Steele's Estate, In re

• Decision Date: 24 March 1954
• Citation: 103 A.2d 409,377 Pa. 250
• Parties: In re STEELE'S ESTATE. Appeal of LAFAYETTE COLLEGE. Appeal of EASTON HOSPITAL. Appeal of ST. JOHN'S LUTHERAN CHURCH.
• Court: Pennsylvania Supreme Court

Page 409

103 A.2d 409

377 Pa. 250

In re STEELE'S ESTATE Appeal of LAFAYETTE COLLEGE Appeal of EASTON HOSPITAL Appeal of ST. JOHN'S LUTHERAN CHURCH.

Supreme Court of Pennsylvania.

March 24, 1954.

Miles W. Kirkpatrick, Thomas B. K. Ringe, Morgan, Lewis & Bockius, Philadelphia, David B. Skillman, Easton, for appellants.

William White, Jr., Sanford D. Beecher, Duane, Morris & Heckscher, Philadelphia, for Adele S. Fretz, income beneficiary, appellee.

Edward J. Fox, Jr., Fox & Oldt, Easton, for Easton Nat. Bank and Trustees.

Before STERN, C. J., and STEARNE, JONES, BELL, CHIDSEY, MUSMANNO and ARNOLD, JJ.

BELL, Justice.

Three charities which are remaindermen under Mr. Steele's will vigorously contend that a stock dividend which is admittedly income should not be distributed to the life tenant but should be retained in the trust, and its equivalent in cash be distributed to the lief tenant.

H. J. Steele died March 19, 1933. He created five other trusts in his will in which he clearly disclosed that his wife and daughter were the primary objects of his bounty. The trust here involved covers the stocks and bonds of the Easton Publishing Company, which at the time of his death were a part of his residuary estate. In the Ninth Paragraph of his will the testator gave and bequeathed his residuary estate '* * * in trust to pay the net income thereof in equal shares to my wife and daughter during their natural lives and upon the death of either then to the survivor and upon the death of both then to pay the principal thereof as follows: one fourth to the issue of my daughter and if there be no such issue living at that time then to the Easton Children's Home, one fourth to St. Johns Lutheran Church of Easton; one fourth to Lafayette College and one fourth to the Easton Hospital as part of its endowment fund.' Mrs. Fretz, testator's only daughter, is still living but has no issue.

Testator appointed his wife, his daughter, Mrs. Fretz, and The First National Bank and Trust Company of Easton as trustees of his estate. Although his widow died in June, 1937 no successor trustee was appointed; The First National Bank and Trust Company was succeeded as trustee by the Easton National Bank.

Part of the principal of Mr. Steele's trust consisted, at the time of his death, of 3.925 shares and $105,000 par value bonds of the Easton Publishing Company. The shares of stock then outstanding totaled 8,000 shares. On March 14, 1951 the Easton Publishing Company declared a 25% stock dividend, of which the Steele Estate received 981 1/4 shares. The trustees thereafter filed an account in order to have the Court determine, as between life tenant and remaindermen, who was entitled to this stock dividend. The intact value of each share of Easton Publishing Company at Mr. Steele's death was $114.55. On March 14, 1951, after declaration of the stock dividend in question, the intact value had increased to $135.42 a share. Even after payment of the stock dividend and the transfer from surplus to capital of $200,000 to cover the dividend, the company had a surplus of $354,000 as campared with $116,000 surplus at testator's death.

The remaindermen admit, as they must, that under Pennsylvania's Intact Value Rule, which was established in 1857 in Earp's Appeal, 28 Pa. 368, and has been followed ever since, until changed by the legislature in the Principal and Income Act of July 3, 1947, P.L. 1283, 20 P.S. § 3470.1 et seq., a dividend of stock of a corporation which represents earnings accumulated by the corporation since the death of the testator is income and distributable as such to the life tenants, provided, of course, that the intact value (existing at the testator's death or at the time of its acquisition) is preserved.

The Principal and Income Act of 1947 cannot be applied retroactively to trusts created prior thereto with respect to the ascertainment and distribution of accumulated corporate earnings and profits. In re Crawford's Estate, 362 Pa. 458, 67 A.2d 124.

Appellants allege three reasons for retaining the stock dividend in the principal of the trust and giving the life tenant the equivalent thereof in cash: (1) A distribution of the stock dividend in kind would work substantial damage to the trust by reason of reducing its voting strength from 49% to 39%; (2) testator's will shows an intention that the working voting control of this stock should be preserved as principal; and (3) Mrs. Fretz's self-interest conflicted with the best interests of the trust and prevents, under the doctrine of self-dealing, the receipt by her of this stock dividend. We shall discuss these seriatim.

(1) Testator's wife and daughter--not the charities--were the primary objects of his bounty, and he directed that they and the survivor should be paid the net income during their and the survivor's life. The stock dividend in question was admittedly income, and under Mr. Steele's will must be paid or distributed to his daughter (or at her option sold and the proceeds of sale distributed to her), unless the testator directed otherwise, or unless she forfeited her right thereto.

Appellants contend that the market value of the estate's holding of stock in the Easton Publishing Company would be very greatly reduced if the stock dividend were distributed to the life tenant instead of being added to and retained by the corpus of the trust. The complete answer is that even if true this is immaterial; under the testamentary direction to pay the net income to his daughter, and under the then existing law of Pennsylvania, market value is of no materiality; and the fact, if it be a fact, that the market value of the stock held in trust would be greatly reduced is not sufficient to defeat Mrs. Fretz's legal right to this stock dividend. In re King's Estate, 361 Pa. 629, 635, 66 A.2d 68; In re Waterhouse's Estate, 308 Pa. 422, 428, 162 A. 295; Jones v. Integrity Trust Co., 292 Pa. 149, 152, 155, 140 A. 862; In re Packer's Estate (No. 1), 291 Pa. 194, 197, 139 A. 867.

In Jones v. Integrity Trust Co., 292 Pa. at page 155, 140 A. at page 864, supra, Mr. Justice Simpson said: '* * * Market value has nothing to do with such distributions; under all the situations which arise only the intact value is to be considered. * * *'

In Packer's Estate (No. 1), 291 Pa. at page 197, 139 A. at page 867, supra, this Court said: '* * * Neither market value, nor any other value than the actual or intact value of the shares, is of any moment in determining how such a distribution [of extraordinary stock dividend] is to be made. * * *'

Furthermore, we are convinced that there is neither authority nor reason nor equity to justify the retention of a stock dividend which is income, in the principal of the trust and exclude such stock dividend from distribution to the life tenant, because its payment or distribution to the life tenant would reduce the working and voting influence of the testamentary trustees in the Easton Publishing Company by virtue of reducing the trust's percentage of voting stock from 49% to 39%. We therefore find no merit in this contention.

(2) The testator did not disclose, as appellants contend, an intention in his will that the so-called working control of this newspaper stock should be preserved as principal. Appellants rely upon the Sixth Paragraph of testator's will to sustain their argument on this point.

'Sixth: I hold and own a quantity of the capital stock and bonds ¹ of the Easton Publishing Company of the City of Easton and it may be to the interest of my estate that the same shall be preserved for a time without separation. I therefore bequeath all my stocks and bonds of said Company * * * which shall be owned by me at the time of my decease unto my executors hereinafter named in trust. * * * It is my desire that said stocks and bonds shall be retained by my said trustees as investments for said trust as long...