For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes

*For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes

of the life tenant, the Washington County | facts and law applicable to the case, and signHospital Association and another appeal. ed a decree giving effect to the conclusion Affirmed. that he had reached, and from the decree this appeal was taken.

Argued before BOYD, C. J., and BURKE, URNER, STOCKBRIDGE, and CONSTABLE, JJ.

C. A. Little and Frank G. Wagaman, both of Hagerstown, for appellants. Shirley Carter, of Baltimore (J. A. Mason, of Hagerstown, of counsel), for appellee.

BURKE, J. The question presented by this appeal is whether the sum of $22,200, paid to the estate of Edward W. Mealey, as dividends on stock held by him in his lifetime in two West Virginia lumber companies is to be treated as corpus and paid to the appellants, the legatees in remainder under Mr. Mealey's will, or as income payable to the appellee, who is the administrator c. t. a. of Mrs. Adelaide Savage Mealey, the life tenant under her husband's will. Mr. Mealey died on the 28th day of April, 1911. The seventh, or residuary clause of his will, which was dated on the 12th day of May, 1908, and admitted to probate by the orphans' court for Washington County on May 12, 1911, is as follows:

"All the rest, residue and remainder of my estate, real, personal and mixed and wheresoever situate, I give, devise and bequeath to the Hagerstown Trust Company of Hagerstown, Maryland, trustee, to hold the same and collect the income therefrom, and pay over the net amount thereof, to my wife Adelaide Savage Mealey in semiannual installments, and upon her death I direct that the whole corpus or principal of the trust estate held under this clause of my will be passed over and delivered by my said trustee as follows: Two-thirds thereof to the Washington County Hospital Association, a body corporate, duly incorporated under the laws of the state of Maryland; and the remaining one-third thereof to the Washington County Free Library, a body corporate, duly incorporated under the laws of the state of Maryland."

Mrs. Mealey, the widow of the testator, died on the 28th of March, 1912, and the dividends, over which the controversy in this case arose, were declared and paid over between the date of the death of Mr. Mealey and that of his wife. The Washington County Hospital and the Washington County Free Library, the two corporations to which the estate was devised and bequeathed in remainder, claim these dividends as a part of the corpus of the estate. This claim is resisted by the appellee, who insists that, since the dividends were declared in the ordinary course of business of the companies, and distributed in the time intervening between the date of Mr. Mealey's death and that of his wife, they are income and not corpus and belonged to her, and are payable to her estate. The lower court sustained the appellee's contention, and further allowed him as interest the sum of $647.50; that being the amount of interest received by the trustee upon the amount of the dividends. In a carefully prepared opinion Judge Keedy reviewed fully the

The facts that need be stated are these: The two corporations in which Mr. Mealey held stock at the time of his death, and which

paid the dividends involved in this case, were: First, the Taggarts River Lumber Company, incorporated in April, 1902; and secondly, the Glady Fork Lumber Company, incorporated in February, 1906. The objects and purposes of the first-named company, as stated in its charter were:

"To acquire (by purchase or otherwise), hold, transfer, assign, lease, sell and convey lands, timber rights, timber, lumber, railroads, tramroads, logging roads and other real and personal property, whether located in Randolph county, or elsewhere in the state of West Virginia; to construct, maintain, operate and remove sawmills, tramroads, railroads, logging plants, roads, lines and appliances, camps, dwellroads, telephone, telegraph and electric light ing houses, and any other buildings, yards, equipments and appliances which may be necessary or convenient for the purposes of its transport and remove all sorts of timber, and incorporation; to cut, haul, manufacture, sell, to deliver the same to points within or without the state of West Virginia; to cut, peel, haul, load and deliver, to points within or without any and all other timber by-products, and to the state of West Virginia, bark, pulpwood and sell the same; and generally to exercise such other functions and to enjoy such other privileges as usually appertain and rightfully belong to corporations organized for similar purposes."

The powers and purposes of the second company were:

ture timber into lumber; to buy and sell lum"To buy and sell timber lands; to manufacber and lumber products; to manufacture lumber into lumber products of all kinds; to build houses; to purchase, erect and equip sawmill or sawmills, and to manufacture thereon lumber into lumber products of all kinds; to build and equip in connection with said sawmill or sawmills, electric plant or plants to light said mill or mills; to build tram or logging railroads in connection with said lumber operation; and to do any and all other things necessary or convenient to carry on a general lumber business, and to manufacture the same into lumber products, and to sell the same at either wholesale or retail, and to carry on and operate in connection therewith a general store.'

The property of the Taggarts River Lumber Company, in which its capital stock has been invested, consisted, as stated by Mr. E. M. Allen, "of a sawmill plant and the necessary equipment, consisting of houses, store buildings, and things of that sort which the company owned in fee, and the land on which they were situated, and my recollection is we owned about 1,500 acres in fee in mountain land, upon which there was some timber, and probably 15,000 acres upon which we had timber rights.

The 1,500-acre tract was bought for a right of way for the railroad; there was very little timber on that.” The capital of the company was used to pay for the timber, for building a railroad, a mill, and was put in by the company for the manufacture of lumber. The company owned

only the timber rights of the greater part of the timber. Practically the same situation existed with reference to the Glady Fork Lumber Company. The business carried on by both companies was the cutting of the timber from the lands, hauling it to the mill, sawing it, or manufacturing the lumber into timber, beams, boards, and selling the lumber, collecting the money, and dividing it among the stockholders as it was earned. This was the usual and ordinary course of the business and methods of the companies, and were the objects for which they were organized.

Nineteen thousand dollars in dividends upon the stock held by Mr. Mealey in the Taggarts River Lumber Company were paid in the period intervening between his death and that of his widow. Testifying as to the source from which that money was derived, Mr. J. A. G. Allen said it was derived from the products of the company, from the manufacture and sale of lumber. In the same period $3,200 in dividends were paid upon the stock held by the testator in the Glady Fork Lumber Company. These dividends were derived from the manufacture and sale of lumber taken between April 28, 1911 (the date of Mr. Mealey's death), and March 8, 1912 (the date of Mrs. Mealey's death), from tracts in which the company owned the timber rights.

[1] It is clear from the evidence that the money from which the dividends were paid was derived from the conversion of the standing timber in which the capital of the companies had been invested, into lumber, and the sale of the manufactured lumber, and it was therefore derived from the prosecution of the very business the companies were organized to carry on. It is obvious that the prosecution of the companies' business necessarily resulted in the cutting, manufacturing, and selling the property in which the capital was invested, and that was the only possible way by which the stockholders could hope to realize on their investment. While it might be that a portion of the lumber from which the dividends on the stock of the Glady Lumber Company were derived was "sawed, cut out," as stated by Mr. J. A. G. Allen, the lumber had not been sold and the proceeds received by the company at the time of Mr. Mealey's death, and therefore it cannot be held that the proceeds of such lumber, if any there was, were earned in the lifetime of Mr. Mealey.

correct.

*

"The principles for the determination of this question have been frequently laid down by this Md. 556, 28 Atl. 565, 44 Am. St. Rep. 310; court. See the cases of Thomas v. Gregg, 78 Smith v. Hooper, 95 Md. 16, 51 Atl. 844, 54 Atl. 95; Robinson v. Bonaparte, 102 Md. 63, 61 Atl. 212; Atlantic Coast Line Case, 102 Md. 73, 61 Atl. 295; Ex parte Humbird, 114 Md. 627, 80 Atl. 209. But there are no facts before this court by which it can say definitely whether that portion of the order of the orphans' court appealed from was correct or inUnder the second clause of Mr. Mealey's will, his widow was to receive in semiannual installments the net income from his estate, but as no dates appear in the account to show when this item of income was received, whether before or after her death, it is impossible for this court to say from the condition of the record whether the allowance so asked for by the executor was correct or not. will to receive the net income, as in the will Mrs. Mealey was entitled under her husband's provided, and if there was income due her which had not been paid at the time of her death, it was manifestly a part of her estate and would pass to her personal representatives."

The question of the apportionment of dividends between a life tenant and a remainderman was considered in the recent case of Virginia Lee Foard v. Safe Deposit & Trust Company of Baltimore, Trustee, 122 Md. 476, 89 Atl. 724, decided January 14, 1914, in

which it was said:

closely with what is now known as the Massa"While the modern English rule corresponds chusetts rule, by which, if the dividend be in cash, it is allotted to the life tenant, but if in stock, it is added to the corpus, this is a simple but an arbitrary rule, and calculated to work injustice in many cases. As opposed to this is what is generally known as the Pennsylvania rule, or as designated by Mr. Cook in his work on Stock and Stockholders, section 554, as the American rule. It is also sometimes designated as the apportionment rule, and is thus stated in Smith's Estate, 140 Pa. 344, 21 Atl. 438, 23 Am. St. Rep. 237; 'It is well settled in this state that, when the stock of a corporation is by the will of a decedent given in trust, and the income thereof for the use of a beneficiary for life, with remainder over, the surplus profits, which have accumulated in the lifetime of after his death, belong to the corpus of his the testator, but which are not divided until estate, whilst the dividends of earnings made after his death are income, and are payable to the life tenant, no matter whether the divstatement of the rule is the substance of the idends be in cash, or scrip, or stock.' doctrine as laid down in Earp's Appeal, 28 Pa. 368, one of the earliest and leading cases upon the subject in this country. It was argued that the doctrine of Earp's Appeal had been shaken, if not modified, by the decision in Boyer's Appeal, 224 Pa. 144, 73 Atl. 320, but any such idea is effectually dispelled by Pa. 277, 87 Atl. 974, in which the rule adoptthe very recent case, In re Stokes' Estate, 240 ed in Earp's Appeal is distinctly reaffirmed. The cases in this state are in full accord with

This court had before it the residuary clause of Mr. Mealey's will and the question the Pennsylvania rule." of the proper distribution of these dividends in the case of Hagerstown Trust Company, Executor of Mealey, 119 Md. 224, 86 Atl. 982, but in the condition of the record in that case the court found it impossible to say whether those sums of money constituted a portion of the corpus of the estate or should have been treated as income. Judge Stockbridge, speaking for the court, said:

This

In Ex parte Humbird, 114 Md. 627, 80 Atl. 209, it appeared that Jacob Humbird by his will provided that the residue of his estate should be held by trustees, who were directed to manage, control, invest, and reinvest said property in a careful and prudent manner, and pay over or distribute annually to each of his children "the interest and earnings" of the estate so devised. The

will further provided that the trust should "last during the lifetime of each of said children, and after their respective deaths said bequests should go to their heirs."

The trustees held an undivided one-sixth

equitable interest in 20,000 acres of land, in which $29,039.35 of the corpus of the estate had been invested. No income had ever been derived from this property. This undivided interest was sold for $85,549.69. Another investment of the corpus of the trust which came into the hands of the trustees were cer+ain shares of stock of a lumber and manufacturing company, upon which the testator had paid $111,149.91. The trustees held the stock, and made certain payments on it out of the corpus of the trust, amounting, with those made by the testator, to $195,999.91. Prior to 1910 the company had paid only three dividends on its stock. In February, 1910, a dividend of $15 per share was declared, and in July following a further dividend of $276 per share. These dividends were paid out of funds realized from the sale of 52,000 acres of the company's timber land. The amount of the dividend involved in that case on the shares of the trust was $676,000. This was claimed by the life tenants as income, while the remainderman asserted that it should be treated as corpus. Upon these facts two questions were presented for decision: First, did the whole of the proceeds realized from the sale of the undivided onesixth equitable interest in the 20,000 acres of land held directly by the trustees belong to the corpus of the trust, or should the difference between the purchase and the selling price of the land be treated as income? Second, was the dividend declared out of the proceeds of the sale of the corporate real estate corpus or income? The lower court decided that the money received by the trustees from both sources constituted a part of the corpus of the trust, and this court affirmed the decree upon the general principle stated in Taylor on Private Corporations (4th Ed.) § 799, and other cases cited in the opinion:

"When after the testator's death the company sells a portion of its property or franchises and distributes the proceeds in the shape of a cash dividend, that, too, is a part of the principal and is not income to be paid over to the life

tenant."

income if they arise from the sale of property made by the corporation in the ordinary course of its business when it sells only such property as its regular business is to sell."

In 2 Clark and Marshall on Private Cor

porations 621, the rule is said not to apply
that its ordinary business is to sell property
"where the nature of the corporation is such
in which its capital is invested, and distrib-
ute the proceeds among its stockholders."
in the exception to the general rule, and re-
The facts of this case bring it clearly with-
quires us to hold that the dividends in con-
troversy are income and are payable to the
appellee as decided by the lower court.

made by the appellants that it was the duty
[2] We do not agree with the contention
of the trustee to have sold the stocks and
invested the proceeds in other securities, and
that since this was not in fact done, the court
of equity will now treat them as converted
from the date of Mr. Mealey's death, "and
will allow the life tenant such a sum as
will represent a fair interest upon the value
of the securities at the time at which they
are to be considered as converted." There
is certainly no rule of Maryland law to sup-
port this contention. It is not supported by
Evans v. Iglehart, 6 G. & J. 171, and Wooten
v. Burch, 2 Md. Ch. 200, cited to sustain it,
and is contrary to the doctrine announced in
Heighe v. Littig, 63 Md. 301, 52 Am. Rep.

510.

The decree appealed from will be affirmed. Decree affirmed, the costs to be paid out of the trust estate.

(124 Md. 46)

HARFORD NAT. BANK OF BEL AIR v.
RUTLEDGE et ux. (No. 50.)

(Court of Appeals of Maryland. June 26,
1914.)

1. WITNESSES (§ 126*)-COMPETENCY-TRANS-
ACTION WITH DECEDENT-GOVERNING STAT-
UTE.

a note, sued thereon by one claiming it as
The question of competency of the maker of
pledgee of the deceased payee, to testify to
transactions with deceased, the action being
is governed by Laws 1902, c. 495, which, with-
commenced in 1897, and the trial being in 1913,
out excepting pending cases from its operation,
made a radical change in the existing law, en-
acted by Laws 1888, c. 315, so as to permit a
party to a contract to testify where the other
party is dead, except in actions by or against
executors or administrators in which judgments
or decree may be rendered against them; and
excepting pending cases from its operation.
[Ed. Note. For other cases, see Witnesses,
Cent. Dig. § 551; Dec. Dig. § 126.*]
2. APPEAL AND ERROR (§ 1050*)-HARMLESS
ERROR-ADMISSION OF EVIDENCE.

After holding that the facts of that case brought it within the general rule, Judge Urner in his opinion proceeds to state the prin-Laws 1904, c. 661, amending said act of 1902, ciple which, in our opinion, should be applied to this case:

"The exceptions to the general rule we have thus stated and illustrated are confined, as indicated in the note in 12 L. R. A. (N. S.) 769, from which we have quoted, to cases in which the earnings of the company necessarily involve the conversion of its capital."

In Taylor on Private Corporations (4th Ed.) 899, the exception is thus defined: "Moneys arising from the sale of corporate property and distributed as a cash dividend are

The testimony of the maker of a note, sued thereon by its pledgee, as to how he was engaged in the canning business, given after his proper testimony, that he was engaged in that business, was harmless.

[Ed. Note.-For other cases, see Appeal and Error, Cent. Dig. §§ 1068, 1069, 4153-4157, 4166; Dec. Dig. § 1050.*]

*For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes