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CATHERWOOD TRUST. (07/26/61)

July 26, 1961

CATHERWOOD TRUST.


Appeals, Nos. 184 and 185, Jan. T., 1961, from decree of Orphans' Court of Philadelphia County, No. 3263 of 1931, in re trust of Daniel B. Cummins Catherwood. Decree, as modified, affirmed; reargument refused August 11, 1961.

COUNSEL

Clarence E. Hall, with him Donald S. Cohan, for appellants.

Thomas S. Weary, with him Saul, Ewing, Remick & Saul, for appellee.

William White, Jr., with him Sanford D. Beecher, Reeder R. Fox, and Duane, Morris & Heckscher, for Adele S. Fretz under Rule 46.

Paul Maloney, for certain life tenant, under Rule 46.

Before Jones, C.j., Bell, Musmanno, Jones, Cohen, Bok and Eagen, JJ.

Author: Jones

[ 405 Pa. Page 63]

OPINION BY MR. JUSTICE BENJAMIN R. JONES

These appeals present three problems arising under the so-called Pennsylvania Rule of Apportionment.

The factual background of these problems is relatively simple. On June 9, 1924, Mr. Catherwood created an inter vivos trust under which the First Pennsylvania Banking and Trust Company was named trustee. To this trust Mr. Catherwood transferred 1896.72 shares of the common stock of American Gas and Electric Company, now American Electric Power Company. The trust provided that the trustee hold the res, collect the income and distribute the net income in equal

[ 405 Pa. Page 64]

    shares to Mr. Catherwood's two children for life and remainder over at their death to their descendants per stirpes. Mr. Catherwood is dead but his two children (the appellants) are living.

At the audit of the trustee's third account by the Orphans' Court of Philadelphia County three apportionment problems were presented.

These problems of apportionment were:

Problem I

When this trust was created, the book value of the stock was $11.76 per share and its market value, i.e., the value at which the stock was carried in the trustee's account was $71.77 per share. On July 16, 1948 the trustee sold 200 shares of this stock. When sold, the book value ( i.e., intact value) of these 200 shares was $2352.94 and the proceeds of the sale were $7808.18 ($39.04 per share). The proceeds of the sale ($7808.18) exceeded the intact value ($2352.94) by $5455.24. However, the sale of this stock resulted in an actual loss to the trust of $6546.90, i.e., $14,355.08 (the carrying value at $71.77 per share) less $7808.18 (the proceeds of the sale). Under such circumstances should an apportionment take place of any part of the proceeds of the sale? The court below answered in the negative and directed the retention of the entire proceeds of the sale in principal.

Problem II

The trustee received four stock dividends - a 5% dividend in 1951, a 2 1/2% dividend in 1952, a 2% dividend in 1955 and a 2 1/2% dividend in 1957. Do such small dividends belong to the life tenants or should they be apportioned? The court below held the dividends should be apportioned.

[ 405 Pa. Page 65]

Problem III

On July 5, 1956, a 50% stock dividend amounting to 800 shares was received by the trustee and labeled by the Company as a "1 1/2 for 1" split. The Company issued 6,555,540 shares of common stock having a $10 share value and $65,555,400 was transferred to the capital stock account of which $40,551,060 (61.9%) was transferred from earned surplus and $24,999,480 (38.1%) from capital surplus. When the Company issued stock dividends in 1951, 1953 and 1955, $27,600,000 was transferred from earned surplus to capital surplus. The court below held that this 50% stock dividend did not constitute an apportionable event. The auditing judge (President Judge CHARLES KLEIN), joined by Judges LEFEVER and SAYLOR, in addition to determining the three apportionment problems adversely to the life tenants, urged upon us a re-examination of our decision in Crawford Estate, 362 Pa. 458, 67 A.2d 124, looking toward the relaxation of the rigidity of the rule therein enunciated so as to permit the retroactive application of the Principal and Income Act*fn1 to trusts created prior to its passage. With the disposition of the apportionment problems, the court en banc was unanimous.

Our initial attention is given to the suggestion that we re-examine and overrule Crawford which, if concurred in, would mean the abolishment and extinction of the so-called Pennsylvania Rule of Apportionment, a Rule consistently applied by this Court since Earp's Appeal, 28 Pa. 368, decided in 1857. That Rule was an equitable one which at the time of its conception and for many years thereafter - under vastly different economic

[ 405 Pa. Page 66]

    conditions than those of the last several decades - strove to balance the equities between life tenants and remaindermen with the aim of protecting the interests of both.

In Nirdlinger's Estate, 290 Pa. 457, 462, 463, 464, 465, 139 A. 200 (1927), this Court pointed out that "[when] the earnings [of a corporation whose stock forms part of the trust] have been permitted to accumulate by a corporation and their proceeds invested in corporate property, in working capital, or retained as cash or its equivalent, and an extraordinary dividend is declared in stock or cash, the respective rights of life tenants and remaindermen" were adjudicated under three rules - the Massachusetts, Pennsylvania and Kentucky rules. Under the Massachusetts rule - one of convenience - all cash dividends are awarded to the life tenant and all stock dividends to the remainderman: Minot v. Paine, 99 Mass. 101.*fn2 Under the Kentucky rule, a "dividend, whether of stock or cash goes to the person entitled to receive the income at the time the dividend is declared, without regard to the time when it was earned": (Nirdlinger's Estate, supra, 465). Under the Pennsylvania rule "the rights of the life tenant and remainderman to an extraordinary cash or a stock dividend declared during the life tenancy are determined by a division of the dividend between the claimants so as to preserve intact ...


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