In re Clarke's Will
| Decision Date | 03 March 1939 |
| Docket Number | 31899,31900. |
| Citation | 284 N.W. 876,204 Minn. 574 |
| Parties | In re CLARKE'S WILL. v. BENNETT et al. CLARKE |
| Court | Minnesota Supreme Court |
On Rehearing April 6, 1939.
Appeal from District Court, Hennepin County; Mathias Baldwin, Judge.
Proceeding in the matter of the trust under the last will and testament of Hovey C. Clarke, deceased, wherein Maggie L. Clarke trustee, made her final account. From an order for judgment and from an order denying her motion for amended findings or for a new trial, Maggie L. Clarke, trustee, opposed by Margaret Clarke Bennett and others, appeals.
Appeal from order for judgment dismissed and order denying motion for amended findings or for a new trial modified and, as modified, affirmed.
Syllabus by the Court .
1. The doctrine rejected that a corporation may properly be considered as a fiction of the law.
2. The concept of disregard of entity and separate status of a corporation also rejected. The process in that field of inquiry is rather but judicial refusal to make the presence and action of a corporation a bar to a judgment required by the sum of facts before the court.
3. Money or other property received by a trustee as proceeds of sale or exchange of capital of trust property is capital, not income. In this case it was the duty of the trustee (who was also life tenant) to allocate to corpus, rather than income all dividends of the corporation so far as they consisted of increases in its capital (profits on sale of securities).
4. Where all the stock of a securities holding company is owned by a trustee who has in consequence complete control of company, the latter is but another self for the trustee, and its action in respect to dividends will be considered that of the trustee.
5. Where the holding company was organized and until his death conducted by the testator and settlor of the trust, the fact that he took all increases of capital as income is inadmissible to show that his trustee and life tenant could do the same. The trust instrument (the will) limited her to income.
6. A minor and inadvertent error in the decision of the trial court should be corrected by motion below rather than by modification here.
Strong, Covell & Strong and Karl H. Covell, all of Minneapolis, for appellant.
Dohery, Rumble, Butler, Sullivan & Mitchell, of St. Paul, for respondents.
This case is furnished by a testamentary trust, of which Mrs. Maggie L. Clarke is trustee. After trial below on her final accounting (she has resigned as trustee), she was surcharged in the sum of $34,740.35. Findings of fact, conclusions of law, and order for judgment were made. There is an appeal from that order, which is not appealable. Hence, that appeal is dismissed. But there was also a motion for amended findings or a new trial. Mrs. Clarke's appeal from the order denying that motion properly presents the case for review.
Appellant is the widow of Hovey C. Clarke, late of Minneapolis, who died testate in 1931. By his will appellant was given enumerated personal effects and one-third of the residue of his estate. The other two-thirds went to her as trustee ‘ to receive and collect the principal, income, rents, issues, and profits of the trust estate, and pay the entire net income received or derived therefrom, to herself.’ The remainder was bequeathed to a sister of the testator, who departed this life in March, 1937, and whose heirs are now the parties adversary to Mrs. Clarke and respondents here.
For some years, Mr. Clarke had carried all his securities, which made the bulk of his estate of over a half million dollars, as the property of a personal holding company, the Hovey C. Clarke Corporation. Under the will, one-third of its stock went to appellant as her own property. The other two-thirds became hers as trustee. Early in 1933, she exchanged her third of its stock for a third of the assets of the corporation, which thereupon retired the stock so transferred to it. Since that transaction, Mrs. Clarke, as trustee, has owned all its stock except for qualification shares. As trustee, she has been in complete and continuous control of the corporation. That power she promptly asserted by removing from the board of directors two of Mr. Clarke's executors and substituting her nephew, Mr. Blackmar, and his wife.
After setting up the corporation in 1924 and transferring thereto all his securities, Mr. Clarke, while he lived, caused dividends to be declared periodically, and, of course, took them all for himself as income. Those dividends were derived from two sources: (1) interest on bonds and dividends from stocks, and (2) profit on sales of securities.
Because, as trustee, Mrs. Clarke has continued (and somewhat expanded) that technique, this controversy has arisen. The decision presents by enumeration instances where securities were sold for more than their cost to Mr. Clarke. Appellant caused the corporation to carry the profits so made as income, and to include them in dividends paid to her as trustee. All such dividends, whether reflecting current earnings or additions to capital, Mrs. Clarke, as trustee, paid to herself, as life tenant.
The bulk of the surcharge is the result of two transactions. In December 1936, the Hovey C. Clarke Corporation sold stock of the Appleton Company, at a profit of $2,194.67, to Mr. Blackmar, the nephew whom appellant had made a director. The price was $23,540, for which the purchaser gave his note, due December 31, 1937. On or before maturity, it was ‘ liquidated’ by the corporation's repurchase of the stock at the very sum for which it had been sold. Mr. Blackmar's note was surrendered. So, although the corporation made no actual profit on sale and repurchase, the initial pseudo gain of $2,194.67 became cash income for Mrs. Clarke, as life tenant. A dividend including that sum was paid to her as trustee, and by her taken as income.
In similar fashion, Hovey C. Clarke Corporation sold shares of the Shevlin-Hixon Company at an evanescent capital gain of $24,135.90. The purchaser was the M. L. Clarke Corporation, another personal holding company organized by appellant after her husband's death and for her own purposes. The price was paid, $10,300 in cash, and $35,000 by note of the M. L. Clarke Corporation. Again, within a year, the stock was repurchased by the Hovey C. Clarke Corporation at the price for which it had been sold. In the meantime, that corporation had carried the vanished profit into its income account, and paid a dividend inclusive of that amount of Mrs. Clarke, as trustee. She appropriated all of it to herself as life tenant.
1-2. There has been much debate at the bar about the process of ‘ piercing the veil’ of, or disregarding, the corporate entity. For appellant the decision below is attacked as an unconscionable putting aside of a corporation, with consequent sterilization of its lawful action as a legal entity.
While the Hovey C. Clarke Corporation, during the period under review, was a legal entity distinct from the personality of appellant, it was yet an instrument wholly under her control. Over such a picture, presence of a corporation, so used by a trustee, throws nothing so thick as a veil. The corporation was so completely the trustee's tool that its transactions must be considered her own for purposes of accounting. That does not ignore the corporate entity. Neither does it reject the dominant fact that the corporation was but another self for the trustee.
We reject as fundamentally unsound and obsolete the thesis that a corporation can be regarded for any purpose as a mere fiction of law. To reduce it to a fiction is to make it nothing. Then to disregard it as a fiction is to disregard nothing. A fiction can not sue or be sued, make and perform contracts, own property, commit torts and crimes. A corporation can do all that, and so is not a fiction. So to consider it is to blind thought to large and important reality.
A corporation is not a person, but has a legal and real individuality. Neither is it artificial, save as it is a generation of law, rather than nature. It is in simple fact a legal unit-a very real one-endowed by its creator with many of the rights and attributes of persons. It is so much sui generis that to attempt to define it, rather than to describe or enumerate its peculiar features, in terms of the law of persons, tends to obstruct rather than facilitate comprehension. Much worse is it to fictionize in decision concerning a thing about which there is no trace of the fictitious. Fiction has its useful place elsewhere, but not on the bench.[1] Litigants, whose personal and business affairs are real, rightly expect their controversies to go to judgment on real, rather than fictitious bases.
Long ago we held that a corporation was so much a real fact that a deed of its real estate from the owner of all its stock was void on its face and not even a cloud on the company's title. Baldwin v. Canfield, 26 Minn. 43, 1 N.W. 261, 276. The result of Prudential Insurance Co. v. A. Enkema Holding Co., 196 Minn. 154, 157, 264 N.W. 576, 578, was reached because the owner of all its stock had used the corporation as a ‘ mere agency to carry out his will.’ Nothing was gained by considering the corporation a fiction. The same end would have been reached had the main actor used another individual as he did his corporation.
Many cases present avowed disregard of corporate entity. E. g. Matchan v. Phoenix Land Investment Co., 159 Minn. 132 198 N.W. 417. But they all come to just this-courts simply will not let interposition of corporate entity or action prevent a judgment otherwise required. Corporate presence and action no more than those of an individual will bar a remedy demanded by law in application to...
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