In re Nirdlinger's Estate

• Decision Date: 25 June 1927
• Docket Number: 170,171,172
• Citation: 139 A. 200,290 Pa. 457
• Parties: In re Nirdlinger's Estate
• Court: Pennsylvania Supreme Court

139 A. 200

290 Pa. 457

In re Nirdlinger's Estate

Nos. 170, 171, 172

Supreme Court of Pennsylvania

June 25, 1927

Argued April 20, 1927

Appeals, Nos. 170, 171 and 172, Jan. T., 1927, by Samuel F E. Nirdlinger et al., from decree of O.C. Phila. Co., July T., 1919, No. 737, dismissing exceptions to adjudication, in estate of Samuel F. Nirdlinger, deceased. Affirmed without prejudice.

Exceptions to adjudication of GEST, J.

The opinion of the Supreme Court states the facts.

Exceptions dismissed in opinion by VAN DUSEN, J., and Samuel F. E Nirdlinger, Theresa B. Nirdlinger and Frederick Zimmerman Nirdlinger, sons and adopted daughter of testator, appealed.

Error assigned, inter alia, was decree, quoting record.

The judgment is affirmed without prejudice, as last above stated, at the cost of appellants.

Francis Shunk Brown, with him Charles M. Willits, Francis Shunk Brown, Jr. and Ira Jewell Williams, for appellants. -- Life tenants are entitled to income from the investment: Kendall v. Klapperthal Co., 202 Pa. 596; S.G.V. Co. v. S.G.V. Co., 264 Pa. 265; Revloc Supply Co. v. Troxell, 281 Pa. 424; Thomson's Est., 153 Pa. 332.

Undistributed income was included in proceeds received from sale of investment: McKeown's Est., 263 Pa. 78.

The practical difficulty of proving that part of amount received was income does not deprive life tenants of their rights: Mandeville's Est., 286 Pa. 368.

The life tenants are entitled to the difference between the amount invested in the theater companies and the proceeds received from the transaction.

Profits realized from sale of stock are distributable as income: Leech's Est., 4 Pa. D. & C. 1.

The original investment is not impaired and, therefore, surplus received is payable to life tenants: Mandeville's Est., 286 Pa. 368; Oliver's Est., 136 Pa. 43.

Life tenants are entitled to the proceeds received from the sale of stock belonging to the estate and from the assignment of loans which were made by the estate to the corporations in which the stock was owned: McKeown's Est., 263 Pa. 78; Quay's Est., 253 Pa. 80.

Trustees were engaged in a joint adventure under the corporate fiction of stock ownership: Graham's Est., 198 Pa. 216; Kendall v. Klapperthal Co., 202 Pa. 596; S.G.V. Co. v. S.G.V. Co., 264 Pa. 265; Revloc Supply Co. v. Troxell, 281 Pa. 424; Handley's Est., 212 Pa. 11; Oram v. Pierce, 73 N.J.Eq. 391; Stevens's Case, 95 N.Y.S. 297; Park's Est., 173 Pa. 190.

James Gay Gordon, for appellees. -- Where stock is sold which belonged to the principal of a trust estate all the proceeds thereof also belong to the principal: Graham's Est., 198 Pa. 216; Leech's Est., 4 Pa. D. & C. 6.

The trustees were not engaged in a joint adventure under the corporate fiction of stock ownership.

Before MOSCHZISKER, C.J., FRAZER, WALLING, KEPHART, SADLER and SCHAFFER, JJ.

OPINION

MR. JUSTICE KEPHART:

Samuel F. Nirdlinger died leaving a will devising his entire estate in trust. He authorized his trustees either to retain his securities, or sell them and invest the proceeds, without being limited to those regarded as "legal investments." The "rents, issues, income, dividends and revenue" were to be paid by the trustees to designated beneficiaries for life, and, at their death, the corpus was to pass to remaindermen. In September, 1920, the orphans' court authorized the trustees to enter into an agreement with Erlanger and others by which leases of certain theaters were procured. Five corporations were organized for the purpose of operating the theaters. The trustees became owners of one-fifth of the stock in these corporations, their total financial interest, purchase price and loans, being about $21,370. This stock was sold for $170,000, and it is claimed that $40,000 of this sum represented income earned by the theater companies during the life of the agreement, and was distributable as such to the life tenants under the will. The auditing judge held that the income must pass with the corpus, and, unless dividends were in fact declared, the rule should not be otherwise. Exceptions to the adjudication having been dismissed by the court in banc, adjudication having been dismissed by the court in banc, this appeal by the life tenants followed.

The theory of appellants is, that, since the acts of the parties constituted a joint adventure carried on by five close corporations, the corporate fiction should be disregarded and the increased amount received from the investment divided as profits, or the accumulated earnings should be paid to the life tenants, the original investment not being impaired.

In deciding appellant's case, we determine rights as between life tenant and remainderman where trustees sell shares of stock, receiving a price greater than the value of the stock at the time of testator's death, the increase being due in part to an ascertained accumulated surplus from the earnings of the corporation. It is necessary then to review generally these rights where the subject of the trust consists of shares of corporate stock. We must carefully distinguish between the decided cases wherein these rights as they relate to income or earnings in certain aspects have been considered, and the situations which, it is argued, leave open other aspects of income and earnings in which the relative rights have not been ascertained, and evolve, if possible, from the former, a rule for the latter. For convenience we shall consider the subject under the following general heads: the judicial attitude, (A) where earnings qua earnings come into the hands of the trustee through an actual distribution by the corporation; (B) where the earnings are undistributed by the corporation, but their value is reflected in dollars in the hands of the trustee through a sale of the stock by him; and (C) where earnings have not been distributed by the corporation and the stock is unsold in the trustees's hands. Earnings of a corporation may be divided into gross and net, and the net earnings may again be divided into (1) that portion applicable to a usual or customary dividend at a fixed per cent or sum per share, paid at regular periods, and (2) extraordinary dividends which may assume an unusual form and amount, paid at irregular intervals from accumulated surplus or earnings. Both kinds of dividends must, of course, be declared out of earnings or profits.

(A) Where the corporation distributes its earnings in dividends.

1. It is the general rule as to ordinary dividends, well established in Pennsylvania, that when the trustee receives, after the creation of the trust, money as earnings of the estate or income, its source being an ordinary dividend paid by a corporation, it belongs to the life tenants, regardless of how soon thereafter it is declared. The reason given for this rule is that dividends, unlike interest on bonds, are not earned de die ad diem, and, consequently, are not, in the absence of unusual circumstances, apportionable.

2. When the earnings have been permitted to accumulate by a corporation and their proceeds invested in corporate property, in working capital, or retained as cash or its equivalent, and an extraordinary dividend is declared in stock or cash, the respective rights of life tenants and remaindermen have been variously adjudicated. Three rules prevail -- the Massachusetts, Pennsylvania and Kentucky rules.

(a) Under the Massachusetts rule, the rights of the life tenant and the remainderman depend on the substance and intent of the action of the corporation in declaring the dividend: Rand v. Hubbell, 115 Mass. 461, 474; Minot v. Paine, 99 Mass. 101, 108, 96 Am. Dec. 705. This means, in general, that all cash dividends are awarded to the life tenant, and all stock dividends to the remainderman.

The Massachusetts rule is one of convenience. In Minot v. Paine, supra, it was said (p. 108): "A trustee needs some plain principle to guide him; and the cestui que trust ought not to be subjected to the expense of going behind the action of the directors, and investigating the concerns of the corporation, especially if it is out of our jurisdiction. A simple rule is to regard cash dividends, however large, as income, and stock dividends, however made, as capital." It is not claimed that the application of this rule will accomplish exact justice in all cases (see Boardman v. Boardman, 78 Conn. 451, 62 A. 339), and it has been admitted at times it is entirely opposed to the intentions of the testator. See D'Ooge v. Leeds, 176 Mass. 558, 560, 57 N.E. 1025. This has led the court to look behind the vote of the directors to discover the substantial purpose of the declaration: Heard v. Eldredge, 109 Mass. 258; Leland v. Hayden, 102 Mass. 542; Davis v. Jackson, 152 Mass. 58, 25 N.E. 21; Lyman v. Pratt, 183 Mass. 58, 66 N.E. 423. The present tendency, as indicated by the cases of Gray v. Hemenway, 212 Mass. 239, 98 N.E. 789, and Boston Safe Deposit & Trust Co. v. Adams, 219 Mass. 175, 106 N.E. 590, seems to lean toward more liberal treatment of the life tenant.

The Massachusetts rule has been applied by the Supreme Court of the United States (Gibbons v. Mahon, 136 U.S. 549) and by the highest courts of Connecticut, Georgia (by statute), Illinois, Maine, North Carolina, Rhode Island and West Virginia. See cases collected in 24 A.L.R. 29. The modern English rule is substantially the same: see Bouch v. Sproule, 12 App. Cas. 385; In re Hopkins, L.R. 18 Eq. 696; Jones v. Evans, (1913) 1 Ch. 23.

(b) Under the Pennsylvania or American Rule, adopted in most American jurisdictions, the rights of the life tenant and the remainderman to an extraordinary cash or a stock dividend declared during the life tenancy are determined by a division of the dividend between the claimants so as to preserve...