Court Opinion

ID: 3848298
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:24:52.998296+00
Date Added: 2024-06-11T14:13:07.557563
License: Public Domain

I disagree with the conclusion reached by the majority. While, as the opinion states, "it is clear . . . . . . that when testator expressly and without qualification gave to his widow all the income earned after his death, he meant just what he said," it is just as clear that the same testator gave to the remainderman an estate which cannot properly be cut down merely because the corporation sustained a loss in its earnings while pursuing the business for which it was incorporated. This was a fire insurance company, and it was the company's business to pay the loss here involved, one of the recognized hazards of the business being its extraordinary size. It was an operating loss to be recouped through future earnings and not a capital loss. Insurance rates are regulated to take care of such losses. Testator's capital in the concern should not be reduced when it comes to the remainderman, simply because the company paid such loss out of earnings.
To distribute the stock dividend on the basis of a value per share of $71.09 as the lowest point in value the stock attained since testator's death and not the value at the date of his death, violates the rules laid down by this court as to intact value. In that event, the settlement of like estates in the future will be the subject of expert accounting to ascertain if there are any points lower than that at testator's death, for the majority opinion does not limit the distribution to extraordinary losses outside of the company's usual activities but includes all business losses.
The majority opinion attempts to divide the loss of $1,835,000 from the San Francisco fire between the respective interests of the life tenant and the estate. Its theory seems to be that, as to so much of that sum as could be paid out of earnings accumulated after testator's *Page 457 
death, it is an operating expense and to be paid out of the earnings to which the life tenant is entitled. However, as to that portion of the loss, $715,140, which was met by payments from surplus accumulated before the death of the testator, the court holds that this is a capital loss and must be borne by capital, the corpus of the estate, or intact value. I am of opinion such a distinction is clearly not tenable. For example, if the loss, in this case $1,835,000, had occurred immediately following testator's decease, the estate's interest would have been completely wiped out and the life tenant would become entitled to not only all future earnings but all stock dividends. The physical property or the means of producing earnings (payment from policyholders) would not be wiped out, but the book value on which the majority opinion depends would be nothing. On the other hand, if the loss had occurred in 1924, with the then large earnings, the entire burden would be met by the life tenant. Can such a principle as this be sustained as working out an equitable allocation of loss between the two interests in the stock?
It is submitted that losses of this character can only be treated in one of two ways, either as a capital loss and properly chargeable to the corpus of the estate, or as operating losses which must be charged to the life tenant in any computation as to his or her accumulated interest. The majority opinion has indicated that this is at least in part a capital loss. That is contrary to what I understand to be well settled principles of accounting, and to the practice in insurance business. Let us see what would be the effect of a correct application of this theory. To be consistent, if this earning surplus loss is to be considered a capital loss in any part, it must be so regarded as a whole. Under this view, the majority should include all the earnings since testator's death, if the widow was not to be deprived of "all the income earned after his death." Just before the fire the earned surplus had increased to $2,045,000. Why make the *Page 458 
estate account for part of the lost earned surplus and omit the remainder? In starting at $71.09 the majority fails to consider the accumulation of earning that made the stock worth $254 a share the day before the fire. The sum earned between testator's death and the fire was $1,119,860. If the fire loss is to be treated as a capital loss, then the computation of the majority must be amended.
Before proceeding with this calculation, it is necessary to correct what I deem an error in the computation of the intact value by the majority. In computing the intact value, the estate has been given credit for the contributed surplus but no account has been made to cover the consequent reduction of interest of the original shareholders in the earned surplus at the time of the distribution. This reduction was a necessary incident to the readjustment of the capitalization. There should be added $10.55 per share instead of $21.09 to secure the intact value giving a result of $173.05 instead of $183.59. This is illustrated more clearly as follows:
If the value at testator's death may be reduced for any cause, then it is not a fixed and determined value; it is inaccurate to say the contributed surplus added $112.50 to each share at its then value. In giving to each share of stock, old and new, its proportion of value from the contributed surplus, the same process must be applied to the earned surplus on hand when that distribution is made. It is just as certain when the stock was increased, that the value of accumulated surplus to each share was decreased. Here it would be $210,909 divided by 20,000 or $10.55.
We would have:
Share value
    Contributed surplus .................... $112.50 Earned surplus .........................   10.55 Capital value ..........................   50.00 ------- Intact value ......................... $173.05 *Page 459
We arrive at an intact value of $173.05 instead of $183.59 as in the majority opinion. The effect of this is to change still lower the award to the corpus.
However, this correction fails to take into account the fact that the corpus of the estate has been charged with $715,140 out of what must be regarded as a capital loss of $1,835,000 if it is to be treated as a capital loss as to any part. Consequently to be correct, under this view, the majority would have to deduct $111.19 per share additional from the value as computed after the fire. This would result in the complete extinguishment of the value creating a deficit for each share of $40.09. Adding the increase in value resulting from contributed surplus, we would reach an intact value of $71.60; this being less than the value at the date of stock distribution, the corpus of the estate would be entitled to no share in this stock dividend.
It has been pointed out that the San Francisco loss should be treated as an operating loss and deducted from earnings before the life tenant is entitled to a share. Under this view, if the intact value at testator's death is to be preserved, then the distribution of stock dividend should be on the basis of that value. To distribute the 100 per cent stock dividend on this basis there should be added, to the value at death, the additional value through contributed surplus as the majority opinion states, and following the rule of our previous cases and the one adopted by the majority (except as to the time when the intact value is taken), the following statement will show the proportions the life tenant and remainderman should receive.
Share value
Value of stock at testator's death, par ............... $ 50.00
Add to this the value of earned surplus as reduced by new shares ...........................................  46.30
Add to this the value each share, old and new, has of contributed surplus .................................. 112.50 ------- Total book value .................................. $208.80 *Page 460 
Total book value (brought forward) .................... $208.80
After the stock dividend, this value was reduced to ...  152.16 ------- The difference is ................................. $ 56.64
or 44 + shares to corpus.