Chalkwater v. Dolly

WILNER, Chief Judge. When Henrietta Stegmaier died on November 19, 1993, she owned 2,381 shares of stock in First Financial Corporation of Western Maryland along with options to purchase an additional 2,070 shares at $10/share. Her Will, dated April 6, 1993, contained the following bequest: “The following shares of common stock of First Financial Corporation of Western Maryland: (i) Two Thousand Shares (2,000) to Rosemary Diaz; (ii) One Thousand Shares (1,000) to Wanda Dolly; ⁵⁴² (iii) Four Hundred Fifty Shares (450) to Barbara Nies, for her friendship to me and the dogs.” The Will did not mention the stock options, which Ms. Stegmaier did not exercise prior to her death. Marcia Chalk-water, appellant, was named as the residuary legatee.

Ms. Dolly was named as personal representative. It is evident from the above that, although Ms. Stegmaier bequeathed 3,450 shares of the stock, she owned only 2,381 shares when she signed the Will and when she died. This situation changed when, on November 30, 1993, First Financial distributed a three-for-two stock split to stockholders of record as of November 10, 1993. As a result of that split, Ms. Stegmaier’s 2,381 shares became 3,571 shares and her options for 2,070 shares became options to purchase 3,105 shares.

The Will was admitted to probate in the Orphans’ Court for Allegany County. In the initial Inventory filed in February, 1994, Ms. Dolly included the entire 3,571 shares then in the estate but omitted to include any of the options. This was corrected by a revised Inventory filed on December 1, 1994. That Inventory (1) listed only the original 2,381 shares, (2) added the 2,070 original options, valued at the closing price of the stock of 27%, less the $10 option price, and (3) called attention to the stock split and the corresponding increase to 3,571 shares and 3,105 options, respectively.

In her administration account, filed March 3, 1995, Ms. Dolly: (1) accounted for the original shares and options at the values set forth in the revised Inventory and the additional shares and options received through the stock split, at no value; (2) claimed an expense of $20,710 for the cost of exercising the 3,105 options (with the stock split, the exercise price dropped from $10 to $6.67/share); and (3) treated the estate as owning a total of 6,676 shares and proposed the following distribution of those shares: (i) To Rosemary Diaz—3,000 shares; ⁵⁴³ (ii) To Wanda Dolly—1,500 shares; (iii) To Barbara Nies—675 shares; and (iv) To Residuary (Ms. Chalkwater)—1,501 shares. The effect of these provisions was to give Ms. Diaz, Ms. Dolly, and Ms. Nies the benefit of the stock split and to charge the residuary estate with the cost of exercising the 3,105 options, 1,604 of which were necessary to provide the full distribution to the three named legatees. Ms. Chalkwater filed exceptions to the account, contending, among other things that (1) the options were part of the residuary estate and that their exercise was unnecessary and (2) the three stock legatees should receive only the number of shares stated in the Will and that any additional shares obtained as the result of the stock split (or through exercise of the options) belong to the residuary estate. After a hearing, the exceptions were denied and the account was approved.

This appeal ensued. As in the Orphans’ Court, appellant claims that the general assets of the estate should not have been used to exercise the options and that the stock legatees should receive no more than the number of shares listed in the Will. DISCUSSION (1) Specific, General, and Demonstrative Legacies Appellant treats both issues—the exercise of the options and the distribution of the stock—as governed by whether the bequests of the stock are to be regarded as specific, demonstrative, or general legacies. These categories are recognized both by statute (see Md.Code Est. & Tr. art., § 9-103) and in the case law.

In England, Ex’r v. Vestry of P. George’s Par., 53 Md. 466, 468-69 (1880), the Court, quoting from 1 Roper on Legacies, 190, defined a specific legacy as “the bequest of a particular thing, or money, specified and distinguished from all others of the same kind, as of a horse, a piece of plate, money in a purse, stock in the public funds, a security for money, ⁵⁴⁴ wMch would immediately vest with the assent of the executor.” That definition remains standard. See Bristol v. Stump, 136 Md. 236 , 110 A. 470 (1920); Shamberger v. Dessel, 240 Md. 650 , 215 A.2d 177 (1965). To constitute a specific bequest, there must be “a segregation of the particular property bequeathed from the mass of the estate, and a specific gift of a specified portion to the legatee.” Miller v. Weber, 126 Md. 658, 663 , 95 A. 962 (1915), quoting Mayo v. Bland, 4 Md.Ch. 484, 487 (1852). A general legacy, on the other hand, “is one which is payable out of the general assets of the estate of the testator, being a bequest of money or other thing in quantity, and not separated or distinguished from others of the same kind.” Shamberger, supra, 240 Md. at 654-55 , 215 A.2d 177 .

A demonstrative legacy, sometimes regarded as a third type, sometimes considered as a subcategory of general legacies, has been characterized as follows: “Demonstrative legacies partake of the characteristics of both general and specific ones. They are general in nature, but a certain fund or piece of property is pointed out as being primarily, charged with their payment. The fund or piece of property (subject, of course, under certain circumstances to possible indebtedness, etc., of the testator) is primarily liable for their payment, but, due to their ‘general’ nature, if the fund or piece of property proves insufficient to pay them, the legatee may receive payment out of the general assets of the estate.” Shamberger, at 655, 215 A.2d 177 ; see also Kunkel v. Macgill, 56 Md. 120, 122 (1881) and Gardner v. McNeal, 117 Md. 27, 35 , 82 A. 988 (1911), defining a demonstrative legacy as “in the nature of a general legacy, with a certain fund pointed out for its payment.” Which category a bequest falls into is determined ultimately by the testator’s intent,' and there are a number of principles that have been applied to guide the court in ascertaining that intent. Those principles derive, at least in part, from the different consequences that may flow from the result. ⁵⁴⁵ Specific bequests have at least three advantages, but one major disadvantage.

The advantages are that (1) they abate last, (2) they are not liable for contribution to pay debts of the estate, and (3) the legatee is entitled to income and increments from the gifted property, accruing from the death of the testator. Shamberger, supra, 240 Md. at 656 , 215 A.2d 177 ; Dryden v. Owings, 49 Md. 356 (1878); Bristol, supra, 136 Md. 236 , 110 A. 470 . The disadvantage is that, if the testator disposes of the item prior to his death or it is otherwise lost or destroyed, the legacy fails; it may not be paid out of general estate assets. Dryden, supra, 49 Md. 356 ; Kunkel, supra, 56 Md. 120 ; Bristol, supra, 136 Md. 236 , 110 A. 470 .

Conversely, a general bequest abates ahead of specific legacies (Md.Code Est. & Tr. art. § 9-103), but, because it does not depend on the existence of specific property, it does not fail merely because any particular property mentioned no longer exists or proves insufficient. The personal representative must then apply other estate assets to the payment of the legacy. A demonstrative legacy shares the advantage of a specific legacy in abating last (Est. & Tr. art., § 9-103), but in other respects it is treated like a general one. It does not fail merely because the property identified for its payment ceases to exist or proves insufficient; in that event, the legacy is paid from other estate assets.

These characteristics have long led the courts to prefer to construe a bequest as general, or demonstrative, rather than specific. Such a construction not only avoids the harshness of failure where the specified property no longer exists but provides more flexibility in the use of estate assets to satisfy debts and other legacies. In Dryden, supra, 49 Md. at 364 , the Court noted: “In determining this, as well as all other questions involving the construction of a will, it is admitted that the intention of the testator must prevail; but inasmuch as specific legatees are not liable to contribution in case of a deficiency in assets, and inasmuch as the legacy fails entirely if the testator parts with the property or thing specifically be ⁵⁴⁶ queathed, courts lean against construing a legacy to be specific, and have gone so far as to say that in no case ought a mil to be so construed, unless the language imperatively requires it. And accordingly we find Lord Eldon saying that according to well settled rules of construction, he was obliged to decide a legacy to be general, although according to his private opinion, the testator meant it to be specific.” (Emphasis added.) Although later cases cast doubt on whether this rule of construction is as firm as Lord Eldon viewed it, the principle has been restated that bequests will not be regarded as specific “unless the language imperatively requires it.” Gardner, supra, 117 Md. at 34 , 82 A. 988 ; Bristol, supra, 136 Md. at 239 , 110 A. 470 .

(2) Stock Split It is clear in Maryland, by statute, that if a bequest of stock is found to be a specific legacy and, by reason of corporate changes the