American Security & Trust Co. v. Frost

• Decision Date: 25 November 1940
• Docket Number: No. 7481.,7481.
• Citation: 117 F.2d 283
• Parties: AMERICAN SECURITY & TRUST CO. et al. v. FROST et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

117 F.2d 283 (1940)

AMERICAN SECURITY & TRUST CO. et al. v. FROST et al.

No. 7481.

United States Court of Appeals for the District of Columbia.

Argued May 9, 1940.

Decided November 25, 1940.

Petition for Rehearing Denied December 16, 1940.

Frederic D. McKenney, John S. Flannery, G. Bowdoin Craighill, and John E. Larson, all of Washington, D. C., for appellant.

John A. Kratz, Norman B. Frost, Frederic N. Towers, Conrad H. Syme, and James C. Wilkes, all of Washington, D. C., for appellees.

Before GRONER, Chief Justice, and STEPHENS and RUTLEDGE, Associate Justices.

GRONER, C. J.

The appeal is from a decree of the District Court construing a will and ordering distribution of certain proceeds of testatrix' estate as "income" to the life beneficiaries of a residuary trust rather than as principal to be added to the corpus.

The will, executed December 30, 1935, is that of Mary Harlan Lincoln, who died March 31, 1937, leaving two daughters, two grandsons, and one granddaughter. After various specific provisions, the will created a residuary trust with three trustees, the income to go to the children and grandchildren for life, and the corpus ultimately to be distributed to any direct descendants of the testatrix living at the time specified for its final distribution to them. If there were no such descendants at that time, the corpus was to be divided among the First Church of Christ Scientist in Boston, the American Red Cross, and Iowa Wesleyan College. Item Eleventh of the will authorized the executors and trustees "To retain as part of the principal of the trust estate hereby created any shares of stock or bonds or other investments of which I may be possessed at the time of my demise; to decide finally any question that may arise as to what constitutes income and what principal, — it being my wish, however, that whenever feasible their decision be in favor of the life beneficiaries named herein; * * *." The issues relate to the applicability of this provision to two items of assets of the estate, consisting of "administration income" and stock dividends.

To pay funeral expenses, debts, legacies, taxes and costs of administration, the executors sold during the course of administration securities which yielded $835,715.28. Prior to sale, these securities produced an income of $38,018.84. During the administration the estate also received 500 shares of new common stock in the Continental Illinois National Bank and Trust Company as a 25 per cent dividend on the 2,000 shares of the bank's common stock held by testatrix at the time of her death.

The testatrix nominated the American Security and Trust Company, Norman B. Frost, and Frederic N. Towers, as executors and trustees under the will, and they have qualified and are acting as such. The corporate trustee is the appellant, and the individual trustees are appellees.

The two individual executors and trustees, Frost and Towers, decided that the $38,018.84 and the 500 shares of stock were income which should be distributed to the life beneficiaries. The trust company disagreed, and contended that the property should be added to the corpus of the trust. As the trust company declined to join in a proceeding to obtain instructions from the court, it was made a defendant in this action in which the individual trustees ask that the court construe the will with particular reference to the power therein conferred upon the executors thereof and trustees thereunder to decide finally any question that may arise as to what constitutes income and what principal. A special master found that the $38,018.84 was "income," but that the 500 shares of stock were "principal." The trial court approved the master's findings as to the $38,018.84, but held that the 500 shares of stock also should be distributed to the life beneficiaries. The trust company is the only appellant.

The question is whether, considered in connection with the whole will, Item Eleventh empowers the trustees to allocate the funds and stock in question to the life beneficiaries as income.

When the will is entirely silent on what shall constitute corpus and what income, contains no provision as to how that question shall be determined, and merely directs that income be distributed in one manner and corpus in another, the question is determined in accordance with rules of construction established by law. Thus, in such a case, it has long been the established law of the District of Columbia that stock dividends shall be distributed as corpus. Gibbons v. Mahon, 136 U.S. 549, 10 S.Ct. 1057, 34 L.Ed. 525; Lanston v. Lanston, 53 App.D.C. 340, 290 F. 315. And since Proctor v. American Securities & Trust Co., 69 App.D.C. 70, 98 F.2d 599, it has been settled that "administration income" shall be disposed of likewise.

While it is true these are rules of construction, it is also true they are rules which affect the disposition of property by will in the District of Columbia and as such must control whenever appropriate in the interest of certainty. Testatrix was a resident of the District, and her will was prepared by experienced counsel. She is presumed to have been familiar with the fact that certain rules had been announced and would be adopted from time to time with respect to the disposition of various items in the administration of trusts. She is also presumed to have intended these rules to govern in the interpretation of her will unless she expressed a contrary intention.

The conceded facts demonstrate that the particular stock dividend in question, as well as the administrative fund, under the settled rules to which we have just referred, constitute corpus and not income unless a contrary intention appears from the whole will or unless the language in paragraph 11 is held to confer on the trustees discretionary power to reach a different result. We are of opinion neither of these conditions exists. Mrs. Lincoln's will, after providing in Clauses 1 to 6, inclusive, for certain special gifts to each of her two daughters and her granddaughter and for small gifts to several others, reads: "All the rest, residue and remainder of my estate of every kind whatsoever and wheresoever situate I give, devise and bequeath unto my trustees hereinafter named, their survivors or survivor and successors or successor, in trust, nevertheless, to invest and reinvest the principal and collect the income thereof and out of the gross income to pay all taxes and other legal charges and expenses attending the execution of the trust; and out of the net income to make the following payments, at convenient and regular intervals * * *".

Then follows a distribution of the income among the daughters and grandchildren and others, and Clause 8 provides: "I direct my trustees to hold the principal of my residuary estate intact for the purposes hereinbefore expressed until the death of the survivor of my two daughters, Mary Lincoln Isham and Jessie Lincoln Randolph, at which time I direct said trustees to pay over to each of my grandchildren then living the sum of One Hundred Thousand Dollars ($100,000) in cash, free and clear of all trusts; and I direct my said trustees to hold the balance of my residuary estate intact for the purposes hereinbefore expressed until the expiration of twenty-one years from the death of the survivor of my two daughters * * * and three grandchildren * * *".

Then follows a provision for distribution of the estate per stirpes among the issue of the three grandchildren. If at any time there should be a complete failure of grandchildren and their issue competent to take, then the property should go to the daughters or the survivor of them, or if neither were then living, to certain named charities.

There is nothing in any of these clauses which even suggests an intention to depart from the rules which we have shown to exist in the District of Columbia. Whatever contrary intent exists — if it exists at all — must be found in Clause 11, and we shall, therefore, confine ourselves to considering the effect of the words of that paragraph, which gives the trustees power "to decide finally any question that may arise as to what constitutes income and what principal".

The learned trial judge was of opinion that the quoted language was sufficiently broad to permit, in the discretion of the trustees, the distribution of the "fund" and the "dividend" among the life beneficiaries. He conceded that to do this would involve a determination contrary to a local rule of construction, but was of opinion the rule should yield to the expressed intention of the testatrix. While without doubt that view would be correct in a proper case, we nevertheless think that his interpretation of the language of the paragraph is too broad. To say that Clause 11 empowers the trustees to "decide" contrary to local "rules of construction", proves too much. In a sense, every item of property is controlled by a "rule of construction". E. g., bonds received from the original estate would be corpus, the interest on those bonds, income. This is a "rule of construction" derived from the customs of the community. Surely, it would not be said that under the power given in Mrs. Lincoln's will, the trustees could override this rule. And yet if they may override some rules of construction and not others, there would be complicated questions of degree, e. g., whether one rule or another was so certain that the trustees must not overstep it. We think the will was intended to be more certain than this. It does not empower the trustees to decide what is income and what is principal, but only to decide "any question" that may arise in that respect. Doubtless a question may arise in respect to many items on the borderline, but a "question" should not and cannot arise except where there is a reasonable doubt. Where, as in the instant case, the exact status of the "fund" and of the dividend has been determined by judicial decisions, no question can arise because...