In re Elting

This proceeding is erroneously entitled an intermediate settlement, when in fact it is a final judicial settlement of

The testator, Abijah Curtiss, was, a few years prior to his death, which occurred in 1888, president of the Sixth Avenue Railroad Company. That company was organized in September, 1851, and thereafter, and down to the year 1892, operated a street railway in the city of New York, through the use of horses. The original capital stock was $750,000. This was increased in 1885 to $1,500,000, and again in 1891 to $2,000,000. The increase in 1885 was effected by a sale of new stock at par, the money received being used in the improvement of the road and in changing the character of its rails. The increase to stock in 1891 was made to retire bonds of the company of an equal amount, and the new stock was substituted for the bonds. For many years the company paid regular dividends out of the net earnings of from 7 to 8 per cent, per annum. About the time of the organization of the company they began purchasing real estate for depot stables and car houses at Sixth avenue, Forty-Third and Forty-Fourth streets, increasing the plant from time to time by the purchase of other lots as the business required, until they had acquired some 29 lots of land. They also acquired certain real estate at Sixth avenue, Fifty-Eighth and Fifty-Ninth streets, which, with the exception of a very small portion used as a waiting room, was never used for railroad purposes, but was allowed to remain as vacant land. The testator, at the time of his death, owned 264 shares of the stock of the company, which shares have since been held by his executors and trustees under the authority contained in his will. When a division of the trust took place, these shares were apportioned among the several trusts.

In 1892, by lease dated March 1st, the Sixth Avenue Railroad Company leased to the Houston, West Streets and Pavonia Ferry Railroad Company, otherwise known as the “Metropolitan System,” its entire railroad franchises, horses, cars, and railway property of every description, excepting its depot and stable property at Sixth avenue, Forty-Third and Forty-Fourth streets, and the real estate owned by the lessor on Sixth avenue, Fifty-Eighth and Fifty-Ninth streets. The term of the lease was 800 years, at an annual rent, for the first two years, of $152,500, and thereafter at the annual rent of $145,000. The lessee agreed to spend $1,000,000 in substituting other motive power in place of horses, and also to pay all taxes, license fees, etc. At the expiration of the lease the lessee agreed to return the leased property in its improved condition to the lessor. Pursuant to the agreement, the lessee has spent in improvements on said road, and in changing the motive power, more than the $1,000,000 required by the lease. The condition of the affairs of the company at the time of testator’s death is shown by a sworn statement filed with the railroad commissioners. The cost of road and equipment are put down

Per Cent

October 1, 1892...................................................... 1%

November 1, 1895 .................................................... 20

July 3, 1896.......................................................... 6

October 1, 1806...................................................... 6

October 20, 1897..................................................... 6

October 1, 1898...................................................... 1A

July 1, 1900.......................................................... 3

Total ......................................................... 4414

There is left to be distributed the balance of the proceeds of the Sixth avenue, Forty-Third and Forty-Fourth streets property, amounting to $800,000, and which will go to the stockholders by a further dividend of 40 per cent, upon the par value of their stock.

Since the declaration of the first of these real-estate dividends, on October 1, 1892, there have been a number of final judicial settlements of the accounts of the executors and trustees under the will of Abijah Curtiss. Those accounts show that the dividends which had been received at the time of such accountings had been distributed by the executors and trustees to the life beneficiaries as income. No question was raised as to the propriety or legality of such payments, the accounts were judicially settled and allowed, and it is upon this accounting the question is raised for the first time. It is now insisted by the special guardians that these dividends were a distribution of the capital of the company, and consequently belonged to the principal of the trust estate, and were improperly distributed to the life tenants.

I decided upon-the hearing, and I think correctly, that the accounting trustee acted in good faith, that the former decrees upon the judicial settlements had established the law of the case in the nature of stare decisis to the extent of justifying him in following the precedents which had been established, and which had had the sanction of the court upon the former accountings, and that such payments

While, as between the party receiving the money and benefiting thereby and the party legally entitled thereto, there may be an absolute right to recover, a trustee is liable only when he has acted in bad faith, or failed to exercise the reasonable discretion which a prudent man would exercise in respect of his own affairs. The former decrees of this court are sufficient to justify the trustee’s action. I will therefore consider the question presented for the purpose of determining the future duty of the trustee, when the further real-estate dividend of 40 per cent, shall have been declared. ■

In ascertaining the law to be applied to the facts, it is unnecessary to examine other than the three leading cases in the court of appeals. In re Kernochan, 104 N. Y. 618 , 11 N. E. 149 ; McLouth v. Hunt, 154 N. Y. 179 , 48 N. E. 548 ; In re Rogers, 161 N. Y. 108 , 55 N. E. 393 . In the latter case, which arose in this court, every authority upon the subject, both in this country and in England, was called to the attention of the court, either by counsel or in the opinions below. The law as established in this state by these cases makes the disposition of the question under consideration without difficulty. Counsel for the life beneficiaries states in his brief that “this is one happy case where we are not set to digging out with inadequate tools what the testator, as a matter of law, must have contemplated in a mass of legal contingencies which, as matter of fact, he never contemplated. If Abijah Curtiss meant such dividends as these to be income, he has failed to so say in express terms; if he intended them to be principal, the law steps in to say his intentions cannot control.” In this the learned counsel is in error. The point where we must begin to approach the question is the condition of the company and its capital at the time of the testator’s death, and as it must have been contemplated by him when he made his will, and expressly provided that his trustees might retain as part of the trust estate the securities representing part of the capital of the Sixth Avenue Railroad. The intention of the testator in every case is to govern where it can be ascertained and can be carried out within lawful limits. The testator had power to make capital distributable as income. He had no power, however, to make profits earned subsequent to his death capital; for this, in effect, would create an illegal accumulation. In re Rogers, 22 App. Div. 431 , 48 N. Y. Supp. 175 . I do not regard the action or the resolutions of the Sixth Avenue Railroad of any moment. It was said, in the Kernochan Case, that whatever the corporation determined to be capital was capital, and whatever it determined to be income was income; but the authority of that case is much confined and limited by the McLouth Case, in which Judge O’Brien says “that, while such a rule might have the merit of simplicity and convenience, it ought not to determine property rights of parties interested in the corporate property.” While the action of a corporation cannot determine the property rights of the parties interested in the corporate property as between themselves, such corporate action, however, should

Mr. Curtiss, by reason of his conceded intimate connection with the company, must have been familiar with its affairs and financial condition, and he must have known and considered that the stock which he held, and passed on to his executors and trustees, represented that proportion of the assets of the company included in the item of “cost of road and equipment.” The enormous increase in the value of railroad franchises, and the improvements in railroading which took place years afterwards, and which have made street railways profitable to an extent not dreamed of 15 or 20 years ago, could not have been contemplated by the testator. We cannot say that he did more than to realize that he had a good security proper for his executors and trustees to hold, and which was represented by a plant that had cost the company about $2,000,000, subject only to a bonded debt of $500,000. The necessary conclusion from the sworn statement made by the company to the railroad commissioners, without further figures or evidence before us, is that the entire capital of thé company went into the building and equipping of the road and the purchase of its real estate. The surplus shown was . too insignificant to have included the latter item.

These real-estate dividends were not dividends declared by a going concern in the ordinary course of business. The Sixth Avenue Bail-road, upon its lease to the Metropolitan system, ceased to be a going concern, and began a partial liquidation by the sale of the very property which, if it were a going concern, would be absolutely necessary to its business. The distribution of the proceeds of real estate in dividends must be looked upon and viewed as was the distribution of the assets of the corporation which figured in the Bogers Case. If the Sixth Avenue Bailroad were a going concern, and they had accumulated a large amount of profits which it had invested in the plant, they might, by resolution or action of its directors, have directed that property which had been a part of its original capital be substituted for the accumulated profits, and thereafter the real estate so originally purchased with capital might take on the character of profits, and the accumulated profits the character of capital. This was not done, and there is no ground to assume that it should have been done. There is no evidence of accumulated earnings being invested in the plant. The evidence before us leads to the conclusion that the- contrary wras the fact. It is undoubtedly true that the value of the franchises of the Sixth Avenue Bailroad, by reason of the change in the character of street railroading, and by reason of the vast increase in street-railway travel, and by reason of the connections made possible by the Metropolitan system, have increased enormously in value; nevertheless, this increase is in no sense profits

o The investment by the lessee provided for in the léase of $1,000,000, to be used in improving the plant and changing the motive power, was not an earning of the Sixth Avenue Eailroad Company out of which profits could be paid; it was merely a guaranty of the fulfillment of the obligations of the lessee; it was to be expended immediately, in order that the fulfillment of the terms of the lease might be insured, and the lessor might be indemnified in case of having to repossess itself of the property. Considering the long term of the lease, it was not a large sum to be required to be expended; in fact, during the continuance of the lease, many millions more will be required to be expended for the same purpose. The repairing and maintenance and replacing worn-out tracks, cars, horses, motors, or things of that character, are presumably to be paid out of the income, and, had the railroad remained in the possession of the lessor, these extensive repairs might have had to be paid out of earnings. If the company had, from time to time, set aside out of the earnings certain amounts to be applied when needed to rebuild and reconstruct the road, it could not be claimed that this would not be a proper application of earnings, although, naturally, it would have reduced the dividends.

Of course, we know that the life beneficiaries are usually the ones for whom a trust-maker has a special regard, and, in cases of doubt, it may be presumed that he intended to benefit the life tenants. There is nothing, however, in the case before us raising the slightest doubt as to the character of the money distributed, and no uncertainty as to the conditions which the testator must have contem

Decreed accordingly.