Opinion
04-28-1898
LANG'S EX'R v. LANG et al.
Guild & Lum, for complainant. Charles A. Reed, for defendant William Lang. Sherrerd Depue, for infant defendants.
Bill by Henry Lang's executor against William F. Lang and others. Decree ordered directing the executor according to the opinion.
Guild & Lum, for complainant.
Charles A. Reed, for defendant William Lang.
Sherrerd Depue, for infant defendants.
EMERY, V. C. This bill is filed by an executor and trustee for directions as to the disposition of money, in his hands, paid to him as a dividend (declared after the death of testator) upon shares of stock owned by the testator at the time of his death. The testator died February 18, 1890, and owned at the time of his death 630 shares (out of 1,500 total paid-up shares) in the Henry Lang Company, a manufacturing company organized in 1892 by the testator and others, with an original paid-up capital of $101,000, which capital was increased to $150,000 by a stock dividend of $49,000 declared in January, 1896, previous to testator's death. The testator received his proportion of the stock dividends, so that the entire holdings at his death were 630 shares. On July 1, 1896, the company declared a dividend of 40 per cent. in cash, being $25,200 on the 630 shares; and this dividend has been paid to the executor, who holds it as part of the residuary estate of testator, under a trust, in substance, to pay the income (after certain deductions) to the defendant William Lang during his life, and on his death to convey the principal to his children, the infant defendants. The question raised in the case is whether this cash dividend received after testator's death is principal, to be held by the executor for the benefit of the remainder-men, or income, to be paid to the life tenant. The general rule applicable in such cases was settled in this court, by Chancellor Zabriskie, in Van Doren v. Olden (1808) 19 N. J. Eq. 176, where he adopted the rule sometimes called the "Pennsylvania rule," as first settled in Re Earp's Appeal, 28 Pa. St. 368. This rule, as stated by the chancellor, is (see page 179, 19 N. J. Eq.) "that where trust funds, of which the income, interest, or profits are given to one person for life, and the principal bequeathed over upon the death of the life tenant, are invested, either by the trustees, or at the death of the testator, in stock orshares of an Incorporated company, the value of which consists in part of an accumulated surplus or undivided earnings laid up by the company, as is frequently the case, such additional value is part of the capital; that this, as well as the par value of the shares, must be kept by the trustee intact for the benefit of the remainder-man, but the earnings on such capital, as well as upon the par value of the shares, belongs to the life tenant." I understand this principle or rule to mean that the actual value of the shares at the time of the death of the testator, so far as the same can be ascertained, is the capital or principal intended by the testator for the remainder-men. This value at testator's death is evidenced in part by the book assets, including the accumulated surplus account standing on the books at that time; and in cases where the stock has a market value, as in Earp's Appeal, this also is evidence of value. "It is the intrinsic value of the shares, to be ascertained from the amount and value of the assets at the death of the testator, and at the time of the increase of stock, which governs in the apportionment of the surplus profits. The market value may aid in the ascertainment of the actual value, and is therefore properly received in evidence on that issue." Smith's Estate (Pa. Sup., 1891) 21 Atl. 438. In Van Doren v. Olden the learned chancellor further says (page 180) that, "when an extra dividend is declared out of the earnings or profits of the company after testator's death, such extra dividend belongs to the life tenant, unless part of it was earnings carried to account of accumulated profits or surplus earnings at the death of testator, in which case so much must be considered as part of the capital." The learned chancellor did not, however, by this further statement, mean to change the rule previously stated, but meant, as I understand, that if the dividend was declared and paid, in part or whole, out of the accumulated surplus, as it existed on the books at the death of the testator, and the payment of the dividend reduced the amount of surplus below what it stood at on the books at the testator's death, it was, as between tenant for life and remainder-man, to that extent a payment out of the capital existing at testator's death. If the subsequent payment of the dividend did not trench on this surplus, and the surplus after the payment continued to be as large as at testator's death, then the payment was from income, and not from capital. The trustee, in the latter case, after the payment, still retains, and evidently as capital, at least the par value and a surplus as large as at testator's death. The order of reference directed in Van Doren v. Olden (page 180) shows clearly, I think, that this is he proper construction to be placed on the expression, "dividend declared out of earnings carried to account of surplus profits," and that the learned chancellor did not linend to deprive the life tenant of the dividends, unless the earnings out of which it was paid had not only been carried to the account of surplus profits during the lifetime of the testator, but also the dividends had been actually paid, wholly or in part, by an appropriation of part of this surplus after exhausting surplus subsequently carried to the account. The order of reference directed (page 180) that, if the per cent. of the accumulated profits held at the filing of the bill was equal to the per cent. held at the death of testator, the life tenant was entitled to the whole dividend; if not, so much of the extra dividend as would make the original stock and present surplus equal to the stock and surplus at the death of the testator should be retained, and the excess paid to the life tenant. The general rule declared in Van Doren v. Olden has never been questioned in this state, but has been approved in Ashhurst v. Field (Chancellor Runyon, 1875) 26 N. J. Eq. 11; Pratt v. Douglas (Err. & App. 1884) 38 N. J. Eq. 516, 541. And the doctrine first settled in Earp's Appeal has, it may be further stated, been at last so thoroughly and generally established in the American courts that it may now be called the general American rule, as distinguished from the English and Massachusetts rules. 2 Thomp. Corp. § 2193, etc.; Smith's Estate (Pa. Sup., 1891) 21 Atl. 438; McLouth v. Hunt (N. Y. App., Nov., 1897) 48 N. E. 548, and cases cited.
In the present case the amount of surplus profits at testator's death still remaining after charging off the $49,000 stock dividend in January, 1896, was $69,596.65. On July 1, 1896, being the end of the fiscal year of the company, a further credit to the surplus account was made, of $123,743.68, for the profits of the entire preceding year; making the total credit at that date $193,117.13. From this total the dividend in question, $60,000, was declared and paid in July, 1896. This payment of $60,000 must, under the rule as above explained, be considered as made not from the earlier item of $69,373.45 standing to the credit of the profit account at testator's death, but as between the present contestants, and for the purposes of testator's will, be considered as made from the profits or earnings above the $69,373.45, and subsequently added; there being a sum abundant for this. On the facts, therefore, in the present case, the source of the dividend now in question is the income, and not capital, under the above rule. The report of the master, finding it to be income, is therefore approved, and the exceptions are overruled. Whether, for the purpose of final settlement between the remainder-man and tenant for life, on the sale of the shares, the surplus as it existed on the books at testator's death is to be taken conclusively as the value or amount of capital to be invested, or whether the principal is entitled to be increased by a proportion of profits of the year, which were or may have been earnedto that time, although not yet carried to the surplus account, if this proportion can be ascertained, is not now directly involved, and is not passed upon. Where stock has a continuous market value, this element of doubt is largely eliminated; but in the present case the stock has not been sold on the market at all, and has no fixed market value, which could be taken as it was in Earp's Case, as a basis for fixing value at the time of testator's death, and at subsequent periods.
Another ground for declaring the dividend to be capital, instead of income, was urged, and very ably, by counsel for the infant defendants, on the hearing, and involved questions not referred to the master. The testator's will expressly directed his executors "to sell my bank stock, and also to sell and dispose of, to the best advantage, all my other personal property not hereinbefore bequeathed [including the shares now in question], and to keep the proceeds of such sales, and all other moneys of my estate otherwise received, securely invested in bonds secured by mortgage upon improved real estate; the interest thereof, with the other income of my estate, to be appropriated as hereinafter directed." After directing certain payments out of the income, he then (section 5) directs his executors "to pay my son William $150 per month during his natural life, and after paying taxes," etc., "to also pay him the residue of the income of my estate then on hand during his natural life." The contention on behalf of the remainder-men is that the will directs the absolute conversion of this stock, and a special investment of the proceeds, and that, as between the remainder-man and the tenant for life, the life tenant is entitled to receive only so much of the income as would have arisen from the personal estate, as interest, if this personal estate had been converted and invested according to the trust within a year after testator's death, and the trustees cannot be allowed any great payment to the life tenant in passing their account, and must hold any balance as principal. The English rule is stated in this general form. 2 Perry, Trusts, § 548; Hill, Trustees (2d Am. Ed.) *387; Dimes v. Scott (1827) 4 Russ. 195. But the rule as there declared in reference to personal securities is based to some extent upon the fact that the securities are such as the executor or trustee could not, under the will, or under their rules, properly hold as trust Investments, but must be converted at once; and on the question of the application of the rule great weight is given to the directions of the testator, as contemplating immediate conversion, or holding longer than the year. In a late case,—Sparling v. Parker (1846) 9 Beav. 524, 526,—there was a bequest to trustees, to invest all moneys, and all mortgages, shares of stock, etc., "as can be immediately sold without disadvantage, and otherwise, as soon as may be. in the purchase of lands," and a direction that, until converted, interest should be paid to one Mrs. P. The question arose, four years after testator's death, as to the right to the income on the property still unconverted. Lord Langdale, M. R., in reference to the claim that the rule was absolute that it was the duty of executors to convert within the year, and that, although there were no executors who could sell (owing to a dispute over the probate of the will), yet the accounting must proceed on that basis, says (page 529, etc.) that this doctrine has unfortunately given rise to many conflicting decisions of different judges; that each case of this kind must depend on its own peculiar circumstances, and on the intention of the testator as to what should be done with the income until the time of conversion, if this can be ascertained from the will. And he held in this case that there being no direction for Immediate conversion, and the conversion having been delayed without any fault, and no want of discretion in that respect being suggested, the entire income, pending conversion, should go to tenant for life. The intention of the testator, as disclosed by his will, in reference to the destination of the Income pending conversion. Is to be discovered and applied, if possible (so it seems to me), in preference to any fixed general rule; and, in ascertaining this intention, it must be borne in mind that, unless the will expressly directs a conversion within a limited time, securities held by the testator at his death would be legal Investments of the estate pending the conversion directed by the will. Except for the direction to sell "to the best advantage," and then Invest in bond and mortgage, the investment might have continued as a permanent investment, under our statute (2 Gen. St. p. 2401, pi. 197). In this case testator's stock is to be sold and disposed of by the executors to the best advantage. This does not require an Immediate sale, and, as appears in this case, no sale by the complainant executor could have been made before the declaration of this dividend. The executor named in the will did not receive his letters until September 26, 1896, nearly three months after the declaration of the dividend,—a delay due, probably, to the appointment of an administrator cum testamento annexe No claim is made that an advantageous sale could have been made before July 1, 1896, by anybody; and the failure to convert before July 1st was not due to the fault of the executor, nor can it be considered a failure to sell as directed. And, inasmuch as the testator gives to his son William the entire residue of the Income of his estate, it seems to me that, under the terms of the will itself, the whole dividend now in question, received while no conversion could be effected, was Income, and that the case does not come within the application of the rule relied on by counsel.Upon the whole case, therefore, a decree will be advised directing the executors to treat the dividend as income, and pay it accordingly under the directions of the will.