Union & New Haven Trust Co. v. Taintor

Upon the admitted facts the Delaware, Lackawanna and Western Railroad Company purchased, with its earnings, certain stock of the Lackawanna Railroad Company which it held among its assets. It declared a thirty-five per cent. dividend on its capital stock by distributing the stock of the Lackawanna Railroad Company so held by it to its stockholders. The stock thus distributed ceased to be a part of the surplus assets of the Delaware, Lackawanna and Western Railroad Company, and passed from its control and ownership. Such a dividend has all of the characteristics of a cash dividend. The fact that the distribution was made of the stock held as an asset, rather than in cash procured from its sale, does not affect its character. Cash dividends include all distributions of surplus assets, whether in the form of cash or property, taken from the body of the assets to become the property of the shareholders. Bishop v.Bishop, 81 Conn. 509, 527, 71 A. 583; Green v. Bissell,79 Conn. 547, 551, 65 A. 1056.

The rule that, save in exceptional cases, cash dividends are regarded as income and pass to the life tenant, while stock dividends — that is, an issue by a corporation of new shares of its own stock to its shareholders — are treated as capital and pass to the remainderman, is the settled doctrine of this jurisdiction. Usually the payment of a stock dividend is made by the transfer of surplus assets to capital, while the cash dividend is made by either the transfer to the stockholder of surplus assets, or their conversion into cash and distribution pro rata among the stockholders. Smith v. Dana,77 Conn. 543, 60 A. 117; Stamford Trust Co. v. Yale Towne Mfg. Co., 83 Conn. 43, 49, 75 A. 90; Boardman v. Mansfield, 79 Conn. 634, 640, 66 A. 169. Under our rule, the dividend of the Lackawanna stock was a cash dividend, and passed to the life tenant, Mrs. Dwight.

The burden was upon the remaindermen to show that in this instance the operation of the rule took from the capital its rightful due, and this burden they have signally failed to meet. The remaindermen attempt to except this case from the application of our rule. They assert in their brief that the Lackawanna Railroad Company changed the main line of the Delaware, Lackawanna and Western Railroad by a short cut, thus diverting traffic from the old line of the Delaware, Lackawanna and Western Railroad and presumably decreasing its value, and to this extent the new road takes the place of the old; that the Delaware, Lackawanna and Western Railroad Company took its surplus earnings, which were represented by its stock, and capitalized them into a roadbed, rails, and rolling stock in place of its old roadbed represented by its stock, and thereby presumably increased the value of the Delaware, Lackawanna and Western stock, and that the stock of both roads represent merely the actual value of the old road before it built the Lackawanna with its earnings.

We have no occasion to consider rights arising out of a situation of this character, since all of this argument rests upon a set of facts wholly outside the record. So far as that speaks, each corporation existed independently of the other, and the Delaware, Lackawanna and Western Railroad Company purchased the Lackawanna stock as an investment, and held it among its surplus assets. Nor does the record disclose the physical relation of the new road to the old.

The suggestion that the surplus earnings of the old road were represented by its capital stock is not in accord with our law. Capital may not be impaired by distribution to shareholders; surplus may be. Smith v.Dana, 77 Conn. 543, 552, 60 A. 117; Stamford TrustCo. v. Yale Towne Mfg. Co., 83 Conn. 43, 49,75 A. 90.

The remaindermen argue that the real transaction underlying the acquisition of this stock, the lease of the railroad, and the dividend vote was the incurring of a perpetual obligation of the Delaware, Lackawanna and Western Railroad Company to pay four per cent. to the Lackawanna for the use of the short cut, and that this guarantee imposed upon the stock of the Delaware, Lackawanna and Western Railroad Company a liability to the extent of the rental guaranteed. So they contend this case is on a parity with Bishop v. Bishop, 81 Conn. 509,70 A. 583.

The essential difference between that case and this, is that in Bishop v. Bishop the dividend was by the distribution of bonds, secured by assets of the Adams Express Company set apart for their payment, but that the company directly assumed as a liability the payment of these bonds. In this case, the stock was purchased and upon its distribution as a dividend no liability to the Delaware, Lackawanna and Western Railroad Company of any description arose. There the shareholder received by the distribution an obligation of the company; here the shareholder received a part of the assets. In order to find a similarity between that case and this, there arose the necessity for assuming that the four per cent. guaranty was a liability incurred as a result of the distribution of the stock, and that assumption compelled the assumption of facts outside the record.

The further contention, that the character of the assets, by their investment in permanent works, improvements, or extensions, became such that, as between owners of successive stock interests, they ought to be regarded as capital, and in fact cannot be disassociated from the rest of the working capital, relies upon a condition not supported by the finding. Moreover, if the facts supported the argument, it would appear to have been disposed of adversely to the remaindermen by Smith v. Dana, 77 Conn. 543,60 A. 117, where the facts upon which the remaindermen relied to show that the distribution was of capital were very much more persuasive and potent than any the remaindermen mistakenly claim to exist in this case.

The claim that General Statutes, § 377, controls this case and makes imperative the distribution of this stock as capital, is entirely without merit.

The Superior Court is advised to render its judgment that the fifty-three shares of stock of the Lackawanna Railroad Company of New Jersey and the $90 cash, referred to in the complaint and now in the hands of the plaintiff trustee, is income of the trust fund and belongs to, and should be paid over and transferred to, the defendant Elizabeth Wakeman Dwight, as part of the income of said trust fund to which she is entitled under the said will and codicils referred to in the complaint.

In this opinion the other judges concurred.