clined to the view that it has that effect as to the defendant widow. Her husband may not accomplish indirectly what he is not permitted to do directly. I therefore regard the contract valid as between the parties thereto, but malum prohibitum as to her, and without effect upon her interest in her husband's estate under the statute of distribution. James M. Ordway left no will, and therefore the enforcement of this contract is in no way brought into conflict with any other disposition of his property made by him.

These views lead to the conclusion that judgment must be entered in behalf of the plaintiff for the specific performance of the contract set up in the complaint, such judgment not to affect the interest of the defendant widow in her husband's estate.

Judgment accordingly.

(111 App. Div. 882)

ROBERTSON et al. v. DE BRULATOUR et al.

(Supreme Court, Appellate Division, First Department. March 23, 1906.) 1. TRUSTS-CAPITAL AND INCOME-DIVIDENDS ON STOCK.

Where testator's will gave railroad stock to trustees, to pay the income and profits to testator's wife for life, with remainder to his heirs, and real estate of the corporation which was not needed in its business was sold and the proceeds distributed as a dividend, the widow was entitled to the same.

2. SAME-DEPRECIATION IN SECURITIES-RIGHT TO ESTABLISH SINKING FUND. Where testator's will gave certain securities to trustees, to pay the income and profits to the widow, with remainder to testator's heirs, the trustees had no authority to establish a sinking fund from income and profits to provide for depreciation in the value of the securities. 3. SAME-COMMISSIONS OF TRUSTEES.

Code Civ. Proc. § 2802, provides that a testamentary trustee shall be allowed the same compensation as executors and administrators on the basis of receiving and paying out "sums of money." Section 3320, as amended in 1904, provides that a trustee shall receive commnissions on all sums of "principal" received and paid out. Held that, the amendment having been made after judicial construction of the other sections so as to award commissions only when the property had been received and turned into money, a trustee receiving securities to pay the income and profits to a life beneficiary was entitled to commissions immediately upon the receipt of the property out of the corpus of the estate.

4. SAME.

Where a will gave personal property to trustees, to pay the income and profits to a life beneficiary and to preserve it for certain remaindermen, the life beneficiary was entitled to receive a commission as trustee on personal property received by the trustees.

Appeal from Judgment on Report of Referee.

Action by Alexander F. Robertson and another, as testamentary trustees under the will of John T. Farish, deceased, against Martha S. De Brulatour and others, to have their accounts settled. From the judgment entered upon the report of the referee, all parties appeal. Modified and affirmed.

Argued before O'BRIEN, P. J., and PATTERSON, INGRAHAM, LAUGHLIN, and CLARKE, JJ.

Henry De Forest Baldwin, for appellant, De Brulatour.

George F. Canfield, for remaindermen.

Edward T. McLaughlin, guardian ad litem for infant remaindermen.

and 132 New York State Reporter

INGRAHAM, J. This action was brought by the trustees under the last will and testament of John T. Farish to have their accounts settled. The controverted questions upon this accounting related to dividends upon stocks bequeathed to the trustees in trust for the testator's widow and as to the commissions to which the trustees were entitled. The trust was created by the sixth clause of the will of John F. Farish, and is as follows:

"Sixth. I give and bequeath to Charles M. Fry, Alexander F. Robertson, and my wife, Martha G. Farish, and the survivors and survivor of them, and to the successor or successors of such survivor, twenty-five hundred (2,500) shares of the capital stock of the New York & Harlem Railroad Company, one thousand (1,000) shares of the capital stock of the New York Central & Hudson River Railroad Company (consolidated), and one thousand (1,000) shares of the capital stock of the Chicago, Rock Island & Pacific Railway Company, also twenty thousand dollars ($20,000) at the par value of the consolidated bonds of the Erie & Pittsburgh Railroad Company, fifty thousand dollars ($50,000) at the par value of the consolidated bonds of the Chicago & Northwestern Railway Company, and thirty thousand dollars ($30,000) at the par value of the first mortgage bonds of the Louisiana & Missouri River Railroad Company, together with all interest accrued on said above-described bonds at the time of my death and all interest accruing thereon thereafter, and also every and all dividends which may be declared on the above-described stocks subsequent to my death, in trust, nevertheless, to receive the income and profits thereof and apply the same to the use of my said wife, Martha G. Farish, during the term of her natural life; and I hereby authorize and empower my said trustees, if it shall seem advisable to them so to do, to sell and dispose of any or all of the aforesaid shares of stock and bonds, and to invest and reinvest the pro- * ceeds in such securities as to them may seem advisable and to apply the income arising therefrom as above provided. Upon the death of my said wife I give and bequeath all of the above-mentioned shares of stock and bonds, or the proceeds of such as shall have been previously sold, to such persons as would have inherited the same under the laws of the state of New York, if the same were real estate and I had died, intestate and unmarried, at the same time as my said wife, and in such proportions as they would have inherited the same, respectively."

The testator died, a resident of the city of New York, on the 13th day of May, 1891. He left, him surviving, his widow, but no children; his next of kin being certain brothers and sisters, all of whom are now dead. Those who are his present next of kin are the descendants of two sisters, who are parties to this action. The first questions to be considered relate to a dividend declared on September 19, 1899, by the New York & Harlem Railroad, which amounts to $31,250; to a dividend of 100 shares of stock declared as a stock dividend upon the stock of the Chicago, Rock Island & Pacific Railroad Company held by the trustees, and to the amount realized by the trustees for the sale of rights to subscribe for certain additional stock of the Chicago, Rock Island & Pacific Railroad Company and the New York Central Railroad Company, and the allowance of commissions.

Before discussing the question relating to these dividends, we will consider the intention of the testator relating to this trust as disclosed by the will. The testator, leaving a large estate, made provision for his wife. He gave her $100,000 in cash, a stable, and his horses, carriages, furniture, and household articles, and created for her benefit this trust, consisting of securities of the par value of $125,000. This trust consisted of $325,000 of stock of three railroad companies and

$100,000 of railroad bonds. These specific securities having been bequeathed to his trustees for the benefit of his wife, he also bequeathed to them "all interest accrued on said above-described bonds at the time of my death and all interest accruing thereon thereafter, and also every and all dividends which may be declared on the above-described stock subsequent to my death." The bequest was in trust "to receive the income and profits thereof and apply the same to the use of my said wife, Martha G. Farish, during the term of her natural life," with a power to the trustees to sell any or all of these securities, "and to invest and reinvest the proceeds in such securities as to them may seem advisable and to apply the income arising therefrom as above provided," viz., to the use of his wife during the term of her natural life. Having thus disposed of what should accrue upon these securities by way of income and profits during the life of his wife, upon the death of his wife he bequeathed "all of the above-mentioned shares of stock and bonds, or the proceeds of such as shall have been previously sold, to such persons as would have inherited the same under the laws of the state of New York, if the same were real estate and I had died, intestate and unmarried, at the same time as my said wife, and in such proportions as they would have inherited the same, respectively."

It would seem that the testator intended by this bequest to dispose of all these securities, including any income that was received during the continuance of the trust and what would be left of the trust upon the death of his wife. He disposed of the "income and profits" of the securities received during the life of his wife by directing that they should be applied to her use. What he directed should pass upon the death of his wife was "the above-mentioned shares of stock and bonds, or the proceeds of such as shall have been previously sold"— an indication, it seems to me, that what the testator understood would remain undisposed of at the death of his wife were these specific shares of stock as they then stood, or the proceeds in the hands of the trustees in the event that such shares had been sold by the trustees under the power given to them. There was no expressed intention that any dividend or interest that had been received by the trustees upon the shares of stock or bonds should be held by the trustees and turned over to those entitled to the remainder. This provision for the wife was to be in lieu and bar of all dower and right of dower and of any other claim or interest whatsoever that she might have in his estate, real or personal, or any part thereof. There is certainly in this will no indication that it was the intent of the testator that there should be anything deducted from the sums received by the trustees in the way of dividends, income, or profits to be accumulated by them to prevent any deterioration or depreciation in the value of the stock and bonds during the continuance of the trust. The primary object was to make provision for his wife during her life, and, subject to that provision, what was left at her death was to be disposed of as indicated.

There was bequeathed by the testator to these trustees, as a part of the trust property, 2,500 shares of the capital stock of the New York & Harlem Railroad Company. On September 19, 1899, the di

98 N.Y.S.-2

and 132 New York State Reporter

rectors of the New York & Harlem Railroad Company passed the following resolutions:

"Whereas, it appears from the treasurer's report that the company's cash surplus now amounts to upwards of $2,500,000 over and above all claims and obligations, existing and contingent, and that the same is now available for distribution among the stockholders: It is further resolved, that the sum of $2,500,000 of the said surplus distributed at the rate of $12.50 per share to all stockholders of record at the close of business on the 23d day of September, 1899, and that the treasurer be and he is hereby authorized and directed to make such payment on the 2d day of October, next."

The amount of this dividend was $31,350, which was received by the trustees and retained by them; and the first question presented is whether this amount is to be retained by the trustees as capital of the trust, or whether it belongs to the widow as beneficiary for life. The New York & Harlem Railroad Company was the owner of a steam railroad and was also the owner of a street railroad in the city of New York. Long .prior to the death of the testator, the steam railroad had been leased to the New York Central & Hudson River Railroad Company, which agreed to pay the New York & Harlem Railroad Company as rent 8 per cent. per annum upon its stock. At the death of the testator, the New York & Harlem Railroad Company operated its line of street railroad, and the profits of that line were divided among its stockholders. The company also owned several parcels of real estate in the city of New York. After the death of the testator the New York & Harlem Railroad Company leased its city line of railroad to the Metropolitan Street Railway Company. There was evidence that after this lease certain real estate that belonged to the Harlem Railroad Company and which was not needed in its business was sold, and it would appear that the particular money used in paying this dividend was partly the proceeds of the sale of this real estate. The amount distributed as a dividend, however, was surplus. which represented the accumulations of profits of the company in the past, either from its operation, or from the increase in the value of its real estate; and this distribution was simply a distribution of surplus profits of the company realized from its operations and which were not needed in the conduct of the company's business. The profits as such were realized when the company's real estate was sold. It then became money in its possession as surplus profits, and was distributed by the company among its stockholders as such. The trustees, therefore, received from the New York & Harlem Railroad Company a dividend of $12.50 a share as a distribution by the company of its surplus. The testator had directed the trustees to receive the income and profits of these securities and to apply the same to the use of his wife during her life.

There is nothing in the evidence to indicate that this dividend was a distribution of the capital of the railroad company, as the witnesses all testify, and the referee finds, that the capital of the company was intact after the payment of the dividends, and the property of the company was largely in excess of its indebtedness and capital stock. Of late years this question has been much discussed, and there is now a settled distinction between a case where specific securities consisting of stock and bonds are bequeathed to a trustee, with a direc

tion to pay the income and profits of these specific securities to a life beneficiary, and where a sum of money is bequeathed to trustees, with directions to invest that sum of money and to pay the income of the amount so bequeathed and invested to a beneficiary. In the latter case, the trustees are bound, whatever the form of the investment may be, to preserve intact the capital of the trust bequeathed to them; and while, if in case of unexpected decline in the value of the securities, or for any other reason, the capital becomes impaired, where the trustees have acted in good faith and observed the rules of law in carrying out the trust, they are not required to make up such deficiency from the income, still, when they purchase securities at a high premium, they are justified in applying a part of the income or dividends to prevent a depreciation in the value of the securities, where such interest or dividends represent in part a premium which they have paid; but a different situation is presented where a person bequeaths to trustees specific securities and directs that the income and profits of such securities be paid to a beneficiary for life, with a bequest over of such securities at the termination of the life estate. In the latter case it is the income or profits that the trustees received from the securities to which the life beneficiary is entitled, not the income of a specific fund which represents the value of the securities at the time of the testator's death; and I think it is now established that when the profits or surplus of a corporation, which it has earned or realized in the management of its business, are paid to its stockholders by way of dividends, whether such profits or surplus has been earned before or after the creation of the trust, so long as the amount that is actually distributed is actual surplus earned, or income or profits made, by the corporation in its business, and distributed as such, it is income. or profits which go to the life tenant.

The first case to which I will call attention is Matter of Kernochan, 104 N. Y. 618, 11 N. E. 149. In that case the trustees were authorized to receive the "rents, interests, and income" of property given to them in trust and to apply the net amount of such rents, interest, and income to the use of the widow during her life, and after her death to divide his estate among his surviving daughters and the issue, if any, of such as may have died. Among the personal property left to the trustees was 5,000 shares of the capital stock of the Panama Railroad Company. It seems that this stock was, subsequent to the death of the testator, sold to the Panama Canal Company at something over $265 per share. As a part of the agreement of sale it was provided that:

"All earnings of the railroad company to and including June, 1881, and all moneys and other effects not by that agreement to be left with the railroad company, should be transferred by the railroad company to a trustee for the benefit of all the existing shareholders who are such at the time of the declaration of such dividend or transfer of the railroad company."

It appeared that these assets were subsequently sold to a syndicate for an amount which equaled $24.26 on each share of the capital stock of the company; and on June 30, 1881, a dividend of $24.26 on each share of the capital stock of the company was declared. It appeared that the assets which formed the consideration of the pay