Mercantile-Commerce Bank & Trust Co. v. Morse

• Decision Date: 21 April 1947
• Docket Number: 39823
• Citation: 201 S.W.2d 915,356 Mo. 336
• Parties: Mercantile-Commerce Bank and Trust Company, Trustee Under the Last Will and Testament of Paul Brown, Deceased, Appellant, v. Dorothy Brown Morse and Frank C. Rand et al., Trustees of Barnes Hospital
• Court: Missouri Supreme Court

201 S.W.2d 915

356 Mo. 336

Mercantile-Commerce Bank and Trust Company, Trustee Under the Last Will and Testament of Paul Brown, Deceased, Appellant, v. Dorothy Brown Morse and Frank C. Rand et al., Trustees of Barnes Hospital

No. 39823

Supreme Court of Missouri

April 21, 1947

Rehearing Denied May 12, 1947.

Appeal from Circuit Court of City of St. Louis; Hon. William H Killoren, Judge.

Reversed and remanded (with directions).

Thompson Mitchell, Thompson & Young, Samuel A. Mitchell and Edgar H. McCulloch for appellant.

(1) The will itself does not reveal a specific intent of the testator that the life beneficiary receive the full coupon rate of interest as income where bonds are purchased at a premium but, on the contrary, the language of the will, the circumstances, and the facts at the time of its execution, and the relation of the parties, reveal that testator had no such specific intent and, therefore, the will must be considered silent as to the intent of testator on the questions involved in this suit. Hayes v. St. Louis Union Trust Co., 317 Mo. 1028, 298 S.W. 91; Robert v. Mercantile Trust Co., 324 Mo. 314, 23 S.W.2d 32; Selleck v. Hawley, 331 Mo. 1038, 56 S.W.2d 387; In re Lloyd's Estate, 292 N.Y. 280, 54 N.E.2d 825; Sedgwick v. Sedgwick, 74 Ohio App. 435, 59 N.E.2d 19. (2) In the absence of a specific intent in the will itself, the questions presented for instructions in this suit involve not one of construction of the will itself, but of the general law relating to and arising from the relationship of the life beneficiary and the remainderman and the Trustee's duties with respect thereto. Estey v. Commerce Trust Co., 333 Mo. 977, 64 S.W.2d 608; Loring, a Trustee's Handbook (5th Ed.), pp. 174, 175. (3) The duties of a trustee as between a life beneficiary and the remainderman are reflected in several particular rules of law, one of which, to-wit: the duty to deal impartially, governs the problem under consideration. Scott on Trusts, Secs. 232, 233, 239; American Law Institute, Restatement of the Law of Trusts, secs. 232, 233, 239; 33 Am. Jur., sec. 367, p. 883. (4) In determining the amount of income payable to the life beneficiary of a trust, the funds of which have been invested in bonds that are purchased at a premium, a deduction should be made from each interest payment, of equal installments, sufficient in amount in the aggregate to bring the purchase price of the bonds to par at maturity. Old Colony Trust Co. v. Comstock, 290 Mass. 377, 195 N.E. 389, 101 A.L.R. 1; Sedgwick v. Sedgwick, 74 Ohio App. 435, 59 N.E.2d 611; Annotated Note to 4 A.L.R. 1249 et seq.; Annotated Note to 16 A.L.R. 527 et seq.; Annotated Note to 48 A.L.R. 684 et seq.; Annotated Note to 101 A.L.R. 7 et seq.; Annotated Note to 13 A.L.R. 1426 et seq.: In re DePew's Estate, 179 Misc. 1074, 41 N.Y.S. (2d) 19; Scott on Trusts, secs. 239, 239.2; American Law Institute, Restatement of the Law of Trusts, secs. 239, 239(f); Bogert on Trusts and Trustees, sec. 831, p. 2430; Loring, Trustee's Handbook (5th Ed.), p. 194; 33 Am. Jur., sec. 369, p. 885; Nossaman, Trust Administration and Taxation, sec. 186. (5) No part of the potential profit resulting from investment of funds of the trust in bonds below par should be treated as income. Old Colony Trust Co. v. Comstock, supra; Scott on Trusts, sec. 240.2; American Law Institute, Restatement of the Law of Trusts, sec. 240 (n); Annotated Note to 131 A.L.R. 1426 et seq., supra; Bogert on Trusts and Trustees, sec. 830, p. 2423; 33 Am. Jur., sec. 370, p. 888. (6) When trust funds are invested in bonds purchased at a premium and thereafter sold before maturity at a price in excess of the then investment value, such profit is a capital gain and belongs to the corpus. New England Trust Co. v. Eaton, 140 Mass. 532, 4 N.E. 69; Annotated Note to 13 A.L.R. 1004; Annotated Note to 101 A.L.R. 7; American Law Institute, Restatement of the Law of Trusts, sec. 239 (f); Scott on Trusts, sec. 239.2.

J. C. McManaway and John C. Tobin for respondent Dorothy Brown Morse.

(1) The court's sole problem in this case is to determine the intention of the testator; his intention is the worthy part, the principal thing, and, however difficult the task of ascertaining it, it is a necessary judicial task and the rule of law is that when the intention of the testator in a will is ascertained then the bounden duty of a judge is to make that intention effective unless it contravenes some positive rule of law. Eckle v. Ryland, 165 S.W. 1035, 256 Mo. 424; Gibson v. Gibson, 144 S.W. 770, 239 Mo. 490; Grundmann v. Wilde, 141 S.W.2d 779, 346 Mo. 327. (2) The Massachusetts Rule with reference to the allocation of income between a life tenant and a remainderman in a trust estate where the trustee has purchased bonds at a premium is a canon of construction and not a rule of property law. In determining rights between life tenant and remaindermen the intention of the testator is the controlling situation. In re Lloyds Estate, 292 N.Y. 280, 54 N.E.2d 825; Shaw v. Cordis, 9 N.E. 794, 143 Mass. 443; Morris v. Dorch, 194 Ark. 153, 106 S.W.2d 159; In re Hoyt, 160 N.Y. 607, 55 N.E. 218, 48 L.R.A. 126; In re Bendheims Estate, 23 N.Y.S. (2d) 878; New England Trust Co. v. Eaton, 140 Mass. 532, 4 N.E. 69. (3) The prevailing modern rule in the United States is that in administering a trust, the income of which is given to one person and the corpus to another, premiums paid for securities in investing trust funds need not be amortized and discounts need not be accumulated. This rule is codified in Section 6 of the Uniform Principal and Income Act and is commonly known as the Kentucky Rule. Liberty Natl. Bank & Trust Co. v. Loomis, 275 Ky. 445, 121 S.W.2d 947, 131 A.L.R. 1419; American Security & Trust Co. v. Payne, 33 App. D.C. 178; Hite's Executors v. Hite's Devisees, 20 S.W. 778, 19 L.R.A. 173; Handbook, Natl. Conference of Commissioners on Uniform State Laws 1929, p. 285 at 290, 1931, p. 326 at 332, 1930, p. 341 at 346, 1928, p. 206 at 211. (4) Through the adoption of the Uniform Principal and Income Act, the Kentucky Rule is now the law in the following states: Alabama 1939, Code 1940, Title 58, Secs. 75-87; California 1941, Gen. St. Supp. 1945, Sec. 1292e-1301e; Florida 1937, F.S.A. 690.01-690.15; Louisiana 1938, Darts Gen. St. Supp. 1938, 9850-2, 9850-68 to 9850-78, 9850-97; Maryland 1929, Code 1938, Art. 75B; North Carolina 137, G.S. Sec. 37-1 to 37-15; Oklahoma 1941, 60 Okla. St. Ann., Sec. 175.1-175.53; Oregon 1931, OCLA, Sec. 74-101 to 74-114; Pennsylvania 1945, 20 P.S., Sec. 3471-3485; Utah 1938, Code 1943, 73 A-0-1 to 73 A-0-17; Virginia 1936, Code 1942, Secs. 5133c to 5133r. (5) After a most thorough investigation and the fullest discussion, the Massachsetts Rule was abrogated by statute in New York as to trusts created after September 1, 1942. The Statute was passed on the recommendation of the Law Revision Commission of the State of New York and, as to testamentary trusts, upon the further recommendation of the Executive Committee of the Surrogates Association of the State of New York; the result of this investigation and consideration are set out at length in Legislative Document (1942), No. 65 (D), State of New York Law Revision Commission; Act, Recommendation and Study relating to the Allocation of Income from Premium and Discount Bonds between the Beneficiary Under a Trust and the Remainderman. (6) In addition, the following states have abolished or modified the Massachusetts Rule by statute: Delaware, Hawaii and Ohio.

OPINION

Douglas, P.J.

This suit was brought by the Mercantile-Commerce Bank and Trust Company, successor to the Mercantile Trust Company, Trustee under the will of Paul Brown for instructions in the allocation of trust funds to income and principal in view of the resulting effect upon the respective rights of the life beneficiary and the remainderman.

Defendants are Dorothy Brown Morse, the life beneficiary, and the Trustees of Barnes Hospital which is the remainderman.

The trust company seeks guidance and instructions as to its duty or discretion in several accounting practices: (a) amortizing premiums paid for bonds out of payments of interest received on the bonds; (b) where the premium paid for a bond is small, such as $ 10 or less, charging the full amount of such premium immediately upon purchase of the bond against available income instead of amortizing it out of periodic payment of interest; (c) crediting excess of amount realized over purchase price, where bonds have been purchased at a discount and paid or sold for par or more, to corpus rather than to income; and (d) crediting excess of sale price over the amortized or investment value to corpus rather than to income.

Dorothy Brown Morse, the life tenant, has objected to these accounting practices, and contends that she is entitled under the will to the coupon rate of interest received on bonds without diminution for amortization of premium; to any excess received over the investment value when a bond is sold; and to any excess received over purchase price of a bond bought at a discount. Her general contention is that the will intended she should receive the full amount of income and revenue produced by the trust estate, regardless of the fact that thereby the principal of the trust be diminished or encroached upon.

Paul Brown's will first made several specific bequests including one of $ 100,000 to Barnes Hospital, one of the same amount to the St. Louis Children's Hospital, and one of the same amount to the St. Louis Maternity Hospital. He divided his residuary estate among the members of his family leaving a one-sixth part in trust with the trust company for the equal benefit of Dorothy Brown Morse and her half brother, Paul Brown, III.

The provisions...