Robertson v. de Brulatour

The plaintiffs, as trustees under the will of J ohn T. Parish, who died in 1891, brought this action for an accounting and to have determined thereby questions, which have arisen upon conflicting claims of the cestui gue trust and of the remaindermen to moneys and securities distributed by corporations, whose stocks formed part of the capital of the trust fund, and questions relating to the trustees’ right to commissions upon the corgms of the trust and to their management thereof. The sixth clause of the will provides for the trust in the following language :

“ Sixth: I give and bequeath to Charles M. Fry, Alexander F. Robertson and my wife Martha G. Farish, and the surMvors and the survivor of tliém and to the successor or successors of such survivor Twenty-five hundred (2,500) shares of the capital stock of the New York and Harlem Railroad Company, One thousand (1,000) shares of the capital stock of the New York Central and Hudson River Railroad Company (consolidated), and One thousand (1,000) shares of the capital stock of the Chicago, Rock Island and Pacific Railway Company, also Twenty thousand dollars ($20,000) at the par value of the consolidated bonds of the'Erie and Pittsburg Railroad Company, Fifty thousand dollars ($50,000) at the par value of the consolidated bonds of the Chicago and Northwestern Railway Company and Thirty thousand dollars ($30,000) at the par value of the first mortgage bonds of the Louisiana and Missouri River Railroad Company together with all interest accrued on said above described bonds at the time of my death and al]

interest accruing thereon thereafter and also every and all dividends which may be declared on the above described stocks subsequent to my death, in trust, nevertheless, to receive the income and profits thereof and apply the same to the use of my said wife Martha Gr. Farish, during the term of her natural life. * * * [Here follows a power to sell and to reinvest.]

“ Upon the death of my said wife I give and bequeath all of tbe above mentioned shares of stock and bonds, or the qn’oeeeds of such as shall have been previously sold, to such persons as would have inherited the same under the laws of the State of Hew York, if the same were real estate and I had died intestate and unmarried, at the same time as my wife, and in such proportions as they would have inherited the same respectively.”

The testator left no children, or descendants, and his residuary estate was given to his heirs-at-law. The testator’s widow remarried and is now Madame de Brnlatour. She and Mr. Bobertson are the survivors of the three trustees named. There has been no difficulty in the past upon their accountings and that which now arises presents legal questions of interest and of -importance ; especially, with respect to the proper disposition by the trustees of distributions, or dividends, made by certain corporations upon their capital stock. The right to them, as between the beneficiary of the trust and the remaindermen, will depend, primarily, upon the testator’s intention, as it may be gathered from the will, and, then, if that is deemed to be expressed ambiguously or indefinitely, upon the subject, resort must be had to the facts, in order to discover whether the particular dividend was a distribution by the corporation of accumulated earnings and profits, or of that which was capital. There can be no doubt but that the testator has employed rather unusual language in making the trust provision for his wife and, in my opinion, it is such as, by a fair and reasonable reading, would give to his widow, as the beneficiary, everything which is distributed to the trustees, as the legal holders, upon the shares of stock

But, while I entertain the opinion that the trust clause of this will is comprehensive enough to include the extraordinary dividends, or distributions, in question, however they may be termed, which were made by the New York & Harlem Railroad Company and by the Chicago, Rock Island and Pacific Railroad Company, I prefer- to place our decision, in that respect, upon the ground that their distributions were of income and profits, and not of capital.

The New York & Harlem Railroad Company’s distribution was made in September, 1899, pursuant to a resolution of the board of directors. It read :

“Whereas it appears from the treasurer’s report that the company’s cash surplus now amounts to upwards of $2,500;000 over and above all claims and obligations existing and contin-■ gent, and that the same is now available for distribution among the stockholders; It is Further Resolved that the sum of $2,500,000 of the said surplus he distributed at the rate of $12.50 per share to all stockholders of record at close of business on the 23rd day of September, 1899, and that the treasurer be and he is hereby authorized and directed to make such payment on the 2nd day of October next.” The word dividend is not used ; hut that is quite immaterial, if the facts disclose the origin of this “ surplus ” and enable us to ascertain that “income and profits” were the subject of distribution. The findings are explicit enough upon this head. At the time that the resolution was passed, the company’s hooks showed on the credit side of the profit and loss account a surplus of $3,096,705.84. The contention of -the remainder-men was, in effect, and the referee so held below, that the $2,500,000 distributed by the directors represented the proceeds of sales of portions of the.company’s real estate ; which, by reason of certain leases of its railways, more particularly referred to hereafter, had become useless. Being the proceeds of the sale of a “ portion of the abandoned plant of the company, theretofore used in its business,” as they say, the

distribution was of the corpus of the company’s property and was a return of capital. The facts do not justify the contention and it is based on a fallacy, in the assumption that, because the sale of real estate had put the company in the possession of sufficient cash, the distribution, necessarily, was of. the real estate as converted. But that is not the fact. The surplus item in the profit and loss account did not arise from, nor had it any relation to, these sales. The result of the sales was to increase the cash balance and, undoubtedly, the cash proceeds were used in the distribution of the company’s surplus among the stockholders, as was the finding of the referee; blit that was a mere matter of bookkeeping, as will be explained later. The essential is that the sales did not create the surplus, nor affect it as an item in the account of assets and liabilities, and such are the findings. The surplus shown by the company’s ledger represented the difference between assets and liabilities, as carried in the profit and loss account, and how it arose is readily ascertainable from the accounts of the company’s transactions. In 1873, the company leased its steam lines and real estate appurtenant thereto to the New York Central & Hudson Biver Bail road Company for 401 years, at a rental measured by payments of eight per cent on its capital stock and of the interest on its bonds. In 1896, it leased its horse-car line on Fourth and Madison avenues to the Metropolitan Street Bail way Company for 999 years, at a rental measured by payments on the former’s capital stock, Avhicli would amount, in a few years, to four per cent. As the result of these leases, the company, while still a going concern, ceased to operate its raihvays. It owned, in addition to the great terminal station at 42nd street, other, and unneeded, parcels of real estate; Avhich had been formerly used, either, for a station, Avhen the terminal had been below 42nd street, or for its street-car stables and other similar corporate purposes. Some of these properties had not been included in the leases. One of them Avas the block, between Fourth and Madison avenues, 26th and 27th streets, doav occupied by the “ Madison Square Garden,” and which had been the principal

railroad station before the building of the “ Grand Central ” depot; another was an unimproved block between Fourth and Lexington avenues, 34th and 33rd streets; another was the block at Fourth avenue and 32d street, used for street-car stabies, and another was a plot at Madison avenue and 85th street, also, used for the same purposes. Between 1886 and 1899 these four properties were sold at a large profit. In the company’s ledger was kept an account known as.“Real Estate in NTew York, City,” and, as sales were made, the proceeds -were, wholly, credited to that account; with the result, of course, that, to the extent of the credits, the charge to the account was reduced. The profits of the transactions went to reduce the carrying cost upon the books of the other real estate. The moneys were charged to cash in “ temporary assets ” and the result of the bookkeeping was that the charge against real estate became lessened, until the value, on the books, of the company’s New York city real estate was written off at $478,376.81. If the profits upon the transactions of sale had been regarded as creating a surplus of assets, they would not have been credited in the real estate account. In that case, only the cost of the real estate sold would have been credited and the item of surplus would have been increased to the extent of the clear profit; but that item never reflected the profit on sales. The account with the real estate reflected the condition of the company’s real estate as an asset and it would seem quite plain that this method of bookkeeping, by which the proceeds of sales of real estate were carried as a credit to the real estate account, actually, increased the value of the capital stock by the amount that the clear value of the real estate in possession was increased.

This is shown by the findings of fact, which must negative any inference that the subject of distribution by the resolution of September, 1899, was the proceeds of the real estate sales. It is found that “ the Profit and Loss account on the •company’s books and the company’s surplus account on its books were practically unchanged and unaffected by the

aforesaid sales of real estate. * * * When tlie above mentioned properties were sold, the purchase price thereof was credited to the ‘Real Estate in ¡New York City’ account and charged to cash, but without affecting on the books the balance of surplus in the Profit and Loss account. After said sales the ‘Real Estate in ¡New York City’ account was carried at $478,376.81, at which figure it stood in September, 1899. Said Profit and Loss account included both earnings and income and not necessarily any profits from the sale of real estate owned by the Company.”

The only surplus, which the books showed to the directors as held by the company, was its profit and loss account. That, as already mentioned, amounted at the time to $3,096,705.84. In 1873, at the time of the making of the first lease, it amounted to $1,611,347.63, and we are informed, by the findings, that from that date it did not fall below that figure, “ but increased from year to year up to September 30th, 1899, when it amounted to $3,096,705.84.” We are, further, informed how this gradual increase was possible. Beyond the rentals from its lessees, the company was in receipt of “some interest and dividends on investments” and “it has not required any casli capital for the purpose of carrying on its business.” Row the total increase in the surplus in the twenty-six years from 1873 was less than $1,500,000, or at the rate of only about $57,000, a year. In view of the finding that the profit and loss account included the corporate earnings and income and that the surplus item in that account was unaffected by the real estate sales, but the one conclusion is permissible, that the surplus, or increase in the surplus, arose from the excess of the company’s revenues, remaining after the payment of the annual dividends, o That item in the account would have been just the same, if there had been no sales; but, to the extent that sales were made of real estate and of securities, (and there were sales of the latter), assets were liberated and the cash accumulations created a cash surplus, which the directors could, in the exercise of their discretion, distribute among the stockholders. When that dis

Authorities need not be cited in support of the views which have been expressed. We have, upon several occasions, considered the subject of the respective rights of life tenants and remaindermen to distributions made by corporations among their stockholders of the corporate assets. It would not be profitable, at this time, to review them; inasmuch as in the'latest of our decisions the principle has been fully enough discussed for the present purpose. (Lowry v. Farmers' L. & T. Co., 172 N. Y. 137 .) In Lowry's case, the Pullman Palace Car Co. declared a dividend of fifty per cent upon it's capital stock, payable in new share certificates at par. The discussion was upon the effect-of the corporate action and whether the distribution should be regarded as of earnings, oías an addition to capital. Upon the authority of McLouth v. Hunt, ( 154 N. Y. 179 ), which involved the disposition- of a stock dividend, made by the Western Union Telegraph Company, as between the beneficiary of a trust and the remainder-men, we held the question to be one determinable by the facts. In each case, the corporate action was based upon an accumulation of earnings and the dividend declared was adjudged to be income and not capital. In both of the cases, it is true, the resolutions of the directors of the companies recited, in effect, that the dividend was from earnings, which had been withheld from the stockholders, or which had accumulated as a surplus “at the credit of income account.” The rule, however, was laid down, in Lowry's case, that the determination of such a question, when presented, must be reached, first, by

The Rogers case, (Matter of Rogers, 161 N. Y. 108 ), is not an authority, particularly, in point; because, there, -the industrial corporation, whose shares of stock were held in trust, sold its plant to a new corporation for a certain amount of its stock and went out of business. In liquidating its affairs, there remained property on hand which had accumulated in the past as a surplus and consisted in government bonds, railroad stocks, real estate, etc. These were sold and

The disposition to be made by the trustees of the 100 shares of stock received from the Chicago, Rock Island & Pacific Railroad Company, in 1898, and of certain cash dividends, paid in subsequent years, was correctly adjudged below. The referee held that they went to the beneficiary of the trust as income, and he has been 'sustained by the Appellate Division. The question is one of much less difficulty than that presented in the case of the Hew York & ITarlem Railroad Company’s distribution of surplus and, as it has been carefully and well discussed in its legal aspects by the referee, it needs but slight mention here. In 1881, 1882, 1883 and 1884 the company’s board of directors, by resolutions, directed the transfer from “ the Profit and Loss, or Income, Account ” of sums of money, aggregating $1,000,000, to the credit of a new account, to be known as the “ Addition and Improve

The questions as to the new shares of stock purchased by the trustees, in the exercise of their right to subscribe therefor, and as to the sums of money received by them from sales of subscription right's upon the stocks given by the will in creation of the trust, were correctly decided in favor of the remaindermen.

So, also, was the question correctly decided, which the remaindermen raised as to the obligation upon the trustees to maintain a sinking fund, with which to make good any depreciation in the value of the securities by the falling off in the premiums. This rule has no application where the securities have been specifically bequeathed. It, only, applies, in ordinary cases and where the will affords no aid upon the subject of the testator’s intention, when trustees have, themselves, ipade investments from the trust funds, in the purchase of securities at a premium. (N. Y. Life Ins. & Trust Co. v. Baker, 165 N. Y. 484 , affirming the decision in 38 App. Div. 417 )

A question was raised as to the right of the trustees to the statutory commissions on the entire capital of the trust received by them. The plaintiffs .had accounted, as executors of the

As to the right of the testator’s widow, the beneficiary of his trust, to actas trustee, the referee held, and the Appellate Division has affirmed his decision, that she could do so. I think that the decision was correct. If she were the sole trustee, the question might be different, (see Woodward v. James, 115 N. Y. 346 , 357, and Greene v. Greene, 125 ib. 506); but she is, certainly, competent to act as trustee with others, in the management of the trust; if not as to her own interests, so far, at ■least, as it has to do with the preservation of the fund for the remaindermen. (Rogers v. Rogers, 111 N. Y. 228 .) She was selected by the testator as one of the trustees to preserve the estate and the legal title vested in all of them. She had duties to perform as a trustee, aside from what concerned

Ho other questions demand our consideration. Those discussed have been well and carefully dealt with below and their review here is justified by their importance, or by their novelty. . The conclusion reached is that the judgment entered upon the order of the Appellate Division, and now appealed from, was correct and should he affirmed. Some of the questions presented by the appeal have not been free from difficulty and they have been very carefully and ably argued in behalf of the trastees and the remaindermen. I advise that costs be allowed to both and, that the burden may he equitably borne, that they should he paid ont of the capital of the trust estate.

Cullen, Ch. J., Edward T. Bartlett, Haight and Willard Bartlett, JJ., concur; Hiscook and Chase, JJ., concur in result.

Judgment affirmed.