
    John A. Stewart and Others, as Trustees under the Last Will and Testament of Isaac N. Phelps, Deceased, Respondents, v. Anna Frances Phelps and Others, Respondents, Impleaded with Helen Louisa Phelps Stokes, Appellant, and Others.
    
      Trust — right of the cestui que trust to stock dividends; to increase of sale value over the inventoried, value of securities set off to the trust; to increase in, value of securities purchased by the trustees; to the value of the right given to the trustees as stockholders to purchase new stock— “issues and profits” defined.
    
    A testator, by the 14th clause of his will, gave his residuary estate, both real and personal, to his executors, “ to take, receive, hold, collect, manage, invest and. reinvest the same, and the net rents, income, issues' and profits thereof to pay over semi-annually to my said daughter Helen Louisa Stokes until the expiration of one year from the time of my death, and thereupon to pay to my said daughter - out of said residuary estate the sum of three hundred thousand dollars and the net rents, income, issues and profits of said residuary estate, after making said payment of principal therefrom, to pay to my said daughter semi-annually as aforesaid until the expiration of three years from the time of my death, and thereupon to make a further payment to her out of the principal of said residuary estate of the sum of four hundred thousand dollars, and the net rents, -income, issues and profits of said residuary estate, after making said two payments of principal therefrom, to pay to my said daughter semi-annually as aforesaid until the expiration of five years from the time of my’death, and thereupon to make a fuither payment to her out of the principal of said residuary estate of the sum of three hundred thousand dollars, and the net rents, income, issues and profits of said/ residuary estate, after making the three above-directed payments of principal therefrom, to pay over to my said daughter semi-annually as aforesaid during her natural life.”
    The residuary estate consisted largely of stocks and bonds, and the trustees were given broad powers of investment. Pursuant to this power the trustees sold a portion of the securities for reinvestment, realizing a large sum in excess of the inventoried value of the securities.
    They also sold other securities purchased by themselves at prices in excess of the cost thereof.
    They also invested a portion of the estate in the stock of a railroad company which company gavé to its stockholders the right to subscribe to new stock to-be issued for the purpose of redeeming maturing mortgage bonds. The executors sold this right for over $6,000.
    It appeared that the trustees received as a part of the trust fund 200 shares of the capital stock of a telegraph company which belonged to the testator prior to his death; that the telegraph company increased its capital stock and declared a stock dividend of ten per cent, which dividend represented net earnings of the company, which- had been appropriated to the purchase of new lines- and other capital purposes.
    
      Held, that the life beneficiary was entitled to the stock dividend declared by the-telegraph company, but that the other above-mentioned increase in the estate was an accretion to the principal of the trust fund to which the life beneficiary was not entitled;
    That the use of the words “issues and profits,” in the 14th clause of the will did not indicate that it was the testator’s intention that profits arising from the sale of the various investments should be given to his daughter — especially when construed in connection ivit-h the phraseology in other, trust provisions of the will.
    Appeal by' the defendant, Helen Louisa Phelps Stokes, from so-much of a judgment of the Supreme Oourt in favor of the plaintiffs and certain of the defendant's, entered in the office of the clerk of the county of Hew York on the 7th day of June, 1899, upon, the report of a referee, as provides :
    “ Fourth. That the defendant Helen L. Phelps Stokes is not entitled to receive any of the increase or .gain over inventory value or cost price realized by the plaintiffs on the sale of any -stocks or securities belonging to said testator in his lifetime, or acquired by the executors of, or trustees under his will, but that all of said gains belong, and have been properly credited by the plaintiffs, to-the principal of said residuary trust estate.
    “ Fifth. That the defendant Helen L. Phelps Stokes is not entitled to receive any increase or gain over inventory value of cost :price that m'ay hereafter be realized by the plaintiffs on -the salé of any stocks or securities now belonging to said residuary trust estate.; ”■ and also from so much of the said judgment as overrules the several, exceptions filed by her to the account of the said trustees, and from so much of the judgment as confirms and ratifies the - said account in respect of, and only in respect of, the items and matters referred to and specified in her exceptions to the said account so overruled, and she appeals from no other part or portion of the said judgment.
    
      Cephas Brainerd, for the appellant.
    
      Edward W. Sheldon, for the plaintiffs, respondents.
    
      William Rand, Jr., for the respondents Hoyt.
   Ingraham, J.:

The question upon this appeal arises under the 14th clause of the last will and testament of Isaac H. Phelps, deceased. The testator died on the 1st day of August, 1889, and his will, which disposed of a large amount of personal. and real property, was admitted to probate by the surrogate of the county of Hew York, After making provision for his wife and grandchildren, the testator,, by the 14th clause of the will, gives to trustees all the rest, residue and remainder of his estate, real and personal, “ to take, receive^ hold, collect, manage, invest and reinvest the same, and the net rents, income, issues and profits thereof to pay over semiannually to my said daughter Helen Louisa Stokes until the expiration of one year from the time of my death, and thereupon to pay to my said daughter out of said residuary estate the sum of three hundred thousand dollars and the net rents, income, issues and profits of said residuary estate, after making said payment of principal therefrom to pay to my said daughter semi-annually as aforesaid until the expiration of three years from the time of- my death, and thereupon to make a further payment to her out of the principal of said residuary estate of the sum of four hundred thousand dollars, and the net rents, income, issues and profits of said residuary estate, after making said two payments, of principal therefrom, to pay to my said daughter semi-annually as aforesaid until the expiration of five years from the time of my death, and thereupon to make a further payment to her out of the principal of said residuary estate of the sum of three hundred thousand dollars, and the net rents, income, issues and profits of said residuary estate, after making the three above-directed payments of principal therefrom to pay over to my said daughter semi-annually as aforesaid during her natural life.” After the death of this daughter, one-half of -the said sum held in trust was to go to the issue of the said daughter, and the remaining one-half to certain specified beneficiaries.'

The three specified sums of $300,000, $400,000 and $300,000, to be paid to the testator’s daughter under the 14th clause of his will above referred to have all been paid to her, leaving $3,714,833.68 of the residuary estate held in trust. At the time of the death of the testator, when the residuary estate was turned over to the trustees, it consisted largely of bonds, stocks and securities of a like character, and was appraise'd at what was assumed to have been its fair market value. Subsequently the trustees sold a portion of these securities for reinvestment, realizing a price in excess of that at which the securities were appraised. The increase in the amount realized over and above that at which the property has been appraised seems to be the sum of $399,067.68. The trustees have also from time to time reinvested the estate in other securities, some of .which have been sold at a price in excess of that paid, and the amount of such profit upon the sale of the securities purchased by the trustees seems to be the sum of $129,969. It also appears that the executors invested a portion of the estate in purchasing 1,325 shares of the Chicago and Alton Railroad Company, and that company gave to the stockholders the right to subscribe to an increase of the company’s capital stock, which right was sold by the executors for the sum of $4,306.25, and that subsequently, on February 15, 1894, upon a further increase of the stock of the same corporation; the right to subscribe to such increase was sold by the trustees for the sum of $1,937.50, there having been realized upon the sale of such right to subscribe the sum of $6,243.75. It also appears that the trustees received from the executors of the estate 200 shares of the capital stock of the Western Union Telegraph Company, which belonged to the testator prior to his death; that in ^November, 1892, the directors of the telegraph company increased their capital stock and declared a dividend of ten per cent on the amount of stock' before the increase, which represented the net earnings of the company which, since July, 1881, had been appropriated to the.purchase of new lines and other capital purposes, and the trustees received 20 shares of stock of the company as a dividend and sold that stock for the sum of $1,987.50.

The question presented on this appeal is as to whether or not these various sums thus realized by the trustees belong to the appellant as the beneficiary under the trust, or should be retained by the trustees as principal. The referee held that the life beneficiary was entitled to the dividend upon the stock of the Western Union Telegraph Company; that she was also entitled to the sum of $416.66, the interest on a certain purchase-money certificate of the Union Pacific Railroad Company; but that the remaining increase in the estate was an accretion to the principal of the trust fund, to which the life beneficiary was not entitled. The learned counsel for the appellant bases his argument in opposition to this conclusion of the referee upon the language of the 14tli clause of the will which provides that the “ rents, income, issues and profits of said residuary estate,” after making the three payments of principal therefrom, should be paid over to the appellant semiannually during her natural life, as indicating an intention of the testator that profits which should arise from the sale of the various investments of his estate by the trustees were to be for the benefit of the' life beneficiary, and that this intention is shown by the language used in the other clause of the will creating trusts which omitted the words' “ issues and profits.”

By the 2d clause of the will a trust of $200,000 is created, and the “net interest and income thereof” is directed to be paid to the wife of the testator semi-annually. By the 11th clause the sum of $500,000 is given to his executors in trust, and the “ net income, issues and profits thereof” are directed to be paid over semi-annually to his wife during the term of her natural life. By the 12th clause of the will $100,000 is' given to his. executors in trust “ to take, receive, hold, manage, invest and reinvest the same, and the net income, rents, issues and profits thereof to collect and accumulate until my grandchild Isaac ¡Newton Phelps Stokes arrives at the age of twenty-one years,” and thereupon the sum of $100,000 was to be paid to the said grandchild. By the 13th clause of the will the testator gives to his executors a dwelling house in Madison, Oonn., occupied by his brother, in trust, to hold the same as a house and dwelling for the benefit of his brother during his life, and also bequeaths to his executors the sum of $10,000 in trust “to take, receive, manage and invest the same, and the net income^ issues and profits thereof, and also the net rents, issues and profits of said dwelling house and land, in case my brother elect not to occupy the same, to pay over to my said. brother semi-annually during his natural life.”

These quotations-from the other clauses of the will would seem to indicate that the testator used these phrases interchangeably, adding the word “rents” when there was a devise of real property. We can see nothing in the will which would indicate an intention to give to the life beneficiary more than the annual income received from the trust estate. The broad power of investment given to the trustees by the 3d codicil to the will cannot be construed as an intention of the testator to authorize liis trustees to use this trust fund for the purpose of. speculation for the benefit of his daughter. There is nothing to justify a conclusion that the testator intended more than to vest his trustees with the broadest discretion, trusting in their ability and integrity, so that they should not be limited by the legal rules which are imposed upon trustees when no express powers are given as to the character of the investment to be made of the trust fund. This discretion as to' the character of the securities in which the trust property was to be invested did not either expressly or by implication relate to the question as to what should be income and what principal. It is still an investment of the trust fund that the trustees are required to make. In investments of this character there is always a possibility of loss as well as gain, and it is contrary to that purpose for which' a trust fund is created to allow an increase in the value of the securities in which, the fund is invested to be paid to the living beneficiary, where no provision is made for such a repayment in the event of any loss which may be sustained by reason of unfortunate investments. It cannot be claimed that, had there been a decrease in the value of the securities turned over by the executors to the trustees as part of this trust estate, the life beneficiary would be liable to make good to the estate a loss; nor could it be claimed that, had the trustees made investments that turned out disastrously-to this estate, the life beneficiary would be bound to make good a depreciation in the value of the securities in which the fund had been invested. That the investments of this, estate have shown a remarkable increase in value, and that the trustees by wise and judicious management have increased the value of the estate by reason of investments that they have made, would not justify the court, without the explicit direction of the testator, in decreeing that such an increase be paid to the living beneficiary, when the future may show a depreciation in the value of other securities in which the trust estate is invested and which would deplete the trust which it was evidently the intention of the testator should be preserved for the benefit of his daughter during her life, and for the benefit of her children and the other members .of his family after her death. We can find nothing in this will or codicil which would justify us in giving to the language used by the testator in this will any different or broader meaning than would be given to any will giving a general direction to pay the net rents, income, issues and profits of a trust fund to a living beneficiary with a remainder over. The learned referee in his opinion has very satisfactorily discussed the question as to the meaning to be given to these words, and we have nothing to add to his opinion upon that subject.

There are one or two special classes of investments to which attention should be called. The trustees were holders of stock in the Chicago and Alton Railroad Company, and were given in the years 1892 and 1893 the privilege to subscribe to new stock to be issued for the purpose of redeeming mortgage bonds about to mature. Instead of accepting this privilege, the trustees sold the right and realized upwards of $6,000, and it is claimed by the life beneficiary as income or profits and that it should be paid to her as such. There is plausibility in this claim, but upon consideration we think that this right was not in the nature of a dividend on the stock. If the trustees had subscribed to this stock, they would have used the principal of the trust fund and would have been entitled to that stock as principal; but, in their discretion, they concluded not to accept that right to subscribe, and because the stock was of greater value than they would have had to pay the company for it, they realized this amount. It certainly was not income or a dividend on the stock. What the trustees had was a right to subscribe for stock, which, if the right had been exercised, would have resulted in an investment of the trust estate; and the situation was no different than if the trustees had subscribed for the stock and subsequently sold it at an increase. We do not think that this could be said to be rents, income, issues or profits. ■ • ■

This view is, we think, sustained by Matter of Kernochan (104 N. Y. 630). The case of the Lackawanna Iron and Coal Company stock is within the case of Matter of Rogers (161 N. Y. 108). There the securities that were delivered to the trustees upon the surrendering of their' stock were delivered to them as the value of the stock that had been owned by them and which constituted part of the trust estate. It was not paid asa dividend, interest or income. A corporation owning capital stock of $100,000 and having a surplus of $1,000,000 is dissolved, and the $1,100,000 is distributed -among the stockholders. Certainly the $1,000,000 that was distributed, being the accumulated profits of the company, is not income, but is the payment of the value of the stock represented as its principal and which gave it its value, whether the stock was sold just before the distribution of the capital stock of the corporation among the stockholders or held until the accumulated capital was distributed. The amount received was the capital of the trust, and not income or profits.

There are other questions presented as to specific investments,, but they do not require special discussion. In none of them is the amount sought to be recovered a dividend or interest or profit upon an investment. On all corporate stock owned by a trustee, the living beneficiary is entitled to all dividends declared upon that capital stock, but not to the amounts owned or reserved by the company where no dividends have been declared. The increase in the value of the stock caused by the accumulation of the undistributed profits does not become income or profits payable to the living beneficiary until dividends have been actually declared by the directors and thus separated from the capital of the corporation to be distributed as profits to its stockholders. '

We think the conclusion arrived- at by the referee was correct, and the judgment appealed from should be affirmed, with costs.

Van Brunt, P. J., O’Brien, McLaughlin and Hatch, JJ., concurred.

Judgment affirmed, with costs.  