New York Law Review

Tag: Restraints on Alienation

  • Wildenstein & Co. v. Wallis, 79 N.Y.2d 642 (1992): Rule Against Perpetuities in Commercial Art Transactions

    Wildenstein & Co. v. Wallis, 79 N.Y.2d 642 (1992)

    The Rule Against Perpetuities does not apply to preemptive rights and exclusive consignment rights in commercial art transactions where such rights facilitate broader marketing and pose only a minimal limitation on alienability.

    Summary

    Wildenstein & Co., an art dealer, sought to enforce a settlement agreement granting it preemptive and exclusive consignment rights to paintings from Hal Wallis’s collection. The Wallis estate argued the agreement violated the Rule Against Perpetuities and the common-law rule against unreasonable restraints on alienation. The Second Circuit certified questions to the New York Court of Appeals, which held that neither rule invalidated Wildenstein’s rights because the agreement served commercial interests and only minimally affected alienability, distinguishing it from traditional family land transfers.

    Facts

    Hal Wallis, a film producer and art collector, entered into a settlement agreement with Wildenstein in 1982. Wildenstein returned two paintings to Wallis in exchange for $665,000 and the agreement granted Wildenstein: (1) a right of first refusal to purchase 15 named paintings in the Wallis collection; and (2) an exclusive right of consignment to auction those paintings. The first refusal right required the Wallises to give Wildenstein 30 days’ notice of any proposed sale, allowing Wildenstein 20 days to match the offer. The exclusive consignment right stipulated that if the Wallises decided to sell at auction, Wildenstein would have exclusive consignment for six months. The agreement applied to the parties’ executors, successors, and assigns, but excluded paintings given to tax-exempt charities. After Wallis died, his son sold a Renoir painting covered by the agreement. Later, the Hal B. Wallis Foundation planned to sell other paintings at auction. Wildenstein sued to enforce its rights.

    Procedural History

    Wildenstein sued in the United States District Court for the Southern District of New York. The District Court dismissed the complaint, granting summary judgment to the Wallis defendants, based on the common-law rule against unreasonable restraints on alienation. The Second Circuit Court of Appeals then certified four questions to the New York Court of Appeals regarding the applicability of the Rule Against Perpetuities and the rule against unreasonable restraints on alienation, as well as potential remedies if the agreement was invalidated.

    Issue(s)

    1. Whether the New York Rule Against Perpetuities applies to preemptive rights and future consignment interests in personal property?

    2. Whether the New York common law rule against unreasonable restraints on alienation invalidates preemptive rights and future consignment interests in personal property?

    Holding

    1. No, because the Rule Against Perpetuities does not apply to preemptive rights and exclusive consignment rights in the context of commercial art transactions.

    2. No, because the common-law rule against unreasonable restraints on alienation does not invalidate the preemptive rights and exclusive consignment rights in this case.

    Court’s Reasoning

    The Court reasoned that the Rule Against Perpetuities, designed to prevent undue restrictions on property alienation, should not be rigidly applied to commercial transactions. The court distinguished this case from donative family transfers, noting the agreement served significant commercial interests by facilitating broader marketing of art treasures. The Court emphasized that Wildenstein’s rights were triggered only by a decision to sell, allowing the Wallises to realize the highest possible price. Referencing its prior holding in Metropolitan Transp. Auth. v Bruken Realty Corp., the court noted the inapplicability of the rule to preemptive rights in commercial transactions that promote property use and development.

    Regarding the rule against unreasonable restraints on alienation, the Court considered the duration, price, and purpose of Wildenstein’s rights. The 30-day first refusal period and six-month consignment period were deemed reasonable. The first refusal right required Wildenstein to match a third party’s offer, ensuring the Wallises received fair market value. The Court deferred to the parties’ arm’s-length agreement, concluding that the rights did not constitute an effective prohibition against transferability.

    The court highlighted an expert affidavit attesting to the widespread use of these rights in the art world and the short duration of the consignment period. Because Wildenstein’s preemptive and exclusive consignment rights serve significant commercial interests and pose minimal limitations on alienability, neither the Rule Against Perpetuities nor the rule against unreasonable restraints on alienation applied. The court emphasized the importance of the commercial context, differentiating it from purely donative family transfers where the traditional concerns of the Rule Against Perpetuities are more directly implicated. The court stated, “Inasmuch as Wildenstein’s preemptive and exclusive consignment rights serve significant commercial interests by facilitating broader marketing of world-renowned art treasures while posing, at the most, only a minimal limitation on the alienability of the works, we conclude that they are not subject to the Rule against Perpetuities.”

  • Matter of Vought, 25 N.Y.2d 163 (1969): Enforceability of Inalienability Clauses in Remainder Interests

    Matter of Vought, 25 N.Y.2d 163 (1969)

    A testator may validly restrict the alienation of a vested remainder interest in the principal of a trust during the term of the trust, provided that the legal title of the trust assets remains alienable by the trustees.

    Summary

    The New York Court of Appeals addressed whether a testator could validly restrict the alienation of a vested remainder interest in the principal of a trust. The testator’s will created a trust for his widow, with the remainder to be paid to his two sons upon her death. One son, Chance, assigned his remainder interest before his mother’s death. The will contained a clause stating that the principal was not assignable. The court held that the inalienability clause was valid and enforceable, preventing Chance’s assignees from claiming his share of the trust principal. The court reasoned that allowing such restrictions aligns with modern policy considerations and respects the testator’s intent.

    Facts

    Chance Vought, Sr., created a testamentary trust in 1930, providing income to his widow for life, with the principal to be divided equally between his two sons, Chance, Jr. and Peter, upon her death.
    The will included a clause stating that the trust principal “shall not be assignable”.
    Chance, Jr. executed several assignments of his remainder interest between 1959 and 1960.
    Chance, Jr. predeceased his mother in 1964. His mother died in 1965.
    The trust corpus was valued at $1,857,876.20 at the time of the accounting.

    Procedural History

    The Surrogate’s Court, New York County, held that Chance, Jr.’s remainder interest vested indefeasibly upon his father’s death, but the will validly prohibited assignment of the principal. Therefore, the assignments were void.
    The Appellate Division unanimously affirmed without opinion.
    The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a settlor has the power to make inalienable a principal remainder interest limited on an entrusted life estate, when the creating instrument specifies that the interests of all beneficiaries shall be inalienable.

    Holding

    Yes, because, absent strong statutory direction or precedent restricting provisions making principal inalienable, the testator’s intent should be given effect to protect intended beneficiaries, provided the legal title of the assets remains transferable.

    Court’s Reasoning

    The court recognized that the issue was one of first impression, with no direct statutory prohibition against creating an inalienable equitable interest in trust principal. While prior cases had upheld the alienability of remainder interests, none involved a restriction imposed by the creator of the trust.

    The court distinguished between restrictions on legal estates and equitable estates. A restriction on a legal estate renders the property totally untransferable, while a restriction on a beneficial interest doesn’t shackle the principal because the trustees retain the power to sell or convey the assets.

    The court addressed policy considerations, stating that allowing inalienability provisions enables creators to postpone a beneficiary’s control of wealth until they are better equipped to manage it. This desire is not unnatural, nor does it unduly burden those who extend aid to the beneficiary, provided they do so knowing they cannot be reimbursed from the principal against the creator’s wishes.

    The court noted the prevailing weight of authority supports the power to impose inalienability on principal. The Restatement (Second) of Trusts now allows for inalienability of the principal.

    The court rejected the assignees’ argument that they should be entitled to the interest now that the trust has ended. Such a result would render the inalienability provision meaningless, as the beneficiary would effectively transfer their right to later possession, frustrating the creator’s wishes.

    The court emphasized that the assignees suffered no loss greater than that for which they bargained on the face of the assignments.

    The court stated: “In the absence of any strong statutory direction, or any developed body of precedent restricting provisions making principal inalienable, the will of the testator should be given effect, and the interest of the assignor be deemed unassignable during the life of the trust.”