Case Name: In the Matter of the Accounting of Frederick H. Stevens et al., as Trustees under the Will of Julia A. Brooks, Deceased. Jesse B. Nichols et al., Appellants; Frederick H. Stevens et al., as Trustees et al., Respondents
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1907-02-26
Citations: 187 N.Y. 471
Docket Number: 
Parties: In the Matter of the Accounting of Frederick H. Stevens et al., as Trustees under the Will of Julia A. Brooks, Deceased. Jesse B. Nichols et al., Appellants; Frederick H. Stevens et al., as Trustees et al., Respondents.
Judges: 
Reporter: New York Reports
Volume: 187
Pages: 471–483

Head Matter:
In the Matter of the Accounting of Frederick H. Stevens et al., as Trustees under the Will of Julia A. Brooks, Deceased. Jesse B. Nichols et al., Appellants; Frederick H. Stevens et al., as Trustees et al., Respondents.
Trusts—When Testamentary Fund Invested in Securities at a Premium Must Be Kept Intact by Deduction of Interest. Where trust funds are invested by a testamentary trustee in bonds having a term of years to run and purchased at a premium, in the absence of a clear direction in the will to the contrary, such a proportionate deduction should be made from the nomirial interest as will, at the maturity of the bonds, make good the premiums paid and thus preserve the principal of the fund intact; a surrogate's decree, therefore, in a proceeding settling the trustee’s accounts awarding to a life tenant as income the whole amount of the interest coupons is erroneous.
Matter of Stevens, 111 App. Div. 773, modified.
(Argued January 7, 1907;
decided February 26, 1907.)
Appeal from an order of the Appellate Division of the Supreme Court in- the fourth judicial department, entered March 7, 1906, which ‘affirmed a decree of the Chautauqua County Surrogate’s Court settling the accounts of the trustees herein.
The facts, so far as material, are stated in the opinion.
Clare A. Pickard for Jesse B. Nichols, appellant.
The fair and reasonable construction of the language of this will —the language which expresses the intention of the testatrix ■—• demands that all earnings of the stock embraced in the trust as fast as it is released from its corporate control, shall be paid over to the life tenant as “dividends, issues and profits.” (Thorn v. De Breteuil, 179 N. Y. 64; Haskall v. King, 162 N. Y. 134; MoLouth v. Hunt, 154 N. Y. 179; Lowry v. F. L. & T. Co, 172 N. Y. 137.)
John Ewen for Jessie V. Tyler, appellant.
Unless a contrary intention can be inferred from the language of the trust instrument in connection with the surrounding circumstances, deductions should be made annually from the interest received on trust securities to cover depreciation in their value caused by the wearing away of premiums paid at the time of their purchase. (N. Y. L. Ins. & T. Co. v. Baker, 38 App. Div. 417; 165 N. Y. 484; N. Y. L. Ins. Co. v. Kane, 17 App. Div. 542; People ex rel. Cornell v. Davenport, 30 Hun, 177; 117 N. Y. 549; MoLouth v. Hunt, 154 N. Y. 179; Matter of Hoyt, 160 N. Y. 607; Lynde v. Lynde, 113 App. Div. 411.)
George A. Lewis for trustees, respondents.
The entire proceeds of the sale on June 20, 1901, of the business, plant, materials or other property, tangible or intangible, of the Brooks Locomotive Works to the American Locomotive Company represent principal and not income to the stockholders of the Brooks Locomotive Works. (Matter of Kernochan, 104 N. Y. 618; Thorn v. De Breteuil, 86 App. Div. 405; 179 N. Y. 64; Matter of Nesmith, 140 N. Y. 609; Matter of Proctor, 85 Hun, 572; Matter of Gerry, 103 N. Y. 445; Stewart v. Phelps, 71 App. Div. 91; Matter of Curtis, 29 N. Y. S. R. 217; Matter of Skillman, 24 Abb. [N. C.], 41; 9 Am. & Eng. Ency. of Law [2d ed.], 717-719; Matter of Roberts, 40 Misc. Rep. 512; People ex rel. v. Roberts, 159 N. Y. 70.) In view of the provisions of the will of the testatrix, and the situation of her legatees and the beneficiaries and remaindermen under the trusts created by said will, it is not the duty pf the trustees to maintain a sinking fund for the extinguishment of premiums ¡)aid upon bond purchases. (McLouth v. Hunt, 154 N. Y. 179; Matter of Hoyt, 160 N. Y. 607; N. Y. L. Ins. & T. Co. v. Baker, 165 N. Y. 484; Matter of Johnson, 57 App. Div. 494.)
John Ewen for Jessie V. Tyler, respondent.
It was the intention of the testatrix that the trust fund should be kept intact until the life beneficiarioi should severally arrive at the age of thirty years, and the dividends representing the price received upon the sale of the business of the Brooks Locomotive Works are not income within the meaning of the will.' (Lowry v. F. L. & T. Co., 172 N. Y. 143; Kiah v. Grenier, 56 N. Y. 220; Van Nostrand v. Moore, 52 N. Y. 21.) When a corporation in whose stock trust funds have been invested goes into liquidation and distributes all of its property in the shape of dividends, those dividends paid to the trustees from so much of its assets as were used in its business at the time it ceased operations, should, in the absence of a contrary intention expressed in the trust instrument, be held as principal of the trust fund. (Lowry v. F. L. & T. Co., 172 N. Y. 142; McLouth v. Hunt, 154 N. Y. 179; Matter of Kernochan, 104 N. Y. 618; Gibbons v. Mahon, 136 U. S. 549; Stewart v. Phelps, 71 App. Div. 91; 173 N. Y. 621; Matter of Rogers, 22 App. Div. 428; 161 N. Y. 108; Matter of James, 146 N. Y. 78.)

Opinion:
Cullen, Ch. J.
The decree of the surrogate, from the affirmance of which by the Appellate Division this appeal is taken, judicially settles the accounts of the executors and trustees of the will of Julia A. Brooks. The controversy relates to the respective rights of life tenants and remainder-men in property, the subject of the trust under the said will. The testatrix created separate trusts for her five grandchildren, exactly alike in character. In each of these trusts she bequeathed to her executors 247 shares of Brooks Locomotive Works in trust, to receive the dividends, issues and profits thereof and apply the same to the use of the grandchild until he became of the age of thirty years, at which time she gave the principal of the trust fund to said child absolutely. In case of the death of the grandchild without issue before arriving at the age of thirty years, then the fund was to go to the testatrix's surviving children and grandchildren. Though the probability is that the appellant Jesse Brooks Nichols will ultimately prove to be the remainderman in this fund, still, on account of the contingency that he may not survive until the age of thirty years, the questions involved must be determined on the ordinary principles which prevail between life tenants and remaindermen. The testatrix died November 30tli, 1896. Even then the Brooks Locomotive Works was a very successful manufacturing corporation. From the time of the testatrix's death until June 20tli, 1901, when the whole plant and properties were sold to the American Locomotive Company, its success was phenomenal. Owing to this fact and to the consolidation of the various interests arid companies engaged in the manufacture of locomotives, the Brooks Company, on the sale of its plant and property, received a price several times its estimated value at the time of the decease of the testatrix. ¡ It is the distribution of this enhanced value between income and principal of the trust fund which has given rise to the principal questions involved in the present controversy. A majority of the'Court are of opinion (in which, personally, I do not share) that under the findings of the surrogate and the unanimous affirmance by the Appellate Division, the apportionment made by the surrogate of the funds and properties received by the executor on the dissolution of the Brooks Company cannot be disturbed. We all agree, however, that the principal amount in controversy, a very large sum, received for good will on the sale of the works, cannot be deemed income, but was properly awarded. to principal of'' the trust as an appreciation in the value of the corpus. As this court has, within a few years, several times written at length on the general subject, we deem it unecessary to do more than state our conclusion, and should affirm the decree below without opinion were it not that there i§ also presented by the appeal a question involving an amount small compared to the large fund which is the subject of these trusts, but which frequently arises in the administration of estates.
The trustees have invested large portions of the fund, which came into their hands on the dissolution of the Brooks Company, in bonds purchased at a premium. The appellant Tyler contended before the surrogate that from the interest collected on those bonds there should be deducted, as it was collected, a sum sufficient to make good at the maturity of the bonds the amount paid as a premium. The surrogate overruled this claim and awarded the whole amount of the interest coupons to the life tenant as income. This disposition was erroneous and is in conflict with the recent decision of this court in New York Life Ins. & Trust Co. v. Baker (165 N. Y. 484). It was there held that where trust funds are invested by the trustee in bonds having a term of years to run and purchased at a premium, such a proportionate deduction should be made from the nominal interest as will, at the maturity of the bonds, make good the premium paid, and thus preserve the principal of the fund intact. It is true that in that case the late chief judge of this court said that the language of the will and the surrounding circumstances might indicate a different intention on the part of the founder of the trusts, in which case the testator's intent would control. Such was the case in Matter of Hoyt (160 N. Y. 607), where a testator left as a trust fund for his daughter and only child a comparatively small share of a vast fortune and directed the income to be applied to her use "in the most bounteous and liberal manner." It was held by a divided court that the life tenant should not be charged with any part of the premium paid for the security in which the trust fund was invested. In the earlier case of McLouth v. Hunt (154 N. Y. 179) it was held that the life tenant should not be charged with premium on bonds received in kind from the estate of the testator. But as to investments made by the trustees it was said: "There were $5,000 of the United States bonds purchased by the trustees after the erection of the trusts at the same premium. There may be reasons for charging the life tenants with the premium on these bonds that do not apply to the others. But that item" is so insignificant that it does not play any part in the controversy. - All questions as to the premiums on these bonds were virtually waived on the argument." While we admit, in accordance with the decision in Matter of Hoyt, that the terms of the will may be such as to take a case without the general rule that the principal of the fund must be preserved intact, we think that to justify such an exception to the rule the intent should be expressed in the very clearest manner. If we arq to lay down the doctrine that the question is to be determined on the peculiar facts and language of each particular case, no trustee will know how to safely act, and a question constantly arising in the administration of estates will be involved in great confusion and be the cause of great litigation, the latter often at an expense to the estate greater than the sum involved. Such a result would prove very unfortunate.
The justification for the rule is very apparent. The income on a bond having a term of years to run and purchased at a premium is not the sum paid annually on its interest coupons. The interest on a $1,000 ten-year five per cent bond, bought at 120%, is not fifty dollars, but a part thereof only, and the remainder is a return of the principal. All large investors in bonds, such as banks, trust companies and insurance companies, purchase bonds on the basis of the interest the bonds actually return, not the amount they nominally return. Nor is the premium paid on the bond an outlay for the security of the principal. All government bonds have the same security, the faith of the government; yet they vary in price, a variation caused by the difference in the rate of interest and the time they have to run. It is urged that there is often a speculative change in the market value of a bond, and a bond may be worth more at the termination of the trust than at the time of its purchase, This has no bearing on the case. The life tenant should neither be credited with an appreciation nor charged with a loss in the mere market value of the bond. But apart from any speculative change in the market value, there is from lapse of time an inherent and intrinsic change in the value of the security itself as it approaches maturity. It is this, and this only, with which the life tenant is to be charged. We, therefore, adhere to the rule declared in the Baker case, that in the absence of a clear direction in the will to the contrary, where investments are made by the trustee, the principal must be maintained intact • from loss by payment of premium on securities having only a definite term to run, while if the bonds are received from the estate of the testator, then the rule in the McLouth case prevails, and the whole interest should be treated as income. These rules may not work perfect justice in all cases, and we fully appreciate that there may be inconsistencies between them, but it is far better that they should be uniformly adhered to, even at the expense of a particular case, than that the administration of estates should be subjected to constant litigation and disputes. It is also to be said that unless the rule in the Baker case is to be observed, the relative rights of life tenant and remainderman would largely depend on the favor or caprice of the trustee who might either buy a bond bearing a high rate of interest at a great premium and impair the principal, or buy a bond bearing a lower rate of interest substantially at par, and preserve the principal intact.
The order of the Appellate Division and the decree of the surrogate of Chautauqua county should be modified in accordance with this opinion, and for that purpose the proceedings remitted to the surrogate to state the account, with costs to both parties payable out of the estate.