Heard's Estate, In re

• Decision Date: 01 November 1951
• Docket Number: No. 4320,4320
• Citation: 107 Cal.App.2d 225,236 P.2d 810
• Court: California Court of Appeals Court of Appeals
• Parties: , 27 A.L.R.2d 1313 In re HEARD'S ESTATE. HEARD v. BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N et al. Civ.

Page 810

236 P.2d 810

107 Cal.App.2d 225, 27 A.L.R.2d 1313

In re HEARD'S ESTATE HEARD v. BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N et al.

Civ. No. 4320.

District Court of Appeal, Fourth District, California.

Nov. 1, 1951.

Rehearing Denied Nov. 26, 1951.

Hearing Denied Dec. 20, 1951.

Warren K. Taylor, San Francisco, for Appellant Bank of America Nat. Trust & Savings Ass'n.

Calkins, Hall, Linforth & Conard, San Francisco, for appellant Regents of University of California.

John W. Heard, Jr., Bakersfield, in propria persona.

GRIFFIN, Justice.

Emma C. Heard, a widow, died on November 23, 1939, leaving an estate valued in excess of $200,000. Her only close relatives were a brother, to whom she bequeathed $5, and her son, John W. Heard, Jr., plaintiff and respondent in this proceeding. Under Section IV of her will, admitted to probate on January 2, 1940, she bequeathed, in trust, the residue of her estate to appellant Bank of America National Trust and Savings Association, in its capacity as trustee (hereinafter referred to as trustee). This trust provided for a life income for the respondent in the sum of $200 a month, and provided for the payment of various other sums from said income to certain other named persons. The balance of the income was to go to respondent until the termination of the trust, and upon its termination the remaining trust estate was to vest in the issue of John W. Heard, Jr., if any, and if not, then in two named Masonic devisees and the University of California. (According to the briefs, there is now one issue of John W. Heard, Jr.)

After extended litigation in which the validity of the trust was upheld, In re Estate of Heard, 25 Cal.2d 322, 153 P.2d 553, a final decree of distribution was entered on March 18, 1946. Among the assets of the estate, held in trust by the trustee, were 953 shares of common stock of the Bank of America National Trust and Savings Association (hereinafter referred to as the "bank") issued in its capacity as issuer of the stock. On February 8, 1949, the bank proposed a declaration of a 20 per cent stock dividend to its shareholders of record at the close of business on March 15, 1949, and on April 15, 1949, the trustee received from the bank a dividend consisting of 190 3/5 shares of common stock, based upon the 953 shares above mentioned. Upon receipt of this stock dividend the trustee allocated the dividend to the corpus of the trust under its claimed power given to it by sec. IV, paragraph (a) of decedent's will, which reads in part as follows: "In accounting for the income and the principal of the trust estate, my said trustee shall not be required to amortize any premiums paid, nor to accumulate any discounts made upon any securities purchased for the use of the trust, and it shall at all times be the duty and power of my said Trustee to determine what is income and what is principal of the Trust estate; provided, however, that should any sums be received by my said Trustee as bonuses, rentals, or royalties from any real property constituting a portion of the trust estate which may have been leased for oil and/or gas, as more particularly hereinafter provided, then, and in that event, such bonuses, rentals, or royalties and all of them shall be treated as income and not as principal."

Upon the failure of the bank to allocate said stock dividend to income, this proceeding was initiated and on October 19, 1949, respondent filed herein his petition requesting the court below to instruct the trustee that such dividend constituted income of said estate and that its failure to so determine was not in accord with its best judgment or within the bounds of reasonable judgment or according to law, and that such failure constituted an abuse of discretion, and for an order directing the trustee to allocate such dividend to income.

After hearing the court found generally in favor of respondent, i.e., that the stock dividend of 190 3/5 shares constituted income of the trust estate; that the failure and refusal of the trustee to allocate said stock dividend to income of the trust estate constituted an abuse of discretion on the part of the trustee; that the trustee did not act according to its best judgment or within the bounds of reasonable judgment or according to law. Judgment was entered accordingly and the trustee was instructed to forthwith allocate the same to such income. From this order the trustee and the remainderman, Regents of the University of California (hereinafter referred to as "regents") appealed.

In support of the order respondent cites In re Estate of Duffill, 180 Cal. 748, 183 P. 337, 340, wherein our Supreme Court, in discussing two methods of apportioning dividends which are in use in America, i.e., the "American or Pennsylvania rule" and the "Massachusetts rule", cited Cook in his work on Corporations, Seventh Edition, sec. 553, et seq. It is stated, 180 Cal. at page 757, 183 P. at page 340: "According to the American rule, if it be found that the fund out of which the dividend is paid accrued before the life estate arose, it is held to be principal belonging to the corpus of the estate. But when it is found that such fund was earned after the life estate arose, then it is income belonging to the life tenant. Of the other rule, known sometimes as 'the rule in Minot's Case,' which prevails in Massachusetts, Georgia, Rhode Island, and Illinois, the learned author says: 'It regards cash dividends, whether large or small, as income, and stock dividends, whenever earned and however declared, as capital, and the rule, accordingly, is a simple one. Cash dividends belong to the tenant for life and stock dividends to the corpus. There is little doubt, however, that this rule works great hardship and injustice in many cases. Hence the rule is not rigidly adhered to, but the court, in deciding whether the distribution is a stock or a cash dividend, may consider the actual and substantial character of the transaction, and not its nominal character merely.'

"That we adopt the American or Pennsylvania rule is evident from the foregoing discussion and the cases cited."

In re Estate of Traung, 30 Cal.2d 811, 185 P.2d 801, 803, the court said: "With regard to stock dividends based upon earnings, there are three rules, each of which is known by the name of the jurisdiction in which it was first applied. Under the Pennsylvania rule, a determination is made as to whether the dividend or other distribution was declared from earnings which accrued before or after the trust began, and the dividend is apportioned between corpus and income accordingly. California has followed this rule in determining the ownership of extraordinary dividends."

The Pennsylvania rule, however, was rejected, insofar as it applied to the sale of securities. The case held that gains in value of investments, including securities, belong to capital, and are to be credited to the corpus of a trust fund rather than to income, and that although the corporate stock may have increased in value because of earnings accrued since the creation of the trust, the beneficiary does not become entitled to income or profits until a dividend has been declared and the amount separated from the capital of the corporation for distribution to its shareholders. Apparently this rule was in effect in California at the time the testator in the instant case made her will, at the time of her death, and at the time of the creation of the trust.

Subsequently, our legislature, in 1941, Stats.1941, chap. 898, p. 2476, Gen.Laws, Act 8696, passed an act which is referred to as the "Principal and Income Act", concerning the ascertainment of principal and income and the apportionment of receipts and expenses among tenants and remaindermen. Sec. 5, subdivision (1) thereof provides: "All dividends on shares of a corporation forming a part of the principal which are payable in shares of the corporation of the same kind and rank as the stock on which such dividend is paid, and dividends payable in shares of whatever kind or rank, to the extent that they represent a capitalization of surplus not derived from earnings, shall be deemed principal. Subject to the provisions of this section, all dividends payable otherwise than in such shares, including ordinary and extraordinary dividends and dividends payable in shares or other securities or obligations of corporations other than the declaring corporation shall be deemed income. Where the trustee shall have the option of receiving a dividend either in cash or in the shares of the declaring corporation, it shall be considered as a cash dividend and deemed income, irrespective of the choice made by the trustee." (Italics ours.)

Appellants concede that this act was passed subsequent to the creation of the trust here involved, and would not necessarily be involved except to support the allowable discretion given the trustee by the trust agreement to determine what was principal and what was income and to allocate it accordingly.

Some documentary evidence was produced which consisted of a condensed statement of the bank over the period of years here involved showing the amount of capital, surplus, undivided profits, and reserve funds. The head trust officer of the bank was questioned as to what matters the trustee took into consideration in making its determination to allocate the stock to corpus instead of income. He testified they considered the several rules applied in the named states and believed that California followed the Pennsylvania rule, i.e., that any stock dividends paid from earnings accumulated after the creation of the trust should be considered as income; that they considered the provisions of the 1941 Principal and Income Act; that they believed that it did not apply to trusts created before its enactment; that they knew the accumulated surplus of the bank's earnings, since the death of the testator and the creation of the trust, had increased...