Smith v. Hooper

McSherry, C. J., delivered the opinion of the Court. This record contains cross-appeals. Each appeal presents one question. Both questions grow out of the same facts and but one opinion will be needed to dispose of the whole con ²¹ troversy.

The facts are not disputed in any way. They are as follows : By the seventh clause of the will of the late William E. Hooper, who died in eighteen hundred and eighty-five, there was bequeathed to his four sons and the survivors and survivor of them, the sum of ten thousand dollars “upon trust to invest the same and pay to (his) daughter, Mary Elizabeth Smith, during her lifetime, for her sole and separate use, the dividends and income thereof as the same shall accrue, without power to her to anticipate the payment of such income and dividends, or to charge or encumber the trust estate,” with remainder over after the death of the daughter, to her children and the descendants of any deceased child, with a power of appointment by the daughter if no child or descendants of a deceased child survived her, and in the event of there being no child or descendant of a deceased child surviving the daughter and upon failure to make an appointment there is an absolute bequest of “this portion of” the testator’s estate to all his grandchildren then living and the surviving issue of any deceased grandchild. The fund was paid over to the trustees. By the nineteenth clause of the will the trustees were empowered “to invest the moneys that shall come into their or his hands * * * in such property, real or personal, stocks, bonds or securities, as in their or his judgment may be advisable, and all such investments from time to time to change or vary in their or his discretion; as also to sell any property other than money coming to hand as parcel of the trust estate and the proceeds reinvest in their or his discretion, &c.” R. Tynes Smith, the husband of the cestui que trust was engaged in the manufacture of cans.

Associated with him was William A. Weeks, and the firm name was Smith and Weeks. In the latter part of the year eighteen hundred and eighty-seven the property, buildings, letters-patpnt, machinery and tools of the firm were sold at public auction, and, by the request of the cestui que trust, were purchased by the trustees who paid therefor the sum of seven thousand, seven hundred and forty-four dollars and ninety-three cents, out of the ²² ten thousand dollar trust fund held by them under the seventh clause of the will. After paying for the property so purchased, the trustees still had in hand the sum of two thousand, two hundred and fifty-five dollars and seven cents, the residue of the ten thousand dollar trust fund. The trustees then transferred the property thus purchased by them, to a corporation formed under the general corporation laws of this State, which company was known as the R. Tynes Smith Can Company.

In payment for the property so transferred, the trustees received from the company three hundred shares of its capital stock at its par value of one hundred dollars per share. Subsequently the trustees sold fifty shares of this stock for five thousand dollars. The five thousand dollars added to the two thousand, two hundred and fifty-five dollars and seven cents, part of the original ten thousand dollar trust fund, gave them seven thousand, two hundred and fifty-five dollars and seven cents in cash, in addition to the remaining two hundred and fifty shares of the capital stock of the R. Tynes Smith Can Company, still retained by them. At or about that time, as the seventh paragraph of the bill of complaint charges, the cestui que trust, Mary Elizabeth Smith, “paid over and delivered to” the trustees “the sum of two thousand, seven hundred and forty-four dollars and ninety-three cents, in cash for no other reason or purpose * * * * than that they might still have in their possession and hold intact, without any abatement whatever, cash amounting to ten thousand dollars.

In other words, that the cash in their hands might be restored to the original sum of ten thousand dollars, being the sum bequeathed to them in trust under the said seventh clause of the last will and testament of William E. Hooper, deceased.” This sum of two thousand, seven hundred and forty-four dollars and ninety-three cents has relation to the question raised on the second appeal, but is alluded to now merely to preserve the continuity of the narrative. In 1889 Mr. Smith organized another corporation for the manufacture of cans. It was located at Keokuk, in the State of Iowa, and was called the Tri-State Can Company. The trustees ²³ subscribed for ten thousand dollars of the capital stock of this company.

They received three hundred and fifty shares and paid for them with the $2,255.07 of the original ten thousand dollar trust fund, in their hands as heretofore stated ; the $5,000.00 received by them from the sale of the fifty shares of the R. Tynes Smith Can Company’s stock; and the $2,744.93 turned over to them by Mrs. Smith as just above indicated. At that time the trustees held two hundxed and fifty shares of the stock of the R. Tynes Smith Can Company and three hundred and sixty shares of the stock of the Tri-State Can Company. Up to February, 1901, they had collected in dividends on the two hundred and fifty shares, the sum of $27,500.00, and in interest on the ten thousand dollars or portions of it before its investment, the sum of $2,270.07, all of which had been paid over to the cestui que trust. In May, 1901, The American Can Company, a New Jersey corporation with a capital of eighty-eight millions of dollars, was formed.

Its whole capital stock was divided into an equal number of common and preferred shares of the par value of one hundred dollars each. That corporation was organized for the purpose of acquiring the business of all other companies engaged in the manufacture of cans. It accordingly purchased the assets of both the R. Tynes Smith Can Company and the Tri-State Can Company. As a result of this absorption the trustees received in lieu of the two hundred and fifty shares of the R. Tynes Smith Can Company, then owned by them, nine hundred and sixty-two shares of the preferred and nine hundred and sixty-two shares of the common stock of the American Can Company ; 62 shares of the stock of another concern, and thirty-seven thousand, five hundred dollars in cash.

They afterwards sold the nine hundred and sixty-two shares of common stock for twenty-five thousand, one hundred and fifty dollars and ninety-five cents. The final result of their investment of the $7,744.93 in the purchase of the property of Smith and Weeks is, that they now have in place of that sum, through the medium of the exchanges and sales alluded to, the $37,500.00 cash received ²⁴ from the American Can Company, the$25,150.95 just mentioned, as the proceeds of the sale óf the 962 shares of common stock—these items of cash aggregating $62,650.95— and the 962 shares of the preferred stock of the American Can Company, together with 62 shares of the Johnson Company. The trustees received from the American Can Company in exchange for the 360 shares of the Tri-State Can Company, held by them, 180 shares of the preferred and 180 shares of the common stock of the American Can Company, and $16,500.00 in cash. They sold the 180 shares of the common stock for $4,705.89, and still retain the preferred.

The final result of' their investment in the Tri-State Can Company is this: In place of the $2,255.07 part of the original trust fund, the $5,000.00 realized by the sale of fifty shares of the R. Tynes Smith Can Company’s stock, and the $2,744.93 turned over to the trustees by Mrs. Smith, they now have the $16,500 cash received from the American Can Company, the $4,705.89 realized by the sale of the 180 shares of common stock—or an' aggregate of $21,205.80 in cash—and 180 shares of preferred stock. The total result of the investment and reinvestment of the original trust fund augmented by the $2,744.93 contributed by Mrs. Smith is this : The trustees now hold 1,142 shares of the preferred stock of the American Can Company, worth when the bill was filed, sixty-five dollars a share, or $74,230.00; $83,856.31 in cash and 62 shares of the Johnson Company, of no present value; altogether aggregating $158,086.31; apart from the $29,770.07 of the dividends and interest heretofore paid to the cestui que trust. Mrs. Smith, the cestui que trust insists that all of this enormous increase in the fund in excess of the original ten thous- and dollars, belongs to her and should be paid to her as income from the fund, and should not be held by the trustees as part of the corpus of the trust estate. The trustees deny this. .

She also claims, alternatively, that she is not only entitled to a return of the $2,744.93 handed over by her to the ²⁵ trustees, but to a ratable proportion of the gain made by the investment of that sum and the $7,755.07 in the 360 shares of the capital stock of the Tri-State Gan Company. These are the questions which the record presents. The first is the one raised on the appeal of Mrs. Smith; the second is the one brought up on the appeal of the trustees. The Circuit Court decided the first adversely to her; and it decided the second in her favor.

If this increase of $148,086.31 over and above the ten thousand dollars originally received by the trustees is income or dividends within the meaning of the seventh clause of the will, then, Mrs. Smith, the cestui que trust for life, is entitled to that increase, and the trustees can claim no part or parcel of it as capital. If on the other hand, that increase, created in the way hereinbefore minutely pointed out, is not income from or dividends upon the original trust fund, in the sense in which the words income and dividends are used in the will, then the $148,086.31, less the amount involved in the second appeal, forms part of the corpus of the trust estate and belongs, not to the cestui que trust, but to the persons entitled in remainder. And this is so because by the express terms of the will the cestui que trust is entitled only to income and dividends, and not to any part of the capital. So, the precise question on the first appeal is : Does this increase, thus accumulated, constitute income or dividends within the meaning and intent of the will ?

It may not be out of place, before proceeding to solve that inquiry, to advert for a moment to several cases referred to in the argument. They are Quinn v. Safe Deposit and Trust Co., 93 Md. 285 ; Burt v. Gill, 89 Md. 152, and Thomas v. Gregg. 78 Md. 555 . Those cases mainly determine, not vuhat is income or what are dividends, but to whom income and dividends, confessedly such belonged. In the case at bar there is no dispute as to who is entitled to this increase if it be income or dividends, but the question is, does that increase constitute income or dividends at all ?

Obviously, therefore, the cases just referred to have no direct bearing upon this investigation. ²⁶ “The word ‘dividend,’ if unqualified,” said the Supreme Court of Errors of Connecticut, “signifies dividends payable in money. The word ‘income’ has a broader meaning, but hardly broad enough to include things not separated in some way from the principal. It is not synonymous with ‘increase. ’ The value of stock may be increased by good management, prospects of business, and the like. But such increase is not income.

It may also be increased by an accumulation of surplus ; but so long as that surplus is retained by the corporation, either as surplus or increased stock, it can, in no proper sense be called ‘income.’ It may become producing, but it is not income.” Spooner v. Phillips, 62 Conn. 62 . ( 24 Atl. Rep. 524 .) Surplus and accumulated reserve funds until set apart and appropriated by the corporatian for the payment of dividends are capital, and whatever their magnitude may be, they are not, as between life tenant and remainder-man, treated as income until they are distributed. Gibbons v. Mahon, 136 U. S. 549 .

Whether the value of the shares of stock originally acquired by the trustees upon the investment of the $7,744.93, was enhanced by the creation of a surplus fund, by good management and expansion of the company’s' business or by the worth of the patent rights included in its assets, the record does not disclose. Nor does it inform us whether the stock now held in exchange for that acquired in the first instance, owes its value to similar causes. Whatever the actual causes may have been the fact is that the shares of stock have grown enormously in value and the things that have given them that value inhere in them still, since they have not been separated from them by any act of the corporation. The’re has been no segregation from the shares, of any of the elements which make up the value of the shares and until there is such a segregation all of those elements belong to the shares and pass with the latter when sold.

The conversion of some of the shares into money resulted merely in substituting the cash received for the shares thus sold; and if the unsold shares represented nothing but capital, though capital of a largely increased value, the money ²⁷ obtained for the same shares when sold can represent nothing but capital either. Now, it is obvious, we think, that the cash received by the trustees from the sale of the fifty shares of the R. Tynes Smith Can Company and from the American Can Company on the exchange of the two hundred and fifty shares of the R. Tynes Smith Company and the three hundred and sixty shares of the Tri-State Company and from the sale of the shares of the common stock of the American Can Company, cannot be considered dividends. None of that cash arose from a division of earnings. The proceeds of the fifty shares took the place of the fifty shares and constitute capital.

The cash received on the exchange of shares was not a dividend declared either on the surrendered shares of the constituent companies which were merged in the American Can Company, or on the newly issued shares of the American Can Company which took over and consolidated the business of the other canmaking companies. Nor were the new shares, common or preferred, issued by the American Can Company, in any sense dividends on the shares of the companies which it absorbed. It is clear, therefore, that the cestui que trust for life can make no claim to this increased value on the ground that any part of it is, or can be treated as, dividends on the original trust fund. That there has been a marvelous increase of the fund is manifest.

Is that increase income ? Increase and income are not synonymous terms. Until detached or separated from the shares whose value it enhances, increase forms part of that value, and, therefore, part of the shares; and if it be part of the shares themselves then, whilst it may be profit, it is in no sense income. And this has been distinctly adjudged by the Court of Appeal of England. hi re Armitage, 3 Ch. 337, (1893.) In that case it appeared that a testator gave his estate upon trusts for conversion and investment.

He bequeathed one-third of the residue to the trustees for the benefit of A. for life and after her death upon further and other trusts. Part of the residue consisted of ^10 shares in a company with £8 per share paid up. Some years after the testa ²⁸ tor’s death the company was wound up and reconstituted, and the new company paid for the testator’s shares £g 5s. 6j£d. each, being £1 5s. 6*4d. per share more than had been paid up. The question was : Did this £1 5s. 6*4d. per share constitute income to which the tenant for life was. entitled, or was it capital ?

Lindley, L. • J., said : “In this case I do not feel much difficulty. * * * * The question we have to determine is, who is entitled to the sum of £1 5s. 6*4d. per share upon 4,450 shares which belonged to the estate of the testator, those shares being shares in a company which was wound up and reconstituted ? We must first look to the testator’s will. * * * * The short effect of that will is this—one-third part of these shares is held by trustees upon trust to pay the income to the tenant for life and subject thereto in trust for the remainder-man. Now, is this 5s. 6*4d. income within the meaning of that trust? How does this £1 5s. 6*4d. per share arise ?

It arises in this way. The shares were £10 shares with £8 paid up upon them. The company was wound up and the assets of the company were distributed amongst the registered shareholders, and each registered shareholder got £g 5s. 6*4d. instead of ;£8—that is to say, upon the distribution of the assets, there was an excess of £1 5s. 6^d., whether profits or capital I will not at present say, over the £8 paid up in respect of each share. It arose apparently in this way : The assets of the company consisted among other things of about £20,000 standing to a reserved dividend fund, and of ^17,000 standing in the books of the company and representing undivided profits in addition to the reserved dividend fund.

Those undivided profits, of course, could have been divided as dividends if the company had so thought fit. The £20,000 was applicable to the equalization of dividends. The moment the company got into liquidation there was an end of all power of declaring dividends and of equalizing dividends, and the only thing that the liquidator had to do was to turn the assets into money, and divide the money among the shareholders in proportion to their shares. That is what he has done. ²⁹ "Now, there has been a great