Court Opinion

ID: 9645806
Source: CourtListenerOpinion
Date Created: 2023-08-22 21:36:06.021035+00
Date Added: 2024-06-11T18:11:31.817169
License: Public Domain

*125
Eldridge, J.,

dissenting:

I respectfully dissent.
As the opinion of the Court notes, the market value of the assets of the Ernst trust as of April 1973 was $13,646,554. The effect of the majority’s decision is to reduce the corpus of the trust from $13,646,554 to $7,654,554. This amounts to a 44% reduction in the value of the corpus. Such a result, to borrow the language of the chancellor, is “bizarre.” More than that, it is inconceivable to me that the testator would have intended or desired such a diminution in the trust assets.
Assuming, arguendo, that under principles of stare decisis the result reached by the majority would be compelled by our pre-1965 decisions, the General Assembly, in enacting the Revised Uniform Principal and Income Act in 1965, Maryland Code (1969 Repl. Vol.), Art. 75B, § 6 (a), abrogated the effect of those decisions with respect to a stock distribution as we have here. Section 6 (a) of Art. 75B provides in pertinent part:
“Corporate distributions of shares of the distributing corporation (whether or not of the same class), including distributions in the form of a stock split or stock dividend, are principal but the provisions of this subsection shall not apply to successive estates or interests in existence prior to June 1, 1965, in which the life tenant is entitled to stock dividends representing earnings during the life tenancy.”
Section 6 (a) thus adopts the so-called “Massachusetts rule” by providing that all stock distributions, whether in the form of stock splits or stock dividends, become part of the corpus of the trust. The only exception, as the majority opinion recognizes, is for estates or interests previously in existence “in which the life tenant is entitled to stock dividends representing earnings during the life tenancy.” (Emphasis supplied.) The critical issue, therefore, is what did the General Assembly mean by the term “stock *126dividends.” If a particular stock distribution to a pre-1939 trust does not constitute a “stock dividend” within the contemplation of the Legislature when it used that term, then the distribution must be allocated to principal and does not become a windfall to the income beneficiaries.
The majority opinion, citing McCormick v. Frisch, 199 Md. 181, 185-186, 85 A. 2d 793, 794-795 (1952), states that the term “stock split” means a distribution involving no change in the capital account whereas the term “stock dividend” involves a transfer of accumulated earnings to the capital account. In my view, however, the two terms as used in our cases had no such fixed definitions.
It is true that the cases in this Court, applying the so-called “Pennsylvania rule,” have held that a stock distribution not supported by accumulated earnings should be allocated to the corpus of a trust while a stock distribution representing the capitalization of accumulated earnings since the beginning of the trust, or since the acquisition of the original stock, should be treated as income. However, the cases have not consistently defined the former situation as being a “stock split” and the latter situation as being a “stock dividend.” Although the McCormick case may seem to support these definitions, other cases do not. Many of this Court’s opinions appear to have used the term “stock dividend” to encompass both situations. See, e.g., Lindau v. Com. Fund of Balto., 188 Md. 474, 478, 53 A. 2d 409 (1947); Baldwin v. Baldwin, 159 Md. 175, 181, 150 A. 282 (1930); Northern Central Dividend Cases, 126 Md. 16, 27-29, 94 A. 338 (1915); Coudon v. Updegraf, 117 Md. 71, 80, 83 A. 145 (1911). On the other hand, in both Mer.-Safe Dep. Co. v. Apponyi, 220 Md. 275, 280, 152 A. 2d 184 (1959) and Donaldson v. Mer.-Safe Dep. Co., 214 Md. 421, 424-431, 135 A. 2d 433 (1957), certain stock distributions supported by accumulated earnings were described as “stock splits.” In Apponyi, the Court described the American Gas & Electric Company distribution which had been involved in Donaldson as a “stock split,” and the Court went on to state that the ‘Donaldson case es*127tablished that where surplus is capitalized and paid over as a stock split, the life tenant is entitled to the proportion of the new stock that represents surplus earned during the trust.” (Emphasis supplied, 220 Md. at 280.) In Donaldson, the Court throughout its opinion referred to certain distributions supported in part by accumulated earnings as “stock splits.”
Thus, as the appellees acknowledge in their brief in the instant case, the terms “stock split” and “stock dividend” had no clear fixed meanings in our case law prior to 1965. Consequently, it cannot be validly contended that the Legislature, when it used the words “stock dividend” in 1965, meant to embody any particular definition of the term previously established in Maryland law.
Absent any clear and consistent definition of the term .“stock dividend” in our pre-1965 case law, and absent any legislative history regarding the meaning of the term in the Revised Uniform Principal and Income Act adopted in 1965, established principles of statutory construction dictate that the 1970 Proctor & Gamble stock distribution be considered a “stock split” and not a “stock dividend” within the meaning of the statutory language.
As this Court has repeatedly stated, a statute must “be construed according to the ordinary and natural import of the language used,” Grosvenor v. Supervisor of Assess., 271 Md. 232, 237-238, 315 A. 2d 758 (1974). See also Radio Communications, Inc. v. Public Service Commission, 271 Md. 82, 93, 314 A. 2d 118 (1974); Chillum-Adelphi Volunteer-Fire Dept., Inc. v. Prince George’s County, 269 Md. 486, 491, 307 A. 2d 481 (1973); Scoville Service, Inc. v. Comptroller of the Treasury, 269 Md. 390, 395, 306 A. 2d 534 (1973); Giant of Maryland, Inc. v. State’s Attorney for Prince George’s County, 267 Md. 501, 511-512, 298 A. 2d 427 (1973), appeal dis., 412 U. S. 915, 93 S. Ct. 2733, 37 L.Ed.2d 141; Baltimore County v. White, 235 Md. 212, 218, 201 A. 2d 358, 360 (1964). The “ordinary and natural” meaning of the language “stock dividend” when in 1965 the Maryland Legislature enacted § 6 (a) of Art. 75B, would not embrace a stock distribution of *128the type here involved. Rather, the Proctor & Gamble distribution would be regarded as a “stock split.”
The Accounting Principles Board of the American Society of Certified Public Accountants, in Section B of Chapter 7 of Accounting Research Bulletin #43, has defined the terms “stock dividend” and “stock split” as follows:
“1. The term stock dividend as used in this chapter refers to an issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to give the recipient shareholders some ostensibly separate evidence of a part of their respective interests in accumulated corporate earnings without distribution of cash or other property which the board of directors deems necessary or desirable to retain in the business.
“2. The term stock split-up as used in this chapter refers to an issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of outstanding shares for the purpose of effecting a reduction in their unit market price and, thereby, of obtaining wider distribution and improved marketability of the shares.”
See also the New York Stock Exchange Company Manual, §§ A13 and A14, at A-235, A-255-256; Machen, The Apportionment of Stock Distributions in Trust Accounting Practice, 20 Md.L.Rev. 89, 90-92 (1960) (classifying stock distributions in three categories, namely a “stock dividend,” a “true stock split” and a “modern stock split.”)
As the record in the instant case shows, Proctor & Gamble’s purpose in distributing the subject stock was to double the number of authorized shares, to change each of the “presently issued shares of common stock into two *129shares,” and to effect a corresponding reduction in the market price so that the stock would be more marketable. The notice sent by the company’s board of directors stated that the “split of the outstanding shares of the common stock will result in no change in the relative rights or interests of the present shareholders.” The transfer from earned surplus to the capital account of $1.00 per share was a purely nominal transfer, which was required by Ohio law. As appellants point out, the amount of the transfer from earned surplus was only Vis of the book value of the new shares and less than Vso of their market value.
The majority opinion states that merely because Proctor & Gamble characterized this distribution as a stock split “does not make it so.” However, we have much more here than the company’s characterization. The “ordinary and natural meaning” of the terms, in the real world of today, requires that this distribution be regarded as a “stock split” and not a “stock dividend.”
Moreover, even if the normal meaning of the term “stock dividend” in § 6 (a) of Art. 75B were less clear, the result should b.e no different. Section 6 (a) of the Revised Uniform Principal and Income Act represents a legislative policy that all stock distributions should be allocated to principal and not income. Section 13 of the same Act expresses the policy that the statute should be applied to trusts in existence prior to the effective date of the statute.1 The provision dealing with “stock dividends” to previously existing trusts represents an exception to the legislative policy embodied in the statute. As such, the exception for “stock dividends” should be given the narrowest scope reasonably possible. *130Where a general policy is embodied in a statute, exceptions to that policy are to be strictly and narrowly construed. Piedmont & Northern Ry. Co. v. Interstate Commerce Com’n, 286 U. S. 299, 311-312, 52 S. Ct. 541, 545, 76 L. Ed. 1115 (1932); United States v. Scharton, 285 U. S. 518, 521-522, 52 S. Ct. 416, 417, 76 L. Ed. 917 (1932); Perdue v. St. Dep’t of Assess. & T., 264 Md. 228, 232-233, 286 A. 2d 165 (1972); Johns v. Hodges, 62 Md. 525, 537 (1884); 73 Am.Jr.2d, Statutes § 313.
Finally, it is a settled rule of statutory construction that “[a] construction of a statute which produces an unreasonable or illogical result should be avoided wherever it is possible to do so consistent with the statutory language.” Grosvenor v. Supervisor of Assess., supra, 271 Md. at 242. Or, as we have also recently phrased it, “[i]n construing statutes, results that are unreasonable or inconsistent with common sense should be avoided whenever possible.” Giant of Md. v. State’s Attorney, supra, 267 Md. at 514. The Court’s interpretation of the statute today shrinks the corpus of the trust by 44%. The chancellor described this result as “bizarre.” The majority of the Court acknowledges that, if writing upon a clean slate, the Court might come to a different decision, and that the result reached “may be ill-suited to the modern mechanisms of corporate finance and may ignore the realities of an inflationary economy.” However, given two reasonably possible constructions of a statute, we should adopt the one which does not produce “bizarre” results, which is suited to the modern mechanisms of corporate finance, and which does not ignore the realities of an inflationary economy.
Judges Levine and O’Donnell authorize me to state that they concur in the views expressed herein.

. Art. 75B, § 13, provides:
“Except as otherwise specifically provided in this article or in the trust instrument, will or other controlling document, this article shall apply to any receipt or expense received or incurred on or after the effective date of this article by any trust or decedent’s estate or in connection with any legal life estate, whether established on, before or after the effective date of this article and whether the asset involved was acquired by the trustee, personal representative or life tenant on, before or after the effective date of this article.”