Geier v. Mercantile-Safe Deposit & Trust Co.

• Decision Date: 18 November 1974
• Docket Number: No. 17,MERCANTILE-SAFE,17
• Citation: 328 A.2d 311,273 Md. 102
• Parties: , 81 A.L.R.3d 853 Richard Ernst GEIER et al. v.DEPOSIT AND TRUST COMPANY, etc., at al.
• Court: Maryland Court of Appeals

Page 102

273 Md. 102

328 A.2d 311, 81 A.L.R.3d 853

Richard Ernst GEIER et al. v. MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, etc., at al.

No. 17.

Court of Appeals of Maryland.

Nov. 18, 1974.

William L. Marbury and G. Van Velsor Wolf, Baltimore (Donald P. McPherson, III, and Piper & Marbury, Baltimore, on the brief), for appellants.

J. Nicholas Shriver, Jr., and Donald C. Greenman, Baltimore (Ober, Grimes & Shriver, Baltimore, on the brief) for Delle S. Ernst and Sarah Ernst Darnall; no brief filed on behalf of other appellees.

Argued before MURPHY, C. J., and SINGLEY, SMITH, DIGGES, LEVINE, ELDRIDGE and O'DONNELL, JJ.

SINGLEY, Judge.

In May, 1970, Mercantile-Safe Deposit and Trust Company (the Mercantile) and George Stugard, trustees of the trust estate created by the will of Richard P. Ernst, received a distribution of 56,000 shares of the common stock, without par value, of The Procter & Gamble Company (the Company) as a consequence of what was characterized by the Company as a two-for-one split of its stock. Mindful of the decisions of this Court in Donaldson v. Mercantile-Safe Deposit and Trust Company, 214 Md. 421, 135 A.2d 433 (1957) and Mercantile-Safe Deposit and Trust Company v. Apponyi, 220 Md. 275, 152 A.2d 184 (1959), the trustees ¹ filed a bill of complaint in Circuit Court No. 2 of Baltimore City, in which they sought the court's instructions as to whether those 56,000 shares of the Company's stock should be allocated entirely to income, entirely to principal, or apportioned between income and principal.

Named as parties defendant in the proceeding were the two income beneficiaries of the trust, the daughter and daughter-in-law of the testator; the succeeding income beneficiaries, three granddaughters of the testator; and those who then held the remainder interest, a group consisting of 10 great grandchildren of the testator, three of whom were minors. Service by publication was had on nonresident, minor and unknown defendants.

From a decree awarding the 56,000 shares of the Company's stock to the income beneficiaries, the three minor remaindermen, great grandchildren of the testator, entered an appeal to the Court of Special Appeals. We granted certiorari and directed that the case be docketed in this Court.

Certainly, until 1933 the testator, Richard P. Ernst, who lived in Covington, Kentucky, with his invalid wife, was domiciled there. He had represented Kentucky in the United States Senate from 1921 until 1927, when he was defeated by Alben W. Barkley. A member of the Kentucky bar, his law office was in Cincinnati, Ohio, across the Ohio River from Covington.

It would seem that during the depression, Senator Ernst's financial affairs had become quite involved. At the time of his death in 1934, his securities, including 47,170 shares of the stock of the Company which he then owned, were pledged as collateral with banks and brokerage houses in Cincinnati to secure loans of more than $1,000,000.00. Additionally, for a period of some 10 years prior to his death, the Senator had not paid the tax levied by Kentucky on securities owned by residents, with the consequence that more than $100,000.00 in unpaid taxes, interest and penalties had accumulated when he died.

From 15 May to 1 June 1933, Senator Ernst was a patient at Johns Hopkins Hospital in Baltimore, where he underwent a cataract operation. The hospital records described him as a resident of Covington, Kentucky.

Upon his release from the hospital, Senator Ernst returned to Covington. On 3 July 1933, in his law office in Cincinnati, he executed the will which was ultimately admitted to probate, a will which he had drawn himself. In it, he described himself as 'of the County of Washington, State of Maryland.' To the extent here pertinent, the will created a residuary trust, the income from which was payable to Susan Brent Ernst, the Senator's widow, for life; on her death, one half became payable to his son, William Ernst, and to the son's wife, Delle S. Ernst, and to the survivor of them, for life. The other one half became payable to the Senator's daughter, Sarah Ernst Darnall. On the death of the survivor of William and Delle, that share of income will be payable to their children in equal shares. On the death of Sarah, her share of income is to be added to the share limited in favor of William, Delle and their children. On the death of the last survivor of the children of William and Delle, the remainder is to be divided among the issue of said children.

The Senator's son, William; a lawyer who was associated with the Senator, George Stugard, and Mercantile Trust Company of Baltimore ² were named as executors and trustees. If Mercantile did not act, the will provided that the individuals were empowered to name as another trustee 'a corporation organized and doing business in the State of Maryland.'

On 13 July 1933, Senator Ernst conveyed his residence in Covington, together with its contents, to his wife for life, with remainder to his children as joint tenants. At about the same time he conveyed other Kentucky real estate directly to his children.

On 6 November 1933, Senator Ernst took title to residential property at Blue Ridge Summit, in Washington County, Maryland. The deed, which was recorded among the land records at his request on 10 November, described him as 'of Washington County, Maryland,' vested a life estate in him with remainder in his son and daughter. Furniture located in a Washington apartment which he had retained since his term in the Senate was moved to the house, and extensive repairs were contracted for, the work being done between October, 1933, and May, 1934. Mr. Stugard testified that to his knowledge the Senator spent 'at least one night' in this house.

In January, 1934, Senator Ernst left Covington for Los Angeles, where he boarded a ship bound for New York through the Panama Canal. Somewhere between Panama and Cuba, he suffered a stroke. William Ernst met the ship in Cuba, accompanied his father to New York, and took him from the dock to the Johns Hopkins Hospital in Baltimore, where the Senator died on 13 April 1934.

The Orphans' Court of Washington County, Maryland granted letters testamentary on the Ernst estate to George Stugard and Mercantile Trust Company of Baltimore. Mr. Stugard said that William Ernst had declined to qualify as executor because, although he lived in Ohio, he did not want to be subject to service of process in connection with tax claims against the estate, on visits to his mother in Covington. Later, William Brnst did qualify as a co-trustee, however.

With court approval, the executors retained Kentucky counsel to negotiate a settlement of the Kentucky tax claims, including the tax assessed for 1934 on securities owned by the Senator on 1 July 1933. These were settled for $91,525.08, and the executors paid counsel a fee of $25,000.00 for services in connection with the settlement.

The first administration account filed in the Ernst estate accounted for a total personal estate of $1,887,530.31 which was substantially reduced by the payment of debts and expenses of administration. Maryland inheritance, Maryland estate and federal estate taxes were paid by the executors. The executors' federal estate tax return described Senator Ernst as a resident of Blue Ridge Summit, Maryland. The essets which were ultimately distributed to the trustees included 13,705 shares of the Company's stock with a date of death value of $486,527.50 and a book value of $14.01 per share, or $192,007.05. ³ Of this holding, 1,470 shares were later sold or distributed, leaving 12,235 shares with an aggregate 'intake' value ⁴ (historic book value, adjusted for sales and distributions by the trust and for purchases by and distributions to the trust) of $171,412.35.

At 30 April 1950, a distribution of 6,117 shares was received, increasing the holding to 18,532, but decreasing the intake value to $9.34 per share. In 1955 and 1956, 3,852 shares were sold, leaving 14,500 shares with an intake value of $135,434.67.

On 2 July 1956, an additional 14,500 shares were received increasing the holding to 29,000 without affecting the aggregate intake value. A sale of 1,000 shares on 1 July 1957 reduced the holding to 28,000 shares and the intake value to $130,764.67. On 11 April 1961, a two-for-one distribution increased the holding to 56,000 shares, leaving the aggregate intake value unchanged.

This was the situation in May of 1970, when the trustees received the distribution of 56,000 shares which gave rise to this case. This distribution had the result of reducing the intake value to $1.1675 per share, if $130,764.67 is divided by 112,000 shares.

Prior to the 1970 distribution, Procter & Gamble had authorized 50,000,000 shares of common stock, without par value, of which 40,775,413 shares, with a stated value of $1.00 per share, were issued and outstanding. The distribution of 40,775,413 additional shares was accomplished by increasing the number of shares authorized to 100,000,000 and by transferring an amount representing the stated value, as fixed by the directors at $1.00 per share in response to Ohio law, aggregating $40,775,413.00 from earned surplus to the capital account. See Page's Ohio Revised Code (1964 Repl. Vol.) Title 17, § 1701.30. The adjusted book value (per the books of the Company) of stock outstanding after the distribution was $15.40 per share.

Mr. Dean P. Fite, financial vice president of the Company, in his deposition explained that in 1939 the Company had made a distribution of 1/75 of a share for each share held, a distribution described by the Company as a stock dividend. This was accomplished by the issuance of stock held in the treasury of the Company. At that time, the Company's earned surplus account was debited and its capital stock account credited in the amount of $4.00 for each share which was issued.

As a result of this distribution, the Ernst estate...