190 A.D. 494 | N.Y. App. Div. | 1920
Appeal from a decree of the surrogate entered in a proceeding brought by the United States Trust Company, respondent, for a settlement of its account as successor trustee under the will of Theron R. Butler, who died in January, 1884. Objections to the account were filed on behalf of Alice Green Hoffman and Mary Butler Green Hartwell, two of the life beneficiaries. i The objections presented the question of the proper disposition of certain money received by the trustee in 1914 for 2,100 shares of the stock of the Lake Shore and Michigan Southern Railway Company (hereinafter referred to as the Lake Shore Company) at the rate of $500 per share and amounting in all to $1,050,000. The trustee credited the entire amount to the capital of the trust estate. The said two life beneficiaries claimed that some portion of the amount so received should have been credited to income and paid over to them and Grace Green Alexander, the remaining life beneficiary. The matter was sent to a referee, who sustained in part the objections so filed and directed the transfer from principal to income of $261,471, that sum being $124.51 out of each. $500 received by the trustee. The surrogate overruled the referee and held that the entire amount received by the trustee for the 2,100 shares should be credited to the principal of the trust estate. (Matter of Butler, 106 Misc. Rep. 375.) Mrs. Hoffman only has appealed.
On April 29,1914, an agreement of consolidation was entered into between the Lake Shore Company, the New York Central and Hudson River Railroad Company (hereinafter referred to as the Central Company) and certain other railroad companies
On December 15, 1914, the date fixed by the agreement between the protective committee and the Lake Shore Company for the purchase by the latter of the stock deposited with or controlled by the Read committee, the United States Trust Company, as trustee under the Butler will, delivered to the Central Trust Company the 2,100 shares of Lake Shore stock and received therefor $1,050,000. On December 23, 1914, the proposed consolidation became effective and the new company was the New York Central Railroad Company.
The stock of the minority stockholders was not in fact purchased by the Lake Shore Company as had been originally proposed, but by a company known as the New York State Realty and Terminal Company (hereinafter referred to as the Terminal Company), all of whose stock was owned by the Central Company. The Lake Shore Company on December 14, 1914, by order of the Public Service Commission, made an agreement with the Terminal Company transferring to the latter all rights of the former under purchase contracts with non-assenting stockholders. The certificates of said stock were transferred into the name of the Terminal Company and thereafter exchanged by it for stock of the New York Central Railroad Company. The stock so received in exchange has since been sold by the Terminal Company to the public and is now outstanding. No assets of the Lake Shore Company were formally distributed by it to any of its stockholders in connection with or as a result of its consolidation with the Central Company, and no share of its own stock was purchased by the Lake Shore Company in connection with such consolidation.
It is the contention of the appellant that the referee was right; that the transaction involved in this case was analogous to a distribution of assets upon the dissolution of a corporation, where life beneficiaries are entitled to the aggregate of earnings traced as having been accumulated during the period of the trust. On the other hand, the respondent trustee contends that the transaction involved was nothing more than an actual
In the case of United States Trust Company v. Heye (224 N. Y. 242, 254) the court by Crane, J., said: “ The fundamental principle involved in these questions is whether there has been a distribution or division of the earnings, profits or accumulations of the corporation. Until there has been such division, the life tenant is not entitled to any increase in the value of the principal of the trust fund, or the capital and assets of the corporation, shares of which constitute the trust fund. But when there has been a division of the corporate property, no matter what form it may take, that part thereof which consists of accumulated profits or earnings belongs to the life tenant and that which is capital to the remainderman.” Judge Crane quoted the language of Mr. Justice Scott in Matter of Schaefer (178 App. Div. 117; affd., on opinion below, 222 N. Y. 533) to this effect: “ Where the trust fund consists of corporate stock the life tenant will ordinarily be limited to receiving only so much of the profits as the corporation sees fit to distribute in dividends, but when the accumulated profits come into the hands of the trustee in any form or manner the fife tenant is entitled to receive them.” In other words, if there has been a division there must be an apportionment; and in determining whether there has been a division, we must look at substance and not at mere form. In the Schaefer case it was pointed out that a division may take place by way of ordinary dividends, extraordinary dividends, or liquidation. It was held in that case that there was, in effect, a liquidation of one-half of the capital stock of a brewery. What actually happened was that two branches of a family owned all the stock and one branch bought out the other. In carrying through the scheme, the corporation itself bought in half the outstanding stock by means of borrowed money. The stock was not retired, but carried in the treasury and available for resale at any time. Clearly there
We have not now before us a case of an ordinary sale by a trustee. On the contrary, we have a liquidation by the Lake Shore Company of the shares of stock held by the Read committee and by the trustee. As already mentioned, section 9034 of the General Code of Ohio provides that the compulsory liquidation should be at the highest market value of the stock within the preceding two years. The trustee served notice that it demanded such amount and the Lake Shore Company filed a petition to have the same ascertained. Subsequently such petition was withdrawn, but only because the amount had been elsewhere determined. The trustee became a party to such condemnation proceedings, in the sense that it deposited its shares with the depositary named in the agreement between the Read committee and the Lake Shore Company and accepted the highest market value as fixed. As a result of the consolidation proceedings the Lake Shore Company for all practical purposes ceased to exist. In that view, the present case is even more favorable to the life beneficiaries than was the Schaefer case, for there the corporation continued operation. The money here paid the trustee really came from the Lake Shore Company, because the payment by the Terminal Company was for the account of the Central Company and in turn for the account of the Lake Shore Company. We have, therefore, in the language of the Heye case, a distribution or division of the earnings, profits or accumulations of the corporation. And as “ each case necessarily is determined by its own facts ” (Heye Case, p. 255) and as the industry of counsel has disclosed no similar case except Matter of Schaefer (supra) there is no danger that the present decision can be construed as abrogating the rule, based on expediency alone, that in an ordinary sale of stock the profit made by a trustee goes to capital and not income. The general rule working even-handed justice to both life beneficiary and remainderman should control.
There was no intention on the part of the testator to restrict
The decree should be reversed and the accounting proceeding remitted to the surrogate for further action in accordance with the views herein expressed, with costs to the appellant payable out of the principal of the trust estate.
Clarke, P. J., Laughlin, Smith and Merrell, JJ., concur.
Decree reversed, with costs to appellant payable out of the principal of the trust estate, and the proceeding "remitted to the surrogate for further action in accordance with opinion. Settle order on notice.