Case ID: ad_112/html/0018-01.html
Source: Caselaw Access Project
Author: {"author": "Ingraham, J.: O’Brien, P. J. (concurring): Houghton, J. (dissenting):", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Henry W. T. Steinway, Respondent, v. Charles H. Steinway and Others, Individually and as Surviving Trustees under the Will of Christian Friedrich Theodor Steinway, Deceased, Appellants, Impleaded with Charles H. Steinway and Others, as Surviving Executors, etc., of Christian Friedrich Theodor Steinway, Deceased, and Others, Defendants.
    First Department,
    March 16, 1906.
    Testamentary trustwhen costs of defending action to invalidate trust ' should be borne by beneficiary.
    It is the duty of testamentary trustees .to defend an actioh attacking the validity of the trust, and when the will creating a trust of certain shares of stock provides that the trustees, in lieu of the statutory compensation, shall receive the surplus income from, said stock after the payment of a certain percentage thereof to the beneficiaries, the costs Of the trustees in defending a suit brought to declare the trust invalid should be charged against the corpus .of the trust ’and not against tlm surplus income due to the trustees as compensation.
    And when the beneficiaries have «agreed that the stock itself shall not be sold to pay the expenses of such litigation, the expense is properly charged against the income from said stock due to the beneficiaries and not against the surplus income due to the trustees.
    'Houghton, J., dissented, with opinion.
    Appeal by the defendants, Charles H. Steinway and others, individually and as surviving trustees under the will of Christian Fried- . rich Theodor Steinway, deceased, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 12th day of August, 1905, upon the report of a referee, with notice of an intention to bring up for review upon such appeal an order entered in said clerk’s office on the 2d day ’ of June, 1905, denying the said defendants’ motion for an extra allowance.
    
      John Delahunty, for the appellants.
    
      Edward Bruce Hill, for the respondent.
   Ingraham, J.:

I agree with the learned referee, except in relation to the expenses incurred by the trustees in defending an action brought by the plaintiff- to declare the trust under which the defendants, the executors of Christian Friedrich Theodor Stein way, deceased, held this property, invalid. The clause of the will establishing this trust provided that one-fourth of the, shares of the testator in the Steinway & Sons’ corporation was given to the trustees for the benefit of the three sons of the testator’s brother Charles Steinway, namely, Henry W. T. Steinway, plaintiff; Charles H. Steinway and Frederick T. Stein way, of the city of Hew York, and there was to be paid to them in equal proportions an annual sum representing an income of five .per centum upon said shares until the 1st day of January, 1904, when the shares were to be divided between the three beneficiaries. The will then provided: “ The excess of the annual income of such shares in the Steinway & Sons’ corporation, over and above said five per centum, shall be retained by my executors and trustees hereinafter named, as their compensation for the management of such shares, and such excess shall be annually divided fro rata among them or their successors until January 1, 1904.” This will was admitted to probate on the 24th day of Hay, 1889. The referee found that in the month of Hay, 1893,, the plaintiff brought an action in the Supreme Court of this State against the defendant trustees and others, for the purpose of having declared void the 33d clause of the will to which attention has been called, which clause created the trust involved in this action. This action was decided in favor of the plaintiff at the Special Term and said trust was declared invalid; bpt this determination was reversed by the Appellate Division, and the complaint dismissed (24 App. Div. 104), which was affirmed by the Court of Appeals, that court holding that the trust was valid (163 N. Y. 183).

The referee further found that the amount paid by the trustees in defending said suit for counsel fees and expenses amounted to the sum of $39,719.11, and the only question about which I have any doubt is as to by whom this sum should be paid. It is conceded that it was the duty of the trustees to defend- this trust; and it is clear that they were entitled to be reimbursed their reasonable and proper expenses in so doing. I think this amount should be paid-out of the corpus of the trust property. By the agreed statement of facts upon which the question was submitted to the referee, it is stated that on January 2, 1904, the trusts under the will of C. F. Theodor Steinway having come to an end, the trustees distributed -and transferred the shares forming the principal of the trust funds, and transferred to the plaintiff, 333 .shares of the capital stock of Stein way & Sons, of which'he is now and ever since has been the owner and holder; that the trustees have in their hands the amount' due to the plaintiff for his share of the five per cent on the capital s.tock of the Steinway Company."corporation, they having deducted therefrom the sum of $3,308.93 which was deducted and charged to- the plaintiff as his proportionate share of" their expenses in defending said suit ■ brought' by the plaintiff to have the trust declared invalid, and that the total amount, paid by said trustees in defending said suit, for counsel fees and expenses, amounted to the sum. of $39,719.11. Before this stipulation was presented to the referee, the question as to the liability for the expenses of this litigation was submitted to him, the parties stipulating that the amount of the excess of income from the trust property, over and above the five per cfent paid to the beneficiaries was more than sufficient to- pay the expenses incurred in defending the attack upon the validity of the trust. The learned referee held that the expense of this litigation was not chargeable to the income to which the beneficiaries were entitled, but was chargeable against the balance of" the .income - remaining.in the hands of the trustees after the payment of the five per cent to the beneficiaries. In the referee’s opinion it is stated • ■ that it was admitted on both sides that the reimbursement for these expenses is to be paid out of the income, and" not out of the principal of the trust property. I do not find any such Stipulation in 'the agreed statement of facts. It was agreed in the stip'ulation that the, amount that was due to the plaintiff upon the termination of the trust was something over $12,000 for income and 333 shares of this stock as principal. The. executors, "apparently with the "consent of all the beneficiaries, with the exception of the plaintiff, had deducted the amount paid in defending the action attacking the trust, from the five per -cent income to which the. beneficiaries were entitled. The- plaintiff- had refused to receive this income,, and it remained in the.hands of the trustees. At the termination of the trust they then" delivered to him the stock of the Steinway corporation, but had retained in their hands' the income. T think it clear that these expenses were not to be paid put of the amount/received by the trustees under the will as the compensation for the management of these shares. If the testator had made no provision as to the compensation of the trustees, they would have been entitled to receive the legal fees which are allowed to trustees for the management of the trust. (See Code Civ. Proc. §§ 2730, 2802.) Under no circumstances would the necessary expenses of defending the trust be payable out of such compensation. In lieu of the compensation fixed by law for trustees, the testator in his will provided for their compensation; and the trustees having accepted the trust, they were confined to the compensation fixed by the will in lieu of the fees allowed by law for their services as trustees. If this stock which was the sole property of the trust estate had paid five per cent or less as dividends during the trust, the trustees would have received nothing for their services. They were bound to defend the trust; bound to retain lawyers and to pay the necessary disbursements, and upon no principle is this expense, which it was their duty to incur for the protection of the tiyist, to be paid out of the compensation that the testator expressly directed that they should receive- for their management of the trust. If these dividends had equaled five per cent on the stock during the term of the trust, and no more, certainly the executors would not have been required themselves to pay the expense of defending the trust. The fact that the dividends exceeded five per cent on the stock so that the executors were paid for their services in managing the property as contemplated by the testator, is no reason why this compensation which he intended should be paid to them for such services, should be reduced because of the proper performance of the duties imposed upon them as trustees. The parties having stipulated that the expenses of this litigation should be borne either by the beneficiaries or' the trustees, as between the beneficiaries and the trustees, I think the beneficiaries should pay the expenses. The question as to the amount of the compensation that the trustees actually received is entirely immaterial. If the views of the learned referee are to prevail, they were bound to défend the trust and to incur the expense necessary for that-purpose. Yet, if there had been no income applicable to the payment pf their compensation, they would under this ruling have been required to pay them this amount personally. As I look at it, it could make no possible diff eren ce whaf the dividends declared upon these bonds were during the period. The beneficiaries were the ones-to be benefited by, the sendees performed by the trustees, .and as between the.beneficiaries and the trustees, upon-the interest of the beneficiaries in the trust property must fall the expense of maintaining the trust.' The testator expressly provided that the excess of income was to be paid to the trustees “ as their compensation for the management of such shares, and 'such excess shall be annually divided pro rata among them or their successors until January 1, 1904.” There Was to be thus an annual division of the excess >when the amount divided would belong to the trustees, and it seems to me that it would be contrary to this declared intention of the testator that tins compensation which was to be paid to them. for their services in the management, .of the trust should be depleted by the necessary expenses incurred by them in the performance of their trust.

I think the judgment appealed from should be modified so that as between the trustees and the plaintiff, the interest of the plaintiff in the trust was chargeable -with the proportion of the expense of the litigation, with costs to the trustees against the plaintiff.

O’Brien, P. J., McLaughlin and Clarke, JJ., concurred.

O’Brien, P. J. (concurring):

The expenditure for the defense of the former suit is not of a kind to bring it within the expenses of “ management,” fdr which the gift of the excess income was made to the defendants. It is equally evident that, it is not properly a charge-,upon the annual’ income given' to the beneficiaries. The proper method ' of reiin-" bursing the. trustees, it being admitted that they should be reimbursed, would have - been to have paid these expenses out of" the x corpus of the trust. This would- have required a sale of- enough shares to pay the amount. ' This- all the, parties agreed should hot be done, all being interested evidently in keeping the shares in the family, and so it was agreed that the expenses should be.paid out of the income. It being so agreed between the.parties that payment should, not be made Out of the corpus, the question of whether it should be paid out of the income payable to the beneficiaries or the excess income which was payable to the trustees must be determined on equitable principles.

It is admitted that the excess income is more than sufficient to defray all the expenses of defending the former suit, and so payment out of the gross income will be virtually a payment out of the excess income given to the trustees. If, however, the payment is made out of the income given to the beneficiaries, while this is not in accordance with the terms of the trust, a result is reached which is more nearly like that which would have been effected if payment had been made out of the corpus. The beneficiaries of the annual income of five per centum are the ultimate donees of the trust shares. By payment, out of the corpus they would, in the first instance, therefore, have borne the entire burden. The excess income thereafter due the trustees would have been only slightly diminished by the sale of some of the shares to cover payment of these expenses, and the annual income of the beneficiaries would have been correspondingly diminished, as the gift to them was five per centum on the par value of the trust shares annually. As the burden should properly have fallen upon the beneficiaries, it seems more in accordance with equity that they should bear the burden out of their annual income under the trust, it being agreed that the payment should be out of income rather than corpus, than that the burden should fall 'upon the trustees who were obliged to defend their trust, and who, for the good of all, entered into this agreement for the preservation of the trust shares intact.

McLaughlin, J., concurred.

Houghton, J. (dissenting):

All parties to this appeal concede the general rule that the expenses incurred by trustees in defending a trust are payable out of the corpus of the estate.

The parties hereto, however, all desired that the corpus of the trust involved should be' relieved from the payment of the large expenses incurred in defending it. • The only issue between the plaintiff and the defendants was whether that expense should be paid out of the five per cent which the cestuis que trusterit were to receive annually or out of the large surplus of dividends arising from the stock held in trust.

The issue tendered to the referee by the parties — the defendants by their account, which charged the five per cent with these expenses. and the contesting allegations of plaintiff 'thereto,, which alleged that these expenses should be paid out of that part of the general income which went to fhebtrustees individually and were not chargeable against any beneficiary receiving but five per cent — did not involve the question whether the corpus of the fund should pay the éx-penses, but only which fund- of income should be chargeable with, them. The parties selected their own issue and narrowed'it to this simple question. I do not think the court should strive to fasten .these expenses upon the five per cent fund simply because the corpus eventually passed to the samé persons who received the five per cent per annum. The referee decided as .between these two funds,, both made up of income, that the larger surplus fund which went to the trustees individually, should bear these expenses rather than the five percent, which was in the nature, of an. annuity payable to- the céstuis que trustent annually. I think he was right in so. holding. The fair interpretation of the trust provision, made by' the_ testator in his will was that the five per cent should be practi¿ally an annuity. The-testator must have known that the stock which he was placing in' trust by his will paid much more than five per cent annually, for about, the time of his death' a dividend fifteen per cent was declared thereon. ,

If this five per cent is .to be treated as a simple annuity, from anything that appears in the record the ,annuitants cannot be made to pay the expense of defending the trust. They had a right to attack the trust as well as the defendants had a right,to defend it. The annuitants, although defeated, were not punished by even having the taxable costs of that action charged against them personally, but such costs were directed to be paid “ out of the income of the fund.” (Steinway v. Steinway, 163 N. Y. 183.)

I concede that it is straining the language giving to the trustees individually the excess of annual income ovér five per centum as their compensation for the management of such shares, and such excess^” to say that the testator meant they should pay all expenses connected with administration out of such excess. On the other hand, it cannot .be said that the testator intended, that the five per cent should be chargeable with such expenses. The defendants having voluntarily eliminated the corpus of the fund from bearing such expenses,, there remains* only the surplus of inepme from which it can be paid; and as between the two, I think'that fund which.went to the trustees for managing the estate should be charged with it.

All concur in the view that the other questions raised were properly disposed of by the referee, and I think the judgment should be affirmed without any modification.

Judgment modified as directed in opinion, and as modified affirmed, without* costs. Settle order on notice.