In re the Accounting of Lloyd

By the decree appealed from, these accounting testamentary trustees have been held subject to surcharges because they allocated wholly to income certain 1932 and 1936 cash dividends on corporate stock held in two of the three trusts erected in obedience to the commands of the will. The will named the widow and appellant trust company as executors and trustees, bequeathed a sum of money to the widow, gave the widow the life use of two residences, devised a country

On January 14, 1932, when the corporation’s fiscal year began, it had no surplus but had on hand undivided profits of about $150,000. During that fiscal year it suffered an operating loss of about $650,000 and paid out $157,500 in three regular quarterly preferred dividends. In April of that year, by appropriate corporate action, it reduced its capital by $750,000, so that, starting out with the undivided profit fund and then giving effect to the dividend payments and the cut in capital, the corporation ended its fiscal year of 1932 with a net balance of about $90,000 in its “ capital surplus account ”. No attack is here made on the legality of the reduction of capital or of the dividend distributions made possible by that reduction (see Jay Ronald Co. v. Marshall Mortgage Corp., 291 N. Y. 227 ). The Surrogate, however, attached great importance to the fact that the first two quarterly dividends of that year, added to the losses sustained up to the times of the declaration of those dividends, had more than used up the credit balance which had been in the undivided profits account at the year’s beginning. Ruling that any payments to stockholders out of the new surplus

We consider now the 1936 dividends. No dividends were paid by the corporation during the fiscal years 1933, 1934 and 1935, so that at the beginning of 1936, the accumulated arrears on the preferred stock were over $800,000. Analyzing the corporation’s history for its fiscal year 1936, the Surrogate came to the conclusion that a dividend of $2.25 per (preferred) share, paid December 28, 1936, on account of arrears, should not have been turned over by the trustees to those entitled to the income of these trusts. As of the beginning of that year the corporation’s capital had been impaired to the extent of about $935,000. In December it reduced its capital by $1,500,000 and was thus able to show on its books a new surplus of $565,000. In 1936, unlike 1932, the business itself was carried on at a profit of $77,000, which operating profit exceeded by about $10,000 the 1936 dividend payment of $67,050. But this dividend, also, the Surrogate ordered treated as principal, not income. Pointing out that the New York statute (Stock Corp. Law, § 58) forbids the payment of dividends except from surplus and that a “ created ” surplus resulting from a reduction of capital does not change the fact of a prior capital deficit, the court reasoned that the placing in a trust’s income account of dividends paid to it after the corporation’s capital deficit has been eliminated, not by accumulation of earnings but by bookkeeping entries consequent on capital reduction, operates to reduce the “ intact value ” of the trust. In other words, according to the Surrogate, the 1936 dividend, so far as these trusts were concerned, should have been treated as capital, since it represented moneys which in the corporation’s own hands would necessarily have been used (had not its capital been reduced) to restore part of the prior capital shrinkage. The 1936 dividend, reasoned the Surrogate, was in cold fact a distribution to shareholders of part of the “ contributed capital ” of the corporation. When such a dividend came into these trusts, he

“ If ”, wrote the Surrogate, 11 a dividend arising from such procedure is not to be put into capital account of the Trust it is evident that the Trust principal can be appropriated to income completely.” But a testator may have it that way if he wishes it. A testamentary trust provision is not invalid, merely because it results in the payment to “ income beneficiaries ” of part of the corpus. (Matter of Osborne, 209 N. Y. 450 , 474.) The freezing of trust principal, so as to keep its original or “ intact ” value undiminished, is a matter of choice for the trustor. His expressed choice settles the question. This testator did not leave it to the courts to look into the facts, circumstances and nature of the transaction and determine the nature of the dividend and the rights of the contending parties accoi'ding to justice and equity ” (Matter of Osborne, supra, at p. 475). He did all that for himself. He spared the courts and the Legislature the burden that might otherwise have been theirs (see Bourne v. Bourne, 240 N. Y. 172 ; Personal Property Law, § 17-a, Opperman’s Estate (No. 1), 319 Penn. St., 455 ), of equitably allocating as between his income beneficiaries and his remaindermen, dividends that for one reason or another might be held to trench on his capital funds. In clear language he instructed his trustees to “ treat all dividends ” as “ entirely income ”, regardless of encroachments on principal. That command of the testator is the law of these trusts, and the trustees obeyed that command when they turned over the dividends to the income beneficiaries.

The order of the Appellate Division and the decree of the Surrogates’ Court, so far as appealed from, should be reversed,

Lehman, Ch. J., LohghRAN, Rippey, Lewis and CoNway, JJ., concur; Thaoher, J., taking no part.

Order reversed, etc.