In re the Judicial Settlement of the Accounts of Ithaca Trust Co.

Hinman, J.: The only clause of the will of Frank J. Enz, deceased, which is pertinent here is as follows: “I will, devise and bequeath to my wife Martha Enz the use and income during the term of her natural life of the rest, residue and remainder of my property, both real and personal.” The controversy here arises out of the disposition of certain cash dividends paid upon certain shares of stock which constituted a part of the residue of the estate of which the widow, Martha J. Enz, was given the life use. Mr. Enz, the testator, died May 27, 1906, leaving a certificate for forty-six shares of the capital stock of the Dwight Farm and Land Company, of the par value of $100 per share, which was appraised in the official inventory of the estate at $250 per share. This stock remained undisposed of in the custody of the executor, acting as testamentary trustee, until the death of Mrs. Enz, which occurred on August 12, 1919. The dividends upon this stock were paid to said trustee during the period of this life estate but only a portion thereof was allotted to and paid over to Mrs. Enz by the trustee, who treated them as partly income and partly principal. The portion treated as principal was that part of the dividends which represented the receipts from sales of lands. This the trustee retained and is the subject of this controversy. The portion treated as income represented the earnings from farming and leasing after deducting all carrying charges including taxes and improvements. The appellants have taken no exception to the following finding of the surrogate: “ The said Dwight Farm and Land Company was incorporated March 10, 1880, under the laws of the State of New York, with a capital' stock of $125,000 ‘ for the purpose of buying, selling, managing and owning lands in the Territory of Dakota and working, cultivating and managing the same and marketing their products.’ The primary source of income contemplated was the profits arising from the sale of lands at an increase over their cost. Both before and after the death of Mr. Enz, towns were laid out into lots and farms developed and sales of lots and of acreage were made by the corporation in the ordinary course of its business. An incidental source of income was the profits arising from the renting and operation of the unsold lands.” Exception has been taken by appellants, however, to the surrogate’s finding that the capital investment of the Enz estate in this stock remained unimpaired at the termination of the life tenancy notwithstanding the fact that the lands of the company had been largely reduced in acreage by sales during the period of the fife tenancy. We think there is ample proof to support [636] the finding. We agree with the surrogate that the value of the company’s assets exceeded its liabilities in a greater amount at the time of the death of Mrs. Enz than at the time of the death of Mr. Enz. The stock was appraised at $250 a share at the time of his death by the appraisers of his estate and the treasurer of the Dwight Farm and Land Company said it was worth $250 at the time of the death of Mrs. Enz and that he had bought some at that figure a few months after her death. At the time of the death of Mr. Enz the lands were carried on the books of the company at about $245,000. The president of the company testified that January 1, 1907, the value of the lands was raised oh- the books to $300,000 “ because we thought the land had increased in value.” That figure was not reached by the appointment of appraisers to examine and determine the value of each piece of land but apparently it was the best judgment of the officers of the company. While these lands were being sold, from time to time, the remaining lands were being improved and developed and were more valuable so that at the time of the death' of Mrs. Enz there were over 6,000 acres of the best lands left, which both the treasurer of the company and the president of the company testified were worth at that time $100 an acre, which is undisputed, and they were not interested witnesses. They showed further that from January 1, 1907, they had been carrying the lands on their books at $300,000 as a mere matter of convenience in bookkeeping. The prices received for lands sold during the life tenancy aggregated $169,575.48, but the best lands of the company had been retained and improved and represented at the close of the period an aggregate value of substantially $600,000, whereas the outstanding liabilities were the unchanged capital stock of $125,000. The capital stock remained unimpaired at the close of the life tenancy and the value of the residuum of the capital assets ■ at that time, notwithstanding the intervening sales of lands, • was greater than the value of the capital assets at the beginning of the period. In no sense was the corpus of the trust estate impaired, unless it can be said that the sale of the lands was such a sale of the capital assets as to constitute a gradual liquidation and extinguishment of the capital stock. While the general rule is that dividends representing the proceeds of sale of capital assets belong to the remainderman, there is an exception to this rule in the case of a corporation which contemplates such dividends as its primary source of income and obtains those proceeds in the ordinary course of its business. Where such a corporation, having so conducted its business and declared dividends during the lifetime of the testator, continues so to do [637] during the life tenancy, and there is no evidence to show that it does not intend to continue so to do indefinitely, even though its property is gradually being exhausted, then the earnings belong to the life tenant, so long as the capital investment remains unimpaired. That is the rule which has been applied to corporations engaged in buying and selling real estate. (Matter of James, 146 N. Y. 78; Reed v. Head, 6 Allen, 174; Oliver’s Estate, 136 Penn. St. 43; Thomson’s Estate, 153 id. 332; Washington County Hospital Assn. v. Hagerstown Trust Co., 124 Md. 1; 2 Clark & Marshall Priv. Corp. 1621.) This exception to the general rule is applicable here. At the time of his death and for many years before, the testator had been a stockholder of this company and had received many large dividends from the sale of lands. About 60,000 acres of lands had been bought at an average price per acre of $2.66, the balance of which, after very extensive improvements and sales, were worth about $300,000 at the time of his death. The capital stock had not been reduced. No charges had been made against principal account by reason of these dividends. They had been paid from “ profit and loss ” account. The same procedure was continued during the period of the life tenancy, at the close of which the corporation emerges with its capital investment unimpaired and with a residuum of capital assets largely exceeding in value the capital assets as they stood at the beginning of the period. It is no answer to this to say that it was the practice of the company to denominate receipts from sales of land as “ principal ” for certain purposes. This classification adopted by the company’s treasurer when he sent out the dividend checks or a tax report of the company is not decisive. The right to a dividend as between the life tenant and remainderman of an estate is determined by the facts as to the source and character of the dividend considered in the light of the testator’s intention. (McLouth v. Hunt, 154 N. Y. 179, 197; Lowry v. Farmers’ Loan & Trust Co., 172 id. 137, 142; Robertson v. de Brulatour, 188 id. 301, 305; Matter of Osborne, 209 id. 450, 458; United States Trust Co. v. Heye, 224 id. 242, 254.) There is very substantial reason to believe that it was the intention of Mr. Enz that his wife should enjoy the same use and income from this property which he had enjoyed. His wife and adopted daughter were the only persons dependent upon him for support and he had no other heir at law or next of kin residing in this country. The property of which the life use was given consisted of the family dwelling house and about $40,000 in personalty, over one-fourth of which was represented by this stock. These were ordinary dividends, paid in cash out of current [638] profits. They were charged to “ profit and loss ” on the books of the company, and the amount of capital stock remained undiminished. And even though they could be considered extraordinary dividends, they did not “ entrench in whole or in part upon the capital of the trust fund as received from the testator,” because the resources of the company were greater at the end of the life tenancy than at the beginning. (Matter of Osborne, supra, 477.) , The decree of the surrogate should be affirmed, with costs. Kilby and Hasbrouck, JJ., concur; H. T. Kellogg, Acting P. J., dissents, with an opinion, in which Van Kirk, J., concurs.