Palmer v. Pullman Co.

• Decision Date: 12 August 1918
• Citation: 252 F. 286
• Parties: PALMER v. PULLMAN CO. et al.
• Court: U.S. District Court — Northern District of New York

252 F. 286

PALMER v. PULLMAN CO. et al.

United States District Court, N.D. New York.

August 12, 1918

This is a suit by Walter B. Palmer for a decree requiring the defendant the Pullman Company to issue and deliver to him individually 20 shares of its stock for each 421.6 shares of the stock of said defendant. The estate of one Esther G Palmer owns 411 shares of the stock of said Pullman Company and a stock dividend has been declared. The plaintiff claims this stock dividend should issue to him as life tenant of said 411 shares, while the remaindermen claim it should issue to the estate. The claim of plaintiff grows out of and is founded on certain facts which appear in the opinion. The complaint also demands $15,000 damages for the withholding of such shares, but no proof of damages has been given. The suit was commenced in the Supreme Court of the state of New York against the Pullman Company as sole defendant, whence it was removed to the United States District Court for the Northern District of New York, and then the other defendants were brought in and made parties defendant.

C. J Palmer, of Little Falls, N.Y., for plaintiff.

Alexander & Green, of New York City (Allan McCulloh, of New York City of counsel), for defendant Pullman Co.

Arnold Bender & Hinman, of Albany, N.Y., for defendant Wagoner.

Chas. A. Talcott, of Utica, N.Y., for defendant Whiffen.

RAY, District Judge (after stating the facts as above).

Esther G. Palmer, of Utica, Oneida county, N.Y., died, leaving a last will and testament, January 5, 1908, and her will was duly probated in that county February 10, 1908. By said will said testatrix gave all the rest, residue, and remainder of her estate to her husband, Walter B. Palmer, the plaintiff herein, for and during the period of his natural life, to use and enjoy the income and interest thereof, and on his death such rest, residue, and remainder, real and personal, is given by said will of the testatrix to her niece, Gertrude E. Mills, now Gertrude E. Wagoner, and her cousin, Caroline R. Whiffen, share and share alike. The said rest, residue, and remainder of said estate consisted and consists of 411 shares of the capital stock of the defendant the Pullman Company, and same is in the possession of Walter B. Palmer, the executor of said will, pursuant to the decree of the Surrogate's Court of Oneida county, N.Y., but on deposit with a designated depository, where by the terms of such decree it is to remain during the life of said Palmer.

March 21, 1910, at a meeting of the stockholders of said the Pullman Company, the following resolutions were duly adopted:

'Whereas, the value of the assets of this company exceeds the par value of the capital stock by more than twenty million dollars ($20,000,000):

'Resolved, that for the purpose of representing the capitalization of this company existing surplus assets to the extent of twenty million dollars ($20,000,000), the capital stock of the company is hereby increased to one hundred and twenty million dollars ($120,000,000), and the proper officers of the company are hereby directed to issue additional stock to the amount of twenty million dollars ($20,000,000); and

'Resolved, that the directors be authorized to distribute said twenty million dollars ($20,000,000) capital stock pro rata, to stockholders of the company, in the ratio of twenty (20) shares to each one hundred (100) shares held by stockholders of record at the close of business on the 30th day of April, 1910.'

On the same day, at a meeting of the board of directors of said company, the following resolution was duly adopted, viz.:

'Resolved, that said increase of twenty million dollars ($20,000,000) capital stock be distributed pro rata to the stockholders of the company in the ratio of twenty (20) shares to each one hundred (100) shares held by the stockholders of record at the close of business on the 30th day of April, 1910, and the proper officers of the company are hereby directed to carry this resolution into effect.'

Walter B. Palmer, the life tenant, claims this stock dividend, and the remaindermen claim it as a part of the estate to be ultimately divided between them in equal shares. The question is: Who is entitled thereto?

July 12, 1909, on the judicial settlement of the accounts of Walter B. Palmer, as executor of the last will and testament of said Esther G. Palmer, the balance of the estate was established as consisting of cash $493.97, and 411 shares of said Pullman stock, of the then cash value of $60,417; total, $60,910.97-- subject to commissions, $1,042.94, and $28 costs, and the executor was directed to convert certain of such stock into cash to pay such commissions and costs, which he did, leaving certain shares undisposed of and constituting the residuary estate. The decree as to such residue contains the following:

'That the said executor, Walter B. Palmer, continue to hold said estate; that he pay over to himself, the said Walter B. Palmer, from time to time, during his life, all dividends, interest, and income arising out of said estate and said Pullman Palace Car stock, and after his death the said estate be divided, share and share alike, between Gertrude E. Mills and Carrie R. Whiffen.'

The decree also provides that the said executor is to hold such stock, but keep same on deposit in a certain bank named, subject to the inspection of the remaindermen, and is not to be removed or sold without their consent. Nothing is said in this decree as to 'stock dividends,' and I think 'the dividends' referred to in the decree are the ordinary cash dividends declared and made by the Pullman Company in the usual manner. The question arises whether the ownership of this stock dividend, consisting of additional capital stock of the Pullman Company, is to be determined under and according to the rule declared by the Supreme Court of the United States in Gibbons v. Mahon, 136 U.S. 549, 558, 10 Sup.Ct. 1057, 34 L.Ed. 525, and Towne v. Eisner, 245 U.S. 418, 38 Sup.Ct. 158, 62 L.Ed. 372, or under and according to the rule declared by the Court of Appeals of the state of New York in Matter of Osborne, 209 N.Y. 450, 477, 485, 103 N.E. 723, 823, 50 L.R.A. (N.S.) 510, Ann. Cas. 1915A, 298, and Matter of Schaefer, 178 A.D. 117, 165 N.Y.Supp. 19.

If the surplus earnings and profits of the Pullman Company had been accumulated from time to time, and put in bank or specially invested for the purpose of paying a special or extraordinary dividend in cash to stockholders at a subsequent time, I think the dividend subsequently declared from earnings and profits arising during the life of this trust, and thus accumulated, would belong to the life tenant. But this was not done. Such earnings and profits were not taken out of the general property of the Pullman Company, and put in a special or separate fund, and devoted to any such purpose to be subsequently executed. At the end of each year there was a cash surplus, and also rolling stock, equipment, fixtures, and investments in securities belonging to the Pullman Company. The surplus, after payment of ordinary running expenses and repairs, was used so far as necessary for improvements of its properties and additions from time to time as the board of directors should determine, and what was not actually used or kept on hand was invested, not for the purpose of a subsequent dividend in cash, but for such general purposes, it might be dividends, as the board of directors should subsequently determine. It was always within the power and discretion of this board of directors to use up all the surplus earnings, including the investments, for repairs, additions, and extensions. This surplus, not paid out in making the ordinary and regular dividends, became a part of the capital of the company, temporarily at least.

In March, 1910, the stockholders and board of directors passed the resolutions quoted, and determined not to declare and to pay an additional and extraordinary cash dividend to stockholders, but to increase the capital stock of the company 'for the purpose of representing the capitalization of the company,' and to divide and issue it to its stockholders according or in proportion to their respective holdings. These surplus earnings were thus devoted to an increase of the capital of the company, and it was duly apportioned to show the respective interests of the stockholders. The estate of Esther G. Palmer was the owner of 411 shares, and this addition to the capital stock was apportioned by the resolution to the estate, title in the executor as such, not in the life tenant, and when that capital, thus increased, is divided, it will go, under the rule of the Supreme Court of the United States and of the Massachusetts, Connecticut, Maine, Rhode Island, and English courts, to the remaindermen, not to the life tenant. The life tenant will get his interest therein, which will be and is the cash dividends, if any, hereafter declared on all capital stock, including such additional stock. In Towne v. Eisner, Collector, etc., 245 U.S. 418, 426, 38 Sup.Ct. 158, 62 L.Ed. 372, the Supreme Court of the United States, reversing Towne v. Eisner (D.C.) 242 F. 703, has very recently (January 7, 1918) reiterated the rule declared in Gibbons v. Mahon, 136 U.S. 549, 10 Sup.Ct. 1057, 34 L.Ed. 525, and the court said in the case of a stock dividend:

'Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that the dividend (stock dividend) was capital as well for the purposes of the Income Tax Law as for distribution between tenant for life and remainderman.'

In this case I think I am bound to follow these decisions of the Supreme Court of the United States. The New York cases do not give...