Maceachron v. Trs. of Iowa Coll. (In re Sherman Trust)

• Decision Date: 29 September 1920
• Docket Number: No. 32179.,32179.
• Parties: IN RE SHERMAN TRUST. MACEACHRON v. TRUSTEES OF IOWA COLLEGE ET AL.
• Court: Iowa Supreme Court

190 Iowa 1385

179 N.W. 109

IN RE SHERMAN TRUST.

MACEACHRON

v.TRUSTEES OF IOWA COLLEGE ET AL.

No. 32179.

Supreme Court of Iowa.

Sept. 29, 1920.

Appeal from District Court, Poweshiek County; Henry Silwold, Judge.

There is involved the construction of a trust granted by will. The will of L. W. Sherman set aside a sum of money to be held in trust for his son. Of this fund the trustees invested $2,200 in the stock of a bank. The book and market value of the stock was, at the time of the purchase by the trustees, $110 the share. The bank prospered exceedingly, and when the son died the value of this stock had risen from $110 to about $225 the share. This rise in value was due to the fact that the bank paid but relatively small dividends. If it had been willing to let the shares remain at the price they were worth when the trustees bought them, a much larger dividend than was paid to the life tenant could have been paid to him. The appellees claim, and the trial court held, that nothing was due the life tenant except the dividends actually declared, and that said accretions in value were an addition to the corpus, and were the property of the remaindermen. It is from this holding that the administrator of the estate of the deceased son appeals. Reversed.J. G. Shifflett, of Grinnell, for appellant.

A. C. Lyon, of Grinnell, for trustees of Iowa College.

Rayburn & Lyman, of Grinnell, for Congregational Home Missionary Soc.

SALINGER, J.

I. The relief sought is that the $2,200 invested should be surrendered to the remaindermen, and that the difference between that sum and the value of the stock, to wit, $4,500, be surrendered to the estate of the life tenant or, in the alternative, that the stock be ordered sold and apportionment made in favor of the estate of the life tenant in the proportion that $2,200 is to $4,500.

It may be conceded that rules about to be set forth and invoked by appellee have often been held to obtain where the trust property consisted of corporation stock. See Smith v. Hooper, 95 Md. 16, 51 Atl. 844, 54 Atl. 95; Greene v. Smith, 17 R. I. 28, 19 Atl. 1081. But see as to conflict thereon 39 Cyc. 445; 40 Cyc. 1790. But, if it makes a difference, the trust fund we are dealing with was money.

There is a long line of decisions to the effect that the life tenant must be content with the action of the corporation, and that he takes only such dividends as the corporation actually declares. Lauman's Case, 157 Iowa, 275, 135 N. W. 14, 50 L. R. A. (N. S.) 531;Barron's Case, 163 Wis. 275, 155 N. W. 1087; Hyatt v. Allen, 56 N. Y. 553, 15 Am. St. Rep. 449; Spooner v. Phillips, 62 Conn. 62, 24 Atl. 527, 16 L. R. A. 461. Beveridge v. Railroad, 112 N. Y. 1, 19 N. E. 489, 2 L. R. A. 648; Greene v. Smith, 17 R. I. 28, 19 Atl. 1081;In re Kernochan, 104 N. Y. 618, 11 N. E. 149. And if the declared dividend is kept small because in good faith it is deemed wise to reserve part of the profits to create a surplus against future years that may not be profitable, or if the low dividend is due to a good-faith appropriation of profits for betterments that would have a tendency to make dividends larger in the future, that which is not put into the dividend because of these purposes and appropriations, and which accretes the value of the stock, becomes an enlargement of the corpus, and does not belong to the life tenant. Hotchkiss v. Quarry Co., 58 Conn. 120, 19 Atl. 521; Straker v. Wilson, L. R. 6 Ch. 503; Talbot v. Milliken, 221 Mass. 367, 108 N. E. 1060;Lauman v. Foster, 157 Iowa, 275, 135 N. W. 14, 50 L. R. A. (N. S.) 531;Spooner v. Phillips, 62 Conn. 62, 24 Atl. 524, 16 L. R. A. 461; A. & Eng. Ency. of Law (2d Ed.) 710; Lord v. Brooks, 52 N. H. 85. That is the holding in Georgia as well. But it is controlled by the Georgia statute. In re Heaton's Estate, 89 Vt. 550, 96 Atl. 21, L. R. A. 1916D, 201. The Massachusetts rule so called is that, no matter how small a stock dividend is or how large is a cash dividend, the first is an accretion of the capital, while the other is income. See the analysis of Minot v. Paine, 99 Mass. 108, 96 Am. Dec. 705, made in Re Heaton's Estate, 89 Vt. 550, 96 Atl. 21, L. R. A. 1916D, 201. And see Talbot v. Milliken, 221 Mass. 367, 108 N. E. 1060. But Mr. Thompson in his work on Corporations, § 2222, and many decisions, criticize this position. And it seems to be quite the general consensus of opinion that the mere form is immaterial, and that the relative rights of remaindermen and life tenant are not necessarily controlled by the fact that a dividend is a stock dividend or is a cash dividend. As said in Kalbach v. Clark, 133 Iowa, 220, 110 N. W. 599, 12 L. R. A. (N. S.) 801, 12 Ann. Cas. 647, the mere fact that the directors of the bank call the dividend one thing or the other is not controlling. And see 10 Cyc. 559, 560; 16 Cyc. 624.

So, on the one hand, it is asserted that increment in value due to undivided profits of surplus earned or put to the credit of the stock, though not declared in the form of dividends, should be awarded to the life tenant (Wallace v. Wallace, 90 S. C. 61, 72 S. E. 553); held that increase in value is income, and therefore should go to the life beneficiary (Billings v. Warren, 216 Ill. 281, 74 N. E. 1050); that everything in the nature of profits accruing during the continuance of the life estate belongs to the life tenant (16 Cyc. 621); all benefit and profit whatsoever coming from the property (In re Turfler [Sur.] 24 N. Y. Supp. 91); that the word “income” is very comprehensive (Sohier v. Eldredge, 103 Mass. 350), and covers accumulated earnings or profits (40 Cyc. 1789, 1790; Thorn v. De Breteuil, 86 App. Div. 405, 83 N. Y. Supp. 849); that income is anything which is gained from investments; anything that property or business earns, any profit (22 Cyc. 65, 66; 39 Cyc. 444); and that if trust funds are invested in corporation stock, income includes all earnings or accumulated profits not paid out of the capital (39 Cyc. 445).

On the other hand, it has been held in Lauman v. Foster, 157 Iowa, 279, 135 N. W. 14, 50 L. R. A. (N. S.) 531, and Reed v. Head, 88 Mass. (6 Allen) 177, that “income” used in a will which bequeaths stock means the same thing as dividends. And it was held in Spooner v. Phillips, 62 Conn. 62, 24 Atl. 524, 16 L. R. A. 461, and Smith v. Hooper, 95 Md. 16, 51 Atl. 844, 54 Atl. 95, that income is not the equivalent of “accretion.” But need we attempt to reconcile the conflict?

[1] II. As between remaindermen and life tenants the question is not what corporation management may do about declaring dividends so far as stockholders are concerned. What these managements may do is corporation law. What the rights of the remaindermen and life tenants are in corporation shares is a question of what it may reasonably be found was the intent of the creator of the trust. Thomas v. Gregg, 78 Md. 545, 28 Atl. 568, 44 Am. St. Rep. 310; Holbrook v. Holbrook, 74 N. H. 201, 66 Atl. 124, 13 L. R. A. (N. S.) 768; McLouth v. Hunt, 154 N. Y. 179, 48 N. E. 548, 39 L. R. A. 230; Luling v. Ins. Co., 45 Barb. (N. Y.) 510;Howell v. Railroad, 51 Barb. (N. Y.) 378; Smith v. Prattville Mfg. Co., 29 Ala. 503; Rance's Case, 6 Ch. App. 104; Blocksom v. Railway, 3 Ch. App. 337; Simpson v. Millsaps, 80 Miss. 239, 31 South. 915. In Pritchitt v. Trust Co., 96 Tenn. 472, 36 S. W. 1064, 33 L. R. A. 856, it was said:

“There can be no doubt that reserved and accumulated earnings * * * are corporate property. Nevertheless, we are unable to see how that fact determines or affects the question of interest therein as between life tenant and remaindermen of shares. Those persons acquire their interests under the will or deed, and not through any action of the corporation.”

Though endowed with the largest discretion in the honest management of its business, and allowed at pleasure to convert its net earnings into capital stock, through the medium of stock dividends, a corporation cannot by that act turn any portion of those earnings from the life tenant to the remaindermen. Reserved and accumulated earnings held and invested by the corporation are corporate property. But that this is so in no way determines or affects the question of interest therein as between life tenant and remaindermen. In Milner v. Brokhausen, 153 Iowa, 560, 133 N. W. 1068, it is made plain that corporation law rules apply to an interpretation of the trust only if the will that creates the trust does not limit or restrict such application. It is said in McLouth v. Hunt, 154 N. Y. 179, 48 N. E. 548, 39 L. R. A. 230, that life tenants are usually the nearest and dearest objects of the testator's bounty--therefore any claim that the provision for them may be voted up or down, increased or diminished as the corporation may elect, and that such action precludes the court from looking into the real nature and substance of the transaction and adjusting the rights of the parties according to justice and equity, “is a proposition that cannot be accepted.” In 2 Thompson, Corporations, § 2222, the author says that where, say, a provision is for an income to go to widow and child out of railway shares, it ought not to be held that the railroad by electing to declare stock dividends only may thus, by the mere will of its board of directors, which is exerted to serve the interest of the corporation and has no reference whatever to carrying out the trust of the will, save both the corpus and the income to the children, while the widow is allowed to starve. The same condemnation is found in Simpson v. Millsaps, 80 Miss. 239, 31 South. 915. A solution is found in the cases which affirm the right of a corporation to declare or ignore dividends so far as its stockholders as such are concerned, but declare this power does not reach and does not conclude a dispute between remaindermen and life tenants.

III. The flaw in the cases that try and fix a hard and fast rule here by adopting corporation law is that from the fact...