
    In the Matter of the Final Accounting of James P. Kernochan et al., Ex’rs, etc.
    
    
      (Court of Appeals,
    
    
      Filed March 8, 1887.)
    
    1. Will—Income to life tenant—Dividends declared before death OF TESTATOR, BUT PAYABLE AFTER ARE NOT INCOME.
    John R. Marshall died April 20, 1881, and by his will empowered his executors “to receive the rents, interest and income” of so much of the estate as was given to them in trust, to apply the net amounts of such rents or income to the use of the widow of the testator during her life, etc. Held, that dividends on stock declared April 14, payable May 2, formed part of testator’s estate, and were not payable to the widow as income.
    
      3. Same—Bonus received for selling stock.
    Prior to death of testator, the Pan. R. Co., of which he held 5,000-shares, had accumulated a large sinking fund, amounting to $1,102,000. The said company agreed, June 10, to sell their stock to the U. I. Canal Association for $250 a share, and turn over the sinking fund, and the latter company were to pay the stockholders of the Pan. R. Co. a ratable proportion of such fund, equivalent to $15.74 per share. The executors merged this into die price at which the stock was sold, and credited the whole amount to principal. Held, no error, that the money was not paid as a dividend, nor distributed among stockholders, but only to such as sold their shares to the new company, and was paid as a price to the seller.
    8. Same—Dividends.
    It was provided by the agreement of June tenth that all earnings of the railroad company to and including June, 1881, and all moneys and other effects not by the agreement to be left with the railroad company, should be transferred to a trustee "for the benefit of all the existing stockholders,” and belong to and be divided among the shareholders “ who are such at the time of the declaration of such dividend ” or transfer of the railroad company. This was not carried out, but the said assets were sold June-thirtieth to a syndicate for a sum which amounted to $24.26 on each share, and the company declared a regular dividend of that amount. Held, that said amount was properly credited by the executors as income. Andrews,. J., dissenting.
    4. Same—Options to exchange stock.
    The executors classed as income certain options or privileges given by various companies in 1881 to subscribe for and take at par one or more-bonds or shares of stock for a certain number of shares of stock held by the estate. Held, that if the option was accepted, the purchase operated to increase the capital and the increase should not bo classed as income.
    5. Same—Compound interest—When allowed.
    Testator held trust moneys for the purpose of investment and reinvestment, which he mingled with his own funds. Held, that it was not improper under the circumstances to charge him with interest upon interest. Earl, J., dissenting.
    6. Same—Commissions of executors.
    The testator, by his will, directed that “ each executor and trustee, other than my wife, do also receive and take the full rate of commissions provided by law for each executor,” etc. Held, that it was the intention of the testator to exclude his wife, who was appointed executrix, from, compensation.
    Appeal from decision of supreme court, general term,. First department, affirming a decree of the surrogate of the-comity of New York.
    
      Martin & Smith and M. W. Divine, for appl’ts; J. Frederic Kernochan, Wm. Jay and Edtuara S. Dakin, for resp’ts.
    
      
       Modifying and affirming 39 Hun, 658, mem.
      
    
   Danforth, J.

This is an appeal from a judgment of' the supreme court, affirming a decree of the surrogate of' the comity of New York, on a judicial settlement of the-account of the executors of John R. Marshall, deceased. The account was objected to by several of the parties interested, and, with the objections, sent to a referee to hear and determine. Upon the coming in of his report, it was-in substance confirmed by the surrogate, and .upon appeal to the general term his decision was affirmed. All parties. claim under the will of Mr. Marshall, and me principal questions now raised concern the rights of the donee for hfe and the remainder-men, and depend for an answer upon the true construction of so much of the will as empowers the executors “to receive the rents, interest and income ” of so much of the estate as was given to them in trust, to apply the net amounts of such rents or income to the use of the widow of the testator during her life, and after her death to divide the remaining estate among his surviving daughters, and the issue, if any, of such as may have died.

Among the items of personal property left by the testator was one of 5,000 shares of the capital stock of the Panama Railroad Company. This was inventoried by the executors at $100 per share, as its par value, and $275 as its market value, and $1,375,000 as its assessed value. On the 14th of April, 1881, a dividend of $25,000 (No 90), was declared upon this stock, payable May 2, 1881. The testator died during the night of April 20th, at ten minutes past eleven o’clock. The executors treated this dividend as principal, and charged themselves with it in these words: “ Panama dividend declared April 14, 1881. Books closed for transfer April 20, 1881, 2 p. M., and payable May 2, 1881.” Mrs. Marshall, the widow and executrix of the testator, objected to this in both characters, alleging £ 1 that no such amount as the said sum of $25,000 formed any part of the estate of John R. Marshall at the time of his death, and that said statement and item, and said amount of $25,-000, should be stricken from said inventory, and from said' account,” and added to the items of income, and as such received by the executors. The decision of the surrogate was against her contention, and we think properly. As soon as the profits in shares, of stock are ascertained and declared, they cease to be the property of the company, and the owner of the shares becomes entitled to the dividend. It at once forms part of his estate. The fact that they are made payable at a future time is immaterial. The dividend to which a life-tenant may be entitled as income can only be that which the company may declare after that relation is acquired. In this case the dividend represented profits or income, but had become a debt before the will took effect. Mrs. Marshall was entitled to income merely. In Cogswell v. Cogswell (2 Edw., Ch., 231), cited by the appellant, the testator directed that his wife be permitted “to take the interest or dividends” on certain stock, and the question submitted was “as to the time from which she would be entitled to dividends,” and the vice-chancellor said from the death of the testator; that is to say, he adds, “the dividends which may accrue or be declared or become payable at any time after ” that event. The terms of the will and the question were unlike those before us. The will in one case gives income or profits; in the other, dividends, that is, the share of income or profits already ascertained and declared. The first gives that to which the testator had no legal title. The other might include that oi which he became the legal owner on the day when the dividend was declared, although it remained unpaid. Hyatt v. Allen, 56 N. Y., 553; Hill v. Newichwanick Co., 8 Hun, 459; affirmed in 71 N. Y., 593.

2. It is stated in the account that the 5,000 shares of Panama Railroad stock were sold to the Panama Canal Company for $265.74 2-7 per share, making $1,328,714.32. The life-tenant objected to the account in this respect, alleging that in fact the stock was sold at $250 per share only, and not $265.74 2-7, as in the account stated. The facts, so far as they are deemed material in presenting this question, and as found by the referee, show that, prior to the death of the testator, the Panama Railroad Company had not only earned and paid dividends, but had accumulated securities, money, and other assets from earnings over and above expenses and dividends, and on the 10th of June, 1881, had on hand $1,102,000 as a sinking fund for the redemption of outstanding obligations. On the day last named an agreement was entered into between certain stockholders of the railroad company and the Universal Inter-oceanic Canal Association for the sale of their stock to the canal association for $250 for each share, and also providing that the canal company should have the sinking fund, but that the stockholders should be paid by the canal company a sum equal to a ratable proportion of the $1,102,-000 sinking fund above named, which was equivalent to $15.74 per share of the capital stock. This makes the sum of $78,714.34, and in the account of the executors is merged in the price at which the stock was sold the canal company and credited to principal. This was sustained by the referee and surrogate; the life-tenant excepting thereto, and claiming it should have been carried to income. We think the exception cannot stand. The money was not paid as a dividend, nor was it distributed among stockholders, but only to such as sold their shares to the new company, the canal association. Indeed, as stockholders, no one received any part of it. It was paid as a price to the seller. The Panama Railroad Company was not dissolved, and its stockholders who did not sell have continued to receive dividends, and the canal company, which purchased the shares owned by the testator, have received in like manner dividends on the shares so purchased. Had the shares been retained by the executors, the money in question would not have been received by them. It is true that the sale in effect carried with it the interest which each shareholder, as a member of the company, had in the sinking fund; so that, as to that, the new shareholder was substituted for the old. The fund was the accumulation of profits, and may properly be regarded as part of the capital of the company. But it still remained pledged for the bonds, for the payment of which it was created, and its possible value only enhanced the value of the shares. The price paid for the shares, although increased by this prospective advantage, belonged altogether to the remainder-men, and was properly carried to principal, and not income.

3. It was also provided, in the same agreement of June 10th, that all earnings of the railroad company to, and including June, 1881, and all moneys and other effects not by that agreement to be left with the railroad company, should be transferred by the railroad company to a trustee “ for the benefit of all the existing stockholders,” and belong to and be divided among the shareholders “who are such at the time of the declaration of such dividend ” or transfer of the railroad company. This was not carried out; but before June 30th the assets so referred to were sold and transferred by the railroad company to a syndicate for the sum of $1,698,200, and this was paid to the railroad company, June 30, 1881. It amounted to $24.26 on each share of the capital stock of the railroad company, and on the same day the railroad company, on the report of its treasurer that the amount of funds on hand “ subject to distribution was sufficient to authorize a dividend of $24.26 upon each share of the capital stock of the company,” adopted the following resolution: “Resolved, That a dividend of twenty-four dollars and twenty-six cents ($24.26) on each share of the capital stock of this company be, and the same is hereby, declared payable on and after Monday, the first day of August next, to the stockholders of record, or their legal representatives; that the books of transfer be closed on the afternoon of the 30th inst., and be reopened on the morning of the 2d of August, 1881.” This dividend was numbered 91 in regular order, and was payable and paid at the time the usual quarterly dividends were paid. It appeared, also, that the assets which formed the consideration of the payment by the sydicate were accumulated net earnings, represented by cash, or securities calling for cash.

The executors credited to income the above amount of $24.26 per share, making $121,300. It was objected, in behalf df the remainder-men, that the above credit to income was wrong, and that the sum of $121,300 should have gone into the principal of the estate. The referee finds and reports that of this sum only $22,442.85 should be regarded as income belonging to the life-tenant, and the residue, $98,857.15, should be regarded as a portion of the corpus of the estate. To so much of the finding as apportions any part to principal, exception was taken in behalf of the life-tenant. The referee made the apportionment in question by ascertaining how much was earned before and how much after the death of the testator, and, so doing, applied a rule which may be founded on general equity, viz., that when a fund is given for life to one beneficiary, and remainder over, the first shall have its earnings after his life-tenancy begins, and the remainder-man the balance. I find nothing in the will which indicates that the testator intended any such investigation or division, or that any other than the ordinary rule, which gives cash dividends declared from accumulated earnings or profits to the life-tenant, should be applied. His direction to his executors is to receive the rents, interest, and income of his estate, and apply the net amount of such rents or other income (with certain exceptions not now material) to the use of his wife. From the shares in question no income could accrue, no profits arise, to the holder, until ascertained and declared by the company and allotted to the shareholder; and that act should be deemed to have been in the mind of the testator, and not the earnings or profits as ascertained by a third person or a court upon an investigation of the business and affairs of the company, either upon an inspection of their books or otherwise,

This was held in Clapp v. Astor (2 Edw. ch. 379) in construing a contract relating to “net profits or dividends,” and by this court in Hyatt v. Allen (56 N. Y., 553). The principle stated was said to be founded in good sense, and applied in construing an agreement made August 11, 1871, which provided that ‘ ‘ all profits and dividends of and upon ” certain “ stock,” up to the first of January, 1872, should be paid to defendant. No dividends were declared or distribution of profits made prior to that time, but in April, 1872, a dividend of $15 per share was declared, and was received by defendant. Plaintiff sued to recover it, and a referee found that $250 of this dividend, was earned between August 13, 1871, and July 1,1872, and gave judgment for that amount. This court reversed the judgment, saying there were profits earned by the corporation up to January 1, 1872, but they were not the profits of the stockholders in any legitimate sense. “ There were no profits accruing to the stockholders until they were set apart by the corporation for their use.” The same principle is be be applied in determining the relative rights of a tenant for life and a remainder-man. Payments in respect of profits accruing, and properly divisible as such, are income, and belong to the tenant for life, if the sum payable is ascertained and declared after the testator’s death.

In Be Hopkins’ Trusts (L. R, 18 Eq., 696), a holder of shares bequeathed his personal estate to trustees in trust, to permit his wife to receive the dividends, interest, and income thereof for her life, remainder over. He died in December, 1870. In January, 1873, an extraordinary dividend was declared on part of the shares for five years previous, and in July, 1873, a special dividend was declared on others for the half year previous. It was held that the life-tenant was entitled to both; that, although the company might have capitalized the earnings, they by resolution treated the money as dividend, and not capital, and their decision was conclusive. The same effect was given to the determination of the company in characterizing its earnings in Barton’s Trust (L. R, 5 Eq., 238, 245); and the rule is a reasonable and proper one which limits the right of a stockholder to profits by the action of the managers of a corporation or company. It is their sole and exclusive duty to divide profits and declare dividends whenever, in their judgment, the condition of the affairs of the corporation renders it expedient, and it would lead to great embarrassment and confusion if a court should undertake to interfere with their discretion so long as they do not go beyond the scope of their powers and authority.

In this case no portion of the earnings which entered into the dividend had been capitalized by the company, and therefore the inquiry, when the profits were earned out of which it was to be paid, was immaterial. It is not claimed that the declaration of the dividend as dividend from profits was ultra vires-, and, whenever earned, they were not profits until the directors so declared. In Hyatt v. Allen, supra, it was thought by the learned judge who spoke for the court, that “ a gift of the profits and dividends of stock for life would not be held to carry dividends declared after the death of the beneficiary, although made from profits accrued during his fife,” making the act of the company conclusive, and giving the earnings to the time of the declaration of the dividend. Sproule v. Bouch, 29 Ch. Div., 635, 653, sustains this view. “ The general principle applicable to these inquiries may, in'our opinion.” say the court in that case, “be thus stated: When a testator or settlor directs or permits the subject of his disposition to remain as shares or stock in a company which has the power either of distributing its profits as dividend, or of converting them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under him (the testator or settlor) in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid by the company to the shareholders as capital, or appropriated as an increase in the capital stock in the concern, inures to the benefit of all who are interested in the capital. In a word, what the company says is income shall be income, and what it says is capital shall be capital. ”

I think, therefore, the executors properly carried the whole of this dividend (91) to income; that the referee and surrogate erred in making an apportionment, and therefore that the exception of the life-tenant should prevail.

Fourth. The executors classed as income certain options or privileges given by various companies in 1881 to subscribe for stocks and bonds, in all of the value of $44,478. This was objected to by the remainder-men, and the objection sustained by the referee and surrogate. The privilege or option was to subscribe for and take at par one or more bonds or shares of stock for a certain number of shares of stock already held by the estate. The right to subscribe belonged to the trust-estate, and accrued upon condition the estate chose to pay for or purchase the bonds or stock. If [the option was accepted, the purchase operated to increase the capital or change its manner of investment; and, if not accepted, the life-tenant could neither complain of the choice of the trustees, nor in any way control their discretion. We think the value did not belong to her, and that the decisions of the referee and surrogate in regard thereto were correct.

Fifth. The guardian of Marie Marshall, a person of unsound mind, and the guardians for Kernochan, an infant, also appeared against (1) allowance of compound interest on moneys found due Mrs. Marshall from the testator; (2) commissions to Mrs. Marshall. 1st. Both referee and surrogate were against the objectors as to the first; as to the second, the referee sustained the objection, but the surrogate overruled it, and allowed $15,000 to Mrs. Marshall as commissions.

As to the first, the testator had the principal moneys in hand for the purpose of investment and reinvestment, but mingled them with his own funds. It was not improper, therefore, under the circumstances of this case, to charge him with interest upon interest, as if received in the usual manner, for he forebore investment, and used the moneys for his own convenience.

As to commissions, the referee found that Mrs. Marshall “duly qualified as executrix of the last will and testament of John R. Marshall, deceased, on the 8th day of October, 1881, and has been at all times since that date ready and willing to take part, and has taken part, in the management of the estate.” The objection raised in behalf of the remainder-men hangs upon the request of the testator contained in the will, in these words: “It is also

my request that all persons herein named as executors, will consent to act as such executors and trustees, and that each executor and trustee, other than my wife, do also receivé and take the full rate of commissions provided by law for each executor, intending thus to provide suitable compensation for their services in and attention to the duties herein devolved upon them.” We think the intention of the testator was to exclude his wife from compensation. Substantially the whole income of the estate, the result of the management of the executors, of whom she is one, is given to her and it cannot be supposed that he intended she should also be paid for caring for it. The decree of the surrogate and judgment of the supreme court should be modified according to the above opinion, and as so modified, affirmed, without costs in this court to either party.

Ettger, Oh. J.; Sapallo and Finch, JJ., concur. Earl, J., concurs, except as to allowance of compound interest, and as to that item he dissents. Andrews, J., dissents as to the $24.26, a share, on the ground that it was in substance a closing out of the sale of the stock and a distribution of capital. _  