Thomas v. Gregg

Boyd, J., delivered the opinion of the Court. John G-regg died on February 11th, 1890, leaving a last will and testament by which he left one-half of his ⁵⁴⁷ property to three trustees, in trust for the sole and separate use and benefit of his daughter, Annie Gf. Thomas, for and during her natural life, and after her death then in trust to grant and convey, transfer and deliver the same to the issue of her body living at the time of her death, share and share alike, &c. The other half of his property is left to the same trustees for the benefit of his other daughter, Margaret Pennington, for and during her natural life, and after her death to be held in trust for the issue of her body living at the time of her death, share and share alike, &c.

In each case provision is made for the disposition of the property in the event of either daughter dying without issue. Amongst other provisions the will directs the trustees to make, under the orders and supervision of a Court having equity jurisdiction, a division and partition of his estate into two parts. Mrs. Thomas died in July, 1891, leaving three children and her husband who was made executor of her last will and testament. The trustees filed a petition in the Circuit Court of Baltimore City, asking it to take jurisdiction over the estate, and on September 15th, 1891, that Court did assume jurisdiction over the same.

On December 13th, 1892, the trustees filed a bill or petition in said Court asking that they may be directed to make a partition of the estate as authorized by the will. They gave lists of the properties, bonds, stocks, &c. in their possession including 3352 shares of the common stock of the Baltimore and Ohio Railroad Company. On December 19th, 1892, they filed a petition in which they stated they had failed to include in their bill, 670 shares of the common stock of the Baltimore and Ohio Railroad Company which were issued to them in pursuance of a resolution of the board of directors of said company passed on the 11th day of November, 1891, whereby a dividend of twenty per cent, on the common ⁵⁴⁸ stock of the company, was declared for the three fiscal years ending respectively September 30th, 1889, September 30th, 1890, and September 30th, 1891, and. that the 610 shares of stock were issued to and held by them as dividends or earnings on the 3352 shares of stock mentioned in the bill, and prayed the Court to permit them to amend their bill by including the 610 shares of stock, which amendment was allowed by the Court. The parties in interest answered the bill as amended.

John Marshall Thomas, the husband and executor of Annie G. Thomas, who died in July, 1891, claimed in his answer that inasmuch as the said 610 shares of stock are the dividends and earnings of the 3352 shares of stock, held by the deceased in his life-time for the three years ending September 30th, 1889, September 30th, 1890, and September 30th, 1891, respectively he, as executor of his wife and in his own right, was entitled to one-half of the proportionate part of the said earnings (dividend stock) that were earned between the decease of the testator on February 11th, 1890, and the decease of Mrs. Thomas on July 8th, 1891. Margaret Pennington and husband claimed that the 610 shares of stock were issued as a dividend on account of earnings and income, and that hence she was entitled to one-half of the same as her absolute property. Testimony was taken, and the Court passed an interlocutory decree for partition, appointing the three trustees commissioners. The commissioners made their return to the Court and included one-half of the said 610 shares of stock in each of the 4wo schedules of the trust property.

Mr. and Mrs. Pennington and Mr. Thomas excepted to the return of the commissioners and trustees for the reasons set out in their answers. The Circuit Court of Baltimore City overruled the exceptions, ratified and confirmed the return in respect to those shares of stock, and directed that they should ⁵⁴⁹ be held by the trustees under the will of John Gregg. From this decree appeals were taken by J. Marshall Thomas, in his own right and as executor of Annie Gregg Thomas, and by Margaret Pennington and husband. The first question therefore to be decided is, are the 670 shares of stock issued by the Baltimore and Ohio Eailroad Company to be considered as income, and vest in the life tenants, or as capital, and be held by the trustees together with the rest of the trust estate ?

Although this Court has never been called upon before to decide this question, it has frequently been before the Courts of England as well as many of the Courts of last resort in this country. We are not helped, but rather embarrassed, however, by the fact that so many Courts have passed upon the question, as we find jurists entitled to our highest respect widely differing on the subject. It is true that some of the decisions can be reconciled by a careful examination of the facts on which they are based, yet there are others which are irreconcilable. The authorities generally agree that if the intention of the testator can be gathered from the will, it must prevail in determining such questions as are now presented for our consideration, but the will of John Gregg throws but little, if any, light on the subject.

There is a class of cases that decide that when the company has the power of distributing its profits as dividends, or of converting them into capital, and it validly exercises such power, it is binding on all persons interested, and what the “company says is income shall be income, and what it says is capital shall be capital.” In other words, that the intention of the company shall prevail in determining the question. This Court decided in State vs. Balto. & Ohio R. R. Co., 6 Gill, 363 , that the directors of this company are only bound to divide such part of the net profits as they may deem proper; that they can apply any portion of the ⁵⁵⁰ net profits not divided to any legitimate purposes of the company, and that they can expend the revenues of the company absolutely, without being bound to refund them, or they could appropriate and agree to refund them to the stockholders in their discretion. This statement of the power of the directors assumes of course that they would act in good faith. The only evidence in the case that in any way reflects upon the intention of the company, is the resolution of the directors declaring the dividends, which is as follows: “Whereas, for the fiscal years terminating September 30th, 1889, 1890 and 1891, the net earnings and income of the company have amounted to the sum of $4,545,272.34 — as shown by its reports — after the payment of dividends on the first and second series of preferred stock to the amount of $900,000, the adjustment of sinking fund accounts, and after charging to operating expenses during those years over one million dollars expended in betterments and improvements of the physical condition of the property, and in bringing it up to a higher working standard; “And whereas, after charging to ‘Profit and Loss’ of those years the sum of $1,617,051.09 — a deduction which has been deemed proper to make by reason mainly of depreciation of the value of equipment, which properly should have been made during the year 1888 — there still remains of such net earnings and income the sum of $3,311,455.23, which sum, in addition to the amounts derived from other sources, has been used in reduction of the bonded and car trust indebtedness of the company to the amount of $1,325,102.64, and also for the permanent improvement of the railway, and for new construction, all of which contribute valuable additions to the property and to the capital of the company: “Therefore resolved, that a dividend of twenty (20) per cent, be declared upon the common stock of this ⁵⁵¹ company for the period ending September 30tb, 1891, payable on and after 31st day of December, 1891, in common stock of the company, at the office of the treasurer, to the stockholders of record, on the 30th day of November, 1891.” &c.

As so many different views have been expressed by the Courts in passing upon the respective rights of tenants for life, and remainder-men in regard to what are commonly called “stock dividends,” it will be well to refer to some of the leading cases. In Minot vs. Paine and others, 99 Mass., 101 , what is sometimes called ‘ ‘the Massachusetts ’ Rule” was adopted, viz., “to regard cash dividends, however large, as income, and stock dividends, however made, as capital.” The Court said that the trustee needed some plain principle to guide him, and deemed the above rule simple and equitable, as well as in conformity with the prior decisions of that Court. In that case the Court hold that the distribution of stock of a railroad company to represent improvements on the road, construction of a bridge, &c., although admitted to have been made from the net earnings of the company, should be treated as capital and not as income, and hence should be held by the trustees and not delivered to the life tenant. Regular cash dividends had been paid semi-annually on the stock. .

This rule has not been altogether acceptable, and has been somewhat qualified, or modified, by subsequent cases in that State, although the general principle as settled in Minot vs. Paine, is still maintained. In Daland vs. Williams, 101 Mass., 571 , the directors having voted to increase the capital stock by three thousand shares, declared a cash dividend of forty per cent., and authorized the treasurer to receive that dividend in payment for twenty-eight hundred shares, the remaining two hundred shares to be sold, the Court held that the trans ⁵⁵² action was virtually a stock dividend, and that the-shares must go to the remainder-man’s fund. In Leland vs. Hayden, 102 Mass., 542 , where the company had invested its surplus earnings in its own stock, and subsequently declared a dividend of that stock, the life tenant was held entitled to it. The Massachusetts Court in these later cases determined that they can, in deciding whether in a given case the distribution is a stock or cash dividend, consider the actual and substantial character of the transaction, and not its nominal character merely.

See also Rand vs. Hubbell, 115 Mass., 461 ; Heard vs. Hldridge, 109 Mass., 258 ; Davis vs. Jackson, 152 Mass., 58 . In Rand vs. Hubbell, Ch. J. Gray, in speaking of the earnings of a corporation said: “When a distribution of said earnings is made by the corporation among its stockholders, the question whether such distribution is an apportionment of additional stock or a division of profits, depend upon the substance, and intent of the action of the corporation, as shown by its votes.” In the case of Gibbons vs. Mahon, 136 U. S., 549 , Justice Gray uses very much the same language, adding that “ordinarily a divided declared in stock is to be deemed capital, and a dividend in money is to be deemed income, of each share. ” The Court decided that the new shares-issued in that case were capital. Th.e company had paid money dividends from time to time, and had invested portions of its net earnings, income and profits in the enlargement of its plant so that its construction account exceeded one million dollars — being double the capital stock.

The capital was increased to one million dollars, and by resolution of the directors the increased stock was awarded to the shareholders, share for share. The greater part of the investments was made prior to the beginning of the life tenancy, although the construction account was increased between one and two hundred thousand dollars afterwards. ⁵⁵³ The Court practically adopted the Massachusetts-Rule, qualified as above stated, and decided that the new stock was capital. In Connecticut and Rhode Island dividends of new shares representing accumulated earnings, are held to be capital and not income. Brinley vs. Grou, 50 Conn., 66 ; Brown and Larned, Petitioners, 14 R. I., 371.

In Richardson vs. Richardson, 75 Maine, 570, the Court said: “The decided preponderance of authority probably concedes the point that dividends of stock go to the capital under all ordinary circumstances.” In Georgia, the Code is construed so as to follow the Massachusetts Rule. Millen, et al. vs. Guerrard, et al., 67 Ga., 284 . In England there have been a number of decisions on this question, and they are somewhat conflicting. The earlier cases decided that an ordinary, regular and usual dividend, whether it be cash, stock or property, belonged to the life tenant, and that an extraordinary dividend belonged to the corpus.

In the later cases, the Courts have examined into the real nature of the transaction to ascertain the intention of the company. In the case of Bouch vs. Sproule, L. R., 12 App. Cas., 385, 397, where the early English cases are reviewed, Lord Hbrsciiell quoted with approval the principle expressed by Lord Justice Fry: “When a testator or settlor directs or permits the subject of his disposition to remain as shares or stocks in a compan}r which has the power either of distributing its profits as dividends, or of converting them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under the testator or