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Matter of Estate of Dawson

Decided: June 9, 1994.

IN THE MATTER OF THE ESTATE OF DUDLEY B. DAWSON, DECEASED, LATE OF BOONTON, MORRIS COUNTY, NEW JERSEY


On certification to the Superior Court, Appellate Division.

Clifford, Handler, O'Hern, Garibaldi, Stein

Clifford

[136 NJ Page 3] The opinion of the court was delivered by

CLIFFORD, J.

This appeal poses the issue of the correct interpretation and application of the term "stock dividend" as used in the testator's will. The narrow question is whether trustees of a testamentary trust should allocate eight different stock distributions to income or to principal. The will provided that in administering the trust, the trustees should allocate stock dividends to income and allocate stock splits to principal. The will did not define those terms, however.

In three prior intermediate accountings, the Chancery Division, Probate Part, had defined the term "stock dividend" by referring to the traditional rule, which focuses on a capitalization of assets. Accordingly, in those earlier accountings that court had allocated stock distributions to income whenever the issuing corporation had made journal entries transferring assets from a surplus account to a capital account. In the fourth intermediate accounting, however, the trial court adopted a different test to distinguish between stock dividends and stock splits. Adopting the New York Stock Exchange rule, the trial court characterized stock distributions as dividends if they constituted less than twenty-five percent of the outstanding shares of stock and as splits if they equalled twenty-five percent or more of the outstanding shares. In an unpublished opinion, the Appellate Division reversed the trial court's judgment, rejecting that court's twenty-five-percent rule and relying instead on the traditional approach. We granted certification to determine the correct rule.

I

On December 1, 1952, the testator, Dudley Dawson, executed a will. At that time, he was married to his second wife, Anna Coffin Dawson. Dawson's first wife, Julia G. Dawson, had died on December 25, 1939, and he married Anna on June 13, 1941. The testator did not have any children with either of his wives. Anna, however, had three children from a previous marriage. When Dawson executed his will, his closest relatives other than his wife

were: (1) Elizabeth Dawson Dumont, a sister, who died without issue in 1961; (2) Elizabeth Dawson Birch, a niece, and Raymond Dawson, Jr., a nephew, both children of Raymond Dawson, a deceased brother; and (3) Louis W. Dawson, Palmer C. Dawson, and Nicholas J. Dawson, nephews and children of Nicholas Dawson, also a deceased brother.

Dudley Dawson died on May 11, 1957. At the time of his death, his closest surviving relatives were his wife, Anna; his sister, Elizabeth; and his niece and four nephews by his deceased brothers, Raymond and Nicholas. His will left nothing to his sister, Elizabeth, or to Anna's children. The testator did make several specific bequests, however, including a bequest to his wife, Anna, of personal property and $5,000.

Paragraph "NINETEENTH" of the testator's will directed his executors to pay Anna quarterly the income from the estate during the period that the executors controlled the estate. Paragraph "TWENTIETH" established a residuary trust, instructing the trustees to (1) pay the entire net annual income from the trust to Anna during her life, in quarterly installments; and (2) pay the income from the trust after Anna's death to "my nieces and nephews, and the issue of any deceased niece or nephew, * * * in equal shares per stirpes * * *." The will provided that the trust would exist as long as the rule against perpetuities (now codified at N.J.S.A. 46:2F-1 to -8) would allow, namely, twenty-one years after the death of the survivor of the named niece, nephew, grandniece, and three grandnephews. The trustees were directed to distribute the trust funds thereafter "to my nieces and nephews and the issue of any deceased niece or nephew, in equal shares per stirpes * * *." Paragraphs "THIRTY-FOURTH" and "THIRTY-FIFTH" named Dawson's wife, Anna, and the Hanover Bank (later Manufacturers Hanover Trust Company, and currently Chemical Bank) as executors and trustees.

When Dawson executed his will in 1952, the New Jersey Principal and Income Act, N.J.S.A. 3A:14A-1 to -9, provided that dividends paid in stock should be allocated to principal, N.J.S.A.

3A:14A-4A(a), and that dividends paid other than in stock should be allocated to income, N.J.S.A. 3A:14A-5A(a). Paragraph "THIRTY-FIRST" of Dawson's will, however -- the paragraph in dispute in this action -- gave the following directions in respect of the trustees' allocation of stock distributions:

All gains and losses on the sale or redemption of securities shall be added to or subtracted from corpus, but all stock dividends and all rights to subscribe to stocks shall be treated as income and shall be distributed to the income beneficiary or beneficiaries as such. Neither my executors nor my trustees shall be required, nor are they authorized[,] to set aside from income any sums to provide for the amortization of premiums in the purchase of securities.

The first intermediate accounting of the trust covered the period from June 6, 1960, when the trust first received the assets from the testator's estate, until November 22, 1967. At that accounting, the parties agreed to the allocation between principal and income of the shares from most of the stock distributions to the trust. They disagreed, however, about the proper allocation of two distributions. One distribution concerned American Electric Power Company (American Electric) stock: the trust initially held 300 shares; American Electric distributed to the trust 300 additional shares; and American Electric adjusted the par value of its stock, transferring funds from its capital-surplus account to its capital-stock account. The other distribution concerned Ohio Edison Company (Ohio Edison) stock: the trust initially held 400 shares; Ohio Edison distributed to the trust 400 additional shares; and Ohio Edison adjusted the par value of its stock, transferring funds from its premium-on-common-stock account and from its earned-surplus account to its capital account.

The question before the trial court on that first intermediate accounting was whether those two distributions were stock splits (allocable to corpus under the terms of the trust) or stock dividends (allocable to income under the trust's terms). The trial court allocated both stock distributions to income as dividends, relying on this Court's decision in In re Trust of Arens, 41 N.J. 364, 375, 197 A.2d 1 (1964) (noting that in stock split "no change whatever is made in any corporate accounts," but that stock dividend involves "capitalization of earnings by a transfer * * *

from the earned surplus account to a capital account"). The trial court found that inasmuch as "in both cases there was a capitalization of earnings," the distributions were stock dividends and thus allocable to income under the terms of the trust. Similarly, in later approving second and third intermediate accountings, the same court applied the disputed stock distributions to income when the issuing corporations transferred funds from a surplus account or from undivided profits to the capital-stock account.

After the death of Anna Coffin Dawson in September 1989, the trustees' filed with the Chancery Division a fourth intermediate accounting, running from May 12, 1981, to September 3, 1989, and a fifth intermediate accounting, covering the period September 4, 1989, to December 17, 1989. The court, now presided over by a different Judge from the one who had heard the previous applications, appointed a new guardian ad litem to represent the interests of the minor defendants (the guardian ad litem who had represented their interests in the previous accountings had died), and extended the guardian ad litem's representation to include the unborn parties in interest. That new guardian ad litem then challenged the trustees' proposed allocation to income of eight stock distributions that the trust had received during the period of the fourth intermediate accounting. See Appendix, infra at - (slip op. at 30-34) (describing each stock distribution). All the disputed stock distributions involved transfers of funds to the issuing corporations' capital-stock accounts, but the guardian ad litem urged the court to adopt a new rule in respect of how to determine whether a stock distribution is a dividend or a split.

The trial court, in an oral decision, noted that Dawson's will evidenced substantial concern for his wife as well as for his collateral descendants; therefore, the court concluded that in deciding whether to allocate the stock distributions to income or to principal, it could not rely with confidence on notions of which beneficiaries the will favored. Moreover, that the trust contained no provisions for the invasion of principal also indicated to the trial

court that the testator had a "meaningful objective" in preserving the corpus.

The court therefore determined that the relevant considerations in determining whether a distribution is a stock dividend or a stock split are whether the distribution effects a rearranging of the principal assets of the trust or whether the distribution is a slight enhancement, that is, an income payout. Reasoning that corporate-accounting concepts have changed and that the rules of stating the capital of corporations have little relation to the issue of allocation of stock distributions to a trust's income or principal beneficiaries, the court advocated a common-sense, functional approach: it adopted the rule advanced by the guardian ad litem and used by the New York Stock Exchange. That rule states that

if a stock distribution amounts to less than [twenty-five] percent of the sharehold[,] * * * it should be treated as income and paid out to the income beneficiaries. If it is [twenty-five] percent or more, it should be treated as simply an adjustment in the way in which a principal asset is held.

Although noting that the twenty-five-percent benchmark was somewhat arbitrary, the trial court felt the rule made "functional sense." Applying that rule to the eight stock distributions involved, the court concluded that the income beneficiaries would receive no distribution.

The trial court next determined that principles of collateral estoppel did not preclude it from adopting the twenty-five-percent rule. In the three prior intermediate accountings the court had not considered the issues posed here "in the context of the adversarial interests of the current income beneficiaries * * *." Moreover, "there have been very substantial evolutions in concepts [of accounting, corporate financial management, and estate management] between the time of the earlier adjudications in this case and the present adjudications.

Finally, the trial court decided that the law-of-the-case doctrine did not compel a different result: (1) the case has spanned a very long period of time; (2) substantial differences exist in the financial and analytical contexts of the current litigation and the prior

adjudications; and (3) the parties are not the same here as they were in the prior accountings.

The Appellate Division, in an unpublished opinion, reversed the judgment of the trial court. Viewing that court's twenty-five-percent rule as arbitrary, the Appellate Division determined that the trial court should have applied the rule of Arens, supra, 41 N.J. 364, that "the key distinguishing factor between stock dividends and stock splits [is] the capitalization of corporate earnings and the resultant transfer of funds from surplus to capital accounts." Applying the Arens rule, the Appellate Division then concluded that all eight of the contested stock distributions were dividends (and thus allocable to income under the will) because all eight involved a transfer of funds to stated capital.

We granted both Manufacturers Hanover Trust Company's and the guardian ad litem's petitions for certification, N.J. (1993), and now reverse.

II

In deciding whether to allocate the stock distributions to income or to corpus, we look first to the testator's will to determine, if we can, whether that instrument favored his wife (thus encouraging an allocation to income) or his collateral descendants (thus favoring an allocation to principal). In doing so, we "ascertain and give effect to the 'probable intention of the testator.'" Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564, 178 A.2d 185 (1962) (quoting Fidelity Union Trust Co. v. Robert, 67 N.J. Super. 564, 572, 171 A.2d 348 (App. Div. 1961)); accord In re Accounting of Thompson, 53 N.J. 276, 299, 250 A.2d 393 (1969); In re Estate of Conway, 50 N.J. 525, 527, 236 A.2d 841 (1967); In re Estate of Cook, 44 N.J. 1, 6, 206 A.2d 865 (1965). "In ascertaining the subjective intent of the testator, courts will give primary emphasis to [the testator's] dominant plan and purpose as they appear from the entirety of [the] will when read and considered in the light of the surrounding facts and circumstances." Fidelity Union Trust Co., supra, 36 N.J. at 564-65; accord In re Estate of

Branigan, 129 N.J. 324, 332, 609 A.2d 431 (1992); Darpino v. D'Arpino, 73 N.J. Super. 262, 268, 179 A.2d 527 (App. Div. 1962); Zwoyer v. Hackensack Trust Co., 61 N.J. ...


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