Lauman v. Foster

• Decision Date: 15 March 1912
• Citation: 135 N.W. 14,157 Iowa 275
• Parties: LUCY J. LAUMAN, Appellant, v. WILLIAM P. FOSTER, et al
• Court: Iowa Supreme Court

135 N.W. 14

157 Iowa 275

LUCY J. LAUMAN, Appellant, v. WILLIAM P. FOSTER, et al

Supreme Court of Iowa, Des Moines

March 15, 1912

Appeal from Des Moines District Court.--HON. W. S. WITHROW, Judge.

SUIT to require defendants, as trustees of the estate of George C Lauman, to pay to plaintiff certain moneys as income derived therefrom; the same having been obtained by virtue of being given the right, as stockholders in a bank, to subscribe for additional stock. The petition was dismissed and plaintiff appeals.

Affirmed.

Power & Power and Thos. Hedge, for appellant.

Poor & Poor, for appellees.

OPINION

LADD, J.

The plaintiff is the widow of George C. Lauman, who died many years ago. His will was admitted to probate, and therein among other provisions, he bequeathed his personal estate to three trustees, directing them to deal with it substantially as he might have done, if living, and "that all the rest and residue of my estate be held together, without division, by my trustees during the life of my wife, to whom they shall pay the entire net income of my estate, after deducting taxes and proper expenses of the trust. Payments of the income shall be made every three months, beginning with the first day of the month in which I die." Other portions of the will indicate what shall be done with the property after the widow's death. Among other securities of the estate which came into the trustees' possession were one hundred shares of stock in the Continental National Bank of Chicago, Ill., and with reference thereto it was stipulated that at that time the capital stock of the bank was $ 2,000,000, and its surplus, including all undistributed earnings, was $ 206,648.24; that from 1888 until January 1, 1903, dividends were regularly declared and paid quarterly to the trustees on the shares held by them at the rate of 6 percent per annum, from then until January 1, 1910, at the rate of 8 percent per annum, and thereafter at the rate of 10 percent per annum. In April, 1901, the surplus, including undisputed earnings, had increased to $ 802,360.91, and the capital stock was increased to $ 3,000,000. The bank, in doing so, gave to its stockholders the option to subscribe in proportion to their holdings for the new issue of stock, at par, and the trustees, pursuant thereto, on April 6, 1901, subscribed for fifty shares, paying therefor $ 5,000. On September 26, 1902, the trustees disposed of the shares so purchased for $ 13,903.75.

In April, 1906, the surplus, including the individual earnings, had become $ 1,016,052.99 and the capital stock was increased to $ 4,000,000; the stockholders being given the option to subscribe as before, with the exception that the price was fixed at $ 200 per share. The trustees purchased thirty-three shares on the 3d day of April, 1906, paying therefor $ 6,600, and on June 25, 1908, sold the same at the net price of $ 7,220. Prior to this increase, the book value of the stock was $ 134 per share, and it was $ 151 afterwards. In February, 1906, prior to this increase of stock, the market value was $ 259 and thereafter $ 240 per share, though it decreased by May 2d to $ 228 per share.

In September, 1909, the surplus, including all undivided earnings, became $ 3,991,608.12, and the bank increased its stock to $ 5,000,000, permitting the stockholders to subscribe as before, but at $ 175 per share. On September 6, 1909, the trustees procured fifty shares of the stock at the price stated, and on December 9th of the same year sold the same at the net price of $ 14,401.85. Prior to this increase, the book value of the stock was $ 199 and after the increase, $ 154 per share. On August 3, 1909, prior to the increase, the market value was $ 320 per share, but on September 18th, after the increase, it had fallen to $ 267 per share. The trustees have retained the original shares. The option given the stockholders to purchase the additional stock at less than its book value was because of their interest in the capital, surplus, and undivided profits held by the bank. It had been long established and had a valuable and increasing good will, with good prospects of larger business and profits in the future.

Upon this statement of facts, the plaintiff claims the sums of money derived by the trustees in the subscription for and purchase of the stock and sale thereof as a part of the net income directed to be paid to her in the clause of the will quoted; she having received the cash dividends declared on all the stock held by the trustees. It will be observed that the trustees, by exercising the options, derived altogether $ 15,175, and that doubling the capital stock in 1901 impaired the book value of the stock from about $ 140 per share to $ 127; that, inasmuch as more than book value was exacted for the increased capital stock in 1906, such value was enhanced thereby $ 17 per share, while the book value was reduced by the increase of capital stock in 1909 $ 45 per share. The sole inquiry is whether the difference between what the trustees paid for the stock in the manner described and received on sale should be paid to the plaintiff as income from the estate, or preserved as a portion of such estate for the remaindermen.

It should be said at the outset that whether the earnings of a corporation shall be distributed among its shareholders is purely discretionary, and that until a dividend has been actually declared, either in form or substance, the stockholder has no claim thereto as against the corporation. Any enhancement in the value of stock by reason of withholding the earnings inures entirely to the benefit of the corpus, and the life tenant derives no advantage therefrom. This proposition was well expressed in Moss's Appeal, 83 Pa. 264 at 267 (24 Am. Rep. 164): "As a general rule, nothing earned by a corporation can be regarded as profits until it shall have been declared to be so by the corporation itself, acting by its board of managers. The fact that a dollar has been earned gives no stockholder the right to claim it until the corporation decides to distribute it as profit. The wisdom of such distribution must of necessity rest with the corporation itself. From motives of prudence and self-interest, it is frequently desirable to add all or a portion of the earnings to the capital. This is sometimes necessary as a basis of credit for more enlarged operations. It is often a wise exercise of discretion for a corporation to strengthen itself in this way, and with such discretion a stockholder can not interfere. His only remedy is by an appeal to the ballot at the election for directors. But where a corporation, having actually made profits, proceeds to distribute such profits amongst the stockholders, the tenant for life would be entitled to receive them, and this without regard to the form of the transaction." See Soehnlein v. Soehnlein, 146 Wis. 330 (131 N.W. 739).

"Income," as used in a will bequeathing stock, means the same thing as "dividend." Reed v. Head, 88 Mass. 174 at 177, 6 Allen 177. In Spooner v. Phillips, 62 Conn. 62 (24 A. 524, 16 L. R. A. 461), it was said: "The use of the stock seems to be limited to the receipt of dividends and income. The word 'dividends,' if unqualified, signifies dividends payable in money. The word 'income' has a broader meaning, but hardly broad enough to include things not separated in some way from the principal. It is not synonymous with 'increase.' The value of the stock may be increased by good management, prospects of business, and the like. But such increase is not income. It may also be increased by an accumulation of surplus but, so long as that surplus is retained by the corporation, either as surplus or increased stock, it can, in no proper sense, be called 'income.' It may become producing but it is not income." Smith v. Hooper, 95 Md. 16 (51 A. 844). See Gibbons v. Mahon, 136 U.S. 549 (10 S.Ct. 1057, 34 L.Ed. 525). The difficulty involved in the present case is to determine what shall be required as dividends. The new shares of capital were not issued as stock dividends, but at a price, specified by the bank, much below the market value, and the option to buy was extended to the shareholders only. In Kalbach v. Clark, 133 Iowa 215, 110 N.W. 599, the differences of opinion with reference to stock dividends was referred to, and the American or Pennsylvania rule approved as best sustained in principal and by authority; and it was there said that "all pure dividends, whether in cash or in stock or other property, are a part of the income, and, when declared, should go to the life tenant, and not to the remainderman, as it is not a part of the corpus of the property, but a part of the income derived from the use and management thereof. Any dividends, so called, presumptively belong to the life tenant, as they are, in the absence of showing to the contrary, assumed to have been divided as profits. If, however, the so-called stock dividends represent the corporate capital--that is, represent nothing but the natural growth or increase in the value of the permanent property, so that there is merely a change in the form of ownership--such stock should go to the remainderman; for in such cases the dividend is a dividend of capital, representing simply an increase in the value of the physical property, good will, or other thing of tangible value."

Where a cash dividend is declared, and at the same time an option granted to the stockholders to acquire additional stock at a price equal to the...