Ex Parte Humbird

⁶²⁹ Urner, J., delivered the opinion of the Court. The questions presented on this appeal arise from conflicting, though amicable contentions, between life beneficiaries and remaindermen under a testamentary trust, as to the disposition of funds which the former assert to he income, and the latter claim to he corpus of the estate. The facts upon which these questions are to be determined appear in an agreed statement contained in the record', and are in part as follows: Jacob Humbird, of Allegany County, died on March 26th. 1894, seized and possessed of a large real and personal estate, and leaving a will by which, after certain dispositions in favor of his widow, he gave all the residue of his estate to his seven children equally, to be held, however, by his sons, John A. and David Humbird, and his son-in-law J. B. G, Roberts, in- trust for the use and benefit of all the children. The trustees were directed to “manage, control, invest and reinvest said property or estate in their trust in a careful and prudent manner, and pay or distribute annually to each of said children the interest or earnings of the estate so devised.” It was provided that the trust should, “last during the lifetime of each of said children, and after their respective deaths said bequests to go to their heirs.” By a codicil to the will the testator, after directing that there be invested in “good and safe security” seven hundred thousand dollars, authorized the reduction of the trust estate to that amount by permitting the trustees to divide the balance of the estate, “equally with the seven heirs.” The executors of the will, who were the same persons named as the trustees, with the consent of all the children of the testator, transferred to the trustees certain real and personal estate amounting to slightly more than $700,000, as constituting the corpus of the trust.

Among the original assets of the trust estate was an undivided one-sixth equitable interest in a tract of 20,000 acres of timber land in British Columbia, known as the Kowitchen ⁶³⁰ and Kokosala lands upon the purchase of which the testator had paid $11,884.58. The trustees made further payments out of the corpus, upon the investment, increasing its total to $29,039^35. No income was derived from this property. The undivided interest held by the trustees was sold in July, 1910, for $85,549.69.

One of the questions we are to consider is whether the whole of the proceeds belongs to the corpus of the trust, or whether the difference between the purchase and selling prices of the land should be applied as income. Another of the investments which came into the hands of the trustees consisted of 2450 shares of the capital stock of the Victoria Lumber and Manufacturing Company, a Canadian corporation, upon which the testator had paid $111,-149.91, the par value being $245,000. The trustees have continued to hold this stock, and have made further payments upon it, amounting, with those made by the testator, to - a total of $195,999.91. All of the payments by the trustees were from funds belonging to the corpus of the trust estate.

Prior to 1910 the company paid only three dividends of three per cent, each on its capital stock. In February, 1910, a dividend of $15.00 per share was declared, and this was followed in July by a further dividend of $276.00 per share. These dividend's were paid out of funds realized from the sale of 52,000 acres of the companys’ timber lands. The total price was $3,500,000 of which $250,000 was paid in February and the remainder in July, 1910.

A portion of the first payment was appropriated to the $15.00 dividend, while the later and larger one was declared out of the balance of the purchase money. The smaller dividend, amounting to $36,750.00 on the stock of the trust, was distributed by the trustees to the life beneficiaries, and this disposition of the fund it is agreed' by all the parties shall be treated as final, and shall not affect the question now presented as to the subsequent dividend of $276.00 per share. The amount of that dividend on the ⁶³¹ shares of the trust is $676,000, and is now in the hands of the trustees. It is claimed by the life tenants as income of the trust estate, while the remaindermen assert that it should be held and invested as corpus.

In order that the questions we have, indicated might be judicially determined, the trustees filed-a petition for that purpose in the equity proceeding in which the jurisdiction of the Court below had been invoked and assumed at the inception of the trust. Answers were filed by all the parties interested setting forth their respective theories, and an agreement was filed stating the facts we have mentioned, together with others to which we will presently allude. The question being thus presented, the learned judge who heard the case below decided that both the funds in controversy are properly to be regarded as corpus, and from his decree, giving effect to that conclusion, the tenants for life have appealed. The questions to be determined, therefore, involve the application, as between the corpus and income of the trust, of: first, the increase in value realized by the sale of the land held directly by the trustees, and, secondly, the dividend declared out of the proceeds of corporate real estate in which the trustees were interested as stockholders.

Before proceeding to the discussion of these questions, we will recur to the will by which the trust was created to ascertain how far it affects their determination. As already quoted, the provision relating to the life tenancy of the testator’s children in the trust estate directs the trustees to “pay or distribute annually to each of said children the interest or ecvmings of the estate.” In the codicil it is provided that, “In case of the death of son or daughter leaving no legal living heirs, the wife of the son and the husband of the daughter may, if living, receive annually one thousand dollars of the interest money due the son or daughter”’ and, “In case of the d'eath of son or ⁶³² '•daughter leaving no living heirs, their estate, principal and interest, shall he divided equally with the grandchildren.” We have italicized the words used hy the testator in describing the funds to be paid to the life tenants, because it has been argued that the terms “interest or earnings,” mean more than income, and are broad enough to embrace any increase realized on the estate. .If this construction could be accepted, it would readily dispose of both the points at issue in this case, as it is, of course, perfectly well settled, that in ■ all such questions the intention of the testator, as expressed on the subject, must be strictly regarded. It Seems clear tp rrs, however, that the language of the will does not admit of ;the construction suggested. That the testator understood ■ and employed the words “interest” and “earnings” as synonymous with each other, and with “income” in its ordinar*y sense is conclusively shown by the fact that he provided, upon the death of the children, in certain contingencies, for • the further appropriation of their shares of the “interest” from the estate. ■ It was also suggested that the provision in the codicil authorizing the limitation of the corpus of the trust at its inception to $700,000, and the division of the “balance of the estate” among the seven children, should he taken as indicating that the testator intended the life beneficiaries to have any increase over the original amount which might subsequently accrue.

This theory is not supported by the terms of the codicil, and its application would produce results which it’ is not reasonable to suppose the testator ever contemplated. It would compel the trustees to convert into money, for distribution to the life tenants, every increase in value of the individual securities of the estate, whenever any enhancement over the primary appraisement became appai*ent. It would have required the sale of the land and stock in question when their appreciation was first noted and when they were far short of the present values. It would involve ⁶³³ constant change Tn the investments, and would' seriously complicate the administration of the trust.

The testator, after providing for the investment of the estate in “good and safe security” to the amount mentioned, empowers the trustees to divide the remainder among the children. This authority having heen exercised, the corpus designated is in the same position with reference to the effect of fluctuations in value as if it had been limited' in the first instance to $700,000.00. There is nothing, therefore, in the will before us to differentiate this case from the ordinary situation existing where the life tenants are entitled simply to the income Horn the trust. With this understanding of the testator’s intention, we can have no difficulty in deciding the first of the questions we have stated.

It has been held by this Court that an increase, in a trust estate, resulting from the enhancement in value of an investment of the corpus, cannot be distributed as income. Smith v. Hooper, 95 Md. 16 . In the case just cited, a life tenant was claiming the amount obtained from the sale of stock in excess of the sum originally invested, and it was held that the increase thus, produced in the trust fund belonged to the corpus. The same principle applies to an investment in real estate under similar circumstances.

The fact that, as here, the property may have been unproductive of income does not affect the ownership of its augmented value. This consideration might influence its purchase or retention as an investment but would not change from corpus to income any part of the fund realized from its sale. In this case it appears that the life tenants expressly consented to the taking over of the timber land as part of the trust estate. If it had depreciated in value, they could not have been required to bear the loss, and there is no sound principle upon which they can be awarded the increase which it has produced in the corpus. ⁶³⁴ This feature of the ease was not especially emphasized by the appellants; but it has been argued with great earnestness and ability on their behalf that they are entitled as.life beneficiaries of the trust to the dividend of $676,000.00 received by the trustees upon the stock held by them in the Victoria Lumber and Manufacturing Company.

In considering this question, we are not be governed by the mere form in which the dividend has been declared. The origin and character of the fund out of which the dividend is paid is the controlling subject of inquiry. If it- is found to represent earnings, it will be held to be income; but if it is an appropriation of capital, it belongs to the corpus. This has been distinctly settled, so far as this State is concerned,, by the case of Thomas v. Gregg, 78 Md. 545 , in which the rules recognized in various jurisdictions were discussed, and the policy of our own Court adopted.

In that case a dividend of earnings was declared in the form of stock, but it was held to be income regardless of its form, because of the source from which it was actually derived. It was there said to be the duty of the Court in such cases to ascertain whether the distribution was made from earnings or capital. This duty of investigating the origin of the fund was also recognized in Quinn v. Safe Deposit Co., 93 Md. 285 , where an extra money dividend arising from accumulated earnings was awarded to life tenants; and in The Atlantic Coast Line Dividend cases, 102 Md. 73 , where stock dividends originating in the same way were held to be income. In the present case the. fund applied to the dividend in question, as shown by the resolution declaring it, was derived from the sale of timber lands.

The property sold, comprising 52,000 acres, had been acquired, except as to a very small proportion, at the beginning of the corporate enterprise in 1890. It was included in a purchase of 88,000 acres of timber land, called the Comox lands, as an investment of capital. The charter of the corporation empowered ⁶³⁵ it to “purchase, mortgage, lease, hold and acquire timber and other land's, and sell, mortgage, lease or otherwise alienate and dispose of the same, erect mills and machinery, manufacture lumber and all articles made of wood, acquire water privileges and rights of way, construct ditches, flumes, roads and tramways, purchase, sell and acquire goods and merchandise of every,kind and description and generally do all such things as are conducive or incidental to the attainment of the above objects, or any of them, in the Province of British Columbia. Under this charter power the company engaged in a saw mill and lumbering business, and its operations and acquisitions of property have been confined to those purposes.

In 1910 a part of the proceeds of the sale of the 52.000 acre tract was used in the purchase, from the trustees in this case and from others, of the entire title to the 20.000 acre Kowitchen and Kokosala tract, in which the company already held' an undivided interest. Its other purchases of land, after the first, amounted to five or six thousand acres, which about equaled the area from which timber was cut by the company in the prosecution of its business from 1890 to 1910. The whole of the Cornox tract of 88,000 acres was bought by the company in 1890 for $555,000. The sale of 52,000 acres of the tract in 1910 for $3,500,000.00 left the company with ample timber land for its immediate purposes and enabled it not only to declare the extraordinary dividends referred to, but also to complete the purchase of the Kowitchen and Kokosala lands at a cost of $456,264.84-, to pay all its outstanding