176 Mass. 558 | Mass. | 1900
The petitioner is a trustee under the will of Elizabeth Lambert, by the residuary clause of which she directed him to hold three-sixths of the residuum as a trustee, and to pay over the income of it to certain persons for life, and on the death of the last survivor of them to pay over the principal to certain persons and corporations to be held by them absolutely. A part of the property which has come into his hands is twenty-two shares of the capital stock of the Adams Express Company. This company is not a corporation, but a joint-stock association organized under the laws of the State of New York and having a capital stock divided into transferable shares. It had accumulated from earnings a surplus amounting to more than twelve million dollars, which it had invested in securities and property, the income of which it had divided among its stockholders in cash dividends from time to time, together with the earnings of the original capital. On the ninth day of February, 1898, the board of managers of the company voted to distribute its surplus to the amount of $12,000,000 among its shareholders, by issuing bonds equal in amount to the capital stock of the company, in denominations of $1,000 and $500, so that each shareholder should receive in bonds an amount equal to his capital stock. Under this vote, the petitioner has received two bonds of $1,000 each, and $200 in money the proceeds of his fractional interest in another bond, and the question is whether they are to be
Ordinarily when a testator leaves property to a trustee, the income of which is to be paid to one for life and the principal paid to another after the death of the life tenant, it is the duty of the trustee to take the whole property and use and invest it as a single fund, of which the income only is to be paid to the life tenant, and the principal is to be held for the remainderman. If the property, or a part of it, is of a kind which under the law is controlled and managed by another, so that the trustee can receive into his hands only what the managers turn over to the owners of the beneficial interest, questions of difficulty sometimes arise in determining whether the receipts are income or principal. Thére is much confusion in the decisions on these questions in the English courts. The judges apparently have desired to take the property as a whole and as the testator is supposed to have known it, and treat it as a single fund, that is, as capital, when the will takes effect upon it, and then determine whether that which afterwards comes into the hands of the trustee is income from it, or is a part of the principal fund. The questions have most often arisen in connection with property in corporations. In reference to such property, the rule in Massachusetts is now well established. Everything is made to turn upon the action of the corporation. “ A simple rule is, to regard cash dividends, however large, as income, and stock dividends, however made, as capital.” Minot v. Paine, 99 Mass. 101, 108, Daland v. Williams, 101 Mass. 571. Leland v. Hayden, 102 Mass. 542, 550. Rand v. Hubbell, 115 Mass. 461. Gifford v. Thompson, 115 Mass. 478. Adams v. Adams, 139 Mass. 449, 452. In considering the distribution to determine its character, substance and not form is regarded. The simple question in every case is whether the distribution made by the corporation is of money to be spent as income, or is of capital to be held as an investment in the corporation. While this arbitrary rule may sometimes defeat the intention of the testator, in most cases it accomplishes the result intended, and there were practical considerations as well as principles which required the adoption of it. The property of a corporation, in whatever way obtained, belongs, in the first instance, to the corporation and not to the stockholders. It
Courts have often suggested the desirability of ascertaining whether the distribution in question is from a surplus accumulated prior to the creation of the trust, or from one accumulated during its continuance. Many decisions in England have been affected more or less by this consideration. See Bouch v. Sproule, 12 App. Cas. 385, and Sproule v. Bouch, 29 Ch. D. 635, and cases cited. But in Massachusetts, and we think now in England, it is held to be impracticable in most cases to conduct such an inquiry in the courts with justice to the parties. It would often be impossible to tell what part of an apparent surplus on hand at a particular time was needed for the protection of the capital, or to determine just when the surplus was earned. The conditions which create expenses often come into existence a long time before the expenditures are made, and the returns of one period are often the fruit of effort or outlay made long before. In cases of corporations, therefore, our court does not inquire further than to ascertain whether the distribution is of money to be used as income, or is of capital to be continued in the business. This, too, is the rule in the Supreme Court of the United States. Gibbons v. Mahon, 136 U. S. 549.
In the present case, although the Adams Express Company is not a corporation, it is like a corporation in the management of its property and business. The stockholders are all liable as partners for the debts of the company. But under the articles of association the business of the association is conducted and governed by a board of managers consisting of nine persons. The property and effects of the association are in the possession
It is to be noticed here that we have no such question as often arises between partners as to what shall be called capital and what income, when by their contributions to the capital, or by the terms of the partnership articles, their proportional shares of the income are different from their shares in the capital. Such questions arise when a partnership business is closed and the partnership affairs are settled, or at any earlier time when there is a division of the profits. In reference to such a question the rule is that everything in addition to the capital contributed by the individual partners is income; but the question in reference to the rights of life tenants and remaindermen is, What part of the property is held in the business as a fund to be used for the benefit of the business, and what part is permanently separated from the business and turned over to the individual proprietors as income +o be spent ?
In this company each shareholder is entitled to the same share of the income as of the capital. Like the directors of corporations, the managers -under these articles of association have the power to determine what dividends ■ shall be declared and distributed as income, and what part of the earnings shall be retained in the business and used as capital. So far as concerns the question now before the court, we see no reason for treating this distribution differently from a distribution of a similar kind made by a corporation.
This property, having been in the business on February 9, 1898, to be kept and retained like the original capital for permanent use there, was owned by the trustees, and the beneficial interest of the shareholders in it was represented by their certificates of stock. When these bonds were issued, what occurred? First, there was a change of form in the ownership, so that each shareholder had, as evidence of his title, bonds for a part and his original certificates of stock 'for the rest. His actual title was neither less nor more than before. His ownership was divided so that either part could be trans
That it was contemplated that the bonds and the original stock should continue contemporaneously as investments, and that the two kinds of holdings in the company should terminate at substantially the same time, is further shown by the facts that the bonds are made payable on March 1, 1948, and that the managers recommended an amendment of the articles of association, which we suppose has been adopted, so as to read, “ The association shall continue until July 1, 1948, unless otherwise dissolved by law, or according to these articles.”
It is plain that the action of the company was like making a dividend of preferred stock. It was a more formal capitalization of earnings which previously had been capitalized in substance and effect. Applying the rule by which the court is governed in such cases, it follows-in the opinion of a majority of the court, that these bonds must be held by the trustee for the benefit of the remaindermen, as the property which they represent was held before the change.
It is apparent that these earnings had all, or nearly all, been accumulated before the will took effect, and had been treated as capital, and that the testatrix had been receiving income from them in her lifetime. She must have expected that her entire property in this company would be treated by her trustee as principal, which, after payment of the income, would be preserved for the remaindermen.
Decree accordingly.