[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 139 [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 141 The object of this action was to have it determined that, as between the plaintiff, the beneficiary of a trust created by the testator's will, and those entitled in remainder to the trust fund, the shares of stock received by the trustee, in payment of a dividend of fifty per cent, which had been declared by the Pullman Palace Car Company upon its capital stock, were to be regarded, and treated, as income of the trust estate. The question whether the life tenant of property, or the remainderman, should have the dividend, which a corporation has declared and has made payable in certificates of its stock, has been a vexed one. The decisions of the courts in this country and in England have not been harmonious and in this state, it may be said, it had received no authoritative treatment by this court, until the decision of the recent case of McLouth v. Hunt, (154 N.Y. 179). Several decisions of the Supreme Court of this state had, previously, given support to the doctrine that where a life tenant is given the income and profits, and specifically, in some cases, dividends, all dividends, whether payable in cash, or in certificates, belonged to him. (Clarkson v. Clarkson, 18 Barb. 646; Simpson v. Moore, 30 ib. 637; Riggs v. Cragg, 26 Hun, 89.) When the case of Riggs v. Cragg came to this court, (89 N.Y. 479), this question, though passed upon below, was not decided; the appeal being determined upon other grounds. It was there observed in the opinion, that the question had not been considered by this court and that, in view of the conflict in the decisions elsewhere, it would be its duty, when the occasion arose, to settle the question upon principle. That occasion did arise, when the appeal in McLouth v. Hunt, (supra), came before this court. In McLouth v. Hunt, the direction was to pay over to the beneficiary "the full income" and the question presented was, whether a stock dividend, declared by the Western Union Telegraph Company, some four years after the testator's death, should be treated as income, payable *Page 142 to the life tenants, or as accession to the capital of the trust fund. The company, as the facts are stated, in 1892, "by a capitalization of accumulated earnings made and retained in its hands, from time to time, increased its capital stock from $86,200,000 to $100,000,000 and, predicated thereon, made a stock dividend of ten per cent to its stockholders;" the resolution reciting that the earnings of the corporation had been withheld from the stockholders for almost ten years; that they had accumulated, and that they were distributed in the form of stock certificates instead of money. It was pointed out in the opinion that the substance and intent of the corporate action were to distribute earnings and that there was no addition made to the capital; for, notwithstanding that there resulted an increase of capital stock, the corporation had neither more property, nor more capital. It was held that the transaction, although in the form of an issue of stock certificates, was a distribution of the profits and that what the stockholders got "represented income and was income." The opinion discussed the question with some fullness, as an undetermined one in this court, and a further review of the cases is unnecessary now. Aside from cases which are substantially parallel in their facts and, therefore, within the precedent, under the authority of McLouth v. Hunt, courts will determine for themselves, "according to the nature and substance of the thing which the corporation has assumed to transfer," whether a dividend, when declared, represents income, or not. That case was a stronger one, in some aspects, than the present one for the remainderman. The rule, as settled by that case, is that where a corporation has declared a dividend upon its capital stock, payable in new stock certificates, if it is based upon an accumulation of earnings, or profits, by their distribution in that manner, the stockholders receive the representative of income and not of capital. I do not think that it is possible to distinguish that case, as an authority upon the question before us. It may be true, as the appellant contends, that McLouth v. Hunt declared no hard and fast rule, that stock dividends are always to be treated as *Page 143 income, and that each case must be decided upon its own facts; but the general rule, which it enunciated, seems to apply very exactly to the conditions of the present case.
In approaching the consideration of such a question, the language in which the gift is made to the beneficiary of a trust, or the life tenant of the estate, must be regarded, in order to determine, preliminarily, the comprehensiveness of the testator's intention, with respect to the enjoyment by the object of his bounty of the yield of the intermediate estate. Then the transaction, through which the property of the corporation is being distributed in the extraordinary form of a stock dividend, is to be looked into; in order that its true nature may appear and that a determination may be reached, whether capital, or an accumulation of profits on the capital, is being divided among the stockholders. While the corporate action may not be, necessarily, conclusive upon the court, with respect to the question, if it is based upon facts, and is not purely arbitrary, it will, and should, be controlling. In the first place, then, we have, in this will, a provision made by a parent for his child; which gives to the latter the "rents, issues and profits" of his equal share of the residuary estate, during his life. Upon the remarriage, or the death, of the testator's widow, that share is to be proportionately increased by the distribution of the one-fourth share, which had been held in trust for the widow. Further, the testator directed that the entire income of the securities of the trust fund was to be applied and that no part should be diverted to the formation of a sinking fund to replace any loss of the principal by depreciation in value of the securities. These provisions, certainly, evidence a comprehensive intention of the testator that whatever was in the nature of profits upon, or income of, the trust fund should be fully enjoyed by the beneficiary. In the next place, we have the trustee receiving from the Pullman Company, upon the shares of its stock held in trust, a dividend of fifty per cent, paid out of "accumulated net surplus at the credit of income account," in certificates of new stock of the corporation. The fact of the source of the dividend *Page 144 appeared from the company's statement; which showed an accumulation of net surplus from year to year, for thirty-one years. A cash dividend of twenty per cent had been declared a short while previously; which the trustee had paid over to the plaintiff. Had this dividend of fifty per cent been declared and paid in cash, would there have been much doubt about the plaintiff's right to receive it? (Matter of Kernochan, 104 N.Y. 618,629.) What reasonable, or substantial, distinction is there, is principle of ownership, between a dividend which is paid in stock and one which is paid in money, when either is based upon a division of earnings? Mr. Morawetz, in his work on Corporations, (§ 468), has observed, with respect to such stock dividends, that, "in substance and effect, it amounts to a distribution of profits among the shareholders in cash and a subsequent purchase of new shares in the company with the sums distributed." It is true enough, as the appellant argues, that the testator, at the time of his death, owned the right to share in the assets of the corporation, proportionately to the amount of stock which he held; but it does not, therefore, follow that dividends, thereafter made from the accumulations of earnings, must be regarded and treated as additions to the capital of the trust estate. All stockholders are interested in the operation of the property of a corporation and their shares of stock represent individual interests in the corporate enterprise, in its capital, as in its net earnings; but the corporation itself has the legal title to all the properties and holds them for their benefit. They have a right to dividends, only as the corporate agents, in the exercise of their discretion, may declare them, (in the absence, of course, of any question of bad faith, neglect, or abuse of discretion), and they have the right to a pro rata distribution of the corporate assets upon dissolution. (Jermain v. L.S. M.S.R. Co., 91 N.Y. 483; Plimpton v. Bigelow, 93 ib. 592; Matter of Bronson, 150 ib. 1; Greeff v. EquitableL. Assur. Socy., 160 ib. 19.)
The declaration of a dividend by a corporation in active operation is the appropriation of a portion of the assets, which *Page 145 represented the net earnings of the corporation, for the use of the stockholders and, pro tanto, the assets are diminished. The stock no longer represents them. The capital is unchanged; but the value in the market of the shares may be affected by the diminution in the amount of the corporate assets. That the value of the shares of stock has been lessened by a dividend is a fact of no relevancy in determining the question of whether the dividend is to be regarded as income to the life tenant, or as capital for the remainderman. That question will be determined by the origin of the dividend. In this case, a fund had been created by an accumulation of the net earnings of the corporation and it remained a part of the general assets, until, in the judgment of the directors, the time came when it was proper and prudent to distribute it among the stockholders. That which the directors of the corporation distribute among its stockholders, without intrenching upon capital, must be comprehended within the term "profits" and we should assume that the testator intended that what might be paid in that way should belong to the beneficiary.
There is no question of diminishing the capital; nor of increasing the capital for any corporate purpose, or need. It was, simply, a mode of distributing the profits earned by the employment of the capital.
Enough has been said, in connection with the authority ofMcLouth v. Hunt, to render the conclusion necessary that the judgment of the Appellate Division should be affirmed; with costs to the plaintiff and to the defendant trustee, to be paid out of the principal of the fund.
PARKER, Ch. J., O'BRIEN, BARTLETT, MARTIN, VANN and CULLEN, JJ., concur.
Judgment accordingly. *Page 146