Lowry v. Farmers' Loan & Trust Co.

• Decision Date: 07 October 1902
• Citation: 64 N.E. 796,172 N.Y. 137
• Court: New York Court of Appeals Court of Appeals
• Parties: LOWRY v. FARMERS' LOAN & TRUST CO. et al.

172 N.Y. 137

64 N.E. 796

LOWRY

v.FARMERS' LOAN & TRUST CO. et al.

Court of Appeals of New York.

Oct. 7, 1902.

Appeal from supreme court, appellate division, First department.

Action by Edmund J. Lowry against the Farmers' Loan & Trust Company and others. From a judgment of the appellate division (67 N. Y. Supp. 759) reversing a judgment for defendants and directing judgment for plaintiff, defendants appeal. Affirmed.

The action involves the construction of the provisions of the will of John Lowry, who died in 1895. In the seventh clause the will set apart one-fourth of the residuary estate to be held by the Farmers' Loan & Trust Company, in trust to apply the rents, issues, and profits thereof to the use of the testator's widow until her death or remarriage; in either of which events the trust property should go ‘to increase the portion of the estate held in trust for the benefit of my children, as hereinafter stated.’ By the second subdivision of the same clause the residuary estate was to be divided by the executor, the defendant trust company, into shares for the testator's children, and one of said shares was given to it ‘in trust to receive the rents, issues, and profits thereof, and to apply the same to the use of each one of my children who may survive me, during the natural life of such child, and after the death of each child to pay over the principal of such trust fund to the right heirs of such deceased child.’ The eleventh clause of the will provided that ‘the trustee under my will, and its successor, in addition to the ordinary powers of trustees in such cases, shall have full power to retain the trust fund in any securities in which the same may be invested at the time of my death,’ and that, ‘when any investment of trust funds has been made by purchase of securities, such securities shall form part of the principal of the trust fund, and follow the trust; and the entire income from such securities shall be applied as income, irrespective of the price paid for the securities or the subsequent value thereof; it being my will that no part of such income shall be diverted to form a sinking fund to replace any loss to the principal by depreciation in value of the securities.’ The plaintiff is one of the surviving children of the testator, and brought this action to compel the trustee to account for, and to pay over to him, an extra dividend of 50 per cent. which had been declared upon the capital stock of the Pullman Palace Car Company, payable in certificates of stock at par value. The testator's estate comprehended 50 shares of the stock, 8 of which formed part of the trust estate held for plaintiff. The dividend had been declared and paid from the ‘accumulated net surplus at the credit of income account’ as the same appeared in the accounts of the company. This accumulation of surplus had existed at approximately the same figure for a time prior to testator's death. At the special term, the complaint was dismissed upon the ground that the stock dividend should be treated as principal, and therefore should be held for the remaindermen. The appellate division of the First department, holding that the stock dividend should be treated as income, reversed that judgment, and ordered a judgment for the plaintiff. The trust company thereupon appealed to this court.

STOCK DIVIDENDS-WILL-CONSTRUCTION-INCOME-CAPITAL.

1. Where a dividend has been declared by a corporation on its capital stock, payable in new stock certificates based on accumulated profits, it is received as income by the stockholders, and not capital.

STOCK DIVIDENDS-WILL-CONSTRUCTION-INCOME-CAPITAL.

2. A will created a trust during the life of a beneficiary, with remainder to his heirs, but provided that the income of the trust fund should be applied as income, and none of it diverted to the sinking fund, to replace any loss of the principal by depreciation in value of the securities. Held that, where a stock dividend was declared out of the surplus, the undivided profits of the stock of the corporation in which the trust fund was invested went to the life tenant, and not to the remainderman.David McClure, for appellant Farmers' Loan & Trust Company.

Alfred Roelker, Jr., for appellant Muriel Valentine.

Clinton E. Bell and Eugene H. Lewis, for respondent.

GRAY, J.

The object of this action was to have it determined that, as between the plaintiff, the beneficiary of a trust created by the testator's will, and those entitled in remainder to the trust fund, the shares of stock received by the trustee in payment of a dividend of 50 per cent. which had been declared by the Pullman Palace Car Company upon its capital stock were to be regarded and treated as income of the trust estate. The question whether the life tenant of property or the remainderman should have the dividend which a corporation has declared and has made payable in certificates of its stock has been a vexed one. The decisions of the courts in this country and in England have not been harmonious, and in this state it may be said it had received no authoritative treatment by this court until the decision of the recent case of McLouth v. Hunt, 154 N. Y. 179, 48 N. E. 548,39 L. R. A. 230. Several decisions of the supreme court of this state had previously given support to the doctrine that, where a life tenant is given the income and profits, and specifically, in some cases, dividends, all dividends, whether payable in cash or in certificates, belonged to him. Clarkson v. Clarkson, 18 Barb. 646;Simpson v. Moore, 30 Barb. 637; Riggs v. Cragg, 26 Hun, 89. When the case of Riggs v. Cragg came to this court (89 N. Y. 479), this question, though passed upon below, was not decided; the appeal being determined upon other grounds. It was there observed in the opinion that the question had not been considered by this court, and that, in view of the conflict in the decisions elsewhere, it would be its duty, when the occasion arose, to settle the question upon principle. That occasion did arise when the appeal in McLouth v. Hunt, supra, came before this court. In McLouth v. Hunt the direction was to pay over to the beneficiary ‘the full income,’ and the question presented was whether a stock dividend declared by the Western Union Telegraph Company some four years after the testator's death should be treated as income payableto the life tenants, or as accession to the...