In re Carey

“(2) That a dividend, to be known as an extra dividend, and to amount to forty ($40) dollars in cash upon each share of the common stock now outstanding, shall, upon declaration thereof by the board of directors, be paid and distributed, from and out of the accumulated surplus of the company, to and among the holders thereof. (3) That holders of the outstanding common stock shall have the right to subscribe, take and pay for, at par, for cash, an amount of the new and increased common stock equal to forty (40) per cent, of the outstanding common stock held by them respectively, as stated opposite their signatures hereto. Every stockholder signing this agreement covenants and agrees, but only on payment of said' extra cash dividend of forty ($40) dollars per share, to so subscribe and pay for the above-mentioned amount of said new common stock; and that, upon payment of the extra cash dividend above referred to, the money so paid shall be applied in payment of such subscription.”

Under this agreement a check for $4,000, being 40 per cent, on the 100 shares of the stock of this corporation held by the trustees above named, was received by the attorneys named in their proxy, who-indorsed and delivered it to the corporation, and on or about January 2,1907, the trustees received a certificate for 40 shares of new common stock of'said company of the par value of $100 each; and the question presented to the court for determination at this time is whether this-is properly added to the trust estate as a part of the capital of the trust, or whether it is income and, as such, should be paid to Lady Leigh as a. part of the surplus of income over and above the $10,000-provided for the annuitant, Marie Valadier.

The attorneys for the respective parties herein have presented very able and exhaustive briefs upon the question presented. As to whether or not- the 40 shares of stock so received by the trustees shall be considered principal or income is dependent upon two considerations, in the main: First, what provision, if any, the testator has made for any such contingency as this? What, if anything, he has said with reference to any extra dividends upon any portion of his estate ? And, secondly, what is the origin of the dividend itself ? Whence does it come ?■ How was it regarded by those who issued it?

As to the first of these questions, it must be remarked that a careful reading of the will of Mr. Thorne fails to reveal any expressed provision that might apply to anything in the nature of extra dividends upon any portion of his estate. This will simply directs that the trustees shall pay an annuity of $10,000 to Marie Valadier, and that the entire surplus, whatever it may be shall be immediately paid to Lady Leigh. That these 40 shares were considered by the corporation itself to be an extra dividend, I feel constrained to hold, unless the language of paragraphs 2 and 3 of the statement issued by the company is to be taken as meaning exactly the opposite of what they say. Of course, I am

In the case of Lowry v. Farmers’ Loan & Trust Company, 172 N. Y. 137 , 64 N. E. 796 , the court lays down the rule:

“The transaction, through which the property of the corporation is being distributed iñ the extraordinary form of a stock dividend, is to be looked into, in order that its true nature may appear, and that a determination may be reached, whether capital, or an accumulation of profits on the capital, is being divided among the stockholders. While the corporate action may not be, necessarily, conclusive upon the court, with reference to the question, if it is based upon facts, and is not purely arbitrary, it will, and should, be controlling.”

Now, was the action of this company arbitrary in declaring this dividend ? It would hardly seem so from the statement which they issued. It had a surplus; it had a very large surplus. It stated that it believed that the common-stock holders were equitably entitled to a portion of this surplus, and it actually paid it in cash.

To my mind this leaves little, if any, question as to the character of the fund in question. It is contended by the trustees that there has been no distribution and no change in substance, but only a change in form, resulting in a capitalization of surplus and a dilution of the common stock of the company, so that the 140 shares which the trustees held after the issue of the new stock was of no extra value and represented the same proportionate interest in the property of the company as the 100 shares held by the company prior to such increase; but I am not impressed by this reasoning. To me it seems quite immaterial that there may have resulted this increase in the stock by a capitalization of the income or the profits. The capital test is: Has there been a distribution of income and profits, or has there been a division of capital ? Of course, the latter would not be permitted, and, if the distribution in this case was not made from the income and profits of the business, then I am at a loss how to characterize the transaction. It is true that this dividend was manifestly paid from that portion of the surplus income which had been reserved as working capital; but, no matter how it was designated on the books of the company, it represented actual profits and income from the business of this corporation, and it was from this fund that this dividend was paid, and the mere fact that the common-stock holders used the dividend so received, under an agreement with this company, in the purchase of new stock in the company, did not destroy its character as an actual bona fide dividend, payable from the profits and income of the business.

I therefore decide that the 40 shares of stock received by the trustees from the Niles-Bement-Pond Company are not a part of the capi

Decreed accordingly.