Cox v. Sellers

Decision Date09 November 1942
CourtCourt of Chancery of Delaware
PartiesFRANK G. COX, JOHN H. SHIVELY and WILMINGTON TRUST COMPANY, a corporation of the State of Delaware, Trustees under item 8 of the Last Will and Testament of William F. Sellers, deceased, v. MARY G. SELLERS, ANNA SELLERS COX, FRANK GARDNER COX, JR., WILLIAM SELLERS COX, and WILLIAM SELLERS COX, JR

BILL FOR INSTRUCTIONS filed by the trustees under Item 8 of the will of William F. Sellers, deceased. The respondents Mary G Sellers and Anna Sellers Cox are the widow and daughter respectively, of the testator, and are the life beneficiaries of the trust. The other respondents are children and issue of Mrs. Cox, and are the persons who would be entitled to the corpus of the trust if it should be terminated now and if Mrs. Cox should fail to exercise a power of appointment of the corpus. By order of this court William Sellers Cox was appointed guardian ad litem of his minor son, the respondent William Sellers Cox, Jr. Heard on bill, answers of the respondents, and two stipulations of facts.

Charles F. Richards, of the firm of Richards, Layton & Finger, for complainants.

Clarence A. Southerland, of the firm of Southerland, Berl & Potter for respondents Mary G. Sellers and Anna Sellers Cox.

Robert H. Richards, of the firm of Richards, Layton & Finger, for respondents Frank Gardner Cox, Jr. and William Sellers Cox individually and as guardian ad litem of William Sellers Cox, Jr.

OPINION

THE VICE-CHANCELLOR:

The trustees seek instructions whether they should distribute to the life beneficiaries, or retain as trust corpus, all or part of certain monies received by them from the liquidation of a corporation of which they held preferred and common stock. The monies in question represent the amount of dividends on the preferred stock which were accrued and unpaid at the time of liquidation, and which were paid out of the capital of the corporation. The life beneficiaries contend that the entire amount should be paid to them; while the other respondents, to whom I shall refer as remaindermen, assert that the sum should be held as corpus of the trust.

The testator, William F. Sellers, died in June, 1933, a resident of New Castle County. By his will, dated March 28, 1932, he created a trust, the relevant terms of which read thus:

"8. I give and bequeath all of my preferred and common stock of the Edge Moor Iron Company to my trustees hereinafter named and also any bonds or other securities of said company, in case it issues any such securities and I am the owner of them at the time of my death, to hold and to collect the net income therefrom and to pay over one-half of the net income to my wife, Mary G. Sellers, for and during the term of her natural life, and one-half of the net income to my daughter, Anna Sellers Cox, for and during the term of her natural life. Upon the death of my wife all the net income shall be paid to my daughter. I give to my daughter the same power of appointment of the principal of all of said shares by her will as is set forth in the last preceding paragraph hereof, and in default of such appointment I direct that the principal of said shares shall go as provided in said last preceding paragraph. * * * In using the word shares' I intend to include any bonds or other securities of said company, if issued, of which I am the owner at the time of my death.

"The above disposition of my shares and any other securities of the Edge Moor Iron Company is subject to the following condition: That under no circumstances shall said trust terminate within ten years after my death, * * *. It is well known to the said trustees that the management of the Edge Moor Iron Company has been the chief work of my life, and I desire them so to control the securities of that company of which I die possessed as will best conserve said investment. To this end, in addition to the powers heretofore given them, I give them full power to join in any changes or adjustments in the capital structure of said company and/or in any reorganization, consolidation or merger and with full voting powers. They shall also have the right to sell the securities of the Edge Moor Iron Company if in their judgment it is deemed wise to do so for cash and/or other securities, and in such case to hold the proceeds under the terms of this trust and to invest and reinvest said securities in first class securities at their discretion without being limited to what may be legal investments for trustees under the laws of the State of Delaware or of any other state, provided, however, that in case the securities of the Edge Moor Iron Company are sold so that my estate has no further interest in that company or in any corporation with which it is merged or consolidated, the said ten year provision shall not apply and said trust shall in such event continue for the respective lives of my wife and daughter, but in case my daughter predeceases my wife, it shall terminate as to one-half thereon upon the death of my daughter, and as to the remaining one-half upon the death of my wife."

The testator owned, and the trustees received 5385 shares of the preferred stock of Edge Moor Iron Company (out of 5712, the total outstanding), and 1369 shares of common stock (out of 8000, the total outstanding). The corporation had no other classes of stock. The par value of each class was $ 100 a share. Provisions of the company's amended certificate of incorporation relating to the shareholders' rights to the corporate assets are set forth in Garrett v. Edge Moor Iron Co., 22 Del.Ch. 142, 194 A. 15, 16. The provisions important here are these:

"The preferred stock shall primarily receive dividends, when and as declared out of the surplus or net earnings of the corporation, at the rate of six per centum per annum, payable semi-annually on the first day of April and October in each year; the dividends on the preferred stock shall be paid or set apart before any dividend shall be paid on the common stock. * * * In the event of any liquidation or dissolution or winding up of the company, whether voluntarily or involuntarily, the holders of the preferred stock shall be paid in full the par value of their shares with all unpaid dividends thereon to the date of such payment before any amount shall be paid to the holders of the common stock."

No dividends were ever paid on the common stock. Full dividends were regularly paid on the preferred, to and including October 1, 1931, but were not thereafter paid by the corporation. In December, 1935 the corporation was dissolved and receivers in dissolution were appointed. The company had had an operating loss for the year 1930 and for every subsequent year of its existence. At the time of dissolution, the corporate books showed that the amount in value of its assets, less liabilities, was insufficient to pay the par value of the preferred stock and accrued dividends thereon, plus the par value of the common stock.

The receivers liquidated the corporate assets and paid to the preferred shareholders the par value of their shares in two installments, $ 35 per share on July 16, 1936 and $ 65 on September 18, 1936. In the case of Garrett v. Edge Moor Iron Co., supra, affirmed by the Supreme Court under the caption Pennsylvania Co. for Insurances on Lives, etc., v. Cox, 23 Del.Ch. 193, 199 A. 671, it was determined that the preferred shareholders were entitled to receive, in addition to the par value, the amount of unpaid dividends on their stock from October 1, 1931, to the time of payment of the par value of the stock. Pursuant to the decree entered in the cited case, the complainants, as preferred stockholders, received the aggregate sum of $ 158,480.55, or $ 29.43 a share, in satisfaction of the preferential right to accrued dividends upon liquidation. This is the fund in dispute here. The receivers distributed to the common stockholders, for each share of their stock, property which was valued for tax purposes at about $ 17. The common stockholders thus received substantially less than the par value, $ 100 a share, at which price the common stock had been issued. The source of the payment of the accrued dividends to the preferred stockholders was not earnings of the corporation, but was corporate capital; and the payment reduced the amount of assets available for the common stockholders as a return of their capital contribution.

All parties agree that the intent of the testator must control whether the trustees should pass on to the life beneficiaries, or retain as part of the trust corpus, the amount of the accrued dividends on the preferred stock. The testator did not provide specifically for the situation. He expressed the intent that "net income" of the trust should be paid to the life beneficiaries, and that the trust corpus should be retained for distribution to others. Accordingly, the question presented may be stated thus: Was the fund representing accrued dividends on the preferred stock income of the trust? The life beneficiaries take the position that it has the requisite attributes of trust income. They insist that it is a distribution made in fulfillment of the corporate contract to assure payment of cumulative dividends to the preferred stockholders; and that the right to such dividends is in its very nature a right to income, or to a return upon the investment represented by the preferred stock.

On the other hand, the remaindermen contend that the fact that the source of the fund was capital of the corporation determines the disposition which the trustees must make of it; that the established Delaware rule of allocation of corporate distributions dictates that all distributions which represent corporate capital must be held as trust...

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2 cases
  • Cox v. Sellers
    • United States
    • Court of Chancery of Delaware
    • 28 Julio 1943
  • Cox v. Sellers
    • United States
    • Court of Chancery of Delaware
    • 27 Enero 1943
    ...filed by the trustees under Item 8 of the will of William F. Sellers, deceased. An opinion was filed in this matter on November 9, 1942, 26 Del.Ch 350, 28 A.2d 679. At the close of the opinion, one question was reserved afford the solicitors an opportunity to argue it separately. The solici......

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