De Koven v. Alsop

• Decision Date: 26 October 1903
• Parties: DE KOVEN et al. v. ALSOP et al.
• Court: Illinois Supreme Court

205 Ill. 309

68 N.E. 930

DE KOVEN et al.

v.ALSOP et al. ^*

Supreme Court of Illinois.

Oct. 26, 1903.

Appeal from Appellate Court, First District.

Bill by Annie L. De Koven and others against John De Koven Alsop and Louis De Koven and others. From a judgment of the Appellate Court reversing a decree for complainants, they appeal. Affirmed.

David Fales, for appellants.

Otis & Graves (E. A. Otis, of counsel), for appellees.

WILKIN, J.

This is an appeal from the Appellate Court for the First District in a proceeding in equity begun in the circuit court of Cook county by the trustees of the estate of John De Koven, deceased, to construe certain provisions of his will, wherein the ‘rest and residue’ of his estate is given to trustees, ‘to hold, invest, rent, manage and care for the same, and to apy the net income thereof’ to the testator's widow ‘during her life, so long as she remains unmarried, and upon her death or re-marriage’ to divide such reisdue between the appellants herein, if living at the expiration of the wife's life tenancy.

There is no controversy as to the facts. The testator died April 30, 1898, leaving as a part of his estate a number of shares of the capital stock of several corporations-railroads, telephone companies, etc. These corporations have since his death declared, in one case an extraordinary cash dividend, in another, stock dividends, and in others, stock dividends and rights to subscribe at par for certain shares of stock. The circuit court held the cash dividends and the stock dividends (including the right to subscribe belonging to each of the said stock dividends) to be a part of the net income of the estate belonging to testator's wife, and that the rights to subscribe to certain other stocks are a part of the capital or corpus of said estate, to be held by the trustees as a part thereof. That decree, upon appeal to the Appellate Court for the First District, was reversed by the branch of that court, in part, in carefully considered opinion by Freeman, J. The reasoning and much of the language of that opinion will be adopted here.

The question for determination is whether any or all of these dividends and rights are to be considered ‘net income,’ within the meaning of the provision of the will above referred to, payable to the testator's wife as the life tenant, or whether they constitute a part of the capital or body of the estate, which by the will is, upon the expiration of the life tenancy, to be divided between appellants as remaindermen. These dividends and rights arrange themselves in three classes. The first of these is an extraordinary cash dividend of 20 per cent., declared July 1, 1898, upon the shares of stock in the Pullman Palace Car Company. The dividend amounted to $6,000, and it is to be determined whether this is payable,under the will, to testator's wife as ‘net income,’ or to the remaindermen as a part of the corpus of the estate. The money out of which it was paid appears to have been earned, for the most part, at least, during the lifetime of the deceased, and was retained by the company as surplus assets remaining in the company's treasury as undistributed earnings. While thus in the company's treasury it was subject to such uses as the directors might see fit to make of it for corporation purposes, and its ownership was in the corporation. It had not, therefore, become the property of the testator during his life. In Gibbons v. Mahon, 136 U. S. 549, 10 Sup. Ct. 1057, 34 L. Ed. 525, the court, by Mr. Justice Gray, says: ‘The distinction between the title of a corporation and the interest of its members or stockholders in the property of the corporation is familiar and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to appropriate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining upon the termination or dissolution of the corporation, after payment of its debts.’ Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705;Greeff v. Equitable Life assurance Society, 160 N. Y. 19, 54 N. E. 712,46 L. R. A. 288, 73 Am. St. Rep. 659;Hyatt v. Allen, 56 N. Y. 553, 15 Am. Rep. 449. Applying the principle in the present case, no part of the earnings of the Pullman Palace Car Company out of which the extraordinary cash dividend under consideration was paid had become a part of the testator's estate at the time of his death, no matter when they had been earned by the company. If the dividend had been paid to the testator in his lifetime it would have been received by him as income from his stock investment. It did not become anything else when received by the trustees of his estate, in the form of an extra dividend, after his decease. It was still income, like other dividends, and as such it is payable to the life tenant under the provisions of the will.

The second class of so-called ‘dividends' consists of the issue of certificates of stock known as ‘stock dividends.’ Stock dividends were declared by four of the corporations in which the trust estate was the holder of capital stock. These stock dividends were all substantially of the same character, and in no case was the stockholder allowed an option to take a money dividend instead of stock. These dividends are claimed in behalf of the life tenant as ‘net income,’ and in behalf of the remaindermen as a part of the capital to be held in trust for their benefit.

It is urged in behalf of appellants that it was not the meaning and intent of the testator, ascertained, as it must be, from the whole will and all its parts (Harrison v. Weatherby, 180 Ill. 418, 54 N. E. 237), that the net income payable to the life tenant should include future stock dividends. This, however, must depend upon whether such dividends are, or not, ‘net income’ of the trust estate. The life tenant is entitled to all such ‘net income,’ no matter in what form it may be received, but not to any portion of the capital. There is a wide and irreconcilable difference of opinion between courts whose opinions are entitled to respect, as to whether stock dividends, so-called, are to be regarded as income to which a life tenant is entitled, or as merely representing capital to be held in trust for the remaindermen. Some of these cases seem, however, to have turned, in a measure, upon the intent of the testator, derived from the language used in creating the trust estate, or from the facts and circumstances of the particular case. This seems to be true of two leading cases in the Court of Appeals of New York, viz., McLouth v. Hunt, 154 N. Y. 179, 48 N. E. 548,39 L. R. A. 230, and Lowry v. Farmers' Loan & Trust Co., 172 N. Y. 137, 64 N. E. 796.

In Cook on Corporations (chapter 32, § 353 et seq.) it is pointed out that there are ‘three well-defined rules upon this subject, which may be denominated the American or Pennsylvania, the Massachusetts, and the English rule.’ The first of these is to the effect that, when the fund out of which an extraordinary stock or property dividend is to be paid was accumulated by the corporation before the life estate arose, it should be held to be principal belonging to the corpus of the estate, but if earned after the life estate arose then the dividend should be deemed income and go to the life tenant. The Massachusetts rule regards all cash dividends, large or small, as income, and stock dividends, whenever earned and however declared, as capital. The English rule, as it was originally stated, treated extraordinary cash or stock or property dividends as belonging to the corpus of the trust, but later English decisions are to the effect that extraordinary cash dividends may be decreed to the life tenant. The general subject and the authorities are well considered by the United States Supreme Court in Gibbons v. Mahon, supra, to which reference may be had. The conclusion reached in that case is that stock dividends declared, as in the case at bar, go to the remaindermen. This rule is, we think, supported by sound reasoning, and sustained upon principle by the greater weight of authority. Spooner v. Phillips, 62 Conn. 62, 24 Atl. 524,16 L. R. A. 461;Mills v. Britton, 64 Conn. 4, 29 Atl. 231,24 L. R. A. 536; Brown & Larned, Petitioners, 14 R. I. 371, 51 Am. Rep. 397; Richardson v. Richardson, 75 Me. 574, 46 Am. Rep. 428; Millen v. Guerrard, 67 Ga. 284, 44 Am. Rep. 720; Bouch v. Sproule, L. R. 12 App. Cas. 385.

A dividend is defined as ‘a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation-not to the stockholders-and are liable for corporate indebtedness.’ Cook on Corporations, c. 32, § 534. A stock dividend ‘is lawful when an amount of money or property equivalent in value to the full par value of the stock distributed as a dividend has been accumulated and is permanently added to the capital stock of the corporation. * * * In this country these dividends are frequently made, and are constantly sustained by the courts.’ Id. § 563.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared as in the case at bar. The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all interest therein. The other involves no disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an actual dividend, but certificates of stock which evidence in a new proportion his interest in the entire capital, including such as by investment of accumulated profits has been added to the original capital. The difference of opinion as to whether this additional issue of stock is to be treated as income...