McIlvaine v. AmSouth Bank, N.A.

• Decision Date: 11 April 1991
• Citation: 581 So.2d 454
• Parties: Eugene Thomas McILVAINE III, et al. v. AmSOUTH BANK, N.A., et al. 1900034.
• Court: Alabama Supreme Court

Page 454

581 So.2d 454

37 A.L.R.5th 769

Eugene Thomas McILVAINE III, et al. v. AmSOUTH BANK, N.A., et al.

1900034.

Supreme Court of Alabama.

April 11, 1991.

Rehearing Denied May 17, 1991.

Douglas Corretti and Mary Douglas Hawkins of Corretti & Newsom, Birmingham, and Gerald R. Hart, Jacksonville, Fla., for petitioner Eugene Thomas McIlvaine III.

E.C. Herrin, Birmingham, for petitioner Janet Gayle McIlvaine.

J. Michael Rediker of Ritchie and Rediker, Birmingham, and S. Stanley Kreutzer, New York City, for respondents.

INGRAM, Justice.

AmSouth Bank, as trustee of an inter vivos trust created in 1943 by Neva E. McIlvaine (settlor), filed an action for a declaratory judgment and instructions as to the proper distribution of a one-third share of the current and future net income from the trust. The settlor was a resident of the State of Florida when she created the trust. AmSouth's complaint alleged that the trust agreement provides that the net income from the corpus of the trust, which consists principally of common stock in the Torchmark Corporation, be paid in equal shares to the settlor's three children during their respective lifetimes, or, upon the death of a child, to the "lawful issue of the body" of such child for his or her lifetime. The complaint further alleged that Eugene Thomas McIlvaine, Jr. (Tommy), one of the settlor's children, died on April 11, 1989, the record date for the payment of a stock dividend to the trust. The trustee, therefore, sought instructions as to whether, under the terms of the trust, Tommy's estate or the successor beneficiaries were entitled to the dividend.

AmSouth also alleged that Tommy was survived by a natural son named Eugene Thomas McIlvaine III (Gene) and an adopted daughter, also named Neva E. McIlvaine, and that AmSouth was, therefore, uncertain as to whether future income should be paid solely to Gene or should be divided equally between Gene and Neva.

After answering the complaint, Gene filed a motion for summary judgment. Thereafter, Neva filed a cross-motion for summary judgment. Neva was joined in her motion by Dorothy J. McIlvaine, who is Tommy's widow and the executrix of his estate. The trial court denied Gene's motion for summary judgment and entered a summary judgment for Neva and Dorothy. The trial court instructed the trustee to pay the April 11, 1989, dividend to Dorothy J. McIlvaine as executrix of Tommy's estate and to divide one-third of the future net income from the trust equally between Gene and Neva. Gene appeals.

On appeal, Gene argues that the trial court erred in instructing the trustee to pay the April 11 dividend to Tommy's estate, because, he argues, Tommy died before the close of business on that date. He also contends that the trial court further erred in instructing the trustee to divide the future net income from the trust between Neva and him, because, he argues, the intent of the settlor of the trust, through her use of terms like "lawful issue of the body," was to exclude adopted children from taking under the trust.

I. The Dividend Issue

The trial court found the facts related to this issue to be undisputed. The principal asset of the McIlvaine trust is common stock of the Torchmark Corporation. Torchmark, a Delaware corporation with its principal place of business in Birmingham, Alabama, declared a dividend on February 23, 1989, payable to stockholders of record at the close of business on April 11, 1989. The dividend was to be distributed on May 1, 1989. Tommy, the beneficial owner of one-third of the shares and, thus, of one-third of the dividends, died in New York City on April 11, 1989, at 7:15 a.m., E.S.T.

Based on the undisputed facts, the trial court held that Tommy became the beneficial owner of the dividend as of the declaration date (February 23, 1989) and, therefore, that his one-third share of the dividend should be paid to his estate. In reaching its holding, the trial court applied Delaware law in determining when the rights of the shareholder vest in a corporate distribution and Florida law in determining the rights of a trust beneficiary to a dividend. Although neither party raises the trial court's choice of law as an issue, Gene does state that Alabama law should have been applied in determining the rights of the beneficiaries to the dividend. He goes on to note, however, that the law of Alabama and the law of Florida are consistent on the question, and therefore, he does not request our consideration of the issue.

In his appeal, Gene argues that the trial court erred in finding that Tommy's right to the dividend vested before his death. He asserts that Tommy's estate is not entitled to the dividend, because, he argues, although Tommy was alive for part of the day on April 11, 1989, he died prior to the close of business on that date. Gene asserts that, as a result, Tommy's share of the dividend should pass to Gene, who claims to be the successor beneficiary under the trust.

Initially, we note that as a general rule, a dividend belongs to those who are owners of the shares at the time it is declared and not to those who are owners of the shares at the time the dividend is paid. 3A W. Fratcher, Scott on Trusts § 236.2 (4th ed.1988). When a corporation declares a dividend, the dividend is separated from the assets of the corporation, and a debt to those who are shareholders at the time of the declaration is created, although payment of the debt is postponed. Selly v. Fleming Coal Co., 37 Del. 34, 180 A. 326 (1935); Scott on Trusts, supra.

However, where the dividend is payable to shareholders of record on a specified date subsequent to the declaration date, those who are shareholders on the record date are entitled to the dividend, because the debt created by the declaration is a debt to those who are shareholders on that date. Scott on Trusts, supra. Likewise, where corporate stock is held in trust, the estate of the income beneficiary is entitled to all regular cash dividends declared for the benefit of stockholders of record on dates prior to the beneficiary's death, despite the fact that the trustee may not actually receive such dividends until after the death of the income beneficiary. Wilmington Trust Co. v. Wilmington Trust Co., 25 Del.Ch. 193, 15 A.2d 665 (1940).

Thus, where a dividend is declared during the life of the income beneficiary and is payable to shareholders of record on a date prior to the death of the beneficiary, the dividend is included in the estate of the beneficiary, even though it is not payable until after the death of the beneficiary. See Hayward v. Blake, 247 Mass. 430, 142 N.E. 52 (1924); Scott on Trusts, supra; Restatement of the Law of Trusts § 236, ill. 7 (2d ed. 1959). Conversely, where a dividend is declared during the life of the income beneficiary and is payable to shareholders of record on a date subsequent to the death of the beneficiary, the dividend is not included in the estate of the beneficiary. See Nutter v. Andrews, 246 Mass. 224, 142 N.E. 67 (1923); Scott on Trusts, supra; Restatement of the Law of Trusts § 236, ill. 8 (2d ed. 1959).

In the present case, however, we are confronted with the unusual situation wherein the beneficiary died on the date designated by the corporation for the determination of its shareholders of record. Although there is no Delaware case considering the exact issue raised by the facts of this case, the trial court relied on a New York case that is on point. In In re Estate of Donahue, 78 Misc.2d 923, 357 N.Y.S.2d 777 (N.Y.Sur.Ct.1974), affirmed, 48 A.D.2d 815, 370 N.Y.S.2d 67 (1975), a dividend was declared to shareholders of record at the close of business on a certain day. A shareholder died at 6:30 a.m. on the record date. The shareholder, in her will, had named her son as income beneficiary of a testamentary trust whose corpus was the corporate stock on which the dividend had been declared. The issue for the court, therefore, was whether the dividend belonged to the estate of the deceased shareholder or to the income beneficiary. The Donahue court noted that if the decedent had died on the day before the record date, the dividend in question would have been considered income and would have rightfully belonged to the income beneficiary, and that if she had died on the day following the record date, the dividend would have belonged to her estate. The court further reasoned that the shareholder's death on the day the dividend accrued required the court to consider the dividend as if it had been paid or distributed on that date. Therefore, the court held that the dividend belonged to the estate.

In reaching its conclusion, the Donahue court expressly refused to consider the fact that the shareholder lived through only a part of the record date and was, in fact, dead at the close of business on the record date. The Donahue court opined that to require a fiduciary to take into account the precise time of the shareholder's death and the exact hour and minute at which the corporation's business day ended would be burdensome and complicated. The court also noted that if fractions of a day were considered, fiduciaries would have to take into account time zones and time changes in distributions occurring close to the date of shareholder's death.

The trial court in the present case likewise refused to take into account a fraction of a day. In refusing to take into account the undisputed fact that Tommy had died before the close of business on the record date, the trial court concluded that "[w]ith the modern world's involvement with transnational and international travel across multiple time zones, the Court perceives that great confusion and uncertainty would arise if a 'fraction of a day' rule were adopted." We agree.

Although Gene cites to us cases from various jurisdictions wherein the respective courts have taken into account fractions of a day, we have examined those cases and find none of them to be analogous to the...