administratrix, and the same has been kept separate from other funds, bearing interest at the rate of three per centum per annum.

It appears that when Charlotte McKay made a petition for her appointment as administratrix of the personal estate of Inez McKay, deceased, she included these two funds in making up her estimate in said petition of the quantity of personal property left by the said Inez McKay, deceased; and also her bond as administratrix was increased in amount to the extent of the .amount of these two funds, the proceeds from said real estate. And also that when she made and filed her inventory she included these said proceeds and the interest as assets of the estate of said Inez McKay, deceased vut explicitly states in said inventory that the same were proceeds from the sale of her real •estate and the interest thereo .. It seems to have been kept distinct from the personal property of the said Inez McKay,and mentioned the same, whenever she had occasion to mention them in papers, as the .proceeds from real estate; but it does not appear until recently that the question of whether these proceeds still remained real estate or personal property was considered.

The will of Hiram C. McKay, deceased, did not of itself, because of the trust therein which he attempted to create, or because of the power of sale therein contained, convert the real estate into personal property. The said judgment and decree of the Supreme Court in the action to construe the will is conclusive on that point, for it explicitly adjudged and decreed that the said real estate descended to the said heirs-at-law, subject only to the power of sale and to the widow’s dower. That being the case, then the same became real estate without any question until it was sold by the executor under the power of sale, and said judgment explicitly held that the power of sale was saved; and independently of the adjudication of the Supreme Court on the question of whether the will itself converted the real estate into personalty, it seems to us that the decisions clearly show that the will did not do so. The rule of equitable conversation will be presumed only when absolutely necessary to accomplish the lawful purposes expressed in the will. Chamberlain v. Taylor, 105 N. Y. 185,

If the will contains imperative directions to sell, the real estate is converted into personal property at the death of the testator. Doane v. Mercantile Trust Co., 160 N. Y. 494; Everitt v. Everitt, 29 id. 39; Hatch v. Basset, 52 id. 359; Power v. Cassidy, 79 id. 602; Underwood v. Curtis, 127 id. 523; Matter of Fox, 52 id. 530-537.

When the Supreme Court declared .the trust void, the will, as then left, required no sale of personal property for any purpose. Had the trust remained, aid been valid, then the will would have absolutely required the sale of the personal property for the purpose of carrying into effect the trust; but with the trust left out it left a power of sale only, which was not imperative or obligatory, but was a purely discretionary power and does not effect a conversion of the real estate into personal. See Gerard Real Est. (4th ed.) 382.

The lands descended" to Inez and others and the title was divested by the sale under the power, but the proceeds remained real estate. Clift v. Moses, 112 N. Y. 426; 116 id. 144.

That part of the will which created a permanent fund having been adjudged void by the Supreme Court, so that the will contained no expressed or implied direction to the executor to sell, the power, therefore, became a naked power of sale, which was not mandatory or directory, either expressed or implied, such as the one mentioned in Salisbury v. Slade, 160 N. Y. 289.

Where the power of sale is discretionary with the executor, then there is no conversion from realty to personalty by the exercise of such power. McCarty v. Deming, 4 Lans. 440; Clift v. Moses, supra; Greenland v. Waddell, 116 N. Y. 234; Mott v. Ackerman, 92 id. 553; Matter of Bingham, 127 id. 296; Gerard Real Est. (4th ed.) 350; Gourley v. Campbell, 66 N. Y. 169; Parker v. Linden, 113 id. 28; Matter of Bingham, 127 id. 314.

With the trust purpose declared void the power of sale was discretionary with the executor. Parker v. Linden, 113 N. Y. 28; Matter of Gantert, 136 id. 106.

Where a power of sale is given to the executor for no special purpose such power will not make a conversion. McCarty v. Deming, 4 Lans. 440; Matter of Fox, 52 N. Y. 530.

It is clear from the foregoing authorities and from the judgment of the Supreme Court that the will did not convert the realty into personalty, and that the power of sale was discretionary, and its exercise by the executor did not change the character of the realty to that of personalty, and that the proceeds rendered by the executor were real estate.

Where real property is sold the proceeds of the sale remain realty for the purposes of descent. Gerard Real Est. (4th ed.) 362-365; Gourley v. Campbell, 66 N. Y. 169; Hobson v. Hale, 95 id. 589; Clift v. Moses, supra; Ballou v. Ballou, 78 N. Y. 325; Parker v. Lindon, 113 id. 28.

If we are right thus far, then the proceeds of these sales of real estate by the executor were real estate at the time of the payment of the one fund to the general guardian of the property of Inez McKay, and at the time of the other payment to the administratrix, aforesaid.; and Inez McKay being a minor was incapable of changing these proceeds from realty to personalty ; she never' had the legal capacity to make an election; and the courts hold that the same is realty until the party is capable of election and takes the amount as money. Gerard Real Est. (4th ed.) 349 and cases there cited; Valentine v. Wetherill, 31 Barb. 655; Horton v. McCoy, 47 N. Y. 21. See Code of Civil Procedure, section 2359, which holds that the proceeds of lands of infants sold in pursuance of title 7, chapter 17, of the Code, shall be deemed as real estate; and if the infant shall die before becoming of age, the Supreme Court shall distribute the same as assets according to the law of descent. Matter of Woodworth, 5 Dem. 160; Shumway v. Cooper, 16 Barb. 556. The proceeds of sale of lands belonging to infants, or persons incompetent, continue lands for the purposes of descent until the disability is removed and they elect otherwise. Wells v. Seeley, 47 Hun, 109; Matter of Woodworth, supra; Matter of McComb, 117 N. Y. 378. How if the minor, Inez McKay, was incapable of changing the nature of this property from realty to personalty, then comes the question, whether the general guardians of her property. could change the fund which they held, and whether the administratrix could and did change the fund which was paid over to her, from realty to personalty. The guardians could not, nor could Charlotte McKay, as administratrix.

Courts of equity, in determining between persons claiming converted property by the right of succession, will treat it as property impressed by the will or act of the party who is the ultimate source of title (Hiram C. McKay in this instance), with a specific character different from that in which it is found, and will dispose of it as continuing to possess that character until some one entitled to the whole beneficial interest has elected to take it in the form in which it is found, and has received it under the form of the contract or in execution of the provisions of the will, by which the original title to it was created. Gerard Real Est. (4th ed.) 348.

A court of equity will not divest property of the character which it finds it impressed with, except at the instance of some party having a whole beneficial interest and who has a right to convert it himself from one form to another, and who is of legal capacity to make an election. Gerard Real Est. (4th ed.) 349.

How, Inez McKay never had the legal capacity to make an election, as she was a minor. Lattimer & Winton did not have the whole beneficial interest—they were only guardians—and they could not change the character or nature of the fund in their hands. Charlotte McKay, as administratrix, did not own the whole beneficial interest; she had no right to say, as against those for whom she held the property, that it would be personalty or realty. If she held it as administratrix at all she held it as trustee for different persons, some of whom might wish it one way, and some of whom might wish it another way, and she certainly could not change the character of the funds which came into her possession.

The fact that Charlotte McKay treated these proceeds and the interest thereon as assets in making her petition, bond and inventory did not change the character of the proceeds, nor did it estop her from now claiming the same to be real estate designating real estate as personal property does not make it so Matter of Woodworth, 5 Dem. 156-160; Code Civ. Pro., section 2472; Shumway v. Cooper, 16 Barb. 556.

In Matter of Woodworth the decedent died an infant intestate, leaving her surviving a mother and three sisters. During the lifetime of the said infant certain land which she owned was sold in proceedings instituted for that purpose, and the proceeds of the sale were paid to the county treasurer. After her death the administrator assumed the proceeds to be personal property and obtained an order directing it to be paid to him, and included the amount in his inventory and paid the bulk thereof to the decedent’s mother, and paid fifty dollars out of the same on account of funeral expenses; and upon the judicial settlement of the administrator’s account it was held that, notwithstanding the administrator inventorying these proceeds as personal property, and notwithstanding an order of the court was made directing these proceeds to be paid to him as administrator, the money was nevertheless real property and retained its character as such notwithstanding all of the acts of the administrator in respect thereto. And the ease of Shumway v. Cooper is substantially the same; therefore, the court cannot resist the conclusion that the said two funds are still real estate, 'and that the will of Hiram C. McKay, or the exercise of the? power of sale thereto, did not convert said realty into personalty. That Inez McKay was incapable of changing its character; that the general guardian of her property, and thesaid administratrix, did not have the whole beneficial interest in the funds and they could not elect to make the same personal property. That Charlotte McKay has not individually estopped herself from claiming the said funds as realty; therefore, the amount of the two funds should be stricken from the account of the said administratrix, and the commissions which she has computed on the said amounts should also be stricken out; and that the other items of the account, debit and credit, should be allowed.

Now it is claimed by the counsel for the administratrix that if this court shall conclude that the said proceeds are realty, that the court has jurisdiction to divide the same. The counsel for the minors in this proceeding contends that the court has not jurisdiction or power to divide the same, if the said funds be realty. It was clearly held in the ease of Matter of Woodworth, 5 Dem. 156-160, and in the case of Shumway v. Cooper, 16 Barb. 556, that this court has no authority to inquire into, or settle, the rights of the heirs-at-law to property in the hands of an executor or administrator; and the funds in question, considered by those two cases, were proceeds of the real estate belonging to infants; and each of those cases held that the said funds were impressed with their original character, and while they came into the hands of the administrator añd were treated as personalty, nevertheless, they were realty, and that the same went to the heirs-at-law of the infants and not to the infant’s representatives. Therefore, we have come to the conclusion that this court cannot divide the said two funds and must content itself with striking them out of the accounts of the said administratrix. If this court has no power or jurisdiction to divide the proceeds of real estate which remain realty, then, of course, the decree of this court directing the payment of one of the said funds to the administratrix was void for lack of jurisdiction; and so was the decree of this court ratifying the payment by the general guardians of the property of the said Inez McKay to the said administratrix void. While the court had jurisdiction of the parties it did not have jurisdiction of the subject-matter, and the general guardians should have paid mortgagor, may bring an action to' annul the fraudulent transfer and to recover the property or its avails. It is true that in that case the question of fraud was submitted to the jury as a question of fact, but the court said (at p. 430) : “ The question then is, did the arrangement, if made as alleged and carried out by the permitted sales of, and dealing with, the mortgaged property, necessarily invalidate the mortgage ? Did it conclusively prove that the mortgage was fraudulent in la.w; that is, so conclusively establish the fraud that a verdict of the jury to the contrary would have been set aside as against evidence ? Such an arrangement is incompatible with a mortgage designed only as security to the mortgagee. The dealing with the mortgaged property as a merchandise by the mortgagor, and the sale of the same in the ordinary course of business as a merchant with the consent of the mortgagee, necessarily destroys the value of the mortgage as a security, and makes it only available, if for any purpose, so long as this arrangement and dealing continues to protect the property from creditors, and secure it to the mortgagor. Such a transaction is necessarily fraudulent ” (see also Coleman v. Burr, 93 N. Y., at p. 31).

The only difference between the contract in Southard v. Benner ancL the one under consideration is that in that case a lien was attempted to be given on property then owned by the mortgagor, coupled with a power of sale and use of the proceeds by him; while in this case there exist not only the same facts in connection with what at most was an oral, and, therefore, unfiled, mortgage, but also the additional element of a lien by .the creditor oh property to be acquired by the corporation in lieu of that sold by it.

There must be judgment for plaintiff, with costs.

Judgment for plaintiff, with costs.  