Dumaine v. Dumaine

• Decision Date: 14 September 1938
• Citation: 16 N.E.2d 625,301 Mass. 214
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: FREDERIC C. DUMAINE, JR., trustee, v. FREDERIC C. DUMAINE, JR., & others.

301 Mass. 214

16 N.E.2d 625

FREDERIC C. DUMAINE, JR., trustee, v. FREDERIC C. DUMAINE, JR., & others.

Supreme Judicial Court of Massachusetts, Suffolk.

September 14, 1938

May 4, 1938.

Present: LUMMUS QUA, DOLAN, & COX, JJ.

Trust, Capital and income, Discretionary powers of trustee, Construction of instrument creating trust.

Upon construction of a trust instrument, directing payment of income to the trustee as an individual and of principal after his death to another trust which had been established twelve years before and under which he and members of his family and a charitable institution were beneficiaries, and specifically giving the trustee as to several matters

"absolute and uncontrolled discretion" and limiting his liability to errors or omissions due to "his own dishonesty or gross negligence," a provision that the trustee "shall have full power and discretion to determine whether any money or other property received by him is principal or income without being answerable to any person for the manner in which he shall exercise that discretion" made it proper for the trustee, honestly exercising his discretion, to pay to himself as life tenant a profit derived from sale of a security for a price above its cost.

BILL IN EQUITY filed in the Supreme Judicial Court for the county of Suffolk on February 4, 1938, and afterwards amended.

The case was reserved by Donahue, J. R. C. Curtis, stated the case.

T. Hunt, for the defendants Chase and others, trustees.

C. C. Cabot, for the defendant Frederic C.

Dumaine, Jr., and another.

COX, J. This is a bill in equity for instructions filed in the Supreme Judicial Court by the plaintiff, in his capacity as sole trustee under an indenture of trust dated April 11,

1932. The defendants are the plaintiff as an individual, Frederic C.

Dumaine, Sr., and the trustees of a voluntary association, designated in the articles of association as "Dumaines," created and existing under the laws of New Hampshire. There is no dispute between the parties as to the material facts. The answers admit the allegations of the bill. The case was heard by a single justice who, at the request of the parties, reserved it for the full court upon the bill as amended and the answers. The sole question for determination is the power of the trustee under the following clause of the trust indenture: "The trustee under this instrument shall have full power and discretion to determine whether any money or other property received by him is principal or income without being answerable to any person for the manner in which he shall exercise that discretion.

"

Frederic C Dumaine, Jr., the plaintiff trustee, and Frederic C. Dumaine Sr., a defendant, are the life tenants under the trust indenture, and the trustees of "Dumaines," defendants, are the remaindermen. By the terms of the trust instrument certain property was conveyed to the plaintiff in trust "To hold, manage, invest and reinvest the same with all the powers hereinafter set forth, and, after paying the expenses of administering the trust in this instrument set forth," to pay the net income as therein directed. The trustee is not required to give any bond, and "No trustee under this instrument shall ever be held responsible for any act or omission of any other person nor for any loss or depreciation of any of the trust property unless such loss or depreciation shall have been directly caused by his own dishonesty or gross negligence . . . . He shall not be responsible for any loss which may occur if he shall have in his absolute and uncontrolled discretion mortgaged, pledged or otherwise encumbered any of the property of this trust fund for the benefit of "Dumaines,'" Absolute and uncontrolled discretion is given the trustee as to the purchase and retention of securities. No trustee is ever to be liable to any person for any loss occasioned by depreciation of any security or property, and no person interested in the trust is entitled to proceed against the trustee on account of any such loss.

The bill was amended by adding an additional paragraph thereto: "7. The petitioner has sold certain shares of stock during the year 1938 at a profit over and above cost and is in doubt whether, as alleged by the Commissioner of Internal Revenue, he now under the trust instrument may in his discretion distribute the said profit to himself, as life tenant, as income." The defendants admit the allegations contained in this amendment. The prayers of the bill are (1) whether, under the provision of the trust indenture concerning which instruction is asked, the plaintiff has "the right to determine, contrary to the usual rules of law in this Commonwealth, what money or other property received by him, as trustee under said indenture, is principal or income, or whether said provision is to be construed as a limitation of the liability of the trustee without changing, for the purposes of the trust under said indenture, the usual rules of law of this Commonwealth as to what money or property, received by the trustee, is principal or income," and (2) "Whether or not the petitioner may in his discretion distribute to the life tenant gains from sales of securities." The defendant trustees in their brief state that "The precise question to be determined may be stated as follows: -- Has the Petitioner, in his capacity as Trustee, the right and the power to distribute now to himself (in his personal capacity), `as life tenant,' a profit derived during the year 1938 as the result of selling certain shares of stock, a part of the trust property, at a price `over and above cost'?"

The purposes of the trust are clearly stated to be (1) "to pay so much of the net income as the trustee in his absolute and uncontrolled discretion shall determine, to said Frederic C. Dumaine, Jr. during his life, [2] and upon his death to pay such part of said net income as the trustee in his like absolute and uncontrolled discretion shall determine, to Frederic C. Dumaine . . . [3] and the balance of said income, if there be any at the end of any year, to carry to capital, [4] and upon the death of the survivor to pay over, transfer and convey the trust estate as then existing to the persons who at that time shall be the trustees of `Dumaines,' . . . to be held by said trustees upon the trusts set forth in said [`Dumaines'] instrument." These purposes, however, are subject to the power of the trustee "to apply any money or other property received by him, whether principal or income, for the protection of any of the rest of the trust fund and also for the protection of any or all of the trust fund of `Dumaines' in such manner as he shall in his absolute and uncontrolled discretion deem best," and also subject to the power "to pledge, to borrow and to mortgage any of the property of which this trust fund may at any time consist for the benefit of `Dumaines' . . . and to turn over to said `Dumaines' the money raised thereby, all as he shall in his absolute and uncontrolled discretion deem best, not only for this trust but for the trust fund known as `Dumaines.'" And there is also the provision, which is specifically under inquiry, that the trustee "shall have full power and discretion to determine whether any money or other property received by him is principal or income without being answerable to any person for the manner in which he shall exercise that discretion."

It has often been held that one of the principal requisites for the maintenance of a bill for instructions is the fiduciary possession of a fund of which some disposition is required to be made presently. Bullard v. Chandler, 149 Mass. 532 , 538 and cases cited. Saltonstall v. Treasurer & Receiver General, 256 Mass. 519 , 528. Hull v. Adams, 286 Mass. 329 , 331. Cronan v. Cronan, 286 Mass. 497 . Our inquiry will be limited to the question raised by the amendment to the bill, that is, whether the trustee may, in his discretion, distribute to himself, as life tenant, as income, the profit derived by the sale of certain shares of stock in 1938, over and above their cost. The general rule is that, in case of a trust, gains resulting from the purchase and sale of securities are accretions belonging to the principal of the trust fund, rather than income. Williams v. Milton, 215 Mass. 1 , 11. Tax Commissioner v. Putnam, 227 Mass. 522 , 529. Holcombe v. Ginn, 296 Mass. 415 . Such gains ordinarily do not belong to a beneficiary who is entitled to the "net income" under the trust. Chase v. Union National Bank of Lowell, 275 Mass. 503 , 507. It has been determined that gains from the sale of capital assets may be taxed as "income" within the meaning of a constitutional provision giving the Legislature authority to levy "a tax on income." Tax Commissioner v. Putnam, 227 Mass. 522 . See Greenough v. Commissioner of Internal Revenue, 74 F.2d 25. Reference is made to the discussion of the word "income," in Tax Commissioner v. Putnam, 227 Mass. 522 . It is to be assumed that the settlor was familiar with these provisions of law at the time he executed the trust instrument, Tax Commissioner v. Putnam, 227 Mass. 522 , 528, as well as the rule laid down in Minot v. Paine, 99 Mass. 101 , as to stock dividends payable in cash or in stock being classified as income or principal. It is for us to determine, in so far as we are able, and sufficiently to answer the question raised, what the intention of the settlor was when he made use of the words contained in the clause under inquiry, for it is his intention which is the "controlling consideration" in determining the rights as between the life tenants and remaindermen. Gray v. Hemenway, 268 Mass. 515 , 518. See Atkins v. Albree, 12 Allen, 359, 361; Claflin v. Dewey, 177 Mass. 166 , 169; McElwain...