Wiltbank's Appeal , 1870 Pa. LEXIS 352 ( 1870 )

The opinion of the court was delivered,

by Agnew, J.

— Mrs. Maria Carleton, by her last will, created a trust of her estate, making the defendants trustees, and directing that they should pay to her daughter Julia the sum of $1400 per annum, out of the income and profits, and to her son, the plaintiff, the remainder of the income. After the death of Mrs. Carleton, two corporations in which she owned stock, constituting a part of the trust estate, resolved to increase their capital by an issue of new stock to be subscribed and paid for by the stockholders. The defendants, as trustees, sold the fight to subscribe for stock in one company, and subscribed and paid with their own money for stock in the other company. They sold the stock subscribed for at a premium, and credited the trust fund with the sums made in both cases. The question is, whether the profits made by the trustees belong to the capital or to the income of the trust. The court below thought it was capital. We think this was an error.

The new stock issued by the New York and New Haven Railroad Company, and by the New Haven Gas Light Company, was not a part of the capital of the old stock, but a mere product of an advantage belonging to it, to wit, a right to subscribe for the new stock.' The new stock is added capital represented by the cash which paid for it. This cash belonged to the parties who paid it, and formed no part of the trust estate. Had the companies sold the new stock in the market instead of permitting it to be subscribed for by the stockholders, it is obvious, the new stock would have had no connection with the owners of old stock. The premium of the sales of the new stock would have gone directly into the treasury of the corporations, and would have found its way into the pockets of the stockholders only by means of future dividends. The dividends thus declared, manifestly would have been no part of the capital of the trust estate, but would be a profit earned by the corporation after the death of Mrs. Carleton, and paid to the trustee as income.

Had the defendants purchased at a sale and paid their own money, 'it is evident that they would have been entitled to any profit they might have made for themselves. The liability to account for the profit is founded on the fact that the right of subscription belonged to the trust estate. The defendants had no personal right to subscribe for the new stock, but could subscribe only qua trustee. In so far as this brought an advantage, it accrued, therefore, to the trust, and not to themselves. But this advantage is manifestly a profit, as it consists only of the excess made by the trustee’s sale of the stock for a premium over and above the capital paid in by the trustee at par. This capital belonged to the trustee, the residue only, less expenses, was profit, and belonged to the trust. The sale of the right of subscription, (instead of making ah actual subscription and selling the stock), stands precisely on the same footing. The price obtained for it is the profit, and is the equivalent of the premium on the sale of the stock itself.

The new stock was neither a stock dividend nor a dividend of a surplus fund. It was not paid for out of either capital or income, but with the money' of the trustee or subscriber. It in no sense represents either income or capital of the old stock. The price brought by the sale of the subscription right, and the premium of the subscribed stock, are, therefore, an incidental, and in one sense an accidental profit, following the ownership of the old Stock, as the product of an advantage belonging to it.

The case is not within the decision in Earp’s Appeal, 4 Casey 368, though falling clearly within its principle. There the actual earnings of Robert Earp’s stock made before his death, were held to constitute a part of his capital at his decease, while the earnings made afterwards were income only. The principle established in that case is, that the earnings or profits of stock made after death are income and not capital, even though in form of capital by the issue of new stock. Equity, seeking the substance of things, found that the new stock was but a product, and was, therefore, income. Precisely so it is here, equity discovers the subject of controversy is a mere product; a right incidental to the stock, and is therefore income.

The effect of the issue of the new stock upon the market value of the old, does not alter the principle of the case, however it may possibly influence the administration of the equity in ascertaining the actual profit realized from the advantage of subscription belonging to the old stock. There has been no serious diminution in the value of the old stock caused by the new issue, and therefore, this possible question is not before us. In a case of what is termed the “ watering” of stock merely — an increase of the nominal oapital, without any addition, or only a partial addition to the actual capital — there might be a difference possibly, though we do not assert it now. Here the trustee has credited the trust with the profits made, and the only question is, whether it is income or capital. We are of opinion it is income, and to be distributed as such under the will of Mrs. Carleton. The decree of the Court of Common Pleas is reversed, and a decree ordered to be entered in favor of the appellant with costs, the decree to be drawn up and submitted according to rule.