53 A.2d 413 | Md. | 1947
This Special Case stated (No. 131, October Term, 1946) is similar to case No. 130 (Lindau v. Community Fund,
The trust in this case was created by the will of Charles F. Bevan, a resident of Baltimore City, who died December 23, 1917. The net income was to be paid to his wife during her natural life, and, after her death, the trust property was to be equally divided among his five children. The widow died on August 21, 1946. The Safe Deposit and Trust Company, which was also the substituted trustee of the estate, was appointed as the executor of Mrs. Bevan. At the time of the death of the testator he had 126 shares, of the par value of $100 each of the preferred stock of the Mt. Vernon-Woodbury Mills, Inc. In 1920 the trust estate received a stock dividend of 22 more, which, with the acquiescence of the life beneficiary, were added to the trust principal. This preferred stock provided for seven per cent. cumulative dividends. The corporation had only one other class of stock, the common, also $100 par value. From July 15, 1920 to April 1, 1946, no dividends were paid on the common stock, and there were arrearages of the preferred stock dividends amounting to $67 a share. On October 11, 1945, a readjustment of the capital structure of the corporation was recommended to the stockholders by the terms of which the holder of each share of the preferred stock was to *485 receive in exchange for and cancellation of such share and of all accumulated dividends thereon, $10 in cash, $50 principal amount of four per cent debenture notes, three-quarters of a share of 6.75 per cent. prior preferred stock of the par value of $100 per share, and one-half of a share of common stock of the par value of $20 a share. The letter from the president of the corporation submitting the proposition to the stockholders shows that through ownership of $50 of the debenture notes the holder would receive $2 a year and through ownership of $75 of the new prior preferred stock he would receive $5.06 a year, or a total of $7.06 on a par value of $125 as against $7 a year on a par value of $100 of his old holdings. This proposal was accepted by more than ninety-five per cent. of the preferred stockholders, including the trustee in the Bevan estate, who, in exchange for cancellation of its 148 shares of preferred stock and the accumulated dividends thereon received $1,480 in cash, $7,400 principal amount of debenture notes, 110 shares of prior preferred stock and 74 shares of common stock. It is agreed by all parties in this case that the cash distribution was taken from the earnings of the company, and constituted income and not corpus, so any question as to this will not be considered by us, and we express no opinion about it. It is also not contended (and could not be contended) that the Principal and Income Act, Code, Art. 75B is applicable since the trust was created prior to 1939.
The executor of the life tenant and the trustee, both urge that the recapitalization should be treated in part as payment of the accumulated dividends and, therefore, the securities received are similar to stock dividends. They contend that the new securities were exchanged for not only the stock, but also for the accumulated dividends in arrears. They show that the aggregate par value of the cash and securities exceed by $45 the par value per share of the stock surrendered. They therefore argue that the preferred stockholders are not entitled to receive more than par for the exchange of their *486 stock. It is undeniable that if the situation is to be treated as analogous to a stock dividend, then the Pennsylvania rule applied by this Court in many cases and specifically approved in Lindauv. Community Fund, supra, would compel an apportionment. It therefore becomes of primary importance to determine what this reorganization was.
It was apparently intended to wipe out the arrearages in dividends not yet declared, an obligation which, it was stated, could not be taken care of by the company for a long period in the future. It was also intended to provide some income for preferred stockholders which the company would be able to pay, and to establish a possible basis upon which some dividends might be paid on the common stock. It did not increase the preferred stock held, nor did it pay the remaining dividends which had not been declared. It gave in return for old preferred stock and the right to receive such dividends when and if declared, certain new securities of a different nature and with different characteristics.
It has been the policy of this Court to look to the substance and intent of the action of the corporation as manifested by its votes or resolutions to determine whether dividends represent earnings or capital. Atlantic Coast Line Dividends Cases,
While this Court has adopted the Pennsylvania rule, as to the apportionment of dividends, it has not followed the Pennsylvania rule in cases of sale. Smith v. Hooper,
The appellants rely strongly on three out-of-state cases. These are the Pennsylvania case of Fisher's Estate, supra, a Delaware case, Cox v. Sellers, Del. Ch., 28 A.2d 679, and an Alabama case, Title Guarantee Loan Trust Co. v. Woodward,
There would be practical difficulty in adopting any scheme of apportionment by which the intact value of the corpus could be maintained. The securities exchanged were all new or changed issues with different interest rates and characteristics, including notes and redeemable preferred stock. There is no feasible way by which these can be so divided as to make sure that the corpus will receive enough in all respects (and no more) to insure that it is not impaired. The par values are not a true criterion of the real values. Some cases which apportion securities received in payment of deferred dividends or give such securities to the life tenant involve situations where the old security is retained. They are thus clearly distinguishable from the case before us. One such case is Re Smith's Will Trust, 155 L.T. (N.S.) 248.
It is our conclusion that the transaction in this case was the exchange of one type of securities for another. It was in no sense similar to the declaration of a dividend. It was more in the nature of a sale. We think none of the new securities were intended as payment in whole or in part of the unpaid dividends. As a result, the new securities in their entirety belong to the corpus of the estate and the decree of the Chancellor to that effect will be affirmed.
Decree affirmed, costs to be paid out of the estate. *490