Opinion
Nos. 34177 and 34191
Decided June 15, 1955.
Trusts — Administration of — Sound discretion of trustee not interfered with by courts — Stock dividends allocated to trust principal — Disagreement between trustees — Controversy resolved by court — Venue — Shares of stock assets of trust — Stock dividends principal, not income — Breach of trust — Beneficiary or cotrustee estopped to claim, when.
1. So long as a trustee executes the trust in good faith and within the limits of a sound discretion, a court of equity will not interfere with that discretion or undertake to substitute its discretion therefor.
2. Where there is no claim of fraud or bad faith on the part of a trustee in the allocation of stock dividends to the principal of the trust instead of to income, a sui juris beneficiary or a cotrustee with full knowledge of such allocation, who fails to seasonably challenge and protest but acquiesces in the action of the trustee in that respect, is estopped to claim a breach of trust growing out of the action of the trustee in making such allocation.
3. Where a trustee and a cotrustee authorized to act jointly are unable to agree on a matter relating to the trust, and the subject matter of such disagreement is justiciable in character, the courts will resolve the controversy in accordance with the law in the territorial jurisdiction of the trust.
4. Except as otherwise provided by the terms of a trust, where shares of stock of a corporation are held, as assets of the trust, to pay the income to a beneficiary for a designated period and thereafter to pay the income to another beneficiary, dividends payable in newly issued shares of the corporation itself are principal and not income.
APPEALS from the Court of Appeals for Cuyahoga County.
This is a trust construction cause. Under date of January 24, 1920, Edwin S. Griffiths, now deceased, and Margaret Rusk Griffiths, his wife, hereinafter designated as donors, executed a trust agreement with the Guardian Savings Trust Company of Cleveland as trustee, whereby the donors conveyed to the trust company certain property for safekeeping, management and final disposition by the trustee upon terms, conditions and stipulations, and subject to the uses and purposes, set out in the agreement. On November 20, 1942, upon the liquidation of the Guardian Savings Trust Company, the defendant, the Cleveland Trust Company, hereinafter called trustee, was appointed as successor trustee of the trust estate and since that date has acted as such.
The trust agreement provides that during the lifetime of Edwin S. Griffiths he was to have a large measure of control in the management of the trust, but that after his death the trustee, subject to the concurrence of the cotrustee, William R. Hopkins, who is named as such in the trust agreement and who is plaintiff herein, should have broad powers of management and control of the trust with power of sale and reinvestment of assets, the collection of assets and income, the distribution of income to the wife, Margaret Rusk Griffiths, and other beneficiaries during her lifetime, and the distribution of the income after her death to certain named individuals and charities as beneficiaries. Edwin S. Griffiths died in 1930. Margaret Rusk Griffiths survives and, as shown by a stipulation of facts, has an income of approximately $45,000 per year, about two-thirds of which comes to her from the trust estate.
Among the "powers and duties of the trustee," as set out in the trust agreement, are the following:
"3. To determine whether money or property coming into its [trustee's] possession shall be treated as principal or income, and to charge or apportion expenses and losses to principal or income, according as it may deem just and equitable, provided the approval of the cotrustee be had and obtained thereto * * *."
The trust agreement provides further:
"For the purposes set forth in this instrument, we declare and hereby constitute William R. Hopkins, of the city of Cleveland, to be cotrustee with The Guardian Trust Company. * * *
"Wherever this instrument requires the concurrence, approval, consent or assent of the cotrustee in any action which the trustee may contemplate taking in relation to this trust, such concurrence, approval, assent or consent must be in writing and must be first obtained before the action to which it relates shall be taken.
"* * *
"Wherever any joint action or joint or mutual agreement may be taken or made under the provisions of this instrument, such action or agreement must be evidenced by a writing signed by the parties so acting.
"Before the trustee sells, exchanges, invests or purchases any securities or property, it shall first obtain the written approval in respect thereto of the cotrustee then acting, it being the intent hereof that while the actual possession and management of the estate and property which is subject to this trust shall continue in The Guardian Savings Trust Company as trustee, all sales, exchanges, purchases and reinvestments of any of such property shall be made by it only after obtaining the written approval of the cotrustee for the time acting. Every said sale, exchange, purchase or reinvestment made with the approval of any such cotrustee shall be deemed to be a proper sale, exchange, purchase or investment * * *."
The trust agreement, among other things, provides that the trustee shall keep detailed records of all trust transactions which shall be open at all times to the inspection of the donors and the cotrustee, and that statements of accounts shall be rendered quarterly to the donors and the cotrustee, showing all receipts and disbursements relating to the trust.
Stipulations made by the parties show that among investments held in the trust were shares of stock of International Business Machines Corporation, Skelly Oil Company, Standard Oil Company of California, Pacific Mills, Babcock Wilcox Company, Continental-Illinois National Bank Trust Company, Central National Bank of Cleveland, and National City Bank of Cleveland; that from time to time stock dividends were declared by some of such corporations whereby additional shares of stock were issued to the trustee; and that in making such stock dividends the several corporations transferred on their books from earned surplus to capital account certain sums as consideration for the issuance of the shares as stock dividends.
It was stipulated by the parties also that all stock dividends from time to time received for the trust since November 20, 1942, have been treated by the trustee as principal of the trust; that, except on one occasion during that time, the trustee did not seek the cotrustee's consent to the treating of any of such stock dividends as principal of the trust and the cotrustee never consented that they be treated as such.
Up to 1949, the cotrustee did not raise any question as to the allocations of stock dividends or make any objection against their treatment as principal of the trust. In the year 1949, the cotrustee first objected to allocation of stock dividends to the principal of the trust. All cash dividends were paid to the life beneficiaries of the trust.
In case No. 34177, on March 23, 1950, the cotrustee filed his petition against the trustee, alleging in substance that the trustee has continuously treated stock dividends received by the trust as principal and not as income; that the cotrustee does not approve such allocation and does not agree with the trustee that such dividends should be treated as principal; and that he insists that such stock dividends, at least to the extent that they are derived from and based upon current earnings, should be treated as income and not as principal in the administration of the trust and has so advised the trustee.
The cotrustee alleges further that there is no provision in the trust agreement for the settlement or adjustment of differences between the trustee and cotrustee in respect to this matter and that no final action can be taken in this respect without the guidance and direction of the court, and prays that the court enter a judgment instructing the trustee and the cotrustee whether and to what extent the stock dividends now held by the trustee should be treated as principal or as income under the terms and provisions of the trust agreement, and that the trustee be required to notify the cotrustee when it receives any stock dividends for the benefit of the trust and to obtain his approval as such cotrustee before taking any action treating any stock dividends as principal or income in the administration of the trust estate.
To the petition of the cotrustee, the trustee filed its answer and cross-petition alleging that all stock dividends received by it since its appointment as successor trustee in 1942 had been considered by it as principal and not income under legal requirements, and that, although the cotrustee and the defendant Margaret Rusk Griffiths have regularly received from the trustee quarterly and annual reports showing that such stock dividends were principal and were being treated by it as such, only since June 1949 has the cotrustee raised any question or made any objection thereto and that Margaret Rusk Griffiths had never made any objection or raised any question relevant to the trustee's action with reference to the allocation of such stock dividends. The trustee alleges further that it never had or does it now have any power to determine that such dividends are income or to treat them as such and that by reason thereof it had no occasion to request or obtain the concurrence or approval of the cotrustee respecting the allocation of such dividend shares of stock.
Margaret Rusk Griffiths was made a party defendant to this action but filed no answer or cross-petition. Certain contingent beneficiaries of the trust were made parties defendant, and, as such, answers were filed by the Cleveland Clinic Foundation and the Physicians Hospital Association.
Case No. 34191 arose out of the fact that the Attorney General was made a party to this litigation for the first time in the Court of Appeals by order of the court after motions by the trustee and cotrustee. This was due to the fact that certain parties claim charitable interest in the Griffiths trust estate, and pursuant to Section 109.23 et seq., Revised Code, the Attorney General is a necessary party to an action involving charitable trusts.
Upon the trial of the action in the Common Pleas Court of Cuyahoga County, that court held that the trust agreement specifically requires joint management of the trust by the trustee and cotrustee in accordance with the procedure indicated in the trust deed; that the trustee and cotrustee shall consider stock dividends, for the purpose of this trust, as "property coming into its possession" as set forth in item 3 of article I of the original trust agreement; that the decision in the case of Lamb v. Lehmann, Trustee, 110 Ohio St. 59, 143 N.E. 276, 42 A.L.R., 437, has no application to the administration of this trust; that the trustees shall immediately confer and consider the matter of apportioning the stock dividends received by the trustee since its appointment; that the cause shall be continued for a period of 30 days; and that, if within that time the trustees are unable to agree on such apportionment, the court will take further action.
On July 17, 1953, the trustees reported that they were unable to agree upon an apportionment of stock dividends coming to the trust to principal and income, whereupon the court found that it was just and equitable that such stock dividends received since the appointment of the trustee be credited one-half as principal of the trust and one-half as income to the trust, and that, as to stock dividends received in the future, if the trustees are unable to agree on their apportionment within 30 days from the receipt of the stock dividends, such shares shall be treated as income or principal, in accordance with a complicated formula designed to preserve the value of the corporate shares held by the trustee as principal.
The motion of the trustee for a new trial was overruled, whereupon an appeal on questions of law and fact was taken by the trustee to the Court of Appeals. It was stipulated by counsel that the cause should be heard de novo on the record taken below, plus any additional evidence which might be required or stipulated.
The Court of Appeals found and decreed as follows:
"That in determining whether stock dividends heretofore or hereafter received for the trust by the successor trustee shall be treated, all or in part, as principal or as income, the holding in Lamb v. Lehmann, 110 Ohio St. 59, is not here applicable in view of the specific powers vested in the trustee by the * * * provisions of the trust instrument: article 1 (3):
"* * *
"That the * * * provisions indicate that it was the desire of the trustors to empower their trustee to make such division of property received in the trust as income or principal as would be just and equitable with respect to all needs of the life beneficiary and those entitled to participate in the income after the death of the life beneficiary; that the trustors unequivocally bestowed this right upon the trustee is evident from an analysis of the words used by the trustors; that the word `property' is used in its generic sense and is sufficiently broad to include stock dividends; that the word `treated' is sufficiently broad to indicate that the trustee was clothed with discretion in reaching a determination in respect of the allocation or apportionment of property coming into its hands and is equally applicable to the charge or apportionment of expenses and losses; and that all of these words and phrases are modified by the phrase `according as it may deem just and equitable,' which must be construed in its broadest sense as clothing the trustee with power and discretion to consider every available factor in making division of property received by it, between income and principal.
"That it is the duty of the successor trustee to give due consideration to the character of the property coming into its possession, and upon such analysis to give due consideration to the needs of the life beneficiary and life tenants and to consider such other factors as taxation, depreciation in purchasing power of the dollar, increased cost of living and any other factors which it may deem just and equitable; and that the only limitation placed by the provisions of the trust instrument upon the discretion of the trustee is contained in the words `provided the approval of the cotrustee be had and obtained thereto,' which mean that the concurrence of the cotrustee in the discretion allowed to the trustee must be had and obtained as provided for in the trust instrument, unhampered by the rule of law set forth in Lamb v. Lehmann, supra.
"* * *
"It is, therefore, hereby ordered, adjudged and decreed that in determining whether stock dividends heretofore or hereafter received for the trust by the successor trustee shall be treated, all or in part, as principal or as income, the successor trustee and the cotrustee shall proceed and act in accordance with the foregoing conclusions and instructions of the court."
Separate motions to certify the record to this court were made by both the trustee and the Attorney General. Upon oral argument on these motions, it was agreed that the trustee and cotrustee are still unable to agree on the allocation of the stock dividends as between principal and income. Both of these motions were allowed and the cause is now before this court on the merits.
Messrs. Jones, Day, Cockley Reavis, Mr. Earl W. LeFever and Mr. George H. Rudolph, for appellee.
Messrs. Arter, Hadden, Wykoff Van Duzer, Mr. C.M. Horn and Mr. Richard S. Douglas, for appellants in case No. 34177.
Mr. C. William O'Neill, attorney general, Mr. Franklin A. Kropp and Mr. Ralph Klapp, for appellant in case No. 34191.
The scope and extent of the discretion of the trustee and cotrustee as to the allocation of stock dividends coming into the hands of the trustee of the Griffiths trust from issuing corporations, portions of whose stock make up a part of the corpus of the trust, as between capital and income of the trust, is expressed by the provisions of paragraph 3 of article I of the trust instrument hereinbefore quoted.
The power and authority of the trustee to make distributions to contingent and lifetime beneficiaries of the trust are governed by the provisions of article III of the trust agreement, which specifically provides for the distribution of income only.
There is no allegation in the petition of the cotrustee, or any claim made, that in the exercise of its discretion in this matter the trustee has been guilty of fraud, bad faith, misconduct, connivance with a beneficiary, or even abuse of discretion. So long as a trustee acts in good faith and within the limits of sound execution of the trust vested in him, a court of equity will not undertake to substitute its discretion for that of the trustee, or interfere with that discretion. Shelton v. King, 229 U.S. 90, 57 L. Ed., 1086, 33 S. Ct., 686; Watling v. Watling, 27 F.2d 193; Elward v. Elward, 117 Kan. 458, 232 P. 240; Dumaine, Trustee, v. Dumaine, 301 Mass. 214, 16 N.E.2d 625, 118 A.L.R., 834; In re Trusteeship under Will of Ordean, 195 Minn. 120, 261 N.W. 706. See annotation, 18 A.L.R. (2d), 1231. A mere difference of opinion as to policy is no ground for judicial interference with a trustee's discretion. Edward v. Edward, supra, 459. And, when a settlor reposes his discretion in a trustee, he does so because he desires the honest judgment of the trustee, perhaps even to the exclusion of that of the court. Dumaine v. Dumaine, supra, 222.
In the absence of equity jurisdiction on the part of the court, as seems apparent from the facts in the instant cause, what is the duty of the trustee and cotrustee under the terms of the trust? One guide post, of course, is the intention of the settlors so far as such intention can be determined from the terms of the trust instrument and the situation of the settlors as of the date of the exclusion of the trust, and during such time as they might alter the terms of the trust.
For about eight years prior to the execution of the trust agreement in question, the law as declared by the Circuit Court for the judicial circuit in which Cleveland was located and in which the settlors resided was to the effect that stock dividends are capital and not income. See Miller v. Miller, 15 C.C. (N.S.), 481, 30 O.D., 545. See, also, Raymond v. Perkins, 23 C.C. (N.S.), 385, 34 C.D., 296.
In 1924, six years before the death of Edwin Griffiths, this court decided the case of Lamb v. Lehmann, Trustee, supra. In that case the court was called upon to determine what was "income" and what was "principal" as related to stock dividends in a testamentary trust which provided that the trustee should "pay over to Mollie Lamb * * * the entire net income thereof for and during her lifetime" and at her death "convert the principal of said trust estate into cash, and after paying all costs, expenses and charges incident thereto * * * pay the same to the Endowment Fund Association of the University of Cincinnati."
Under the terms of the trust there involved, this court held:
"1. Where a will gives to a trustee, in trust, certain shares of stock in a corporation, with power of sale and reinvestment, and instructions to pay `the entire net income thereof' to one person for life, with remainder to another, all cash or property dividends declared thereon shall be payable to the person holding the life estate, and all stock dividends, so called, shall become a part of the corpus of the estate and be held by the trustee during the life of the life tenant, and be distributed at his death to the remainderman.
"2. All cash or property dividends declared and paid upon stock dividends shall likewise be payable to the owner of the life estate during his life."
In the instant cause, it is significant that, at the time the trust was created and for years after its creation when the settlors had an opportunity to modify it, the law of this state was firmly established to the effect that stock dividends were capital and not income. It is significant also that, although Margaret Rusk Griffiths, one of the settlors, was made a party defendant in this action, she has never filed any answer or indicated that she is dissatisfied with the allocation of stock dividends by the trustee up to the present time.
Since there was no claim made by either Margaret Rusk Griffiths as life beneficiary of the trust or by the cotrustee that the trustee acted fraudulently or in bad faith in the allocation of stock dividends to principal of the trust instead of to income, and since they failed to challenge the action of the trustee in that respect until the institution of this action, they are estopped to complain as to such allocation made prior to the institution of this action. It is a well established principle of law that a sui juris beneficiary or a cotrustee who consents to, confirms or acquiesces in a claimed breach of trust in making certain allocations to corpus rather than to income is estopped to claim a breach of trust growing out of the action of the trustee in that regard. Scullin, Co-Exr., v. Clark (Mo.), 242 S.W.2d 542, 29 A.L.R. (2d), 1024; McInnes, Exr., v. Whitman, 313 Mass. 19, 27, 46 N.E.2d 527; In re Ryan's Will, 291 N.Y. 376, 413, 52 N.E.2d 909; Wilbur's Estate, 334 Pa. 45, 5 A.2d 325.
What must be the allocation of stock dividends on corporate shares as between income and capital of a trust where a trustee and a cotrustee are in good faith unable to agree on such allocation? Since, in the instant cause, the trustee and cotrustee are unable to agree on the allocation of property coming into the trust, it is unnecessary to discuss the extent of the power and discretion vested in them to make such decision regardless of the character of the property involved.
Although, as hereinbefore observed, a court of equity will not exercise jurisdiction to control the bona fide discretion of a trustee on a matter within the scope of the powers given him by the trust instrument, where the trustee and the cotrustee of a trust authorized to act jointly are unable to agree on a matter relating to the trust, and the subject matter of such disagreement is justiciable in character, the courts will resolve the controversy in accordance with the state of the law on the subject in the territorial jurisdiction of the trust.
The question then is, how does the law of Ohio allocate corporate-share dividends as between capital and income in the absence of specific directions in the trust instrument? It is clear that the trust instrument in the instant cause specifically directs that "income" and only income shall be distributed to the life or short-term beneficiaries, and this fact must be taken into consideration in making a legal determination of the matter. This question was definitely determined by this court in the case of Lamb v. Lehmann, Trustee, supra. In the course of the opinion in that case, the court referred to the English rule, the Pennsylvania rule, and the Massachusetts rule on this subject and then said:
"The third rule, known as the Massachusetts rule, regards cash dividends, whether ordinary or extraordinary, as income, and regards stock dividends, so called, as capital, without regard to the period when the same were earned. It declares that cash dividends belong to the tenant for life, and that stock dividends belong to the estate in remainder. This rule involves no inquiry into the internal affairs of the corporation, unless there is an abuse of power. This rule has found favor with the courts of other states of the Union, as may be seen by an examination of the following leading cases in the courts of various states * * *.
"* * *
"* * * We are forced to depart from the greater number of authorities and follow what we believe to be the greater weight, and hold that stock dividends are a part of the corpus of the estate."
In the case of Millar et al., Admrs., v. Mountcastle (1954), 161 Ohio St. 409, 119 N.E.2d 626, this court again affirmed the principle that a stock dividend does not bring into a trust estate anything that was not there before, and that the property in the estate after the stock dividend is the "identical" property which was in the estate before the stock dividend was declared. In that case this court specifically held:
"The fractional part, portion or share of the proprietary interest of the owners of the corporation owned by a holder of such a share of corporate stock by reason of his ownership of such share is, immediately after a stock dividend thereon, the identical property which he owned immediately before such stock dividend."
In Marsh v. Peck, Tax Commr. (1954), 162 Ohio St. 11, 120 N.E.2d 428, this court quoted with approval from Towne v. Eisner, Collr., 245 U.S. 418, 426, 62 L. Ed., 372, 38 S. Ct., 158, as follows:
"`A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. * * * The proportional interest of each shareholder remains the same.'"
The Restatement of the Law of Trusts (1933), Section 236, stated the Pennsylvania rule on this subject to the effect that "extraordinary dividends declared during the period, whether in cash or in shares of the corporation or in other property, are income to the extent and only to the extent that they are declared out of earnings of the corporation which accrued subsequent to the creation of the trust or the acquisition of the shares by the trustee."
However, Section 236, ibid., was later amended and is now as follows:
"Except as otherwise provided by the terms of the trust, if shares of stock of a corporation are held in trust to pay the income to a beneficiary for a designated period and thereafter to pay the principal to another beneficiary,
"* * *
"(b) Dividends payable in newly issued shares of the corporation itself are principal * * *." See 1948 Restatement of the Law Supplement.
A note to this revision of section 236, under the heading, "Reason for Change," is appended as follows:
"At the time of the adoption of the restatement of this subject, the Pennsylvania rule was considered to be the still prevailing rule in the United States. Since that time, however, by decision or by statute, the Massachusetts rule has been accepted in several states. It is to be noticed that even in Pennsylvania, by the enactment in 1945 of the Uniform Principal and Income Act, the Massachusetts rule has been accepted."
The note then cites a number of cases decided since the adoption of the restatement of this subject in which the Massachusetts rule has been accepted. Among those cases are American Security Trust Co. v. Frost, 117 F.2d 283, certionari denied, 312 U.S. 707, 85 L. Ed., 1139, 61 S. Ct., 829; Powell v. Madison Safe Deposit Trust Co., 208 Ind. 432, 196 N.E. 324, 101 A.L.R., 1368; Kirby v. Kirby, 68 S.D. 612, 5 N.W.2d 405; all holding that stock dividends are principal and not income, in conformity to the so-called Massachusetts rule.
In the case of Equitable Trust Co. of New York, Trustee, v. Prentice, 250 N.Y. 1, 164 N.E. 723, 63 A.L.R., 263, the trustee was given the power to allocate stock dividends to capital rather than to income. The court said:
"* * * an appraisal of intention by which stock dividends, either wholly or in part, are classified as income, has met with stout resistence from courts of high authority. The Supreme Court of the United States and the courts of Massachusetts and England allot such dividends to principal * * *. If the donor had in mind that income for the life tenant should have a secondary meaning alien to its primary one, he should have said so in his deed or will." See comprehensive note on this subject in 12 Ohio State Law Journal, 588.
In view of the state of the law in Ohio as well as the prevailing rule generally, this court finds that stock dividends, unless otherwise directed, must be allocated to the corpus and not to the income of the trust.
This court, therefore, finds that, the trustee and cotrustee being unable to agree, future stock dividends in the Griffiths trust shall be allocated to the corpus and not to income until such time as the trustee and cotrustee are able to agree on a different allocation of such dividends.
The judgment of the Court of Appeals is reversed and final judgment is entered in favor of the trustee.
Judgment reversed.
MATTHIAS, ZIMMERMAN, STEWART and BELL, JJ., concur.
WEYGANDT, C.J., dissents.
TAFT, J., not participating.
Dissents for the reason that the lower courts were not in error in holding unanimously that the decision of this court in the case of Lamb v. Lehmann, 110 Ohio St. 59, 143 N.E. 276, 42 A.L.R., 437, has no application to the facts in the instant case; that stock dividends constitute property coming into this trustee's possession; and that it is the clearly expressed power and duty of this trustee "to determine whether money or property coming into its possession shall be treated as principal or income."