Chapman, C. J.
Under the will of Mrs. Lee, the shares in question were held by the trustee to pay over the net income thereof, as often as convenient, to Mrs. Paine, during her natural life, for her sole and separate use, &c.; and, on her death, to transfer and convey the same in fee to such persons, and on such terms, as Mrs. Paine, by her last will and testament, executed after her majority, may direct and appoint; and, in default of such will executed after her majority, or if she shall die a minor, then to her issue, if any, surviving her; and, in default of such issue or such will, then to the issue surviving her of the said George L. Schuyler; the trustee having full powers of sale and conveyance and change of investments in the management of the trust estate.
[106]*106The fact that the shares in the Western Railroad Corporation were received by the trustee as part of Mrs. Lee’s estate, and that the shares in the Chicago, Burlington and Quincy Railroad Company were purchased by him as an investment, is not material to the present case.
In addition to the cash dividends which were declared by the directors of the Chicago, Burlington and Quincy Railroad Company, a dividend of twenty per cent, in stock was made in September 1867, and received by the trustee, which he sold for $5000, being twenty-five per cent, above the par value of the shares. And, in July 1867, the directors of the Western Railroad Corporation made a stock dividend, three shares of which came to him.
The question presented to the court is, whether these stock dividends, or either of them, are to be treated by him as income, belonging to Mrs. Paine, the tenant for life ; or as capital, to be kept for the legatees of the stock in remainder, and of which Mrs. Paine is entitled to receive the income during her life.
The dividend made by the Chicago, Burlington and Quincy Railroad Company is stated in the vote of the directors to be made to represent expenditures for improvements on the road, the construction of the Burlington Bridge, &c.; and the pleadings admit that it -was made from the net earnings of the road, for the permanent improvement of the road, and additions to the road, and the purchase of property now belonging to the road which yields a net income; and that the dividend made by the Western Railroad Corporation was made from its net earnings for purposes substantially similar. The votes are stated in the 1 ill; but it is not necessary to refer to them more particularly.
The court do not regard the fact that the dividends were made from the net earnings of the roads as material. The net earnings of a railroad corporation remain the property of the company as fully as its other property, till the directors declare a dividend. A shareholder has no title to them prior to the dividend being declared. In most of our prosperous railroad corporations, the directors apply a considerable portion of their net [107]*107income to the laying of additional tracks, the building of new depots, the increase of their rolling stock, and sometimes to the purchase of land which they deem important to the accommodation of their business, or to other permanent improvements of the road; and they have discretionary power to do so. Tt is true that they may abuse their power, and refuse to make any dividends, though their net income may be large; and apply their funds to the permanent improvement of the road, tind thereby deprive a life tenant of all benefit from the shares, and reserve the whole income for the benefit of the remainderman. But in the present case it is not alleged that there* has been any abuse of power; and it need not be decided whether, in case of such abuse, the trustee can protect the interests of the tenant for life in any other manner than by selling the shares and investing the trust fund in some other way by which he may obtain a reasonable income.
It is obvious that, if the directors had made no stock dividend, but had invested the income in permanent improvements, making no increase of the number of shares, the improvements would have been capital, belonging to the legatees in remainder. So, if they had thus invested it, and, instead of increasing the '.number of shares, had increased their par value, the shares would have been mere capital, and not income, as to the shareholders, though increased in value by the application of the net income of the road to that purpose. So, when they increase the number of shares, each share of all the stock in the corporation is in its nature capital. The new shares take their place among the old ones; and each of the old shares thereby becomes a less proportion of the whole stock than it was before, and is entitled to a less proportion of dividends declared than it was before. It may be that dividends are less per cent, than they would otherwise have been, and in such case the old stock is diminished in value, and the interest of the remainder-man is injuriously affected. But, on the other hand, the effect may be, by increasing the business of the road, to increase the dividends and the market value of the old stock.
But neither courts nor trustees can investigate such matters [108]*108with accuracy; and in many cases no investigation can be made. A trustee needs some plain principle to guide him; and the cestuis que trust ought not to be subjected to the expense of going behind the action of the directors, and investigating the concerns of the corporation, especially if it is out of our jurisdiction. A simple rule is, to regard cash dividends, however large, as income, and stock dividends, however made, as capital. The court are of opinion that this rule is more in conformity with the legal and equitable rights of shareholders than any other that has been suggested. It is also in conformity with the decisions of the court, so far as the subject has been considered.
In Reed v. Head, 6 Allen, 174, the cash dividends made by a land company were held to belong to the tenant for life, though they were derived from the sale of its real estate, which was its capital; this being its only method of earning dividends. On the other hand, where a gas light company increased the number of its shares, the right of a trustee to subscribe for new shares, which was a valuable right, was held to be the property of the legatee in remainder, and the sum realized by the sale of the right was directed to be invested for his benefit, the income to be paid to the legatee for life. Atkins v. Albree, 12 Allen. 359.
The subject has been much discussed by other courts; and, as it has been fully and ably argued, and is practically very important, it may be well to refer to the authorities.
The earlier English decisions have been unsatisfactory to the profession, and to the English courts. In Brander v. Brander, 4 Ves. 800, the bank had advanced to the government one million sterling, and had received for it £1,125,000 of five per cent, annuities. These were distributed among the stockholders. The testator bad devised his bank stock to the plaintiff, subject to an annuity for life. Lord Chancellor Loughborough held that the dividends out of the £1,125,000 were accretion to the capital and belonged to the remainderman, and that the tenant for life was entitled to receive only the income which it might earn, He said the same thing had been done when the bank increased their dividends, on the ground that there had been a gradual [109]*109saving.
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Chapman, C. J.
Under the will of Mrs. Lee, the shares in question were held by the trustee to pay over the net income thereof, as often as convenient, to Mrs. Paine, during her natural life, for her sole and separate use, &c.; and, on her death, to transfer and convey the same in fee to such persons, and on such terms, as Mrs. Paine, by her last will and testament, executed after her majority, may direct and appoint; and, in default of such will executed after her majority, or if she shall die a minor, then to her issue, if any, surviving her; and, in default of such issue or such will, then to the issue surviving her of the said George L. Schuyler; the trustee having full powers of sale and conveyance and change of investments in the management of the trust estate.
[106]*106The fact that the shares in the Western Railroad Corporation were received by the trustee as part of Mrs. Lee’s estate, and that the shares in the Chicago, Burlington and Quincy Railroad Company were purchased by him as an investment, is not material to the present case.
In addition to the cash dividends which were declared by the directors of the Chicago, Burlington and Quincy Railroad Company, a dividend of twenty per cent, in stock was made in September 1867, and received by the trustee, which he sold for $5000, being twenty-five per cent, above the par value of the shares. And, in July 1867, the directors of the Western Railroad Corporation made a stock dividend, three shares of which came to him.
The question presented to the court is, whether these stock dividends, or either of them, are to be treated by him as income, belonging to Mrs. Paine, the tenant for life ; or as capital, to be kept for the legatees of the stock in remainder, and of which Mrs. Paine is entitled to receive the income during her life.
The dividend made by the Chicago, Burlington and Quincy Railroad Company is stated in the vote of the directors to be made to represent expenditures for improvements on the road, the construction of the Burlington Bridge, &c.; and the pleadings admit that it -was made from the net earnings of the road, for the permanent improvement of the road, and additions to the road, and the purchase of property now belonging to the road which yields a net income; and that the dividend made by the Western Railroad Corporation was made from its net earnings for purposes substantially similar. The votes are stated in the 1 ill; but it is not necessary to refer to them more particularly.
The court do not regard the fact that the dividends were made from the net earnings of the roads as material. The net earnings of a railroad corporation remain the property of the company as fully as its other property, till the directors declare a dividend. A shareholder has no title to them prior to the dividend being declared. In most of our prosperous railroad corporations, the directors apply a considerable portion of their net [107]*107income to the laying of additional tracks, the building of new depots, the increase of their rolling stock, and sometimes to the purchase of land which they deem important to the accommodation of their business, or to other permanent improvements of the road; and they have discretionary power to do so. Tt is true that they may abuse their power, and refuse to make any dividends, though their net income may be large; and apply their funds to the permanent improvement of the road, tind thereby deprive a life tenant of all benefit from the shares, and reserve the whole income for the benefit of the remainderman. But in the present case it is not alleged that there* has been any abuse of power; and it need not be decided whether, in case of such abuse, the trustee can protect the interests of the tenant for life in any other manner than by selling the shares and investing the trust fund in some other way by which he may obtain a reasonable income.
It is obvious that, if the directors had made no stock dividend, but had invested the income in permanent improvements, making no increase of the number of shares, the improvements would have been capital, belonging to the legatees in remainder. So, if they had thus invested it, and, instead of increasing the '.number of shares, had increased their par value, the shares would have been mere capital, and not income, as to the shareholders, though increased in value by the application of the net income of the road to that purpose. So, when they increase the number of shares, each share of all the stock in the corporation is in its nature capital. The new shares take their place among the old ones; and each of the old shares thereby becomes a less proportion of the whole stock than it was before, and is entitled to a less proportion of dividends declared than it was before. It may be that dividends are less per cent, than they would otherwise have been, and in such case the old stock is diminished in value, and the interest of the remainder-man is injuriously affected. But, on the other hand, the effect may be, by increasing the business of the road, to increase the dividends and the market value of the old stock.
But neither courts nor trustees can investigate such matters [108]*108with accuracy; and in many cases no investigation can be made. A trustee needs some plain principle to guide him; and the cestuis que trust ought not to be subjected to the expense of going behind the action of the directors, and investigating the concerns of the corporation, especially if it is out of our jurisdiction. A simple rule is, to regard cash dividends, however large, as income, and stock dividends, however made, as capital. The court are of opinion that this rule is more in conformity with the legal and equitable rights of shareholders than any other that has been suggested. It is also in conformity with the decisions of the court, so far as the subject has been considered.
In Reed v. Head, 6 Allen, 174, the cash dividends made by a land company were held to belong to the tenant for life, though they were derived from the sale of its real estate, which was its capital; this being its only method of earning dividends. On the other hand, where a gas light company increased the number of its shares, the right of a trustee to subscribe for new shares, which was a valuable right, was held to be the property of the legatee in remainder, and the sum realized by the sale of the right was directed to be invested for his benefit, the income to be paid to the legatee for life. Atkins v. Albree, 12 Allen. 359.
The subject has been much discussed by other courts; and, as it has been fully and ably argued, and is practically very important, it may be well to refer to the authorities.
The earlier English decisions have been unsatisfactory to the profession, and to the English courts. In Brander v. Brander, 4 Ves. 800, the bank had advanced to the government one million sterling, and had received for it £1,125,000 of five per cent, annuities. These were distributed among the stockholders. The testator bad devised his bank stock to the plaintiff, subject to an annuity for life. Lord Chancellor Loughborough held that the dividends out of the £1,125,000 were accretion to the capital and belonged to the remainderman, and that the tenant for life was entitled to receive only the income which it might earn, He said the same thing had been done when the bank increased their dividends, on the ground that there had been a gradual [109]*109saving. To apply such a rule to the cash dividends made by corporations in this country, where dividends are so variable in amount, would be unreasonable and absurd.
In Paris v. Paris, 10 Ves. 185, an extra dividend was declared by the bank from the profits of the last half year. Lord Eldon decided the case on the authority of Brander v. Brander, and said it made no difference whether the dividend was in money or in stock. But he was unable to answer the argument made by Sir Samuel Romilly for the life tenant, or to state any satisfactory principle on which the two cases rested; and seemed to be dissatisfied with the result. In Clayton v. Gresham, 10 Ves. 288, the same rule was adopted in respect to an extraordinary dividend of profits made by the bank among the proprietors of the stock. In Witts v. Steere, 13 Ves. 363, Lord Erskine adopted the rule, but expressed doubts as to the correctness of the principle. In Barclay v. Wainwright, 14 Yes. 66, Lord Eldon, after reviewing the former case, decreed to the tenant for life an extra dividend of five per cent., made by the bank. This case was cited with approbation by Sir Thomas Plumer, V. C., in Norris v. Harrison, 2 Madd. 279.
In Hooper v. Rossiter, McClel. 527, Lord Chief Baron Alexander said it seemed clear from all the cases, from the first to the last, that, wherever the addition was made clearly and distinctly as a dividend only, the tenant for life was to have it; but, wherever it was not clearly given as a dividend, it was considered as an accretion to the capital, divisible amongst the proprietors.
In Price v. Anderson, 15 Sim. 473, an increased dividend made by an insurance company was held to be income. Shad-well, Y. C., said that the company might have declared, if they had thought proper to do so, that a part should be dividend and a part capital. But, as they had declared the whole to be dividend, he held that it belonged to the tenant for life. He refused to go behind the action of the company, and recognized their discretionary power. This discretionary power of a company over its earnings is certainly a very essential element in its bearing upon the respective rights of tenant for life and remainder-man.
[110]*110In Bates v. Mackinley, 31 Beav. 280, dividends and bonuses earned before the testator’s death, but declared afterwards, were held to be income belonging to the tenant for life. In Johnson v. Johnson, 15 Jur. 714, a bonus, or increased dividend of ¿£10 per share, in addition to the usual dividend, was held to be income, and not capital. In Murray v. Glasse, 17 Jur. 816, dividends on Mexican Mint shares, and also bonuses declared out of profits, were held to belong to the tenant for life. In Cuming v. Boswell, 2 Jur. (N. S.) 1005, in the house of lords, bonuses were held to be income ; and the earlier cases cited above were spoken of by Lord Cranworth as not resting on very solid ground.
In re Barton’s trust, Law Rep. 5 Eq. 238, the testator left five shares in the India General Steam Navigation Company. The company added three new shares to the original five, out of the earnings of their steamers for the last half year, to be applied to the cost of new steamers; and the new shares were issued to represent the money so applied. A dividend was made of the remaining portion of the earnings. Vice-Chancellor Wood held that the new shares were capital and not income ; that the company had power to make such an appropriation of a part of their profits; and that a shareholder was bound by the action of the majority.
Clive v. Clive, Kay, 600, Plumbe v. Neild, 6 Jur. (N. S.) 529, and Wright v. Puckett, 1 Johns. & Hem. 266, may be referred to, but do not need to be noticed particularly.
From this review of the English cases, it appears that the case of Brander v. Brander, and the principle on which it rests, are regarded in England as unsatisfactory; and that there is no reason why we should follow it.
The caSes cited from New York have been decided in their supreme court, and not by their highest tribunal. In Clarkson v. Clarkson, 18 Barb. 646, it was held that extra dividends were to be regarded as profits; but bonds or certificates given by a railroad for the purpose of consolidation with another road were capital, and belonged to the remainderman. James, J., expresses dissatisfaction with Brander v. Brander, and the cases which follow it. In Simpson v. Moore, 30 Barb. 638, the subject [111]*111of the bequest was bank stock. The charter of the bank expired, and a dividend of eighteen per cent, was declared, with an option to stockholders to invest it in a renewed charter. It was held that the dividend was profits, except so far as it impaired the capital. So far as it did that, it was directed to be retained as capital, and the balance to be paid to the tenant for life. These cases do not differ from the views we have expressed.
In Earp's case, 28 Penn. State, 368, the capital stock was increased by the creation of new shares. A dividend of the shares was made, and they were paid for out of the profits of the business. It was held that the additional shares should go to the legatee for life as income. But in that case the fact that the corporation has, within the limits of its charter, the power to withhold dividends, and use all its funds in such a way as merely to increase its property, is not discussed.
On this point the case of Pratt v. Pratt, 33 Conn. 446, is pertinent. The court held that, where the directors of a manufacturing corporation were about to invest their income in the erection of new buildings and machinery, and enlarge their business within the limits of their chartered authority, a case was not made for equitable interference by injunction in favor of a minority of dissenting stockholders.
This case illustrates the principle applicable to the present case. The money in the hands of the directors may be income to the corporation ; but it is not so to a stockholder till a dividend is made; and, where the company invest it in buildings and machinery, or in railroad tracks, depots, rolling stock, or any other permanent improvements, for enlarging or carrying on their legitimate business, it never becomes income to the shareholder. The investment becomes an accretion to the capital ; and it is equally so whether they increase the number of shares, or the par value of shares, or leave the shares unaltered. Or if the number of shares is increased for purposes merely speculative, it is an increase of capital stock, and not of income , and it would be practically unwise for courts to go behind the action of the company and attempt to ascertain how they came [112]*112by the funds out of which they declare either cash or stock div dends.
As the corporation is the legal owner of the property, and has power, within the limits of its charter, to give to the shareholders either an increase of income or an increase of capital, out of the money in its hands, according to the discretion of its directors, it would seem to follow that an increase of capital should be kept for the remainderman, and an increase of income should be paid to the tenant for life. This rule appears to be in conformity with the intention of the testator who gives personal property in this manner. He is held to have the interest of the successive takers equally in view. Kinmonth v. Brigham, 5 Alen, 270.
The equitable rights of the cestuis que trust will thus coincide with the legal rights of the legal holder of the stock, who holds his shares as his capital, and his cash dividends as his income from that capital. As to him, a stock dividend is an accretion to his capital; and there is nothing to show that the testator intended that it should be otherwise as between the successive takers of his bounty.
Decree that the new shares be held as capital for the legatee in remainder; the income to be paid to the legatee for life.