Court Opinion

ID: 3373579
Source: CourtListenerOpinion
Date Created: 2016-07-05 18:16:01.43758+00
Date Added: 2024-06-11T12:47:30.230238
License: Public Domain

The only assignment of error to the decree of the Chancellor is: "That the court erred in that it held and decreed that the said dividend of seventy per centum in capital stock of Delaware Railroad Company declared, pursuant to the resolution of said company, adopted on the twenty-first day of February, A.D. 1910, to and among said company's stockholders, according to their respective holdings, amounting to 44 1/10 shares, should be held by said complainants in trust to apply the net interest, income and dividends accruing thereon *Page 476 
to the said Annie Grier Porter for and during her life, and upon her death to be distributed and disposed of to the tenant or tenants in remainder according to the provisions of the last will and testament of James C. Aikin, deceased, and instructing said complainants in accordance therewith." The facts and questions presented appearing in the majority opinion, it is unnecessary that I should repeat them. I shall not enter into any extended discussion of the question which is presented to this court for the first time. The question is not, however, a new one. It has received the attention of many courts; but there is great conflict in the decisions. I shall not review or cite them, as they will be easily found. For a summary and classification thereof, reference is made particularly to the valuable notes in 9 Ann. Cas. 290, 12 Ann. Cas. 650, 23 Ann. Cas. 1218 and118 Am. St. Rep. 162.
In determining the rights of persons in interest in cases of this character, the courts are in accord in holding that the intention of the testator, if it can be ascertained, must control. When, however, such intention is not manifest, the question whether new stock issued and distributed to stockholders, as in this case, should, as between remaindermen and tenants for life, be regarded as capital, forming a part of the trust estate, or as income, belonging to the tenant for life, has perplexed the courts. In England, if the corporation may legally increase its capital stock, the law gives stock dividends, conveniently so called, to the remainderman, and cash dividends to the life tenant. In this country, the courts that have considered the question may, with reference to their conflicting views, be divided into, at least, three groups. What is known as the Massachusetts rule, which is similar to the English doctrine, looking to the substance and not to the mere form of a new issue of stock, regards an issue, such as was made in this case, as a part of the corpus and allots it to the remainderman. This rule obtains in a number of jurisdictions, including the Supreme Court of the United States. Under what is known as the Pennsylvania rule, adopted in other jurisdictions, the question is whether the issue of new stock is based upon surplus earnings. If so, no distinction is made between stock *Page 477 
and cash dividends. But apportionment is made between the life-tenant and the remainderman according as to the time when the earnings were accumulated with respect to the creation of the trust fund. Other jurisdictions recognize the latter rule in making no distinction between stock and cash dividends, but disregard the principle of apportionment, deeming all dividends based on surplus earnings, whether accumulated before or after the creation of the trust estate, as income belonging to the life tenant. It is this last rule which the majority of the court have adopted.
It is a plain principle of law, recognized, I believe, by all the courts, that "money earned by a corporation remains the property of the corporation, and does not become the property of the stockholders, unless and until it is distributed among them by the corporation. The corporation may treat it and deal with it either as profits of its business, or as an addition to its capital. Acting in good faith and for the best interests of all concerned, the corporation may distribute its earnings at once to the stockholders as income; or it may reserve part of the earnings of a prosperous year to make up for a possible lack of profits in future years; or it may retain portions of its earnings, and allow them to accumulate, and then invest them in its own works and plant, so as to secure and increase the permanent value of its property;" and, unless in case of fraud or bad faith, its discretion in this respect cannot be controlled by the courts.
I am of the opinion that the rule adopted by the majority of the court, and the Pennsylvania rule as well, disregard the logic of these fundamental principles. Accumulated earnings, or undivided profits, until distributed by the corporation are assets and form a part of the corpus of the corporation; and by a stock dividend, such as was authorized in this case, there is, in fact, no distribution of surplus earnings to the stockholders. In this case, if the so-called stock dividends should be held as part of the corpus of the trust estate, as I think they should be, the interest of the remaindermen in the corporate funds or property would remain the same as it did before the issuance of the new stock; but a different result follows upon *Page 478 
the distribution of the stock to the life tenant. It seems to me that the new stock issued by the board of the company, authorized and approved by the stockholders, clearly evidencing a conversion by the corporation of certain surplus earnings into capital, should, as between the remaindermen and the life tenant, be considered as capital, and not as income, in the same manner as the said surplus, undistributed and invested in improvements and betterments, inured to the benefit of the said trust estate before the stock was issued for the purpose of representing said surplus in capitalization.
I cannot accept the doctrine that the issuance of the new stock was in law a distribution of the surplus earnings of the railroad company, accruing before or after the death of the said testator and prior to the date of the authorization of the stock. For the issuance of the stock carries with it an interest not only in the earnings which had theretofore been expended and appropriated for substantial and permanent betterments and improvements to the company's railroads and appurtenances, under authority of the board of the company approved by its stockholders, which earnings by such use and by the issuance of the stock as representative of the increased value of the corporation, became and were capitalized; but the capitalization of such earnings and the issuance of stock therefor also carry therewith an interest in the pre-existing capital of the company, including the then outstanding stock representative of such capital. No intent of such character, on the part of the testator, affecting the remaindermen so vitally, is manifested by the testator's will, and in the absence of such intent, every presumption in law is against it. The distribution of the stock in question to the life tenant, affecting the tenants in remainder so prejudicially, without any clear intent of such distribution, on the part of the testator, is, it seems to me, inequitable. I am of the opinion that the new shares of stock in question, and now in the hands of the trustees, should be held by them as a part of the capital of the trust estate, to be by them disposed of under the terms of the will of the said testator, in accordance with the decree of the Chancellor.
It seems to me, after a careful consideration of the cases *Page 479 
dealing with the question, that this conclusion leads to results, as between the parties to this suit, more nearly just and equitable than does any other rule.
I am, therefore, for the affirmance of the decree of the Chancellor.