Richmond v. Richmond

The testator by his will, which was executed on the 14th day of February, 1884, bequeathed to his wife $15,000, to be paid in a reasonable time after his decease “without waiting for the lapse of one year,” to two nieces of his wife $5,000 each upon'attaining the age of 21 years. " By article “Fourth” he bequeathed the residue of his property to his executors “in trust, in their discretion to invest, reinvest and keep invested, the personal property, rent, rerent and keep rented, collect rents, insure and keep insured and in repair, any and .all real estate, and collect all income from my said estate, and to pay over the same and the whole thereof to my said wife,, Loraine Richmond, as follows, viz.: The sum of one hundred and fifty dollars each month during the year, and at the end of each year to pay over to her the remainder of said income, so long as she, my said wife, Loraine Richmond, shall live, and no longer.” In the same article he provided that, when the legacies to the nieces are paid, “the necessary money "to pay the same may be taken from the principal of my estate and the income from the remainder be paid over to my said wife, Loraine, as in this fourth article provided.” He directed that the trust should cease upon the death of his wife, and the rest and residue of his estate should go to his two brothers, Alonzo and Jewett M., and they, with his wife, were nominated executors of his will. Alonzo Richmond died before the testator, and in July, 1888, he made a codicil to his will. By this instrument he gave to his wife all his household furniture, books, jewelry, etc., and to each of his two nieces named in the will $10,000 additional on the decease of his wife. He added $75 to the monthly payment to his wife, making $225. He made his brother Jewett M. his sole residuary legatee and devisee, whom he named executor with his wife, the plaintiff. She renounced her right to the issue of letters, and Richmond was appointed alone. In July, 1895, his account as executor was judicially settled in the Surrogate’s Court of Erie county, and a decree entered which directed him to retain as trustee the stock owned by the testator in the Marine Bank. He resigned as executor in 1897 and the defendant, the Fidelity Trust Company, was appointed by an order of the said Surrogate’s Court trustee of said trust and has since administered the trust estate.

The general scheme of the will seems quite plain. The testator had no children, and obviously his first care was to make adequate provision for his wife. He gave her the bequest of $15,000 unqualifiedly. He directed his executors “to collect all the income from my estate .and to pay over the same and the whole thereof” to his wife in a specific sum each month; and then, to make his purpose more distinct, he added, “and at the end of each year to pay over to her the remainder of said income.” This intention is fortified to some extent by the explicit direction in the will itself that the bequests to the nieces are to ".be paid from “the principal of my estate, and the income from the re

“Shareholders desiring to subscribe for such additional stock must subscribe and pay for the same on or before the 20th day of August, 1906, without further notice.”

On January 29th preceding the surplus and undivided profits of the bank aggregated $2,165,941. In anticipation of the proposed increase of its capital stock the directors of the bank on the 18th of July passed the following resolutions:

“Resolved, that a dividend of 552 per cent, on the capital stock of this bank be declared as of August 15th, 1906, payable on and after that date.”

“Resolved, that in the matter of the increase of the capital stock of this bank, the president be authorized to sell any unsubscribed stock for the best price obtainable, at not less than' 350, when and as authorized at the stockholders’ meeting.”

At a meeting of the stockholders, convened agreeably to the notice, a resolution was adopted authorizing the increase of the capital stock as recommended by the directors; and this resolution was also passed by the stockholders at such meeting:

“That each shareholder who desires to subscribe for his pro rata share of the new stock must do so and pay for the same on or before August 20th, 1906, and that such new stock as shall not have been subscribed and- paid for by the shareholders, under their pro rata privilege, on or before said 20th day of August, 1906, shall be disposed of by the president in such manner as the board of directors may prescribe.”

The added capital stock was paid and the requisite certificate of approval given by the Comptroller of the Currency. On the 15th day of August the amount of the dividend of 552 per cent., or $55,200, was paid by said bank to the defendant trust company as trustee of the tiust created by the testator. The plaintiff claimed this sum was in

The dividend of 552 per cent, was sufficient, avoiding fractional divisions of shares, to take care of all the increased stock. There was left an excess of four shares to be disposed of by the directors. As already stated, the surplus and undivided profits at the death of the testator aggregated about $500,000. After the increase had been made, there was still left in surplus and undivided profits about $900,000. It is'a stipulated fact, also, that the present worth of said increased stock is upwards of $350 per share. This sum is not its intrinsic computable value, but is due doubtless to the marvelous success which had been achieved in the management of the affairs of the bank. In 1906 its net earnings were more than 150 per cent, of its capital stock or about 25 per cent, on a capital of $1,500,000. The growth had not been spasmodic, but continuous from year to year, and it was therefore an excellent investment stock. The submission is to settle the disputes of the parties and two questions are involved: First. Who is entitled to the cash dividend, the widow or the residuary legatees? Second. Is the stock purchased a part of the principal of the estate?

It is quite obvious that the dividend declared by the directors of the bank was paid wholly from the earnings. The capital of the bank was small in view of the magnitude of its profits. The surplus and undivided profits had been accumulating enormously each year. Whatever they were designated, they were clearly the income which accrued from the stock. - Had these profits been distributed each year among the stockholders, there would be no question as to the right of the plaintiff to whatever was apportioned on the stock owned by her husband. After the surplus had accumulated, if the directors had declared the dividend without increasing the capital stock, her title would be unquestionable. If the dividend had not been reinvested, the plaintiff would have been entitled to retain it. The effect upon the capital stock of the declaration of a dividend is of no importance in determining the relative legal rights of adverse claimants to it. As was said in Lowry v. Farmers’ Loan & Trust Company, 172 N. Y. 145 , 64 N. E. 798 :

“That the value oí the shares of stock has been lessened by a dividend is a fact of no relevancy in determining the question of whether the dividend is to be regarded as income to the life tenant,, or as capital for the remainder-men. That question will be determined by the origin of the dividend.”

When the earnings of a bank remain in a mass undivided, the life tenant can make no claim to his proportion of them. One who invests in a bank must accept the management of its affairs by the directors.

In that condition of affairs, the parties, realizing the wisdom of buying the stock, whatever might be their respective legal rights, entered into the agreement contained in the record. In accordance with its terms the stock was to be purchased with the cash dividend, and, if it was determined that the cash belonged to the plaintiff, the transaction was to be treated as a loan by her to the trustee, and the stock held as security for the loan. If, therefore, the stock purchased belongs to the estate—is a part of the trust funds—the dividends hereafter declared upon it are payable to the widow, and the increment not separated by dividends goes to the residuary beneficiaries tipon the death of'Mrs. Richmond precisely the same as if no increase had been made in the capital stock. It is unimportant whether the consent of Mrs. Richmond was essential to enable the trustee to purchase this stock, for she gave her consent, and the trustee has acted upon it. Unless there is some legal objection to that course, it would seem equitable, in' the first place, that the dividend, which is the transfer of a part of the earnings of the bank, should 'be paid to the widow; and, second, that the new stock should be purchased by the trustee from the general funds of the estate and the certificates be held by it in common with the other trust property.

I find nothing in the authorities to prevent such a solution of the

“The privilege or option- was to subscribe for, and take at par one or more bonds or shares of stock for a certain number of shares of stock already held by the estate. The right to subscribe belonged to- the trust estate and accrued upon condition the estate chose to pay' for, or purchase the bonds or stock. If the option was accepted, the purchase operated to increase the capital or change its manner of investment, and, if not accepted, the life tenant could neither complain of the choice of the trustees, nor in any way control their discretion. We think its value did not belong to her, and that the decisions of the referee and surrogate in regard thereto were correct.”

In McLouth v. Hunt, 154 N. Y. 179 , 48 N. E. 548 , 39 L. R. A. 230 , which involved a controversy between life tenants and remaindermen, the testator owned shares of stock in the Western Union Telegraph Company. The capital stock was increased and a stock dividend issued from the earnings, and it was held that the same belonged to the life tenant. There was no payment in cash, no dividend had been declared in 10 years, and the only way the benefit of the income could inure to the life tenant was by vesting in her the ownership of the stock. In Lowry v. Farmers’ Loan & Trust Company, 172 N. Y. 137 , 64 N. E. 796 , the Pullman Car Company declared a dividend payable from the income in certificates of stock, and it was held to belong to the life tenant. Here, again, it was not a cash dividend, and the life tenant received no money. In these cases it will be noted the dividend was of certificates of stock from the earnings. The distinction in the present case is that here the dividend was in cash, and the life tenant is entitled to it. That dividend is entirely distinct from the right attaching to the stock to acquire new stock, and which the trustee, as the representative of all the parties in interest, may purchase out of the trust funds precisely the same as it may make any other investment. In Robertson v. De Brulatour, 188 N. Y. 301 , 80 N. E. 938 , these authorities were reviewed; and in that case there was a right to subscribe for additional stock, and the court recognized that privilege as an . incident to the stock itself, and said at page 315 of 188 N. Y, at page 943 of 80 N. E.:

“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 rights upon the stocks given by the will in creation of the trust, were correctly decided in favor of the remaindermen.”

The right to subscribe allowed to the holders of stock was not availed of in that case, but was sold by the trustees, and the court held the avails were a part of the trust funds. In the opinion delivered in the

“When the corporation gave to the existing stockholders a right to subscribe to its capital stock at a price fixed!, there was nothing in this right of the nature of a dividend or distribution of profits. It was a right which accrued to the owners of the stock as an incident to its ownership. If the owner of the stock had accepted the option and had subscribed to the stock, the stock so subscribed and paid for out of the capital of the trust would be clearly a part of the trust property, and any increase in the value of that stock after its subscription would accrue to the capital of the trust. The trustees, not being in a position to make these subscriptions, sold the right to subscribe, and the proceeds realized from a sale of this right was a part of the capital of the trust.”

If the stock had been sold in the open market, the avails would have gone into the surplus and undivided profits, and the life tenant would have received only the benefit therefrom accruing upon the declaration of dividends from time to time. In Stewart v. Phelps, 71 App. Div. 91 , 75 N. Y. Supp. 526 (affirmed 173 N. Y. 621 , 66 N. E. 1117 , on opinion below), the will of Phelps created a trust, the income and profits of which were to be paid to his daughter semiannually. The property consisted largely of stocks and bonds, including stock of the Chicago & Alton Railroad Company. The privilege of subscribing to new stock was given to the stockholders of this company. The trustees under the Phelps will did not accept the privilege, but sold the right in the market, and the life tenant claimed the avails belonged to her, but the court held they were a part of the trust estate. It said at page 97 of 71 App. Div., page 530 of 75 N. Y. Supp.:

“If the trustees had subscribed to this stock, they would have used the principal of the trust fund and would have been entitled to that stock as principal ; but, in their discretion, they concluded not to accept that right to subscribe, and, because the stock was of greater value than they would have had to pay the company for it, they realized this amount. It certainly was not income or a dividend on the stock. What the trustees had was a right to subscribe for stock, which, if the right had been exercised, would have resulted in an investment of the trust estate; and the situation was no different than if the trustees had subscribed for the stock and subsequently sold it at an increase. We do not think that this could be said to be rents, income, issues or profits.”

The text-books, so far as I have been able to find, give a like construction to this proposition. Cook on Corporations (5th Ed.) § 559; Helliwell on Stock and Stockholders, § 322; 9 Am. & Eng. Ency. of Law (2d Ed.) pp. 717, 718. The principle is clearly stated as follows in Cook on Corporations, § 559:

“The right to subscribe for new shares at par upon an increase of the capital stock, which is an incident of the ownership of the stock, does not belong as a privilege to the life tenant, but such an increment must be treated as capital, and be added to the trust fund for the benefit of the remainder-men. This is equally the rule whether the trustee subscribes for the new stock for the benefit of the trust, or sells the right to subscribe for a valuable consideration. In either event, the increase goes .to the corpus. * * * The subsequent income, however, of such increase belongs, during the continuance of the life tenancy, to the life tenant as income. The new shares are part

of the corpus, and the life tenant, being entitled to the income from the corpus, takes the income from the accretions thereto.”

The same rule prevails where additions to the plant of a manufacturing corporation have been construed in controversies between the life tenant and the remaindermen. Accumulations often go into the business, and, in fact, make up a part of the working capital', although no change in the nominal stock may be made. Dividends may not be declared at all, but by common consent the business is extended from year to year, and the tangible property, real estate, machinery, and visible assets are added on and all from the profits. Stockholders thus have sanctioned this method, and have recognized the absorptions of the accretions into the actual capital as necessary in the extension of the business. These accumulations are held to represent capital stock and pass to the remaindermen, rather than to the life tenant. Chester v. Buffalo Manufacturing Company, 70 App. Div. 443 , 75 N. Y. Supp. 428 ; Gibbons v. Mahon, 136 U. S. 549 , 10 Sup. Ct. 1057 , 34 L. Ed. 525 ; Matter of Rogers, 161 N. Y. 108 , 55 N. E. 393 . The privilege of subscribing for this stock belonged to the trustee as the holder of the stock in common with the other property of the testator for the purposes of the trust which he has created. When purchased, the dividends which may be declared from time to time are to be paid to the plaintiff, and, upon her death, the stock, with the other property held by the trustee, should be disposed of in accordance with the will of the testator.

Judgment should be ordered adjudging the plaintiff the owner of the cash dividend of $55,200, and that the investment of that sum in the new stock is a loan by the plaintiff to the trustee in accordance with the agreement of the parties, that the right to purchase said stock belonged to the trustee, and the stock so purchased is a part of the principal and corpus of the estate. So ordered. All concur.