Equitable Trust Co. of New York v. Prentice

• Decision Date: 31 December 1928
• Citation: 250 N.Y. 1
• Court: New York Court of Appeals Court of Appeals
• Parties: THE EQUITABLE TRUST COMPANY OF NEW YORK, as Trustee under a Deed of Trust of JOHN D. ROCKEFELLER, Respondent, v. ALTA R. PRENTICE, Appellant, and MARY A. PRENTICE et al., Respondents, Impleaded with Others.

250 N.Y. 1

164 N.E. 723

EQUITABLE TRUST CO. OF NEW YORK

v.PRENTICE et al.

Court of Appeals of New York.

Dec. 31, 1928.

Action by the Equitable Trust Company of New York, as trustee, against Alta Rockefeller Prentice and others.Judgment entered on the report of the referee was reversed by the Appellate Division(223 App. Div. 615, 229 N. Y. S. 250), and defendant named appeals by permission, and the Appellate Division certifies a question.

Judgment affirmed, and question answered.

Appeal, by permission, from an interlocutory judgment of the Appellate Division of the Supreme Court in the First Judicial Department reversing a judgment entered upon the report of a referee in an action by a trustee for the settlement of accounts.The Appellate Division certified the following question:

‘Would the allocation by the trustee, with the consent of the committee, of all of the shares of stock received on account of both of the stock dividends referred to in the complaint, to principal, pursuant to the provisions of section I of the trust agreement referred to in the complaint, which have been found to express the intent to give to the trustee, with the consent of the committee, the power to allocate to principal all of said shares of stock, be valid, notwithstanding that in the absence of such provisions the life tenant would be entitled to receive a portion of the shares of stock comprised in said stock dividends?’

Appeal from Supreme Court, Appellate Division, First department.

H. A. Cushing, of New York City, for appellant.

Winthrop W. Aldrich and Harrison Tweed, both of New York City, for plaintiff-respondent.

William D. Stiger, of New York City, for respondents Prentice et al.

Thomas M. Debevoise and Eugene Congleton, both of New York City, for respondents Rockefeller Foundation et al.

Everett Colby and Dallas S. Townsend, both of New York City, for respondentsJohn D. Rockefeller, Jr., et al.

John W. Davis, of New York City, D. F. McPherson, of Chicago, Ill., George W. Jaques, of New York City, and James F. Oates, Jr., of Chicago, Ill., for Edith R. McCormick, amicus curiae.

Hugo Kohlmann and Henry A. Stickney, both of New York City, for Curtis, Mallet-Prevost, Colt & Mosle, amicus curiae.

CARDOZO, C. J.

A deed of trust, made in 1917, gave the net income of shares of stock to stated beneficiaries with remainders over.By its terms the trustee was to have the privilege, acting with the consent of others, to allocate stock dividends to capital rather than to income.This privilege was exercised.There is no question that the allocation would be lawful, if the trust had been created in 1922 or later.Personal Property Law (Consol. Laws, c. 41)§§ 10and17-a, as amended byLaws 1922, c. 452, andLaws 1926, c. 843.The question is whether it is to be condemned as an unlawful accumulation under a trust previously founded.

The rule in this state was settled, until changed in 1926 as to subsequent trusts by an amendment of the statute(Laws 1926, c. 843, amendingPersonal Property Law, § 17-a), that as between life beneficiary and remainderman a stock dividend would be reckoned as principal or income according to the origin of the surplus out of which it was declared.To the extent that it distributed a surplus existing at the creation of the trust, it would be allocated to principal; to the extent that it distributed a surplus earned thereafter, it would be allocated to income.Matter of Osborne, 209 N. Y. 450, 103 N. E. 723, 823,50 L. R. A. (N. S.) 510, Ann. Cas. 1915A, 298;United States Trust Co. of New York v. Heye, 224 N. Y. 242, 120 N. E. 645;Macy v. Ladd, 227 N. Y. 670, 125 N. E. 829;Bourne v. Bourne, 240 N. Y. 172, 148 N. E. 180;Matter of Bird's Will, 241 N. Y. 184, 149 N. E. 827;Sturgis v. Roche, 247 N. Y. 585, 161 N. E. 192.The search in all these cases was to find the intention of the founder of the trust, and then to give effect to it.What is income for a corporation may not be income for a shareholder.People ex rel. Clark v. Gilchrist, 243 N. Y. 173, 182, 153 N. E. 39.What is principal for a shareholder, when taken in his own right, may be income, when held in trust to be divided among others.So, at least, the cases hold.The thought back of them is this:

A surplus in the treasury of a corporation, even though not income for the shareholder, is potentially a fund that may be converted into income.The declaration of a stock dividend destroys this potential income, and turns the surplus into capital.The effect may be at times to thwart the plan of apportionment between life tenant and remainderman, as conceived at the foundation.A founder of a trust has conveyed shares to a trustee, to pay the income to wife or child for life, with remainder upon death to others.Did he mean in thus apportioning his estate that potential income might be cut down through the vote of the corporate managers, so that the beneficiary never could resort to it, and principal increased to the profit of remaindermen, perhaps unknown or unborn?We have thought that intention would be best promoted if the fund thus permanently diverted were included in a gift of income.Very likely the word ‘dividend’ has had a part in shaping the conclusion, for in their typical or common form dividends are income, like other recurrent gains (Lynch v. Hornby, 247 U. S. 339, 344, 38 S. Ct. 543, 62 L. Ed. 1149), and one slips readily into the assumption that the equivalence is absolute.Confusion of the sign with the thing most typically signified is not impossible for judges, much less for founders of a trust.

Even so, an appraisal of intention by which stock dividends, either wholly or in part, are classified as income, has met with stout resistance from courts of high authority.The Supreme Court of the United States and the courts of Massachusetts and England allot such dividends to principal.Gibbons v. Mahon, 136 U. S. 549, 10 S. Ct. 1057, 34 L. Ed. 525;Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705;In re Barton's Trust, L. R. 5, Eq. 238, 243.In the view of those courts, a stock dividend may be likened to a mere exchange of coins.Towne v. Eisner, 245 U. S. 418, 426, 38 S. Ct. 158, 62 L. Ed. 372, L. R. A. 1918D, 254.The life tenant is not aggrieved, though an indirect effect of the exchange is to destroy the possibility of income in the future.Such changes are inherent in the nature of the gift.If the donor had in mind that income for the life tenant should have a secondary meaning, alien to its primary one, he should have said so in his deed or will.

We have no thought to revive a controversy so inveterate by debating these conflicting views.All that concerns us now is to remember that the decisive test was not one of legality; it was one of presumable intention Some of the earlier cases went upon the theory that the whole dividend should go to income.McLouth v. Hunt, 154 N. Y. 179, 48 N. E. 548,39 L. R. A. 230;Lowry v. Farmers' Loan & Trust Co., 172 N. Y. 137, 143,64 N. E. 796;Robertson v. De Brulatour, 188 N. Y. 301, 311,80 N. E. 938.The notion of an illegal accumulation could not have dictated those decisions, for the surplus may have been earned before the trust was set up.What was accomplished by Matter of Osborne, supra, was a modification of the rule in the interest of remaindermen.Every one assumed in that case that the stock dividend, if earned after the foundation of the trust, would be classified as income.The only question was whether an exception should be introduced in respect of surplus earned before.We held that, in determining the presumable intention of the founder, the line of division was to be drawn at the date of the foundation.Cf.Lowry v. Farmers' Loan & Trust Co., supra;Robertson v. De Brulatour, supra; Thompson on Corporations(3d Ed.) vol. 7, § 5403;Perry on Trusts, vol. 2, § 544, p. 872.

If the decisive question in the earlier cases was the question of intention, the decisive one here is the question of legality.So far as intention is concerned, the founder has said that a stock dividend shall be principal, if the trustee shall so declare.The only doubt is whether a rule of law stands in the way of his desire.The rule against accumulations in this state goes back to the Revised Statutes.For the benefit of minors, ‘an accumulation of the interest money, the produce of stock or other income or profits arising from personal property, may be directed,’ to continue not longer than the term of the minority.1 R. S. pt. 2, c. 4, tit. 4, § 3.‘All directions for the accumulation of the interest, income or profit of personal property, other than such as are herein allowed, shall be void.’Section 4.Later revisions, though they have changed the verbiage of this restriction, have not worked a change of substance.Personal Property Law, §§ 10,16.Does the founder of a trust ‘direct’ an illegal accumulation, within the meaning of these statutes, when he provides that a stock dividend, made possible by earnings of the corporation after the trust has been created may be allocated to principal?

We said a while ago that the declaration of such a dividend destroys potential income by turning surplus into capital.The act by which this is done is not an accumulation by the individual shareholder, who may have nothing to do with it.It is no more his act than a refusal by the directors to vote out surplus cash.Matter of Kernochan, 104 N. Y. 618, 11 N. E. 149.Still less is it an accumulation directed by the founder of the trust.The change is one fortuitously ensuing from the declaration of the will of others.We must assume, in the light of past decisions, that submission to this will defeats the purpose of the founder, if the definition of income is not broadened in accommodation to the changed conditions.The consequence does not follow as of course that submission is ‘direction’ within the meaning of the statute.Some courts have thought, in circumstances not dissimilar, that the dividend is...