Heyn v. Fidelity Trust Company

Shehan, J., delivered the opinion of the Court. This appeal is from a decree of the Circuit Court of Baltimore City, directing how certain dividends, paid to the executors and trustees of the estate of Edward C. Heyn on securities and stocks forming a part of the estate, and owned by the testator at the time of his death, on July 28th, 1936; should be distributed or allocated to corpus and income. The suit involves the construction of the Act of the General Assembly of Maryland of 1929, chapter 495, and codified in section 305C of article 93 of the Supplement to the Code of Public General Laws, 1935, which is as follows: “305G. All rents, annuities, dividends and periodical payments in the nature of income, payable under the provisions of any will, deed or other instrument executed after the first day of July, 1929, shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect ⁶⁴³ of time accordingly, unless otherwise expressly stated by the instrument under which they are payable; but no action shall be brought therefor until the expiration of the period for which the apportionment is made.” Edward C. Heyn, by his will, after some formal directions, and certain specific legacies, devised the rest of his estate to the Fidelity Trust Company and Robert E. Heyn, as trustees, for his four children.

The Fidelity Trust Company and Robert E. Heyn were named as executors in the will. In the trust estate there were securities and shares of stock, the allocation of the dividends from which, between corpus and income, is the subject-matter in controversy in this suit. The stockholders, under the charters of these companies, are entitled to dividends, but only when and as declared by the boards of directors of the respective companies, and this immediately brings us to the question whether the date of the declaration of the dividend or the record date of the holding of the stock should be taken in the apportionment or allocation of the dividends to corpus or income. This question was decided in Zell v. Safe Deposit & Trust Co., 173 Md. 518 , 196 A. 298 .

It was there held that the date of the declaration should be the controlling date with respect to the allocation to corpus or income. In further considering the questions here presented, the appellants divide these stocks, for convenience, as did the chancellor, in his opinion, into certain classifications with respect to the character and kind of stock and the nature of the dividends declared, and this division was substantially followed by the appellees in their argument, and, for convenience, we will make the same division herein, although not in the same order. First, testator held, prior to his death, shares of common stock, on which irregular dividends had been paid for a considerable period of time prior to hi's death and on which a dividend, since that time, has been declared and paid. Under this division the deceased held common stock in the United Corporation and, after his death, a ⁶⁴⁴ dividend of twenty cents was declared, payable on December 18th, 1936.

Second, common stock on which dividends have been paid at regular intervals, both before and after the death of the testator. On shares of American Gas & Electric Company, North American Company, E. I. duPont deNemours & Co., Mid-Continent Petroleum Company, and Commercial Credit Company, regular dividends were paid at regular periods, both before and after the death of the testator. Third, shares of stock on which no dividends have been paid since the death of the testator. This applies to the Allegheny Corporation, Maryland Casualty Company, Manufacturers Finance Company, Baltimore Transit Company, and B. Y. D., Inc. Fourth, cumulative preferred stock, on which no divi- • dends had been paid for a time prior to the testator’s death, but on which one or more dividends have been paid thereafter.

Under this division there was held 6% preferred stock of B. V. D., Inc., the Delaware corporation. There seem to have been no earnings on these shares of stock, but there was a paid in capital surplus, and, out of this, a quarterly dividend was paid for the first quarter of 1923, and thereafter no dividend was paid until December 21st, 1936. The resolution of the board of directors, authorizing this dividend, provided that the dividends so paid should be for the period commencing December 31st, 1931, and ending November 30th, 1932. It is claimed that the operation of this company had always shown a net loss, although the capital surplus was sufficient for the purpose.

Fifth, shares of cumulative and noncumulative preferred stock, upon which full dividends have been paid at regular periods, both before and after the death of the testator. Under this classification, the testator held preferred stock of the General Motors Corporation, American Smelting & Refining Company, Consolidated Gas Company, and others. Some of these stocks are cumulative and others noncumulative, but it appears that ⁶⁴⁵ full, regular, quarterly dividends have been paid thereon, both before and after the death of the testator. Sixth, preferred stock on which no dividends have been paid since the death of the testator.

Here there were shares of cumulative second preferred stock of the Manufacturers Finance Company, on which no dividends have been paid since the death of the testator. No other history of this company’s earnings and dividends seems to appear in the record with respect to these shares. Considering these classes of stocks, and dividends thereon, in the order above designated, it is apparent that the facts with respect to the first classification raise the same question as is presented in the case of Zell v. Safe Deposit & Trust Co., Executor, supra. When Edward C. Heyn died, he left, among other securities, shares of stock in the United Corporation on which no dividends had been declared for several years prior to his death.

After his death, a dividend was declared, payable on December 18th, 1936. The chancellor ruled, adhering to the decision of the lower court in the Zell case, that there should be an apportionment as to this dividend, and it should be made on a basis of the number of days between the date of the last dividend prior to the testator’s death and the date of this dividend. The portion of the period prior to his death should determine the amount payable to corpus, and the portion of the period subsequent to his death Should determine the amount of income. Thus the Act of 1929, eh. 495, supra, was construed.

It is our opinion that the chancellor erred, for the reasons stated by this court in the Zell case, and which need not be here repeated, and this dividend was entirely income. The contention of the appellant, that apportionment between corpus and income should be based on the dividend period fixed by the charter or by the customary practice of the corporation, and not the period beginning with the record date of the last dividend prior to the death of the testator, is sound in principle. What we have said applies generally to dividends on preferred ⁶⁴⁶ stock and on cumulative preferred stock. All are included in the broad language of the act, “all * * * dividends and periodical payments in the nature of income.” They do not accrue until declared, as is the case with the dividends on common stock.

The rule is well stated in the English case, by Sterndale, M. R., In re Wakley, 2 Ch. 205, as follows; “ * * * In respect of the time with reference to which dividends are paid, there is no difference between a cumulative preference and an ordinary dividend. Each is a dividend for the year or other financial period of payment: that the preferred dividend is preferential, fixed, and cumulative means only this, that these are the factors by which the priority and the amount of the share of the dividend fund appertaining to the pref erence shareholder are ascertained.” And a similar analysis was made in Crozer’s Estate, 27 Pa. Dist. & County Rep. 179. The classes of stock here involved are common, preferred, and cumulative preferred stock.

In none of these classes, under the facts here presented, does there seem to be any reason for a distinction in regard to the allocation of dividends. There is no special provision in the instrument, or in the charter under which they are declared, nor any extraordinary conditions relating to the dividend, as in Thomas v. Gregg, 78 Md. 545 , 28 A. 565 . See also, Baldwin v. Baldwin, 159 Md. 175 , 150 A. 232 , and Spedden v. Norton, 159 Md. 101 , 150 A. 15 , and Ex Parte Humbird, 114 Md. 627, 629 , 80 A. 209 . The mere classification of stock does not warrant a construction or inference to the contrary.

Preferred stock ordinarily yields income with certain preferences over common stock, and cumulative stock has advantage with respect to both common and preferred stock, but these are only incidents relating to their classification, and have no special significance, when considering only their dividends, in the application of the rule prescribed in the Act of Assembly under consideration. A dividend on preferred stock, as on common stock, does not become due and payable until it is declared, and no obligation is created until such action ⁶⁴⁷ of the proper officers of the corporation is taken. With respect to cumulative preferred stock, the accumulations over the periods are preserved and paid out to stockholders in preference to common and preferred stock, but these are all income within the meaning of the statute and are intended to be treated the same in their allocation to corpus or income. We are primarily dealing with allocations of dividends with respect to income and corpus, and the statute provides that “all dividends” are included, and not with the respective preferences of the holders of classes of stock that the corporation has seen fit to create.

In Crozer’s Estate, supra, the statement is made, with supporting authority, that: “The fact that the dividend is paid on preferred stock makes no difference in the application of the rules, so long as the transaction was in good faith with no intent to take advantage of the owner in remainder.” And further, that: “If dividends on cumulative preferred shares have not been paid for some time prior to the creation of the trust and are subsequently declared and paid during the period of the trust, whether or not out of earnings accruing prior to the creation of the trust, the dividends so paid are income.” With these principles in view we approach the second classification above made. Here there had been regular dividends both before and after the death of the testator,' and it is obvious that such as were declared before his death should be allocated to corpus and such as were declared for the period after his death should go to income, and such dividends as were declared for a period beginning before his death and ending after death should be considered like interest accruing from day to day, and so apportioned over the period. With respect to the third classification, no dividends have been declared since the death of the testator, and therefore there is no question presented here for our consideration, because such dividends as may have been declared prior to his death obviously belong to corpus. The fourth classification presents some difficulty.

The ⁶⁴⁸ lack of earnings, the presence of a paid-in capital surplus and the statement in the dividend declaration to the effect that the dividends so declared should be for the period commencing December 31st, 1931, and ending November 30th, 1932, establishes a definite period. This period began and ended before the death of the testator, and if there was nothing more, and if we are to regard the statute in this respect as meaning literally what it says, and the declaration of the dividend as meaning what it says, then it follows that this must be regarded as income within the meaning of the statute. On the other hand, this payment is out of paid in capital surplus and not out of earnings, and is therefore a distribution of capital, in the nature of a liquidation dividend, and it is contended that the statute refers not to capital, but to income from capital, and the surplus capital, through the increase in the value of the stock, augments the estate, and this dividend merely takes out of the corpus something that belonged to the deceased at the time of his death, and to that extent lessens the value of his estate as it existed at that time, and should, therefore, belong to his estate as corpus after his death. This seems to be the correct view.

It cannot be regarded as a periodical payment in the nature of income, and, as interest accruing from day to day, therefore this entire amount should be regarded as corpus, and no part thereof as income. Thomas v. Gregg, 78 Md. 545 , 28 A. 565 ; Zell v. Safe Deposit & Trust Co., supra. In Ex Parte Humbird, 114 Md. 627, 629 , 80 A. 209, 212 , this court said: “The origin and character of the fund out of which the dividend is paid is the controlling subject of inquiry. If it i's found to represent earnings, it will be held to be income; but, if it is an appropriation of capital, it belongs to the corpus.” The Supreme Court of Pennsylvania, in Re Opperman’s Estate, 319 Pa. 455 , 179 A. 729, 732 , said: “We find that dividends were declared and paid from a surplus brought about by a reduction in capital stock.

Hie distribution of this fund to shareholders by dividend ⁶⁴⁹ was a return of contributed capital by corporate action. It was an unusual circumstance, and having been paid as a dividend its allocation to corpus was beyond question.” In the fifth classification, shares of cumulative and noncumulative preferred stock were held, upon which regular quarterly dividends were paid at periods both before and after the death of the testator. There seems to be no question in this classification. The dividends paid before the death of the testator became a part of his estate and were, therefore, corpus.

Dividends for the current period in which his death occurred should be allocated, under the statute, to corpus and income, and dividends paid for a period beginning and ending after his death should be regarded entirely as income. The sixth classification presents no question for our consideration. There were shares held by ‘the testator of cumulative second preferred stock, on which no dividends had been paid since the death of the testator, and no history of the company’s earnings or dividends appears in the record. We are, therefore, not called upon to pass upon any question in relation thereto.

It should be stated, with regard to these several classes of stock, that there is no relation of debtor and creditor between the corporation and preferred stockholders or cumulative preferred stockholders until the declaration of the dividend, when, in consequence of the declaration, the obligation of debtor and creditor does arise. This question has been well considered in Crozer’s Estate, supra; and in Mitchell v. Liberty Clay Products, 291 Pa. 282 , 139 A. 853, 855 , it was said: “Preferred stockholders are members of the corporation, not its creditors. ‘Formerly it was a matter of doubt and discussion whether or not a preferred stockholder had any rights as a creditor of the company or was confined to his rights as a stockholder. The law is now clearly settled 'that a preferred stockholder is not a corporate creditor.’ ” It must, therefore, follow that the relation of debtor and creditor does not arise between the corporation and ⁶⁵⁰ a stockholder of any of these classes until the dividend has been declared. Having fully expressed our views with regard to the many problems presented on this appeal, the decree will be reversed in part and affirmed in part, as above indicated, and the case will be remanded for the passage of a decree in conformity with the views herein expressed.

Decree affirmed in part and reversed in part, and case remanded for the purpose of a decree in conformity herewith; costs to be paid by the appellees. Offutt, J., delivered for the Court the following additional opinion, after reargument. Reconsideration of the conclusion announced in this case, Heyn v. Fidelity Trust Company, that a cash dividend declared subsequent to the death of the testator on the cumulative preferred 6% percent stock of B. V. D., Inc., was in the nature of a liquidating dividend and a distribution of capital rather than of earnings, requires a more elaborate statement of the factual background on which the. conclusion rested than is found there. Edmund C. Heyn died on July 28th, 1936, leaving a will dated January 8th, 1930, in which he bequeathed to the Fidelity Trust Company the residuum of his estate in trust, to pay the income therefrom (1) to the education, maintenance and support of his four children, until respectively they reach the age of twenty-one years (2) thereafter to pay to “such child” if male, the income from one-half of his share until he arrives at the age of thirty years, then to distribute to him one-half of his share absolutely, (3) to pay to him the income on the remaining half until he reaches the age of thirty-five years, and then to distribute to him that half absolutely, (4) in the case of the daughters to pay to each for her life the income from her share.

Each child is given the power to dispose of his or her share by will, but failing such disposition the share given to each child is to go ⁶⁵¹ to his or her descendants, and failing descendants to the survivors of the four children and their descendants per stirpes. The executors of the will in their distribution account distributed in kind to the trustee as a part of the share of each child 171 shares of cumulative preferred 6^/2 per cent stock of B. V. D., Inc., six shares cumulative preferred 7 per cent stock of the United States Steel Corporation, and eight shares cumulative preferred 7 per cent stock of Manufacturers Finance Company, which the testator owned at his death. Dividends on the preferred stock of B. V. D., Inc., were paid for the first quarter of 1932 and thereafter passed until December 14th, 1936, when a dividend of $6.50 per share was declared “for the period commencing December 1st, 1931, and ending November 30th, 1932,” payable December 21st, 1936, to stockholders of record at the close of business on December 18th, 1936. Another dividend of $6.50 on each of such shares was declared after the distribution account was filed, payable August 21st, 1937.

The United States Steel Corporation paid a dividend on its preferred stock on November 29th, 1935, of fifty cents per share, at which time dividends, which if declared would have aggregated $15.00 per share, remained unpaid. On August 1st, 1936, it paid a dividend of $1.00 per share on account of such dividends, on November 2nd, 1936, its regular dividend of $1.75 per share and $2.00 per share on passed dividends, on December 1st, 1936, a dividend of $7.00 per share on passed dividends, and on January 30th, 1937, a dividend of $1.75 per share on passed dividends. A dividend on the preferred stock of the Manufacturers Finance Company was paid on July 13th, 1936, and after the death of the testator other dividends were paid, the aggregate of such payments, however, being less than the aggregate of payments of dividends on preferred stock at its regular rate would have been if they had been declared. ⁶⁵² B. V. D., Inc., is a holding, company, which upon its organization in 1929 acquired the securities and stock of certain subsidiary corporations. The value of the property of the subsidiary companies fixed by an appraisal for the consolidation exceeded the par value of the common and preferred stock of B. V. D., Inc., and that excess was carried by it as a “paid-in capital surplus,” and “actually came from the earned surplus eventually of the constituent companies.” The history of its operations is indicated in this table: “Year Ended Operating Profit Loss Dividends Accrued Cumulative Accrued Dividends 8/31/30......... 28,502.09 8/31/31.________ 477,961.24 8/31/32......... 985,729.30 253,968.00 253,968.00 8/31/33......... 382,538.16 201,680.37 455,648.37 8/31/34......... 349,512.76 260,370.51 716,018.88 8/31/35......... 36,126.22 260,370.50 976,389.38 8/31/36......... 468,006.32 260,370.50 1,236,759.88” In the fiscal year ending August 81st, 1930, dividends in the amount of $218,332.29 were paid, in the year ending August 31st, 1931, dividends in the amount of $338,-972.30, and in the year ending August 31st, 1932, dividends in the amount of $84,630.00.

In August, 1937, a further dividend of $6.50 per share on its preferred stock was declared for the period commencing December 1st, 1932, and ending November 30th, 1933, and paid from net profits realized in the preceding fiscal year. The company’s charter provided for an issue of 75,000 shares of cumulative preferred 6% per cent stock having a par value of $100 per share and 50,000 shares of common stock having no par value. That capitalization was subsequently reduced to 50,000 shares of preferred and 25,000 shares of common stock. Its charter provided that dividends not exceeding 61/2 per cent on its preferred stock might, in the absolute discretion of its directors, be declared from the net profits of the corporation, payable, if declared, on the first day of June, September, December and'March, should be paid before ⁶⁵³ any dividends were paid on the common stock, and that such dividends on the preferred stock should be cumulative, and that accumulations of undeclared and unpaid dividends on preferred stock should be paid before any dividends were paid on the common stock.

The table shown above indicates that for the period beginning August 8th, 1930, and ending August 31st, 1936, the corporation earned in profits $1,228,559.33, and lost $1,499,816.76, that is, over that period it lost $271,-257.43 more than it earned. In the same period, but including the dividend declared in December, 1936, it paid in dividends on its preferred stock $902,305.09, so that its net loss over the period of $271,257.43, and the aggregate amount of the dividends paid, must have come from surplus accumulated before the trust. It appears to be conceded that the United States Steel Corporation for some time prior to the testator’s death and since then earned net profits sufficient to have paid current dividends on its preferred stock, and that its surplus earnings accumulated at the testator’s death were sufficient, or nearly so, to have covered its payments on account of passed dividends. There is nothing in the record to indicate the source of the dividends paid since the testator’s death on the preferred stock of the Manufacturers Finance Company, although it does appear that when such dividends were paid earlier dividends had been passed.

Out of these facts several questions arise: One, does Code, art. 93, sec. 305C (Acts of 1929, ch. 495) known as the Apportionment Act, control the apportionment of dividends, declared after the death of the testator, on the cumulative preferred stock of the three companies above described? Two, are such dividends allocable to corpus, to income, or ratably to each (a) if the act does apply, (b) if it does not apply? Three, if such dividends may be apportioned, what must be the basis of the apportionment ? The statute provides: “All rents, annuities, dividends and periodical payments in the nature of income, payable ⁶⁵⁴ under the provisions of any will, deed or other instrument executed after the first day of July, 1929, shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly, unless otherwise expressly stated by the instrument under which they are payable; but no action shall be brought therefor until the expiration of the period for which the apportionment is made.” Code, art. 93 (1935 Supp.) 305C.

The chief difficulty in applying that language literally to dividends declared after the death of the holder on stock given by him in trust for successive beneficiaries lies in the irreconcilable difference between dividends and such income as rents and annuities. Rents and annuities are payable ordinarily under the terms of some contract which at once establishes a contractual relation between the parties, under which, while the sums to be paid thereunder may not become payable and due until the occurrence of a predetermined date, they must inevitably eventually become payable, and because of the fixed and certain character both of the payments and of the time when they must be made they may be readily and precisely apportioned. Dividends on the other hand do not accrue, or become due or payable, until declared (13 Am. Jur., Corporations, sec. 683), and until declared no relation of debtor and creditor arises between the stockholder and the corporation in respect to them {Ibid), for until declared they do not exist.

Now the words “dividends and periodical payments,” used in the English Apportionment Act, apparently refer to dividends which are paid at regular intervals or periods, because the word “other” also qualifies “rents and annuities” which are commonly so paid. The question is whether a dividend becomes due and payable upon the incidence of such a period or date when no dividend has been declared. The Maryland Apportionment Act is substantially identical with the second section of the English Apportionment Act of 1870, omitting the section of that Act ⁶⁵⁵ which defines “dividends.” But in respect to the second section of the English Act Jessel, M. R., a very sound lawyer, in Carr v. Griffith, 12 Ch. 661, said that if the Act had stopped with that section it might well