Opinion
May 28, 1926.
Wise, Whitney Parker, for the trustees.
Battle, Vandiver, Levy Van Tine [ George Gordon Battle and Addison A. Van Tine of counsel], for Frances Rice Davis and Amo Pauline S. Banks.
John J. Cray, special guardian.
Alvin M. Higgins, for John Davis Orth and Helen J. Davis MacDonald.
On this accounting a question of the distribution of an extraordinary dividend is involved. The trustees hold, among the assets of the trusts created under the will, 600 shares of the St. Croix Paper Company. In March, 1926, they received a stock dividend of 200 shares. They ask in their accounting for the instructions of the surrogate as to the proper distribution to be made of the same.
The remaindermen claim the entire stock dividend, and like claim is made by the life beneficiaries. Under the authorities of this State the tests to be applied are (1) the source of the property paid out in the form of an extraordinary dividend, and whether there has been a distribution or division of the earnings, profits or accumulations of the corporation; (2) the language of the will. ( Matter of Osborne, 209 N.Y. 450; U.S. Trust Co. v. Heye, 224 id. 242; Matter of Schaefer, 178 A.D. 117; affd., 222 N.Y. 533.)
(1) The remaindermen contend, first, that a stock dividend is not income, but must be deemed to be a distribution of capital, and that the failure to add the extraordinary dividend to the corpus of the trusts deprives them of their property without due process of law, in violation of the Federal Constitution. The contention that the voting power of the stock held for the remaindermen is diminished by paying any of the stock dividend to the life beneficiaries, and that this amounts to a deprivation of property rights in violation of the Constitution, is without foundation. The value of the original stock holdings in the trust fund as of the date of death has been unchanged by the declaration of stock dividends. The position of the remaindermen is just the same as if all the accumulated earnings had been distributed in cash dividends instead of retaining them in the surplus. If the company had needed new capital, and instead of pursuing a policy of economy by retaining the surplus earnings in surplus, the corporation had issued and sold new capital stock for necessary corporate purposes, the voting power of the stock in the original trust would likewise have been diminished. In any case, therefore, where the earnings are distributed in cash, or in the form of stock dividends, the result is the same. ( Matter of Rogers, 22 A.D. 428.)
In Matter of Osborne ( 209 N.Y. 450, 467) the court said: "In Matter of Rogers ( 22 A.D. 428) the questions before the court relate to the division of the property of a corporation in liquidation. The opinion is an instructive one and in it the court, referring to a going concern and to extraordinary dividends, say: `When the former declares a dividend the title to the money is taken from the corporation and vested in the shareholder; whether rightly or wrongly declared, as a matter of fact the money is separated from the share of stock; it is no longer a part of the capital of the company. * * *'"
SCOTT, J., in the prevailing opinion of the court in Matter of Schaefer ( 178 A.D. 117; affd., 222 N.Y. 533), in holding that these profits belonged to the beneficiary, said: "The reason for the rule which requires, in case of a complete liquidation of a corporation, that an apportionment be made between capital and income, seems to me inevitably to require that a like apportionment be made in the present case. Otherwise, as pointed out by CULLEN, J., in Matter of Rogers ( 22 A.D. 428), the accumulated profits will go to the unlawful increase of the corpus of the estate and the enrichment of the remaindermen at the expense of the life beneficiary."
The principal cases cited by the remaindermen to maintain this point are not applicable to the question before me. In Gibbons v. Mahon ( 136 U.S. 549) the stock dividend represented investment of earnings in the capital of the company, and was not a distribution of accumulated surplus earnings. The Gibbons case has been before the Court of Appeals repeatedly. It does not lay down any rule which is binding upon the courts of this State. It is mentioned in Matter of Rogers ( supra) and its effect was presented to the Court of Appeals in Matter of Osborne ( supra). In all the recent decisions the distinction between the rules in the various States and countries and that of New York has been fully discussed. The rule has been repeatedly stated to be based upon our statute against void accumulations, which prohibits the unlawful retention in the trust in any form whatsoever of earnings upon the trust property. ( Matter of Schaefer, supra.) The other cases cited have to do with income tax proceedings. I had occasion to distinguish this class of cases in a proceeding similar to this in Matter of Roberts ( 117 Misc. 794). The courts of this State have laid down the rule to be applied in the allocation of stock dividends between life beneficiaries and remaindermen. ( Matter of Osborne, 209 N.Y. 450; Bourne v. Bourne, 240 id. 172.) In the former case (at p. 477) the court said: "Extraordinary dividends, payable from the accumulated earnings of the company, whether payable in cash or stock, belong to the life beneficiary, unless they entrench in whole or in part upon the capital of the trust fund as received from the testator or maker of the trust or invested in the stock, in which case such extraordinary dividends should be returned to the trust fund or apportioned between the trust fund and the life beneficiary in such a way as to preserve the integrity of the trust fund." This rule, I hold, is the proper one to be applied here. The constitutional question raised must, therefore, be overruled.
(2) Originally the trustees held all the stock in the corpus of one of the trusts only. Some time later, upon application to the surrogate, this method was disapproved and the stock was directed to be distributed proportionately among the several trusts created under the will. ( Matter of Davis, 113 Misc. 419.)
The remaindermen contend, second, that in apportioning the stock dividend, the date of the decree effecting this distribution, November 30, 1920, must be taken as the date upon which the trusts were created, i.e., the date upon which the trusts were actually set up. With this contention I do not agree. The several cestuis que trustent were entitled to the income of the trusts from the date of death. That was the date when the trusts were created. There is nothing in the language of this will to indicate a contrary design, nor any direction to postpone the creation of the trusts beyond this point. I hold that under the will of testator, the trusts were created as of the date of his death on December 18, 1918, and the apportionment is to be made as of that date. ( Matter of Bird, 241 N.Y. 184.)
(3) The facts are stipulated. At the date of the death of testator on December 18, 1918, the book value of the stock was $210.10. On March 31, 1925, the date of the payment of the dividend, the book value was $220.30. It appears, therefore, that the extraordinary dividend was declared by the St. Croix Paper Company out of surplus earnings, and under the law of this State it should be paid to the life beneficiaries.
Submit decree dismissing the objections and distributing the entire stock dividend of 200 shares among the life beneficiaries of the various trusts proportionately.