In re Heaton's Estate

• Decision Date: 23 November 1915
• Citation: 89 Vt. 550,96 A. 21
• Parties: In re HEATON'S ESTATE
• Court: Vermont Supreme Court

96 A. 21

89 Vt. 550

In re HEATON'S ESTATE

Supreme Court of Vermont. Washington.

Nov. 23, 1915.

Exceptions from Washington County Court; Willard W. Miles, Judge.

In the matter of Homer W. Heaton's estate. There was a decree of the probate court treating as income, and distributing to the life tenants of the trust fund, a stock dividend declared on the stock of which they had only a life use, with remainder over, and, the decree being affirmed on appeal to the county court, the Montpelier Savings Bank & Trust Company, trustee, excepted. Exceptions overruled, and judgment affirmed.

Argued before MUNSON, C. J., and WATSON, HASELTON, POWERS, and TAYLOR, JJ.

W. B. C. Stickney, of Rutland, for appellant Montpelier Savings Bank & Trust Co. Fred L. Laird and Fred B. Thomas, both of Montpelier, for appellants life tenants.

TAYLOR, J. Homer W. Heaton died testate January 28, 1899. By his will of October 5, 1895, he created the following trust, among others:

"The residue and remainder of my estate I give to the aforesaid James W. Brock upon trust, and to his duly appointed successor in the trust hereby created, upon the trust that all the income of said residue and remainder of my estate by way of interest, dividends, rents and profits be paid each and every year, or half or quarter year, if convenient, in the following manner, that is to say, one-third part thereof to my son Charles H. Heaton, for the full term and period of his natural life; and one-third part thereof to my son James S. Heaton for the full term and period of his natural life; and one-third part thereof to my grandchildren, Clifton M. Heaton and Ruby M. Heaton, in equal shares for the full term and period of the natural life of each one of them."

After making provision for the disposition of the shares of such life beneficiaries as should decease during the term, the will further provides:

"At the death of said Sarah S. Heaton (wife of Charles H. Heaton, mentioned elsewhere in the will) and my sons and grandchildren, the aforesaid trust and trusts are to be ended and all the property and estate held upon trust is given to the lawful issue of said grandchildren and their heirs in equal shares per capita."

At the time of the testator's death he owned 105 shares of the capital stock of the Montpelier Savings Bank & Trust Company of the par value of $100 per share which was a part of the residue of his estate, and so a part of said trust fund. The testator gave positive directions that said stock, together with certain other property mentioned in his will, should be held until the termination of the trust. James W. Brock having resigned said trust, the appellee was, on January 31, 1913, appointed his successor as trustee and is now acting as such.

On December 15, 1913, the trustees of the Montpelier Savings Bank & Trust Company declared a dividend out of the surplus earnings of said bank under the following vote:

"That a dividend of one hundred dollars per share payable in new capital stock from the surplus earnings of the bank be paid to the stockholders of record at the close of business December 31, 1913, thereby increasing the capital stock to the sum of one hundred thousand dollars represented by one thousand shares of one hundred dollars each."

At the time such dividend was declared, said bank had no rule nor by-law touching its authority to declare dividends or increase its capital stock; so that its authority in this regard depended upon its charter and the general law.

It appears from the agreed statement of facts that at the time of the testator's death the surplus earnings of the bank were upwards of $50,000; and that from that time to the time said dividend was declared there had been a gradual increase of its surplus earnings, so that when said dividend was declared "the surplus earnings of said bank exceeded twice the amount of said surplus earnings at the time of the decease of said Homer W. Heaton by more than the amount of this dividend." It also appears that there has been a corresponding increase in the volume of the bank's business since said dividend was declared.

Pursuant to said vote, said dividend was paid to and accepted by all of the stockholders of the hank in new capital stock, and the dividend of 105 shares on account of the original stock held as part of the trust fund is now in the hands of the bank as trustee. Said bank claims to hold the new shares as part of the trust fund, while Charles H. Heaton, Clifton M. Heaton, and Ruby Heaton-Marks, the surviving life beneficiaries, claim said stock as income of the trust fund. The question arises on an appeal from the decree of the probate court upon the allowance of the annual account of the trustee. That court ordered that the 105 shares of new stock be charged to the account of income and paid and delivered in equal shares to the life tenants, from which decree the trustee appealed. The case was heard in the county court on an agreed statement of facts, and to its judgment affirming the decree of the probate court the trustee excepted. The single question before us is whether said dividend under the will is part of the corpus of the fund which the trustee should hold for the remaindermen, or income of such fund which should pass to the life tenants.

No question is made as to the authority of the bank to declare this dividend. There was nothing in its charter nor in the general law then In force forbidding such a dividend as the one in question. See No. 150, Acts of 1915, § 3. In the absence of some statute to the contrary, there is no legal objection to a corporation's declaring a dividend payable in stock out of its net income, leaving its ordinary capital unimpaired. Such a dividend operates to transfer distributable assets to the individual ownership of the stockholders, thus changing accumulated surplus into permanent capital, and thereby creating an additional liability of the corporation. The vote by which the dividend was declared recites that it was from the surplus earnings of the bank, and it will be presumed that it was declared from surplus earnings available for division among the stockholders. Walker v. Walker, 68 N. H. 407, 39 Atl. 432; Boardman v. Boardman, 78 Conn. 451, 62 Atl. 339, 12 L. R. A. (N. S.) 784; Kalbach v. Clark, 133 Iowa, 215, 110 N. W. 599, 12 L. R. A. (N. S.) 801, 12 Ann. Cas. 647.

Moreover, the transfer of surplus to capital would not impare the surplus fund that the bank was required by law to reserve, as paid-in capital is treated as part of such fund. See No. 158, Acts of 1910, § 69.

We may start our inquiry with the proposition, which will be recognized as elementary, that the income of trust funds belongs to the life tenant, while the corpus of the fund belongs to the remainderman. The difficulty lies in determining what is income and what corpus in the particular case, especially when a dividend in the form of stock is declared by the corporation. When the question is settled whether the dividend is to be regarded as income or as capital of the trust fund, the respective rights of the life tenant and remainderman are readily determined. While the case is one of first impression in this state, the question as to the conflicting rights of life beneficiaries and remaindermen to stock dividends has frequently arisen in other jurisdictions, and it has vexed the courts to formulate a rule that would invariably work out exact justice between the parties.

The early English rule, adopted in 1799, gave all extraordinary or unusual dividends declared during the life estate, whether in stock or cash, to the corpus and not to the income. Brandon v. Brandon, 4 Ves. Jr. 800; Irving v. Houston, 4 Paton, 521. While this rule was recognized in England as late as 1856 (Cummings v. Boswell, 2 Jur. N. S. 1005), there were frequent departures from it even among the earlier cases. See Preston v. Melville, 16 Sim. 163; Prince v. Anderson, 15 Sim. 473; Johnson v. Johnson, 15 Jur. 714. The rule is now practically obsolete in England and of little more than historical value. The modern English rule is very much the same as the rule, hereinafter referred to as the Massachusetts rule. See Bouch v. Sproule, 12 App. Cas. 385; In re Hopkins, 18 L. R. Eq. 696; Jones v. Evans, 107 L. T. Beports (Ch. Div.) 604.

An examination of the American decisions discloses three distinct lines of cases. For convenience their doctrines may be designated as the Massachusetts rule, the Pennsylvania rule, and the Kentucky rule. It is worthy of notice that the American courts view the question from a common standpoint. They all expressly or impliedly recognize that the question whether a distribution made by a corporation during the continuance of a life estate is to be regarded as income or as capital is primarily one of construction—a question of the intention of the creator of the trust manifested by the will or other instrument by which the right to the income is, for the time being, severed from the corpus. The difficulty arises when the will or other instrument merely directs the payment of "earnings'" or "income" or "dividends" to the life tenant and is not sufficiently explicit for the guidance of the court when the distribution by the corporation is of an unusual or extraordinary nature. As we shall see, the application of this principle plays an important part in working out the several rules adopted by the courts of this country, which, though starting from a common premise, reach widely divergent conclusions.

The Massachusetts rule regards all cash dividends, however large, as income and stock dividends, however made, as capital. This rule was first announced in Minot v. Paine, 99 Mass. 108, 96 Am. Dec. 705. It will be observed that under this rule it makes no difference when the dividend was earned, provided it was declared out of net earnings during the life tenancy. It makes the character of the dividend, whether in cash or stock, the criterion of the...