Dickinson's Estate

Testator gave a portion of his estate in trust to pay the income to his nephew and his nephew's wife for their respective lives, and upon their decease to divide the principal among their descendants per stirpes. Among the assets which passed to the trustees, was 120 shares of the stock of the Fire Association of Philadelphia. Its capitalization at that time was 10,000 shares, each having a par value of $50, a liquidating or intrinsic value of $142.61, and a market value of $415, at which latter figure the 120 shares were awarded to the trust estate. Ordinary cash dividends, regularly declared by the corporation, were received by the trustees and paid to the life tenants, but these are of no moment here. The present controversy concerns the distribution of an extraordinary stock dividend of 100 per cent, which the company declared, and for which it delivered to the surviving trustee another certificate for 120 shares. On an adjudication of the trustee's account, the court below awarded the whole of this new stock to the widow of the nephew (he having died before the dividend was declared), whereupon her children prosecuted these two appeals.

Under ordinary circumstances, the applicable rule is plain; and is to be employed, when distribution is being made by the court among those interested in the trust estate, irrespective of the account against which the corporation enters, on its books, the total payments to the stockholders generally. From Earp's App., 28 Pa. 368, to Harkness's Est., 283 Pa. 464, we have uniformly held that, "where extraordinary dividends, whether of cash, scrip or stock, are declared and paid on shares of corporate stock left by a decedent in trust, they are to be distributed by giving to the corpus sufficient to keep intact the value of the shares as they were at the time the trust began, and by giving the rest of the dividend to those entitled to the income of the estate." Following our lead, this has become the rule in nearly all the states of the Union: Harkness's Est., supra. In the instant case, however, there are several unusual circumstances, not appearing in any of our decisions, and we are now required to determine in what way distribution should be made, in view of this altered situation. Happily, all the relevant facts and figures are admitted.

Some six years after the trust began, the corporation suffered and paid a heavy loss, caused by the great fire in San Francisco. The effect of this payment was not only to exhaust all the undistributed income which had been accumulated after the death of testator, but also to partially deplete that which existed prior thereto, thus reducing the then liquidating value of the stock from $142.61 to $71.09 per share. Appellants seem to think that no consideration should be given to this loss, for, without referring to it, they make all their calculations upon the basis of the value of the stock as it existed at the time of testator's death. It is clear, however, that when testator, expressly and without qualification, gave to his nephew and his nephew's wife all the income earned after his, testator's death, he meant just what he said, and hence that gift cannot properly be cut down, for the benefit of the remaindermen, because the corporation was compelled, in order to meet an extraordinary loss, to use a portion of the surplus which had been accumulated before testator's death. The possibility of such a loss was doubtless one of the principal reasons for not distributing all the surplus when and as earned, and this every one interested in the stock was bound to know. Its retention was, therefore, subject to this business risk (see Willcox's Est., 66 Pa. Super. 182), which might result not only in depleting or consuming the surplus, but also in impairing or wholly exhausting the capital. Each interest in the stock was subject to so much of that risk as appertained to its respective share in the capital and surplus, and the remaindermen have no more right to ask the life tenant to make good, out of future earnings given to her by the will, so much of the loss as affected the surplus which had accrued before the death, than they would have to so demand regarding the capital, if it also had been impaired or exhausted. Each must bear his own share of the loss; and, hence, in determining how this subsequent extraordinary dividend should be distributed, we must start with the fact that what for convenience we shall call the "intact value" of the stock in the trust, was but $71.09 a share, from and after the payment of that loss ($50 thereof being its par value), and the remaining earned surplus of the corporation was then only $210,900.

In order to restore, and later to increase, its financial standing, the association, on three several occasions, issued new stock at a price above par, and carried the excess to what it termed a "contributed surplus account." As this was not income which had accrued on the stock, but rather represented a part of the excess of market value over par value, it necessarily belonged, as appellee frankly admits, to the corpus of the trust (Graham's Est., 198 Pa. 216), and the intact value of each share was increased accordingly. On the first occasion, 5,000 new shares were issued and sold, at $300 per share, the $250 excess over par thus realizing $1,250,000. On the second occasion, another 5,000 new shares were issued and sold, at $250 per share, the $200 excess over par thus realizing $1,000,000. The third occasion, though provided for by resolution adopted on the same day as the 100 per cent stock dividend was declared, was not intended to take effect at once, and in fact the new stock then authorized was not issued and paid for until some months after the stock dividend was distributed; hence, since it did not affect the status then existing, it need not be considered in this opinion.

Immediately preceding the distribution of the stock dividend, the corporation had, therefore, 20,000 shares of stock outstanding, a paid-in capital of $1,000,000 and a contributed surplus of $2,250,000. The aggregate of these two sums, divided by 20,000, shows a net valuation of $162.50 for each share, and when to this is added the $21.09 (which represents the proportion of the earned surplus remaining after the settlement of the San Francisco fire loss), a then intact value of $183.59 appears. The declaration and distribution of the stock dividend here involved, resulted in the corporation having 40,000 shares of stock, with a paid-in capital and contributed surplus of $3,250,000, the same as above, and an earned surplus of $2,936,313.41; these sums, aggregating $6,086,313.41, when divided by the 40,000, gives a valuation of $152.16 per share. Since this was less than the intact value of $183.59, the difference of $31.43 per share, must, under the rule hereinbefore quoted, be made good out of so much of the stock dividend as does not represent income earned after testator's death (but which is, in fact, an amount necessary to prevent a depreciation of the intrinsic value of the corpus as a result of the stock dividend), and only the balance (which really represents the earnings which accrued after the fire), should be awarded to the life tenant. Multiplying the $31.43 by 120 shares gives $3,771.60, and dividing that sum by the new value of $152.16 per share, shows that 24 shares and $119.76 in cash must be awarded to the corpus of the trust, in order to restore the intact value, and the balance of 95 shares and $32.40 in cash therefore belongs to the life tenant. That this does no more than preserve the principal of the trust is evident from the fact that 144 shares at $152.16 per share and $119.06 in cash, together amount to $22,030.80, and so do 120 shares at $183.59.

The principal error of the court below was in treating this extraordinary stock dividend as if it was a cash dividend, which would be equivalent to a distribution of the stock at its par value; whereas, as shown above, the actual value of the shares was far in excess of their par value, and the market value, as the court below finds, was much greater yet. Such distributions must be made according to equitable principles, however, and neither par value nor market value play any part in them, but only intrinsic value: Smith's Est.,140 Pa. 344. The need for care in keeping this fact in mind, becomes apparent when it is recalled that in many instances the actual value of stock greatly exceeds its par value, and is much less than its market value, as witness the variances respecting this stock, set forth at the beginning of this opinion. Often these differences are still greater, the stock of the Union Trust Company of Pittsburgh, for instance, showing a par value of $100, a liquidating value of $3,250 and a market value of $5,500 per share. Every one would probably concede that an attempt to distribute a stock dividend of that corporation on the basis of its par value, would, under the circumstances here appearing, work monstrous injustice to the remaindermen, yet the difference between that and the present instance is one of degree only.

Lest it be supposed we have overlooked the fact, it should be stated that, in each instance where the shares were increased, the stockholders, including this estate, were given the right to take the new stock at the price fixed by the corporation. The trustees elected, however, to sell the rights thus given, and the sums realized were credited to the corpus of the trust. This was a correct disposition of the matter: Thomson's Est.,153 Pa. 332; Eisner's Est., 175 Pa. 143; 2 Cook on Corporations (8th ed.) section 559. In no sense could these sums have been considered income; they were rather profits on the capital investment, which always belong to capital: Graham's Estate, supra.

The decree of the court below is reversed, and the record is remitted in order that distribution may be made in accordance with this opinion, each party to bear his own costs.