United States Trust Co. v. Heye

Shearn, J.: This case involves the application of the rules of apportionment of trust property between life beneficiaries and remaindermen, growing out of a distribution of the bulk of the assets of the Standard Oil Company of New Jersey on December 1, 1911, in pursuance of a decree of the United States Circuit Court, adjudging that company and its constituent companies to be an unlawful combination or conspiracy in restraint of trade and enjoining the continuance of the combination. Numerous questions have arisen out of the complexity of the corporate transactions, but one basic principle applies to all. The main question deals with the correct apportionment of the distributed shares of capital stock of the subsidiary companies that substantially constituted the Standard Oil Trust and supplied five-sixths of its earning capacity. Briefly stated, the essential facts underlying the main question are these: Charles F. G. Heye died on February 8, 1899, leaving a will executed March 23, 1898, which was admitted to probate on February 17, 1899. He left surviving him his wife, a son and a daughter. By his will he gave his residuary estate to the United States Trust Company of New York, as trustee, and directed that it be divided into three equal parts. The trustee was directed to pay and apply “ the net income, rents, issues and profits ” of one part to the use of the wife for life, the principal to go to such persons as she might appoint by will, and, in default of appointment, to his children. The net income of one part was to be applied to the use of his daughter during her life and upon her death leaving issue the principal was to go to such issue. The net income of the third part was to be applied to the use of the son until he arrived at a certain age, when the principal share was, with the exception of $100,000 reserved in trust, to be paid over- to him. Among the assets of which the testator died possessed and which the trustee received from the executrix of the will on May 10, 1899, were certificates for certain shares and fractional shares of the capital stock of twenty corporations which had, prior to the ouster judgment of the Supreme Court of Ohio in 1892, constituted the so-called Standard Oil — 548 — Trust, created by agreements dated January 2 and 4, 1882, by which the shares of stock of certain companies theretofore held by certain individuals and corporations for common account were transferred to trustees, who issued certificates of beneficial interest therein to the beneficial owners of the stocks. These certificates for shares and fractional shares of the capital stock of the twenty corporations represented the equivalent of $370,000 par value of the aforesaid Standard Oil Trust certificates which had been owned by the testator and surrendered by him to the trustees of the Standard Oil Trust pursuant to a plan adopted to provide for its dissolution. Included in these certificates owned by the testator when he died were 380 and certain fractional shares of the Standard Oil Company of New Jersey. In the year 1899 a plan was perfected for bringing these twenty oil companies again under common and unified control and management by constituting the Standard Oil Company of New Jersey the parent or holding company and transferring to it the ownership of the capital stock of the nineteen other companies. With this end in view, in the year 1899 the capital stock of the Standard Oil Company of New Jersey was increased from 100,000 shares of the par value of $10,000,000 to 1,100,000 shares of the par value of $110,000,000, of which 1,000,000 shares were common stock and 100,000 shares were preferred stock, the stock of the Standard Oil Company of New Jersey previously outstanding being converted into preferred stock, and the officers of that corporation were duly authorized to issue said certificates of common stock in purchase of the stock of the remaining nineteen of said corporations and its own preferred stock at the rate of one share of such common stock for shares or various fractional shares of the stock of such other corporations and of its preferred stock: Accordingly, on or about August 11, 1899, the trustee under the will of Charles F. G. Heye surrendered to the Standard Oil Company of New Jersey the said certificates of stock of the said twenty corporations, which certificates were actually in the possession of Mr. Heye at the time of his death, and received in exchange therefor 3,700 shares of the common stock of the Standard Oil Company of New Jersey. Thereupon the trustee in dividing the residuary estate of Mr. Heye — 549 — into three equal parts as directed by his will allotted 1,234 shares of the said common stock of the Standard Oil Company of New Jersey to the trust created for the benefit of the testator’s wife, 1,233 shares to the trust created for the benefit of the daughter, and 1,233 shares to the trust created for the benefit of the son. As trustee for the wife the trustee has ever since held said shares allotted to the trust created for her benefit; and also has ever since held the shares allotted to the trust created for the benefit of the daughter; but, as trustee for the benefit of the son, the trustee had prior to September 1, 1911, duly disposed of all of the shares of stock allotted to the trust created for his benefit with the exception of 47 shares. At the time the Standard Oil Company of New Jersey acquired the whole of the stocks of the nineteen other companies, it already owned some subsidiary companies and during the life of the trust it acquired the stock of still others, so that by 1911 it held either all or a majority of the stock of thirty-three companies engaged in the business of producing, refining and distributing oil. Between January 1, 1899, and December 1, 1911, the business of these combined companies was phenomenally prosperous and the Standard Oil Company of New Jersey earned net $823,893,961.13. During the same period it distributed to its stockholders in dividends, after reserving as working capital $328,691,788.13, the total sum of $495,202,173, so that the life beneficiaries of this trust received dividends averaging annually forty per cent. While the individuality of each of the affiliated corporations was scrupulously maintained and all business transactions were transactions of the different corporations severally, throughout the period between 1899 and 1911, as in fact had been the case since the Ohio trust agreement of 1882, the business carried on by the Standard Oil Company of New Jersey and its subsidiaries was conducted as a unified or common business, all the funds employed being utilized by the management as a common fund out of which all amounts requisite for construction and development by the several companies were supplied, each organization being debited or credited with the respective amounts advanced or borrowed and interest being duly debited and credited thereon. In the course of its operations the combination again came in con — 550 — flict with the law and in 1911 on the suit of the Federal government a decree was entered in the United States Circuit Court declaring the Standard Oil Company of New Jersey and its thirty-three subsidiary companies to' be an unlawful combination or conspiracy in restraint of trade, upon the ground that the New Jersey company had acquired the power to control the original nineteen constituent companies and the other companies named in the decree, and to manage their trade, “ without competition among themselves, as the trade and business of a single person,” and the decree enjoined the continuance of this unlawful combination, but expressly provided that “ the defendants are not prohibited by this decree from distributing ratably to the shareholders of the principal company the shares to which they are equitably entitled in the stocks of the defendant corporations that are parties to the combination.” On July 28,1911, the directors of the Standard Oil Company of New Jersey passed a resolution to carry out this decree and authorized that the shares of stock of each of the corporations owned by the company be distributed ratably to the stockholders, and all of the stocks were so distributed on December 1, 1911, except the stock of the Anglo-American Oil Company which was distributed on January 20, 1912. The plaintiff as trustee of each of the trusts created by the will of Charles F. G. Heye received the pro rata share of the distributed stocks pertaining to the Standard Oil stock forming part of the principal of such trust, and included in the stocks so distributed were the stocks of seventeen of the twenty companies, stock in which was owned by the testator at the time of his death, and of several companies whose stock was already held in 1899 by the Standard Oil Company of New Jersey or by some one of the seventeen companies. The only stocks of the original (twenty) companies owned by the testator, and represented by the 2,514 shares of the Standard Oil Company of New Jersey then in the hands of the trustee, which were not redistributed and turned back in kind to the trustee, were the shares of three companies, to wit, Standard Oil Company of New Jersey, Forest Oil Company and North Western Ohio Natural Gas Company. The stock in the last-named company was not ordered to be distributed and continued to be owned by the Standard Oil — 551 — Company of New Jersey and was represented by the stock of that company still held by the trustee. The Forest Oil Company had been absorbed by the South Penn Oil Company in 1902, and the testator’s interest in. that company came back to the trustee in the shares of the South Penn Oil Company. It is upon this state of facts that the life beneficiaries lay claim to all of the stocks distributed to the trustee in pursuance of said decree, upon the ground that the distribution amounts to an extraordinary dividend of profits, payment of which to the life beneficiaries will not, as it is claimed, entrench upon or impair the integrity of the corpus of the trust estate. A much more detailed account of these transactions is set forth in the carefully prepared opinion of Mr. Justice Dowling. Reduced to its simplest terms, the situation was this: The corpus of the trust was originally a proportionate share interest, in twenty oil companies represented by capital stock of each; that same interest continued from 1899 to 1911, represented by the shares of one holding company; after the distribution of December 1, 1911, that same proportionate share interest in the original twenty companies was still held by the trustee, represented by capital stock of eighteen of the original companies. Claiming the redistribution of 1911 to have been in the nature of an extraordinary dividend, the life beneficiaries demand that there be turned over to them the entire share interest of the seventeen* companies transferred back to the trustee, leaving only as constituting the corpus of the estate the original interest in two companies, represented by the stock of the Standard Oil Company of New Jersey, which by the distribution had been stripped of properties constituting five sixths of its earning capacity. To justify this extraordinary result reliance is placed upon (1) the definition of the distribution as an extraordinary dividend, and (2) the fact that the book value of the stock of the Standard Oil Company of New Jersey after the distribution of December 1, 1911, which was $281.72 a share, was greater than at the agreed — 552 — date of the creation of the trust December 31, 1899, when it was $202.32 a share. As this figure of $202.32 included the book value of the stocks of all the nineteen subsidiary corporations originally owned by the testator, the value of the Standard Oil Company of New Jersey stock remaining in the trust after the distribution of December 1, 1911, even if all the distributed stocks went to the life beneficiaries, would exceed the value of the entire trust estate at the creation of the trust. Therefore, the life beneficiaries contend, if all the distributed stocks went to them, that the integrity of the trust fund would still be preserved because its original value would not have been impaired. To call the distribution of 1911 an extraordinary dividend does not determine the question presented. In spite of the stress laid on a mere matter of definition, the life beneficiaries concede, as they must, that to entitle them to an apportionment of these stocks the result must be achieved without entrenching in any way upon the corpus of the original trust. Whatever development there has been in the law dealing with this subject of apportionment, whether in this State or elsewhere, it has been uniformly recognized that at all times the integrity of the corpus of the trust must be preserved. No change whatever was made in this rule by the much-cited case of Matter of Osborne (209 N. Y. 450). Indeed the decision in tho Osborne case strongly emphasized the necessity of maintaining the corpus unimpaired, the Court of Appeals having expressly held that in all cases of extraordinary dividends, either of money or stock, sufficient of the dividend must be retained in the corpus of the trust to maintain that corpus unimpaired. The Osborne case is carelessly referred to as though it had enlarged the rights of life tenants. On the contrary, it materially limited and curtailed them. Prior to the decision of the Osborne case, extraordinary dividends declared by a corporation out of accumulated earnings were apportioned to the life tenant, whether earned before or after the creation of the trust estate. (McLouth v. Hunt, 154 N. Y. 179; Lowry v. Farmers’ Loan & Trust Co., 172 id. 137.) The decision in the Osborne case changed this rule, curtailed these rights of life tenants by limiting them to apportionment of accumulations made after — 553 — the creation of the trust and, as above stated, emphasized the right of the remainderman to have the integrity of the corpus of the trust preserved. The fundamental inquiry, therefore, is whether the apportionment contended for would impair the integrity of the trust fund. The corpus of the trust fund established in 1899 consisted of capital stock in twenty companies. This means that the trustee owned that definite proportion of the capital assets of each company which the shares of stock held in the trust bore to the whole capital stock. Whatever doubt may have previously existed about this was definitely set at rest by the unanimous adoption by the Court of.Appeals of the prevailing opinion written by Mr. Justice Scott in this court in Matter of Schaefer (178 App. Div. 117; affd., on opinion of Scott, J., 222 N. Y. 533), for in the minority opinion (p. 131) sharp issue was taken with the basic proposition formulated by Mr. Justice Scott that the stock owned and sold by the trustees “ represented and stood for one-half of the assets of the company, and those assets in part represented accumulated profits.” So it may be taken as settled, for a starting point, that the corpus of this estate consisted of that proportion of the capital assets of each of the twenty companies which the shares of stock held in the trust bore to the whole capital stock. When the shares of the nineteen subsidiary companies were'transferred to the Standard Oil Company of New Jersey the ownership of the capital assets represented by the trust was transferred to the Standard Oil Company, and the stock of the latter company transferred to the trustees in exchange for the stock of the subsidiary companies represented a proportionate part of what had been the capital assets of both the Standard Oil Company and' the subsidiary companies. When effect was given to the decree of the Supreme Court in 1911 the Standard Oil Company retransferred to its stockholders, the original holders of the stock in the subsidiary companies, the stock which these holders had transferred to it in 1899, thus revesting those stockholders with their interests in the capital assets of the subsidiary companies. The necessary result of this action was to deplete the capital — 554 — assets of the Standard Oil Company, because there was subtracted from those assets the capital assets of the subsidiary companies, which constituted a part of the trust fund when it was set up. The same result would have followed if the Standard Oil Company in 1911 had sold all the stock of the subsidiary companies for cash and then had distributed this cash pro rata among its stockholders. This would have been a partial liquidation of the trust, for the cash would have been derived from and have represented a part of the capital assets of the trust. (Matter of Schaefer, supra.) It follows obviously, therefore, that if the corpus of the trust be stripped of its interest in the assets of seventeen of the original companies composing it, and left only with the stock of the depleted Standard Oil Company of New Jersey, now minus the properties constituting five-sixths of its earning capacity, the integrity of the trust would not only not be preserved but it would be completely disrupted and its major part handed over to the life tenants. Instead of the remainder-men succeeding ultimately to the testator’s interest in the assets of twenty companies, they would get only his interest in two, the Standard Oil Company of New Jersey and the North Western Ohio Natural Gas Company (owned by the former), while the life tenants, in addition to having received annual dividends of forty per cent, would now have the testator’s interest in the assets of each of the eighteen other companies constituting the original corpus of the trust. ' No such result was intended by the testator and no rule of law leads to a result so manifestly unjust. Stress is laid upon the fact that the value of the stock left in the trust would exceed the value of all the stocks in the trust when it was created. But this affords no justification for disrupting the corpus of the trust. If the only stock in the trust originally had been that of the Standard Oil Company of New Jersey its book value would have been a pertinent fact in determining how any extraordinary dividend of that company should be apportioned, under the rule in the Osborne case and under the general rule with reference to preserving the integrity of the trust fund. But' when the corpus of the trust consists of a definite interest in each of — 555 — several companies, the book value of one has no bearing upon the integrity of the trust as affected by taking away from the corpus the testator’s interest in all the other companies. The life beneficiaries have built up their case upon the fact that Judge Cardozo in Matter of Brann (219 N. Y. 263) characterized this Standard Oil distribution as an “ extraordinary dividend.” As already shown, so far as concerns their right to have apportioned to them these stocks in the seventeen original subsidiary companies, nothing is decided by calling the distribution an extraordinary dividend because, even if such be its character, the stocks cannot go to the life beneficiaries for the reason that thereby the corpus of the trust would be disrupted. Moreover, it is very unsafe to attempt to arrive at a correct result in such a case as this by applying a rule to a mere definition. But, it should be pointed out, when Judge Cardozo used the words “ extraordinary dividend ” in the Brann case he was dealing with a very different question from any here presented. What Judge Cardozo had to determine was what passed under a bequest of shares of Standard Oil stock contained in a will executed before the distribution of 1911 and republished after the distribution of that year. He expressly speaks of the distribution as an extraordinary dividend “ declared during the life of the testatrix,” and then proceeds to demonstrate from the provisions of the codicil that the testatrix did not intend to give the subsidiary shares with the main bequest. Of course the distribution of 1911 was in a sense an extraordinary dividend, but under the ruling in the Osborne case, followed by Matter of Megrue (170 App. Div. 653; affd., 2l7 N. Y. 623), it is the duty of the court to inquire in case of an extraordinary dividend what its sources are and to credit to capital account so much thereof as is derived from or constitutes a distribution of capital (including profits accrued before the creation of the trust), and to credit to income account so much thereof as is derived from or constitutes a distribution of profits accrued during the lifetime of the trust. This rule works justice both to remaindermen and to 'the life tenant and accords with the rule laid down in the Osborne case. When we inquire as to the source of the distribution under consideration, we find that it constituted the major — 556 — part of the capital of the original trust. Its allotment to the life beneficiaries would, therefore, impair the integrity of the trust and be illegal, and the situation would not be one which changed by calling the distribution an extraordinary dividend. There are certain other matters dwelt upon by the life beneficiaries which seem to me to be wholly inconclusive. One is that “ the vouchers of the company and its books treat the distribution as one of reserved profits ‘ or ’ accumulated profits.” These statements in the books are mere bookkeeping entries and cannot affect the fact that the transaction was a redistribution of capital assets. Again the fact that the undistributed cash earnings in the hands of the Standard Oil Company at the time of the distribution equalled or exceeded the so-called book value of the stocks distributed does not make the distribution a distribution of earnings or profits. It did not pretend to be any such thing but was avowedly a means adopted by the company to meet the requirements of the judgment which called upon it to dispose of, not its accumulated profits, but its holdings in the subsidiary companies. Finally the fact that the so-called “ book value ” of the Standard Oil Company’s shares was larger after the distribution in 1911 than it had been when the trust was set up in 1899, does not prove that the capital of the trust fund was not depleted by taking away from the capital assets of the parent company the capital assets of the subsidiary companies. Very many things may have operated to increase the value of the capital assets which were of the Standard Oil Company in 1899 when the trust was set up. At all events the fife beneficiaries are not entitled to share in the accumulated earnings, however large, so long as the company kept those earnings in its treasury and neither distributed them as cash dividends nor gave stock dividends to represent them. As was distinctly held in the Osborne case the only value of the trust assets which is to be considered is the intrinsic value; market value, good will and like considerations cannot be considered in apportioning a dividend. (Matter of Osborne, supra.) The remaindermen are entitled to the benefit of any accretion in value of the corpus of the trust which does not — 557 — arise from the application to capital purposes of earnings accruing after the creation of the trust. Equitable Life Assurance Society v. Union Pacific R. R. Co., quoted from at length in the opinion of Mr. Justice Dowling, did not involve any question of apportionment between remaindermen and life "tenants. As Mr. Justice Clarke said in this court (162 App. Div. 81, 86): “ It must be borne in mind at the outset that the matter under discussion is one of corporation law. It arises and must be decided between the corporation and its several classes of stockholders. The law applicable to wills and to trust' estates, to life tenants and remaindermen, is beside the mark.” Further, the Baltimore and Ohio stock involved was a mere investment in the stock of an entirely separate railroad which was not operated as a part of the Union Pacific Railroad Company or of its subsidiaries; and the stock was purchased long after the plaintiff in that case became a stockholder in the Union Pacific Railroad Company. Coming now to the remaining sixteen corporations whose stocks were distributed on December 1, 1911: Eight were companies whose stocks were owned by the Standard Oil Company of New Jersey in 1899 and prior to the testator’s death. These stocks were properly apportioned to capital, for the testator’s ownership of a share of all of the assets of the Standard Oil Company of New Jersey carried with it a similar interest in the stock of these subsidiary companies. This interest could not be severed and allotted to income without impairing the integrity of the corpus of the trust. Three of the companies, Southwest Pennsylvania Pipe Line Company, Washington Oil Company and Crescent Pipe Line Company, were companies whose stocks were acquired by the Standard Oil Company of New Jersey subsequently to December, 1899, from its subsidiary company, the National Transit Company. Shares of the National Transit Company were a part of the corpus of the original trust which were transferred to the Standard Oil Company of New Jersey in 1899 and transferred back to the trustee in 1911. The shifting of the ownership of stock in these three subsidiary companies, owned by the National Transit Company, to the Standard Oil Company of New Jersey, which in turn owned — 558 — the stock of the National Transit Company, in no manner affected the testator’s interest in the assets of those three subsidiary companies, for his proportionate interest was at all times maintained, at one time represented by his shares in the National Transit Company and later by his shares in the Standard Oil Company of New Jersey, issued to him in exchange for his shares in the National Transit Company. This interest in these three subsidiary companies, which constituted a part of the corpus of the original trust, could not be severed therefrom and allotted to the life beneficiaries without impairing the integrity of the trust. Two other companies, the Cumberland Pipe Line Company and the Prairie Oil and Gas Company, were companies whose stocks were owned by the National Transit Company and distributed by that company in 1911 pursuant to the decree and the resolution adopted to carry it out. The Cumberland Pipe Line Company was organized in 1901 by the National Transit Company which took all of its stock. Its lines-were located in Kentucky and it gathered oil in the field for delivery to the Eureka Pipe Line Company for conveyance across the West Virginia border, where it was delivered to other Standard Oil pipe line companies for transportation to Standard Oil refineries. Its stock was not held as an investment but was taken over obviously for the purpose of adding to the working plant of the National Transit Company and constituted a part of the capital assets of that company. It does not appear that it was in any sense paid for out of surplus earnings of the National Transit Company accumulated after the formation of the trust. The Prairie Oil and Gas Company was incorporated in 1900. All of its stock was taken by the Forest Oil Company, one of the original twenty companies constituting the corpus of the trust, and was transferred in 1902 to the National Transit Company, which held it down to the distribution of stocks in 1911. The Forest Oil Company was a producing company operating in Pennsylvania, all of the stock of which had been held by the Standard Oil trustees and had been distributed by them and acquired by the Standard Oil Company of New Jersey by the issue of its own stock in .exchange therefor in and after 1899. The Prairie Oil and .Gas. Company .was the. Standard Oil-producing company in — 559 — the mid-continent field. It supplied from that field a very-large part of the oil used by the Standard Oil refineries. The stock of the Prairie Oil and Gas Company was not held by the National Transit Company as an investment but represented an important part of its working plant and constituted a part of its capital assets. It does not appear that the 'stock of the Prairie Oil and Gas Company was acquired by the National Transit Company out of earnings accumulated after the formation of the trust. The shares of the National Transit Company, which constituted one of the twenty original companies in the corpus of the trust, stood for and represented ownership of an interest in the shares of the Cumberland Pipe Line Company and the Prairie Oil and Gas Company, which constituted a part of the capital assets of the National Transit Company, and this same interest was represented by the shares of the Standard Oil Company of New Jersey until the shares of the National Transit Company were redistributed to the trustee in 1911. When, therefore, the National Transit Company in pursuance of the policy of disintegration under the decree, divested itself of these properties in 1911, if the shares in these two subsidiary companies had been allotted to the life beneficiaries the integrity of the trust fund would have been impaired. They were, therefore, properly allotted to principal. The remaining three companies of the sixteen now under consideration present a different situation. These are the Colonial Oil Company, Standard Oil Company (California) and Standard Oil Company (Nebraska). The stocks of all three of these companies were acquired by the Standard Oil Company of New Jersey out of its cash earnings subsequently to 1899. The Colonial Oil Company was organized in March, 1901, all of the $250,000 of stock being taken by the Standard Oil Company of New Jersey for cash at par. The company was organized to do the Standard Oil Company’s marketing business in Australia, Portugal and its dependencies. The Standard Oil Company (California) was originally organized under the name Pacific Coast Oil Company. Its capital stock was $1,000,000, all of which was purchased in. December, 1900, by the .Standard Oil Company of New Jersey ."for cash. At the time of the -purchase-the company. owned'.K small — 560 — refinery near San Francisco and a small amount of producing property. The name of the company was changed to Standard Oil Company (California). On July 1, 1902, its capital was increased to $3,000,000; on May 6, 1903, to $6,000,000; on October 16, 1906, to $17,000,000, and on August 7, 1911, to $25,000,000. All of these increases of stock were issued for cash at par to the Standard Oil Company of New Jersey at or about the time when the increases took place. The California company erected a very large refinery at San Francisco, constructed an extensive system of pipe lines and acquired a large amount of producing property. In 1906 all of the property of the Standard Oil Company of Iowa, which did the marketing business of the Standard Oil companies in the western states, northwest territories, Honolulu and the Hawaiian Islands, was transferred to the California company. The Standard Oil Company (Nebraska) was organized in 1906 with a capital of $600,000, acquired by the Standard Oil Company of New Jersey for cash. It was organized to take over the Standard Oil marketing business of Nebraska theretofore carried on by the Standard Oil Company of Indiana, which latter company in 1906 conveyed to it all of its marketing stations, plants and facilities in Nebraska. While it does not definitely appear that the stocks of these three companies were acquired out of the surplus earnings accumulated after the formation of the trust, that fact may be fairly inferred from the dates of the transactions and their general nature. If there is any dispute about the fact, it will have to be determined on a reference or by stipulation. As all of the other facts have been agreed upon between the parties, this situation should present no practical difficulty. If these stocks were paid for out of earnings accumulated before the creation of the trust, these stocks were properly allotted to capital for the reasons stated with reference to the stock of the Southwest Pennsylvania Oil Company, Washington Oil Company and Crescent Pipe Line Company. Assuming, however, that these stocks were acquired out' of earnings accumulated after the formation of the trust, which appears to be the fact, we think that the learned referee erred and that they should have been allotted to the life beneficiaries. It is tintó that prior to the distribution in 1911 these stocks — 561 — constituted a part of the capital assets of the Standard Oil Company of New Jersey and the properties were a part of its working plant in a business which, notwithstanding the preservation of the corporate identity of all these various companies, was conducted as a unified business under a common control and for the benefit of the Standard Oil Company of New Jersey. But the money withdrawn from earnings and used to purchase these stocks was not permanently capitalized. As was said in Williams v. Western Union Telegraph Co. (93 N. Y. 162, 191), quoted with approval by Judge Hiscock in Equitable Life Assurance Society v. Union Pacific R. R. Co. (212 id. 360, 372): “ The company had made surplus earnings which it could have divided, but instead of dividing them it had invested them in property to facilitate and enlarge its business; and such property was found to be worth $15,526,590. That sum constituted its surplus. It was commingled with the other property of the company and used for corporate purposes. But it was not beyond the reach of the dividend-making power of the directors. They could reclaim it for division among the stockholders, and, if practicable, convert it into cash for that purpose.” Again, as was said in Smith v. Dana (77 Conn. 543): “ Investment in permanent works does not and ought not to capitalize. Directors can in their discretion, fairly exercised, withhold profits and employ them in the conduct or enlargement of the business. By the same right they ought to be able to, and can, withdraw from any action which will enable the assets thus employed to be returned to their original condition as funds available for distribution to those to whom they might have been originally divided as dividends. Capital of this kind does not bear the perpetual stamp of capital. It simply constitutes a portion of the corporate assets which are within the discretionary control of the directors, which they may use for the corporate advantage in such ways as have the approval of their judgment, or, if that course seems wiser, cease using and by proper action withdraw from the corporate resources.” In the development of the law on this subject the inquiry in these apportionment cases is no longer confined to determining whether the distribution was capital or profits as such. — 562 — On this head Judge His cock said in the Equitable Life Case (supra, p. 371): “ As was made clear by Judge Chase in his thorough consideration of this subject in Matter of Osborne (209 N. Y. 450), more frequently the much considered question in this class of cases has been whether the distribution impaired what was the corpus or capital of the trust fund when it became effective rather than whether it involved a division of the capital of the corporation.” It is clear that the allotment of these stocks to income, acquired as they were after the creation of the trust and with surplus earnings accumulated after the formation of the trust, worked no impairment of the original corpus of the trust. So long as the Standard Oil Company of New Jersey retained and used these properties in its business, the life tenants had no ground of complaint. Neither would it have been any concern, of theirs if the company had chosen to sell these properties and retain the proceeds as reserved working capital, in the absence of fraud or bad faith. But when the company ceased to use and undertook to distribute the properties, purchased with surplus earnings accumulated after the formation of the trust, the life tenants were concerned and were entitled to insist upon a proper distribution. Unlike Matter of Rogers (161 N. Y. 108), this distribution was made by a going concern. As the integrity of the corpus of the trust is thereby in no respect impaired, the stocks in these three companies on distribution should be allotted to the life beneficiaries, within the reasoning of Matter of Schaefer (supra) and Matter of Osborne (supra). It follows, of course, that all stock increases of the Colonial Oil Company, Standard Oil Company (California) and Standard Oil Company (Nebraska) acquired by the Standard Oil Company of New Jersey between 1899 and 1911 for cash at par out of its cash earnings accumulated after the formation of the trust should be allotted to the life beneficiaries. - The next question concerns similar stock increases so acquired by the Standard Oil Company of New Jersey bétween 1899 and 1911 from the Anglo-American Oil Company, Crescent Pipe Line Company, Northern Pipe Line Company, Ohio Oil Company, Southern Pipe Line Company, Standard Oil .Company of New. York, and Union Tank Line,.Company,, all of which companies ivere _eith§^ dirg,ctly-or- through stock — 563 — control a part of the original corpus of the trust. In so far as the distribution of these stocks, paid for out of the accumulated earnings of the company after the formation of the trust, does not entrench in whole or in part upon the capital of the trust as received from the testator, these stocks should be allotted to the life beneficiaries, under the rule in the Osborne case. In determining whether such distribution entrenches upon the corpus of the trust, each corporation, a share in which constituted a part of the original trust, should be considered separately, and the book value of the stock constituting in part the capital of the trust fund as received from the testator shou'd be ascertained in the manner prescribed in the Osborne case. The value of the investment or proportionate interest represented by the original shares after the distribution of December 1,1911, was made is ascertained by the same method. The difference between the two shows whether there has been any impairment of the corpus of the trust represented by the shares of the particular corporation. Similar disposition should be made of the stock dividends declared and paid to the Standard Oil Company of New Jersey between 1899 and 1911 by its subsidiaries, Crescent Pipe Line Company, Indiana Pipe Line Company, Northern Pipe Line Company, Southern Pipe Line Company and Vacuum Oil Company. A volume could be written on this aspect of the case, but a discussion of the matter and an analysis of the numerous cases dealing with varying aspects of the problem as the law has developed in this and other jurisdictions would serve no useful purpose, for, after all is said, the basic and determining inquiry is whether on a distribution of stocks acquired out of and representing surplus earnings after the formation of the trust an allotment thereof to the life tenants would entrench upon the corpus of the original trust. Apportionment on this simple basis is fair to both remainder-men and fife tenants, is workable and tends to carry out the intention of the testator. Further questions arise with respect to extraordinary distributions made since December 1, 1911, by corporations whose shares were distributed by the Standard Oil Company of New Jersey in December, 1911. ■ Stock dividends were declared by ten companies and — 564 — should go, subject to the rule of apportionment in the Osborne case, to the life beneficiaries. Similarly with the stock dividend declared by the Standard Oil Company of Ohio, declared but not paid on the date of the trustee’s last supplemental account. Two companies, the.South Pennsylvania Oil Company and the Standard Oil Company (California) offered to stockholders rights to subscribe for additional stock at par. The learned referee, erroneously as we think, allotted these rights to the life beneficiaries. It has been uniformly held in this State that new shares of stock purchased by trustees in the exercise of subscription rights given to stockholders of the corporation, and the proceeds of the sale of such subscription rights, should be allotted to the principal of the trust and that the life tenant is not entitled thereto. (Matter of Kernochan, 104 N. Y. 618; Stewart v. Phelps, 71 App. Div. 91; 173 N. Y. 621; Robertson v. de Brulatour, 188 id. 301; Richmond v. Richmond, 123 App. Div. 117; affd., 196 N. Y. 535.) It is contended that these cases have been overruled by the decisions made in Matter of Harteau (204 N. Y. 292) and Matter of Osborne (supra). In the Harteau case there was no question between remaindermen and life tenant. There was an extraordinary dividend of 100 per cent declared by a corporation upon its capital stock, shares of which were held by the trustees. The dividend was paid in cash and the trustees invested it in new stock of the corporation, to which as stockholders they had subscription rights, and the new stock thus purchased sold at a profit. The court treated the proceeds of sale as a dividend and apportioned it between principal and income. No question was raised in the case in any of the courts as to subscription rights or whether such rights should be treated as income of the trust estate. So far as the Osborne case is concerned, as has been already pointed out, this decision did not enlarge the rights of life tenants but materially limited and curtailed them. There seems to be, therefore, no reason for departing from the previously settled rule. These subscription rights should be allotted to the principal of the trust. The Standard Oil Company of Kentucky on December 22, 1913, declared a cash dividend of $200 per share payable to — 565 — the stockholders of record at the close of business January 31, 1914, and as a part of the same resolution of the board of directors the increased capital stock of the company to the amount of $2,000,000 was offered to stockholders of record at the close of business January 31, 1914, at par in proportion to the stock then owned by them and the stockholders were authorized to pay for the same “ by applying the cash dividend declared this day.” It is to be noted that while the cash dividend and rights to subscribe accrued simultaneously, no condition was attached which required the stockholders to use the cash dividends to purchase the new stock. If the rights to subscribe had been given to stockholders without a cash dividend being declared at the same time, those rights would have belonged to capital, under the Richmond case. The legal character of those rights is not altered nor is the interest of capital in those rights changed by the fact that at the same time a cash dividend was declared sufficient in amount to pay for the new stock offered to the stockholders. If the trustee used the cash dividend to purchase the new stock and then subsequently sold the stock at a profit to the estate a disposition of this profit would be settled by Matter of Harteau, i. e., it would go to the life tenant. But merely because the dividend is declared and the subscription rights offered at the same time the rule of apportionment as to the subscription rights declared by the Richmond case, and as to the cash dividends, declared by the Osborne case, is not to be changed. This cash dividend should be apportioned under the Osborne case and the subscription rights allotted to the capital of the trust. Similarly with the subscription rights and cash dividends of the Title Guarantee and Trust Company. A still further question as to subscription rights is raised by the Vacuum Oil Company having on April 4, 1912, offered the right to subscribe at par for 500 per cent of holdings of stock of that company and Swan & Finch Company having on August 14, 1912, offered the right to subscribe at par for 400 per cent of holdings of stock of that company. The referee has treated this as practically an extraordinary dividend or division of the surplus assets of those companies and allotted the rights to income. This was error, for it is — 566 — settled that the subscription rights belonged to capital. It can make no difference in principle merely because the right inuring to the holders of the stock is more valuable. Neither does this constitute a distribution of assets. It merely changes the outstanding number of shares representing the assets. The right is a valuable one and properly goes with the ownership of the shares because if it were not given and exercised the holder’s proportion of interest in the assets of the company would be materially altered for the worse. It remains to deal with two other distributors of stock, one by the Ohio Oil Company, which on February 1, 1915, distributed stock of the Illinois Pipe Line Company; the other by the Prairie Oil and Gas Company which .on March 22, 1915, distributed stock of the Prairie Pipe Line Company., Prior to the decision of the Pipe Line Cases in 1914 (234 U. S. 548) the Ohio Oil Company and the Prairie Oil and Gas Company carried their pipe line properties in direct ownership. The Prairie Oil and Gas Company was incorporated in 1900. The Ohio Oil Company, however, was organized in 1887 and its entire capital stock was purchased by the National Transit Company in 1889. Accordingly the testator had an interest in the Ohio Oil Company, represented by his shares in the National Transit Company which were a part of the original corpus of the trust. Similarly with respect to the Prairie Oil and Gas Company, the trustees had an interest in it from shortly after its organization, growing out of the fact that all of its stock was taken by the Forest Off Company, one of the twenty original companies in the corpus of the trust, which company in 1902 transferred it to the National Transit Company, which held it down to the distribution in 1911. After the decision in the Pipe Line Cases, which declared pipe line companies to be common carriers, the Ohio Off Company and the Prairie Oil and Gas Company, in order to avoid regulation by the Interstate Commerce Commission, decided to separate from themselves and place in a separate ownership the pipe line properties. The Ohio Oil Company, therefore, caused the Illinois Pipe Line Company to be formed with a capital stock of 200,000 shares, of the par value of $20,000,000, and sold to it all of its pipe line properties in return for the whole — 567 — capital stock of the Illinois Pipe Line Company. The Prairie Oil and Gas Company carried out a similar operation, transferring its pipe line properties to the Prairie Pipe Line Company in exchange for the entire capital stock of that company. Both the Ohio Oil Company and the Prairie Oil and Gas Company then distributed the stock of the newly-organized pipe line companies among their stockholders pro rata. In this manner the stock came into the hands of the National Transit Company, which made the distribution of 1911. The learned referee has allotted these pipe line shares to the life tenants. In so doing we think he erred. The stocks of the pipe line companies were not distributed by the Ohio Oil Company and the Prairie Oil and Gas Company as a dividend and were in no sense a dividend. All that the jugglery resorted to did was to segregate a part of the capital assets of each company, place the same in the oymership of separate corporations, retaining, however, in the hands of the National Transit Company, the owner of the stock of all the corporations, the same proportionate interest in the assets of each that it had before the transaction. When, therefore, the Ohio Oil Company, fór example, whose stock was owned by the National Transit Company, transferred its pipe lines for the entire capital stock of the pipe line company and then turned the stock of the pipe line company over to the National Transit Company, there was no change whatever in the interest that the National Transit Company theretofore had in the properties owned by the Ohio Oil Company. The testator owned shares in the National Transit Company, and his share in the assets of these companies, represented by his stock in the National Transit Company, was a part of the original corpus of the trust. To allot the pipe line shares to the life beneficiaries would be tantamount to transferring to them a part of the original property in the trust and would violate the fundamental rule requiring the integrity of the trust to be preserved. One final question remains, namely, the dates to be taken for making the calculations necessary for the apportionment of the dividends declared by the former subsidiary companies of the Standard Oil Company of New Jersey. There are two dates to be determined: (1) The date of the creation — 568 — or establishment of the trust, as to which the book value of the securities constituting the principal must be computed to ascertain the original intrinsic value of the shares in the several companies; and (2) the date to be taken for the purpose of ascertaining whether the capital of the trust will be impaired to any extent by extraordinary dividends declared. The life beneficiaries argue that the first date taken should be the date of the testator’s death in February, 1899. The trustee claims and the referee has found that the first date should be May 10, 1899, upon which date it is agreed that the trustee received the securities from the executrix. We agree with the referee that the correct date to be taken is May 10, 1899, when the securities came into the hands of the trustee. This is indicated by Judge Chase in Matter of Osborne (p. 485). As to the second date, the trustee urges that it be fixed as of the time of the distribution of December 1, 1911, irrespective of when the dividends were declared. This would doubtless save many complications but does not appear to be sound. If there is any impairment by reason of the declaration of an extraordinary dividend the impairment exists when the dividend is declared. The second date to be taken is that fixed by the referee, namely, the date of the declaration of the dividend. This was also plainly indicated by Judge Chase in Matter of Osborne where, after saying that the intrinsic value of the trust investment is to be found as “ existing at the time of the creation of the trust,” he said: “ The value of the investment represented by the original shares after the dividend has been made is ascertained by exactly the same method.” The judgment should, therefore, be modified by allotting to the principal of the trust fund instead of to the life beneficiaries (1) the stocks of the thirty-three companies received by the plaintiff from the Standard Oil Company of New Jersey to December, 1911, except, (a) the stocks and stock increases of the Colonial Oil Company, Standard Oil Company (California) and Standard Oil Company (Nebraska); (b) stock increases acquired by the Standard Oil Company of New Jersey between 1899 and 1911 from the Anglo-American Oil Company, Crescent Pipe Line Company, Northern Pipe Line Company, Ohio Oil Company, Southern — 569 — Pipe Line Company, Standard Oil Company of New York and Union Tank Line Company; (c) stock dividends declared and paid to the Standard Oil Company of New Jersey between 1899 and 1911 by its subsidiaries Crescent Pipe Line Company, Indiana Pipe Line Company, Northern Pipe Line Company, Southern Pipe Line Company and Vacuum Oil Company; (2) stock subscription rights declared and offered subsequent to December 1, 1911; (3) the Illinois Pipe Line Company stock received by plaintiff February 6, 1915; (4) the Prairie Pipe Line Company stock received by plaintiff March 25, 1915; and as so modified the judgment should be affirmed, with costs to all parties who have appeared on this appeal, payable out of the trust fund. Clarke, P. J., and Laughlin, J., concurred; Page, J., dissented in part; Dowling, J., dissented. Footnotes [*] Really eighteen, as the Forest Oil Company had been absorbed in the South Penn Company.— [Note by the Court.