text:
    Worthen & Aldrich v. White Spring Paper Company.
    [Submitted May 18th, 1908.
    Decided June 10th, 1908.]
    1. A riparian proprietor is entitled to a reasonable use of the waters of a stream, but the use must be lawful, and must be exercised with due regard to the lawful rights of a lower proprietor, and he cannot pollute the stream to the injury of a lower proprietor.
    2. An appreciable discharge, into a natural water course, of any noisome substance is within the law prohibiting- a riparian proprietor from polluting a stream to the injury of another proprietor.
    3. A riparian proprietor, operating- a paper mill, placed in a natural water course large quantities of waste cotton fibre. The deposit was in such quantities as to be visible to the eye in the discoloration of the water, &c. The material polluted the water, and seriously damaged a lower proprietor in the enjoyment of his property. — Held, that the use of the stream was neither reasonable nor lawful, warranting relief in equity at the suit of the lower proprietor.

      4. A. riparian proprietor, being entitled to have the water of a natural stream come to him in an unpolluted condition, is not required to use any precautions to prevent the polluting of his materials used in his bleachery.
    5. A lower riparian proprietor, instituting a suit to enjoin an upper proprietor from polluting the waters of the stream, is entitled to the relief demanded, though the upper proprietor has installed appliances to prevent pollution,' especiallj' where such appliances are liable to give way, since without injunctive relief the upper proprietor may discontinue the use of the safety devices, and permit injury to the lower proprietor.
    6. A lower riparian proprietor is entitled to maintain a suit to enjoin an upper proprietor from polluting the waters of a stream, and he is not required to seek his remedy at law for damages.
    7. Apart from interfering grants, riparian proprietors have correlative, rights in the waters of a stream, such rights being usxxfructuax'y.
    5. One can have no easement in his own lands.
    9. A riparian proprietor conveyed a part of the premises to a purchaser, l'etaining a tract lower down the stream, a natural water course. The conveyance contained no reservation of rights in the tract below. Subsequently the tract below was sold to a third person. — Held, that no eqxxity arose in favor of the eax-lier conveyance, though there was a more ancient structxxi'e oxx the property so conveyed than on the tract conveyed to the third person.
    On final hearing on bill, answer, replication and proofs.
    The bill in this case is filed for the purpose of enjoining the defendant from polluting the waters of the Yantacaw river and pond. The parties claim one common source of title, the lands having belonged prior to 1892 to one ICingsland, who, on August 13th, 1892, made conveyance of the defendant’s property to a corporation under which the defendant now claims title; and on May 20th, 1895, conveyed to the complainant the land which it now occupies. The Yantacaw river runs through the lands of both parties.and forms the pond on or near to the complainant’s property known, as Yantacaw pond. The complainant is engaged in the business of bleaching, dyeing and finishing cotton cloths. It has erected a large bleachery on its property and has expended in buildings and machinery approximately $500,000. It employs about six hundred men. It requires a large supply of pure water, about three to six million gallons daily, and it. originally located its plant on the stream in question for the reason that it was capable of supplying-a Targe amount of uncontaminatecl water daily. The defendant is an upper riparian proprietor and is engaged in the manufacture of paper from pure cotton and linen rags in a mill which is very ancient, situated about a quarter of a mile up the stream from the works of the complainant,-on the north side of a public highway known as Kingsland’s lane. The river flows through the defendant’s property in a northerly direction, thence turns to the east and then to the south, forming in its southerly course the Yantacaw pond, whence it passes directly alongside of the complainant’s bleachery. The defendant obtains water for its mill by means of a head-race starting from Kingsland’s pond, situated on the south side of Kingsland’s lane, which head-race runs parallel to the course of the river and empties into it about nine hundred feet north of and below the defendant’s mill. Nearly opposite the point where the tail-race joins the river there begins a canal which carries wa£er on a level somewhat higher than that of the river to a point near the complainant’s mill, and is there discharged from the canal into a pipe line which carries the supply across the road and into the premises of the complainant. The head of the water in the canal is somewhat higher than the head of the water in the Yantacaw pond, but it flows from each by gravity into the complainant’s premises which are on a lower level than either. The source of the complainant’s water-supply is therefore twofold, one from the canal, the other from the pond, but both the canal and the.pond derive their supply from the river. The complainant erected its plant and began the operation of it shortly after it was constructed, in 1895. The defendant began its operations in the paper mill up the stream about ten years later. After the defendant’s mill went into operation the complainant almost immediately experienced a difficulty in the bleaching, dyeing and finishing of its goods, and upon examination discovered that the difficulty arose from the close adherence to the fabrics which it was manipulating of small particles of cotton fibre which showed themselves with more or less distinctness at different times on the surface of the cloth. It interfered with the processes to which the cloths were subjected and rendered it necessary to subject the fabrics to other new and distinct operations in order to remove the same. On making an examination into the canse of it, and upon inspection of the canal ’and the waters of the river they found that there were large quantities of cotton fibre floating in both sources of their water-supply, and they finally traced it within k very short time to the mill of the defendant. An examination of the cotton cloths reveals the fact that some of the specimens which were produced as exhibits were soiled with small spots of mud. Without at this time going into the details thereof, it-may be said that there was no proof of the cause of the mud spots. It is highly probable, however, that they were produced at a time when the waters of the stream or canal were being agitated, but by whom or for what purpose the evidence does not show. In the operation of the defendant’s mill large quantities of pure spring water were used which came from a large natural spring located a little to the westward of the defendant’s mill. This water was used in large quantities, and there was at all times while the mill was in operation an unbroken flow of water from the paper mill which was impregnated with cotton fibre that overflowed into the tail-race and thence into the waters of the river, whence the same was taken up by the canal and in the pond and so delivered with the water into complainant’s washing machines. Complaint was made to the defendant and its officers; they acknowledged the pollution and promised to do what they could to remedy the fault.
    The complainant being dissatisfied with the efforts made by the defendant to keep the stream unpolluted, on February 8th, 1906, filed its bill of complaint against the defendant, alleging the facts indicated by the foregoing statement, claiming that the pollution complained of had been carried on to- the complainant’s damage for upwards of three months prior to the filing of the bill; that a large amount of the waste material from the paper mill had accumulated along the banks and in the bed of the river and canal; that the situation was continually growing worse, and claiming that it was entitled to have the waters of the river flow past and through its lands unimpaired in quality and in quantity, except by the reasonable and lawful use of the same by the defendant, and praying that the defendant might be restrained from the further pollution of the waters of the river, canal and pond, and from the discharge into- the river of the said waste material or other foreign substances. Upon the filing of the bill an order was made requiring the defendant to show cause on February 19th, 1906, why an injunction should not issue according to the prayer of the bill, and in the meantime the defendant was enjoined from further discharging into the waters of the river by way of its tail-race or otherwise waste material or foreign substances of any kind calculated to pollute or contaminate the waters of the river beyond what is a reasonable and lawful use of the same. On March 3d, 1906, this restraint was continued till the further order of the court. I do not find that this order has been vacated or varied. Shortly after it was served, proceedings were taken to punish the defendant for contempt in disobeying the order, which proceedings continued for a month or more and were finally ended in the month of April, 1906. The defendant had apparently taken steps to obviate the cause of complaint. The complainant likewise made corresponding efforts on its own property by the use of screens composed of váre having a very fine mesh, and other screens filled with excelsior, and although the complainant’s witnesses testify that the efforts did not entirely succeed, it is quite manifest that they did succeed to some extent, and the suit was allowed to lie without further prosecution or defence until the early part of 1907. In the spring of that year, on account of what the defendant claims was an accident in its mill, there was quite a large amount of cotton fibre deposited in the tail-race, which found its way to the complainant’s washing and bleaching machines. Defendant in the meantime had not answered the bill, although its time to do so- had expired in the month of April, 1906, about a year before. An answer was filed on May 3d, 1907, in which the defendant denies the pollution complained of and the damage to the complainant which is charged in the bill, and states that after the bill was filed the defendant made zealous and earnest efforts not only to prevent the'discharge of any more fibre into the stream beyond what was a reasonable and lawful use of the same, but directed its efforts to preventing the discharge of any fibre whatsoever into the stream, and for the accomplishment of this end that it had established settling tanks and had installed a machine called a saveall machine, the purpose of which was to extract the greatest possible amount of fibre from the spring water discharged by the defendant into the tail-race, and that the defendant had then (May 3d, 1907') established in connection with the said machine an extensive sump, into which all the waters passing from the mill were discharged and from which sump the waters were discharged into the river after filtration through filters constructed of coal ashes, and that these devices had prevented the discharge of any deleterious matter into the river. A replication was filed to" this answer, and the cause came on for hearing January 6th, 1908. On that day the complainant obtained leave to amend its bill by alleging that the contrivances which had been established by the defendant to prevent the discharge of any and all fibre into the stream were inefficient to prevent such discharge, to which the defendant filed a supplementary answer, not denying the allegations of the amended bill, but merely alleging that it had greatly extended the sump system referred to in its answer, and that it had then four separate but connected sumps of the same character as the one mentioned in the answer, which were then in full operation. The hearing was continued, for the purpose of allowing these amendments, and it finally came on for final hearing on amended pleadings and proofs in the early part of 1908.

      Mr. William I. Lewis and Mr. Henry O. Whitehead, for the complainant.

      Mr. Albert G. Wall, for the defendant.
   Howell, V. C.

During the hearing and upon the argument the defendant’s counsel laid much stress upon the manner in which the complainant had set out the measure and extent of its rights in the stream, holding that it had limited them by claiming merely that it was entitled to have the waters of the stream flow through and past its premises unimpaired in quantity and in quality except by the reasonable and lawful use of the same by the upper riparian owners, and that the rise which the defendant had made of the stream, permitting small quantities of cotton fibre to pollute it, was consistent with a reasonable and lawful use, and that thus the complainant had stated itself out of court. This contention, however, is not entitled to any force as a defence 10 the fact of pollution. The defendant is, of course, entitled to a reasonable use of the waters of the stream, but that use must be lawful and must be exercised with a due regard to the lawful rights of lower proprietors, and especially is this true with regard to the charge of pollution. In Holsman v. Boiling Spring Bleaching Co., 14 N. J. Eq. (1 McCart.) 335 (1862), complaint was made of the pollution of a small stream which ran through'the complainant’s land and emptied into the Passaic river only a short distance above the mouth of the Yantacaw river. The complaint was that the defendant had permitted large quantities of chemical matter and other impurities to be discharged from its works into the stream above the land of the complainants, and that the water was thereby filled with offensive matter, was discolored and polluted and rendered unfit for all domestic purposes,' for procuring ice or watering cattle; that it killed the fish and produced offensive odors which invaded the air of the neighborhood and penetrated the complainants’ dwelling, so that the complainants had been compelled to refrain from all use of the water for family or other purposes. Chancellor Green says: “The defendants have a right to use the water upon their oto soil in such manner as they may deem for their interest, provided they discharge it upon the soil of the complainants in its accustomed channel pure and unpolluted.” ' And he held that the complainants were entitled to an injunction to restrain defendants from discharging offensive matter into the stream and thereby polluting the waters which flowed upon the complainants’ laird.

In Acquackanonk Water Co. v. Watson, 29 N. J. Eq. (2 Stew.) 366 (1878), an attempt was made by a private water company to take water from a stream which supplied the defendant’s bleachery, as a source of water-supply for the city of Passaic, it undertaking to furnish to the complainant another source of supply from another stream. The court (Honorable Amzi Dodd, special master, writing the opinion) granted the injunction prayed for upon the ground that no proprietor has a right to use the water of a running stream to the prejudice of other proprietors above or below him unless he has a prior right to divert _ it or a title to some exclusive enjoyment; that he has no property in the water itself, but a simple usufruct while it passes along, and that he must so use and apply the water as to work no material injury or annoyance to his neighbor below him, who has an equal right to the subsequent use of the same water. The decree in'this case was affirmed by tire court of errors and appeals. The same doctrine was laid down by Vice-Chancellor Pitney, in Beach v. Sterling Iron and Zinc Co., 54 N. J. Eq. (9 Dick.) 65 (1895); affirmed, 55 N. J. Eq. (10 Dick.) 824, in the opinion in which he cites all the leading English and American cases on the subject, and in Attorney-General v. Paterson, 58 N. J. Eq. (13 Dick.) 9 (1899); Simmons v. Paterson, 60 N. J. Eq. (15 Dick.) 390 (1899), and in a masterly opinion by Judge Vann, in Strobel v. Kerr Salt Co., 164 N. Y. 303, in which the New York court of appeals followed Vice-Chancellor Pitney’s ruling in the Beach Case, and refused to recognize the Pennsylvania doctrine, which relaxes the ordinary rules governing the rights of riparian owners in favor of great industries engaged in developing the natural resources of the country.

An appreciable discharge, into a natural water course, of any noisome substance is within the prohibition of the law. In the case at bar the pollution consisted of placing in the stream large quantities of waste cotton fibre, the particles of which varied in length from onc-thirty-second to three-eighths of an inch and at times the deposit was in such quantities as to be actually visible to the eye in the discoloration of the water of the canal and river and in the deposit of quantities of the same material on the ground forming the banks and beds of these waterways. And at other times it was deposited in such large quantities as to be visible in the tail-race and in the stream in floating flocks or lumps, and at other times it was deposited in large quantities upon the screens and other apparatus and devices which were placed by the complainant in the canal for the purpose of screening tire water before it went to the complainant’s bleachery. There is no question on the evidence of the deleterious character of the polluting material, nor of the fact that it appeared in the waterways above described in such quantities as to seriously damage the complainant in the enjoyment of its property, nor of the further fact that it appeared in the washing machine in the works of the complainant in damaging quantities, and at times to such extent as to compel the complainant to shut down portions of its machinery and discontinue portions of its works. This was not and is not either a reasonable or a lawful use of the waters of the river, and at the time the bill was filed, in my opinion, the facts and circumstances warranted the complaint which the complainant made in the court.

Pending the suit the defendant introduced several devices to prevent the pollution of the stream bj its waste water charged with cotton fibre, and in its answer tenders to the complainant the issue whether these devices are efficient. Their efficiency is denied by the amended bill. The first device that was installed, after trials of apparatus which' was of no advantage whatever, was a machine called a saveall machine. This seems not to have been sufficient in itself to stop the pollution of the stream, and subsequently large settling basins were constructed into which the waste water from the paper mill was conducted, the design being that the waste water should remain in the settling basins for a sufficient length of time to allow the fibrous matter to precipitate. While the complainant vigorously denies the efficiency of this device, it does appear that there has not been so much cause of complaint as there was before they were constructed, and that the efforts of the defendant, aided by those of the complainant, have to an extent stopped the introduction of the cotton fibre into the bleachery of the complainant; but if the law is as it is above stated there seems to be no reason why the complainant should be put to any expense whatever in fending against the polluting material in the stream and canal, or be under an obligation to make any suggestions or give any advice as to proper methods to be adopted. If it is entitled to have the water come to it in an unpolluted condition, it ought not to be compelled to use any precautions to prevent the polluting material from entering iis bleachery; bat if it were proved that the settling basins or sumps as they are now arranged were entirely sufficient to restrain the polluting material from flowing into the stream, yet the complainant is, under the circumstances, still entitled to a continuance of the injunction which is now in force against the defendant. There was much evidence in the case relating to the character of the construction of these settling basins. They were described and illustrated by diagrams by a surveyor from actual measurements made by him; they were further described by expert engineers and criticised because of their flimsy and unsubstantial character. They consist of logs piled up against stakes which are driven in the ground, and are lined with coal ashes. They are liable to give way by reason of the breaking of the stakes or by the action of the frost, and from other causes which are described by the witnesses. If they are efficient to restrain the cotton fibre from entering the stream they ought to be kept in repair or made permanent constructions so as to prevent deleterious matter from ever getting to the complainant’s property. The case is in this aspect controlled by Beach v. Sterling Iron and Zinc Co., 54 N. J. Eq. (9 Dick.) 65. There similar settling basins had been constructed, but the vice-chancellor determined that it was impossible to say that there would be no further incursions of the muddy water, that without a decree and injunction the defendant would be at liberty to discontinue the use of these safetjr devices and permit muddy water again to flow into the complainant’s supply as it had done. There is an additional argument to the same effect in this case, and that is the unstable construction of the settling basins. Without a decree and an injunction the defendant would not only be at liberty to discontinue the use of the settling basins, but would also be at liberty io allow them to become absolutely inefficient for the purpose for which they were designed.

The claim made by the defendant that the complainant’s remedy for the injury is by common law action for damages is effectually disposed of by the Beach Case.

Lastly, the defendant claims that inasmuch as its mill is an ancient mill and was severed from the common ownership by the common proprietor at an earlier date than the conveyance by him of the property of the complainant, an equity arises in favor of the more ancient structure and the earlier conveyance. It must be remembered that the stream in question is a natural water course, and that apart from interfering grants riparian proprietors have correlative rights in the waters of the stream, these rights being usufructuary. The fact that Kingsland made the earlier conveyance of the paper mill, retaining the tract lower down the stream now belonging to the complainant, cannot interfere with the rule of law, nor, indeed, could anything interfere with it except a positive reservation by Kingsland in the earlier conveyance of rights in the tract of land below.- This question was settled in this state in 1854 in Brakely v. Sharp, 10 N. J. Eq. (2 Stock.) 206, upon a state of facts touching the relations between upper and lower proprietors resembling very much of the facts in this case. There the earlier conveyance from the common proprietor covered the tract furthest up stream. In the opinion Chancellor Williamson lajrs down the rule as follows: “There is a difference between a natural water course and an artificial construction for the conveyance of water. A is the owner of two farms through which runs a natural stream; he sells to B the farm upon which the water course has its origin. A is entitled to have the water flow upon the, farm which he reserves the same .as he enjoyed it when he severed his title, because the water course did not begin by the consent or act of the parties, but ex jure, vaiurce.” citing Hazard v. Robinson, 3 Mason 272.

Kingsland might have reserved a right which would have created an easement in favor of the upper proprietor, but it cannot be said that the situation now in the present state of affairs is governed by the law of easements. A man can have no easement in his own lands. The owner of the Kingsland paper mill could not have an easement in the property now owned by the complainant as long as the title was in himself. There is no prescriptive right claimed, nor, indeed, is there any evidence of a prescriptive right before the court.

The case differs from McConnell v. American Bronze Powder Co., 41 N. J. Eq. (14 Stew.) 449; affirmed, 44 N. J. Eq. (17 Stew.) 603. There the nuisance complained of was the raising of a dam. Pending the litigation the -dam was cut down to its accustomed height, and thus the objection was wholly removed, and this having been established, the case resolved itself into a mere question of costs. It will lie perceived that the difference between the two cases is essential and fundamental. In the McConnell Case the cause of action was abated; in the present ease it is clearly in a position to work harm to the complainant by simple inattention to or negligence of the conditions surrounding the _ situation.

I will advise a decree declaring that the complainant has a right to have the water of the river and its subsidiary waterway, the canal, flow to and upon the premises in its natural and unpolluted state and condition, and that as to the pollution by the defendant, it be restrained from further discharging into the waters of the river waste material or foreign substance of any kind calculated to pollute or contaminate the waters thereof.


source: Caselaw Access Project

author: Howell, V. C.

license: Public Domain

text:
    Theodore Clark v. Harry Morehous et al.
    [Submitted June 15th, 1908.
    Decided July 1st, 1908. ]
    1. A gift to a class is a gift of an aggregate sum to a body of persons, uncertain in number at the time of the gift, to be ascertained at a future time, who are all to take in equal or some other definite proportions, the share of each being dependent for its amount upon the actual number.
    2. Where a particular estate is created, with remainder to the. children of a designated person, the gift by way of remainder will go not only to the objects living at the death of testator, but to all who may subsequently come into existence before the period of distribution.
    3. Courts will make every intendment in favor of a vested, rather than a contingent, estate.

      4. Testator created a life estate in favor of his daughter in bonds, mortgages, and bank stock, “and at her decease I devise the same to her children same manner as if she died seized of it in her own right, to share and share alike.” — Held, that the gift was to a class, consisting of the life tenant’s children, which class would remain open until the period of distribution, at the life tenant’s death, to admit new members, and a child of the life tenant living at testator’s death took a vested estate in remainder which could be subjected to the payment of his debts.
    5. Where a creditor seeks to establish a lien against the interest of his debtor, deceased, vested under a will, and assigned by the debtor to him as security, no relief can be given him by reason of a judgment recovered by him against the personal representative of the debtor in another state, the only effect of such judgment being to prove conclusively the existence of a debt, which was unpaid.
    On final bearing on bill, answer, replication and proofs.
    Evi A. Martin died in the latter part of 1889. He left a will which was executed on July.9th, 1889, and was admitted to probate on November 12th, 1889. By the third paragraph of his will he created in favor of his daughter, Ann E. Morehous, a life estate in several bonds and mortgages and in some bank stock,
    “to have and collect the annual interest and dividends on all the bonds and mortgages and bank stock bequeathed in paragraph three during her natural life, and at her decease I devise the same to her children same manner as if she died seized of it in her own right, to share and share alike, and I'do order and direct that the said Ann K. Morehous shall collect and receive the interest and dividends on the bonds and mortgages and bank stock in this paragraph described for her own use and benefit and give receipt and quittance for the same.”
    Ann Morehous, the life tenant, is still living. She became the mother of four children, Martin L. Morehous, Annie Price, Ella Drew and Clara Dc-inarest, all of whom were living at the date of execution of Evi A. Martin’s will, and also at the time of his death. Martin L. Morehous died on August 20th, 1901, leaving three children, Floyd S., Harry W. and Helen G-., all minors and all now living. On September 15th, 1897, Martin L. Morehous made an assignment to the complainant, Theodore Clark, of all his right, title and interest in the bonds and mortgages ancl bank stock mentioned in the third paragraph of his grand-father’s will, and in which his mother has a life estate, to secure the payment of a promissory note given by him to the complainant.
    The complainant recovered a judgment in the supreme court of New York on this note on June 5th, 1907, against the personal representative of Martin L. Morehous.
    The bill is filed for the purpose of establishing a-lien in favor of the complainant, the prayer being in the following words:
    “That the said assignment made, executed and delivered by the said Martin L. Morehous to your orator, and all the right, title and interest of the said Martin L. Morehous and of his legal representatives and next of kin in and to the said bonds and mortgages and in and to the said bank stock assigned to your orator may be decreed to be absolute in your orator and in his legal representatives and the amounts due thereon so far as the interest of the said Martin Ij. Morehous extended and so far as the interest of his legal representatives and next of kin extend in and to said bonds and mortgages and in and to said bank stock may be decreed to be paid to your orator upon the death of the said Ann E. Morehous and may be applied to the payment and satisfaction of the principal and interest of said judgment so as aforesaid recovered by your orator against the estate of the said Martin L. Morehous, deceased.”
    No objection has been made to the form or substance of this prayer, and I shall treat the case as one instituted for the purpose of having this court- declare that the complainant has a specific lien upon the interest of the said Martin L. Morehous in tire bonds and mortgages and bank stock mentioned, for the purpose of securing the payment of the said indebtedness.

      Mr. Henry G. 'Hunt, for the complainant.

      Mr. George M. Shipman, for the defendants.
   Howell, V. C.

Whether the complainant can have a lien on the properly which Martin L. Morehous transferred or attempted to transfer to him, or not, depends upon the construction of that portion of the will of Evi A. Martin which deals with the property in question. The gift upon the death of Ann Morehous is to a class, “her children,” and the devolution of the title.depends upon the peculiar rules of law relating to class gifts. These relate principally to the vesting of the title in a class and the opening of.the class from time to time to admit new members. Judge O’Brien, In re Russell, 168 N. Y. 169, says: “A gift to- a class has been defined by a recent decision of this court to be a gift of an aggregate sum to a body of persons uncertain in number at the time of the gift, to be ascertained at a future lime, who are all to take in equal or some other definite proportions, the share of each being dependent for its amount upon the actual number,” citing In re Kimberly, 150 N. Y. 90; see, also, In re Brown, 154 N. Y. 313. The definition is Mr. Jarman’s. Jarm. Wills 534. Where a testator devises property to persons who are designated individually as by name or description, or where he devises property in severalty to a number of persons, the courts do not treat such devises as devises to a. class, but hold that the devisees take distributively.

The difficulty in this case lies in determining precisely at what time the members .of the class shall be ascertained, and in further determining with accuracy who constitute the class. Ordinarily speaking, the members of the class are determined at the time the instrument of gift takes effect, and this is ordinarily at the date of the death of the testator, yet there may be provisions in the will which will fix the membership of the class as of the date of the execution of the will or upon the happening of some event in the future.

In the ease now before the court the solution of the question is embarrassed by the use after the devise of the words “same manner as if she died seized of it in her own right,” it being claimed on the part of the complainant that the membership of the class was fixed at the date of the death of the testator, and by the defendants that the words just'quoted indicate that it was the intention of the testator that the membership of the class should not be determined until the death of Ann Morehous.

It is very clear that the period of distribution must await the demise of Ann Morehous-; there is a life estate interposed between the persons who shall eventually be found to be members of the class, and the property, and this life estate must fall in before the property can be distributed to anyone.

Mr. Jarman has formulated the rule applicable to the particular class of cases to which this class belongs, as follows:

“Where a particular estate or interest is carved out with a gift over to the children of the person taking that interest, or the children of any other persons, such gift will embrace not only the objects living at the death of the testator, but all who may subsequently come into existence before the period of distribution.” 2 Jarm. Wills 704 (5th Am. ed.).

The rule is stated by Mr. Williams as follows:

“It may be material in this place to observe, that upon an ordinary limitation by way of remainder to children, &c., in a class, all who are in esse at the time of the death of the testator take vested, and, consequently, transmissible interests immediately upon the testator’s death: and all who come in esse before the particular estate ends and the limitation takes effect in possession, are to be let in, and take a vested interest as soon as they come in esse, and they and their representatives will take as if they had been in esse at the testator’s death.” 2 Wms. Ex. 351.

Mr. Theobald states the rule as follows:

“In the case of a gift in remainder or after a trust to accumulate, all children born at the death of the testator and coming into esse before the death of the tenant for life, or the end of' the period of accumulation, take a share to the exclusion of.those’ born afterwards.” Theob. Wills 255 (5th ed.).

There is another class of cases frequently met with which are dealt with analogously, and that is the class where the period of distribution is postponed until the attainment of a given age by the children. In that class of cases the gift will vest in those who arc living at the death of the testator and who come into existence before the first child attains that age, i. e., the period when the fund becomes distributable in respect of any one object or member of the class. 2 Jar. Wills 712.

These rules so clearly expressed by the text-writers are borne out by the cases. In Middleton v. Messenger, 5 Ves. Jr. 137 (1799), the testator gave his wife a life estate with remainder to the children of his brothers and sisters. The master of the rolls held that all the children living at the death of the testator and those born afterwards before the death of the wife had vested interests. All the early cases on the subject are collected by Mr. Sanders in a note to Heathe v. Heathe, 2 Atk. 121.

The same course was taken by the house of lords in Odell v. Crone, 3 Dow. 61 (1815). See Holland v. Wood, 11 Eq. 91.

The rule was followed in Shattuck v. Stedman, 2 Pick. 468, where Richardson, the testator, gave to his niece the interest of a thousand dollars during her life, and at her death directed that the principal sum should be equally divided among her children, and be payable to them when they respectively arrived at the ago of twenty-one years. The niece had eight children, all of whom were living at the testator’s decease. She had a son John who died before the life tenant, but after he had arrived at the age of twenty-one years. It was held that John took a vested legacy.

In the matter of Evans Estate, 155 Pa. St. 646; 26 Atl. Rep. 739, the rule is stated as above quoted from Jcarman on Wills. There the testator bequeathed a sum in trust with directions to pay the income to his nephew during his lifetime, and at his death to pay the remainder to the heirs-at-law of the nephew. Under the authority of the rule which is there quoted at length it was held that the gift over vested immediately on the testator’s death, subject to open and let in others coming into existence before the period of distribution. In Doe v. Provost, 4 Johns. 61, the facts were that the testator devised lands to his daughter C. “during the term of her life, and immediately after her death, unto and among all and every such child and children as the said O. shall have lawfully begotten at the time of her death, in fee-simple, equally to be divided between them share and share alike.” It was held that the four children of the daughter C. who were living at the death of the testator took a vested remainder in fee, and that in case there had been any children born afterwards, the class would have opened for their benefit, and that the children of a daughter of G. who died in the lifetime of her mother were therefore entitled to the share of C., who was living at the death of the testator.

In Tucker v. Bishop, 16 N. Y. 402, the rule is laid down by Justice Paige, as follows: “Where a bequest is to a class of individuals in general terms as ‘to-t-he children of A* and no period is fixed for the distribution of the legacy, the time for distribution will be tbe death of the testator, and hence, only children born or begotten prior to and in esse at that time will be entitled to share in the distribution, but where the distribution is by the terms of the will to be made at some time subsequent to the death of the testator, the gift will embrace not only all children living at the death of the testator, but also all those who shall subsequently come into existence before the period of distribution, and if the bequest is a present bequest, the beneficiaries, who are in esse at the death of the testator, will take vested interests in the fund, but subject to open and let in after-born children who shall come into being and belong to the class at the time appointed for the distribution.” Thomas v. Thomas, 149 Mo. 426; 73 Am. St. Rep. 405.

The following cases in New Jersey touch the question. Den v. Manners, 20 N. J. Law (Spenc.) 142 (1843). There a testator devised the profits of land to his son, but if the son died in the lifetime of his wife tiren the' devise was to the son’s children and their heirs and assigns. The son died, leaving a wife and eight children. His son Abraham died in his lifetime, leaving two children. It was held that Abraham had a vested estate in the lands which descended to his children and that they took their father’s share. Van Gieson v. Howard, 7 N. J. Eq. (3 Halst.) 462 (1849). There the testator devised real estate to his widow for life and ordered it to be sold after her death and the proceeds to be equally divided among the children of his brothers and sisters. He had three brothers and one sister. One of tire nieces died after the testator’s death and in the lifetime of the widow. It was held that a portion of the estate was vested in her and that she had a devisable interest. In Feit v. Vanatta, 21 N. J. Eq. (6 C. E. Gr.) 84 (1870), Mary Eeit bequeathed to her executors $700 in trust to pay the interest annually to her daughter Ann for life and after her decease to the children of Ann, share and share alike. At the date of the will Ann had one child, Marjq who afterwards married and had children. She died' in the lifetime of her mother, leaving children surviving her. The mother' died in 1866, leaving no' descendants other than the children of Mary. The will provided that if no children of Ann should be living then the devised property was to fall into the residue of the estate of the testatrix which she directed should be equally divided among her children. The chancellor states the rule as follows: "A gift of the interest of the residue to Ann for life and the principal to her children at her death gave a vested interest to such child of Ann as was living at the date of the will and the death of the testatrix. This was held by the court of errors and appeals in a will where the children were named, Howell v. Green, 31 N. J. Law (2 Vr.) 570, and he then quotes the paragraph from Williams on Executors, which is hereinabove copied. But while he stated' the rule recording the authorities, he held that the facts were not within the rule.

In Ward v. Tomkins, 30 N. J. Eq. (3 Stew.) 3 (1878), the testator gave to the children of his son Daniel a part of his residuary estate, to be equally divided between them, as they should respectively come to the age of twenty-one years. At the time of making the will and of the testator’s death, Daniel had two children, but before the elder came of age another child was born, and all three were living, and the eldest had attained his majority. It was held that each of the three children was entitled to an equal share, thus supporting the general result of the rule.

Perrine v. Newell, 49 N. J. Eq. (4 Dick.) 57 (1891), is here mentioned for the reason that it is an example of a gift to children who are named, and although they compose a class, to wit, the children of a son of the testator, they do not take under the rule which I have above cited, but distributively as persons who are specifically named. The devise there was to trustees in trust to pay C the rents and profits during his lifetime, and at the death of the life tenant he gave these lands to C’s three children, B, N and T, naming them. It was held that they took a vested remainder after the trust estate and could mortgage their interest in the lands. See, also, Adams v. Woolman, 50 N. J. Eq. (5 Dick.) 516 (1892).

The defendants urge the application of the case of Van Tilburgh v. Hollinshead, 14 N. J. Eq. (1 McCart.) 22, but in my opinion the case does not apply. There the devise was to “such children of the devisee as shall survive him,” and the chancellor carefully distinguishes (at p. 85) between that gift and a gift to a class. The same may be said about the case of Slack v. Bird, 23 N. J. Eq. (8 C. E. Gr.) 238, and Dutton v. Pugh, 45 N. J. Eq. (18 Stew.) 426, in neither of which eases was the gift strictly to a class. Teets v. Weise, 47 N. J. Law (18 Vr.) 154, is likewise 'distinguishable for the reason that the devise there was to A for life, and at her death to- her children “who ma3r be living at the time of her decease.”

I cannot regard the recent New York cases as author^, for the reason that they seem to be-more or less affected by legislation. The case of' Gilliam v. Guaranty Trust Co., 186 N. Y. 127, cited for the defendants, has for its authority the case of Paget v. Melcher, 156 N. Y. 399; which seems to have been decided upon its own peculiar set of circumstances. The former rule in New York; was undoubtedly as it is given by the text-writers above mentioned. Collin v. Collin, 1 Barb. Ch. 630; Jenkins v. Freyer, 4 Paige Ch. 47. The rule was likewise declared b3r the court of errors and appeals so late as 1857. See Tucker v. Bishop, 16 N. Y. 402, cited herein.

Neither do I think that Price v. Hall, 5 Eq. 399; 37 L. J. Ch. (N. S.) 191, is an authority which applies to the ('acts in the present case; because there the' remainder was manifestly contingent; it depended upon the fact whether William Hall left any children at his death, and so the whole gift was contingent. The cases of Richardson v. Wheatland, 7 Met. 169, and Moore v. Weaver, 16 Gray 307, also cited on behalf of defendants, appear to rest upon a construction of the provisions of the Massachusetts revised statutes.

The next question is whether there is anything in the context of this will which takes the case out of the rule of law above mentioned. It is claimed, on behalf of the answering defendants, that the words “same manner as if she died seized of it in her-own right” have the effect of creating a contingent remainder in such children of Ann Morehous as may be living at the date of her death, and that therefore there was no vesting of the estate on the death of the testator, and that therefore Martin L. Morehous took no interest in the property in question. It is a well-known rule that courts will make every intendment in favor of vesting the estate. Omitting these words, there would be no doubt but that the devise would have vested at the death of the testator. The will would then read, “and at her decease I devise the same to her children * * * to share and share alike.” And there would be no doubt about the fixed right of Martin Morelious in the property at and from the death of the testator. What is the effect of the omitted words? They do not seem to me to have been inserted by the testator for the purpose of denoting or ascertaining the persons who should take upon the death of Ann Morelious; that lie had already done, by a designation of the class of persons who should succeed to the estate; but rather for the purpose of denoting the quality of the estate which the class, to wit, “her children” should take; that is to say, what the testator had in mind was that all the children of Ann Morelious, who were living at his death and wha might come into being before her death, should share equally in the estate mentioned in that paragraph of her will, and that instead of taking a life estate, as the mother had, or some less, or qualified interest, they should take an absolute and indefeasible estate by way of succession from her.

It thus appears that the gift in the will of Evi A. Martin to the children of Ann Morelious is a gift to a class, and that b}r the settled rules governing such gifts, Martin L. Morelious, at the death of the testator, took a vested estate in remainder in the property in question; that there can be no distribution of the property until the death of Ann Morelious, the life tenant, and that therefore the class of legatees must remain open until that time to admit new members, if any there may be, and that at the time of the distribution the class will include all children of Ann Morelious who were alive at the death of the testator and who subsequently became members of the class before the death of the life tenant.

No relief can be accorded to the complainant by reason of the judgment which he recovered against the personal representative of Morelious. ' It was recovered in a foreign state and is no lien upon any property which has its situs here; its sole effect is to prove conclusively that a debt existed from Martin L. Morehous to the complainant which has never been paid; that portion of the prayer of the complainant's bill which seeks relief with respect to the judgment must be disregarded.

I-therefore conclude that Martin L. Morehous, at the time of his death, was seized of a vested interest in the property mentioned in the third paragraph of the will of Evi A. Martin, and that so far as the bill seeks to charge the property with a lien in favor of the complainant by virtue of the assignment of September 15th, 1897, the prayer should be granted.


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    Frank Bassett v. United States Cast Iron Pipe and Foundry Company.
    [Submitted July 31st, 1908.
    Decided August 27th, 1908.]
    1. Under Corporation act 1896 (P. L. p. 2,93 § J/7) giving the corporation capacity to confer on the directors the power to fix the amount to be reserved as working-capital, and the amendatory act of 1901 (P. L. p. 2§ 2) conferring such power on the stockholders unless otherwise provided in the certificate of incorporation or in a by-law, it is primarily the function of the stockholders to fix the amount to be reserved, over the capital stock paid in, as working capital; and the incorporators in the certificate of incorporation and the stockholders in the by-laws may confer power on the directors to fix the amount of the working capital.
    2. The charter of a corporation provided that preferred stock should be entitled to an annual dividend in preference to the payment of dividends on the common stock, and authorized the directors to alter the by-laws and to fix the amount to be reserved as working capital. The directors reserved annually sums for additional working capital, which were not used as actual woiking capital, but were invested in securities.— Held, that such sums did not become actual working capital, but remained under the control of the directors, who might use the same for the payment of a dividend on the preferred stock..
    3. Corporation act 1896 (P. L. p. 293 § J/7) as amended in 1901 (P. L. p. 2J/6 § 2) authorizes the stockholders, unless otherwise provided in the certificate of incorporation or by-laws, to fix the amount to be reserved as working- capital. The charter of a corporation provided that the preferred stock should be entitled to an annual dividend out of any surplus net profits, and authorized the directors to amend the by-laws and to fix the amount to be reserved as working capital. The directors annually reserved sums for additional working capital, which were invested in securities, and not used as actual working capital. — Hold, that, though such sums be considered as actual working capital, the directors could appropriate a part thereof for a dividend on the preferred stock.
    4. Where the charter of a corporation provided that preferred stock should be entitled to an annual dividend, and authorized the directors to fix the amount to be reserved as working capital, and where the bylaws authorized the directors to amend the by-laws and fix the amount of the working capital, an amended by-law permitting them to fix and from time to time increase or diminish the amount of working capital did not add to the powers of the directors to appropriate sums reserved as working capital for the payment of dividends on preferred stock.
    5. Corporation act 1896 (P. L. p. 293 § J¡7) as amended in 1901 (P. L. p. 2J/6 § 2) confers on stockholders the power, unless otherwise provided in the certificate of incorporation, to fix the amount to be reserved as a working capital. The charter of a corporation provided that preferred stock should be entitled to annual dividends out of any surplus net profits, when declared by the directors, in preference to any dividend on the common stock, and declared that the common stock should be subject to the rights of the preferred stockholders. The directors reserved annually sums for additional working capital, not used as actual working capital, but invested in securities. Subsequently the directors voted to use a part of such sums for the payment of dividends on the preferred stock. — Held, that the reduction of the working capital did not belong to the common stockholders, but might be used for the payment of such dividends.
    6. The charter and stock certificates of a corporation, which provide that preferred stock “shall be entitled out of any and all surplus net profits,” when declared by the directors, to dividends, authorize the directors to use any surplus profits arising from the operation of the corporation’s business, whenever made, to pay dividends on preferred stock, no matter when they shall have been declared, and such dividends for any fiscal year need not be declared out of the profits of that year.
    On motion for preliminary injunction, on bill and demurrer.
    The bill in this case is filed to restrain the defendant corporation from paying a dividend which it has declared in favor of its preferred shareholders. The dividend is at the rate of one and three-quarters per cent., and is-foj the last quarter of the fiscal year ending May 31st, 1908. It is payable on September 1st, 1908. It requires in cash $218,750 to satisfy the dividend so declared. The balance sheet taken from the company’s books as of May 31st, 1908 (the last day of the last quarter of the fiscal year), showed to the credit of profit and loss applicable to dividends only $10,024.45. On July 2d, 1908, the board óf directors, by a formal resolution, transferred $209,896.64 from an account known as “Reserve for additional working capital” to the credit of “profit and loss,” increasing that credit to $225,-921.09, out of which the dividend in question would be paid.
    The complainant, who is a large holder of the common stock, objects to this course of procedure and seeks to enjoin the payment of the dividend, upon the ground that the directors arc endeavoring to make the payment out of moneys which had been reserved by the company in preceding years for a working capital, and in which the common -stockholders alone have a proprietary interest; in other w^orcls, that the- directors are about to pay to the preferred stockholders a dividend out of moneys which belong to the common stockholders.
    The facts are these: The defendant corporation was organized on March 3d, 1899, under the- General Corporation law of 1896. It has an authorized capital of $30,000,000, divided equally between common and preferred shares. Only $25,000,000 of this stock has been issued, and this is equally divided between preferred and common shares.
    The fundamental agreement between the shareholders touching the relative rights and duties of-the two classes of stock, is found in the following extracts from the charter and by-laws:
    Charter, paragraph 4:
    “The preferred stock shall be entitled out of any and all surplus net profits whenever declared by the Board of Directors, to nou-cumulative dividends at a rate not to exceed seven per cent. (7 #) per annum for the fiscal year beginning on the first day of June, 1S90, and for each and every-other fiscal year thereafter, payable in preference and priority to any payment of any dividend on the common stock for such fiscal year. In the event of the dissolution of the corporation the holders of the preferred stock shall be entitled to receive par value of their preferred shares out of the surplus funds of the corporation remaining after the payment of its debts, before any payment shall be made therefrom to the holders of the common stock.
    “The common stock shall be subject to the prior rights of the holders of the preferred stock as herein declared. If after providing for the payment of full dividends for any fiscal year on the preferred stock there shall remain any surplus ’ net profits for such year, any of such net profits of such year, and< of any other fiscal year, after the full dividends shall have been paid on the preferred stock, shall be applicable to such dividends upon the common stock as from time to time shall be declared by the Board of Directors, and out of any such surplus net profits after the closing of any fiscal year, the Board of Directors maj; pay dividends upon the common stock of the corporation for such fiscal year, but not until the dividends upon the preferred stock for such fiscal year shall have been actually paid or provided for and set apart.” Chart.er, paragraph 7:
    “The Board of Directors shall have the power, without the assent or vote of the stockholders, to make, alter, amend and rescind the by-laws of the corporation; to fix the amount to he reserved as the working capital,” &c.
    The bill states that after the organization of the corporation by-laws were adopted by fclie stockholders, by which it was provided that the directors should have the power, without the assent or vote of the stockholders, to make, alter, amend and rescind the by-laws of the corporation, and to fix the amount of the working capital, ,and that in 1906 the by-laws in this last particular were amended by the directors so as to permit them “to fix and from time to time increase, diminish and vary the amount of working capital of the corporation in their absolute judgment and discretion," which amendment was never acted upon by the stockholders, excepting that at the annual meeting of the stockholders in 1907 there was passed a.general ratification of all of the acts of the directors during the preceding year.
    By-laws, article XII.:
    “The directors of the corporation after reserving over and above its capital stock paid in as a working capital such -sum, if any, as shall have been fixed by the directors, shall either annually, semi-annually or quarterly, as in the discretion of the directors may seem best, declare a dividend or dividends on the preferred stock of the corporation provided, hoioever, that the aggregate amount of dividends so declared in any fiscal year shall not exceed the sum of seven per cent (7 $) on the preferred stock of the corporation.”
    When the company was organized there was provided in addition to the capital invested a working capital of' $1,720,000. From time to time as the operations of the company went on dividends were declared to the preferred stockholders and large sums were set apart to the credit of an account known as “Reserve for additional working capital/’ until tbe amount to the credit of that account was the sum of $2,459,896.64.
    The following table shows the amount of dividends paid to the preferred stockholders and the amounts added to the reserve for working capital for each year since 1900 :

      Year. Dividends. Reservations.

    1900 ................... $650,250 00 $289,826 85
    —1002 250.000 00 546,717 09
    1903 500.000 00 728,724 29
    11904 500.000 00 732,169 77
    /Í905 375.000 00
    J1906 875.000 00 162,458 04
    875.000' 00
    875.000 00
    $5,406,250 00 $2,459,896 04
    The amount reserved for additional working capital is in cash and quickly convertible assets.
    On July 2d, 1908, the board of directors passed a resolution, which, after reciting that the company had since its organization opened upon its books an account known as “Reserve for additional working capital,” and has set aside out of net earnings and placed to the credit of that account $2,459,896.64, and had used that fund as additional working capital in the business of the company, and that under the present conditions the company did not need, over and above its original working capital, an additional working capital in excess of $2,250,000, resolved that such additional working capital should be diminished by ’withdrawing therefrom the sum of $209,896.64, and that the same should be credited to the profit and loss account, and that the treasurer should make such entries upon the books of the company as should carry out the purpose and intent of the resolution. In this way the fund was provided out of which the dividend declared to the preferred shareholders could be paid.

      Mr. John B. Hardin, for the complainant.

      Mr. Richard V. IAnddbury. for the defendant.
   Howell, V. C.

The difficulties arising out of the above state of facts are principal^ those of interpretation. We must ascertain the nature and character of the fund known as “Reserve for additional working capital,” and' we must understand the relation which the statutory provisions bear to the engagements that the shareholders have entered into among themselves, in the company’s charter and by-laws, in order to determine the character 'of this fund.

Primarily, it is a function of the stockholders to fix the amount to be reserved, over and above the capital stock paid in, as a working capital. Corp. act 1896 § 1(7, P. L. 1901 p. 21/.6. The act of 1896 gave tire corporation capacity to confer this power upon the directors. The act of 1901 confers the power on the stockholders unless otherwisei provided in the original or amended certificate of incorporation, or in a by-law adopted by at least a majority of the stockholders. While there are some important differences between section 47 of the act of 1896 and section 2 of the act- of 1901, above referred to (Stevens v. United States Steel Corporation, 68 N. J. Eq. (2 Robb.) 373), yet for the purposes of the case in hand they are not of consequence, because in this case the incorporators in the original certificate of incorporation and the stockholders in the by-laws conferred the power to fix the amount of the working capital upon the directors.

The directors as early as 1900 opened an account in the company’s books of the character known among professional accountants as a representative account, which they denominated “Reserve for additional working capital,” to which they appropriated large sums of money in the years 1900, 1902, 1903, 1904 and 1906. These appropriations aggregated the sum of $2,459,-896.64. This fund seems never to have been used as actual working capital; that is, it was never invested in book accounts, plant, machinery, fixtures or materials. It was always invested in securities, which were quickly convertible into cash, and as far as the ease shows, bore no relation whatever to those activities in which the company was engaged and for the prosecution of which it was formed.

The complainant does not complain of this action on the part of the directors. I take it that he accords to the directors under the charter and by-laws the right to- pile up this “reserve” in their discretion, but, having once appropriated the money to that account, he denies their right to reduce the amount of such reserve, unless the whole sum so- withdrawn shall be given to the common stockholders. He contends that when the fund is once created it cannot be disturbed except by vote of the common stockholders, and that its appropriation to- working capital perforce changes its character and function to such an extent as to withdraw it wholly from the reach of the preferred shareholders. Concerning this contention two remarks may be made — first, this fund never became actual working capital. It was never actually employed in the business in which the company was engaged. It has always remained in cash or securities. It has always been a mere creature of bookkeeping and, although as a matter of account merely, it was set apart and tagged with a new name, its physical condition and character were never changed. When it was returned to profit and loss account by the resolution of July 2d, 1908, the return was effected by the treasurer by a mere bookkeeping entry as the resolution directed. It was what the directors called it when they opened the special account— a reserve — which might be used as actual working capital in case it should be needed for that purpose. In order to- so use it, it would require the further action of the directors to take the amount so found to be necessary from this account by solemn resolution, and by like resolution to exchange it for machinery or materials. The resolution which declares that the fund had been used as a working capital does not state tire facts. Second, this fund was once “Surplus net profits,” else it could not have been dealt with as the directors dlid deal with it. It was originally a fund which was applicable- to dividends and during the five years above mentioned could legally have been applied to pay full seven per cent, dividends to the preferred stockholders. I fail to see how its character as “Surplus net profits” can be -changed by calling it “Reserve for additional working capital” and doing nothing more about it.

If the fund is of this nature and character, then it is under the full control of the directors and may be used by them for the payment of the dividend in question. They may diminish it for lawful purposes and in a lawful manner in their discretion. They may open other accounts with other names on their books and appropriate the whole or any part of it thereto-. But whatever they do about it, so long as it is not actually paid out, it must remain in fact “Surplus net profits.” Mere bookkeeping entries cannot affect it.

The fourth paragraph of the charter provides that the preferred stockholders may be paid dividends “out of any and all surplus net profits.” If the view above expressed is correct, then the present board of directors ' have express warrant in the charter for paying the dividend in question out of this reserve fund.

An almost conclusive argument in favor of the defendant’s position lies in the fact that there yet remains in the account denominated “Eeserve for additional working capital,” $2,250,000, which is invested in quickly convertible securities and which the corporation management declare is sufficient for the company’s purposes, but which has not yet been actually employed in the operation of the company’s business. I understand from the case that the original working-capital of $1,720,000 was actually invested in the purchase of materials or plant, or invested in book accounts, and that it has been and is treated as actual working capital. It is quite manifest that there is a wide difference between that original -actual working capital invested in property necessary for the company’s business and the reserve of $2,250,000 which is merely held as an investment of the surplus moneys belonging to the corporation.

But if the fund is of the character insisted upon by the complainant, viz., actual working capital, yet, in my opinion, the directors have been given full control of it by the charter and bylaws. The charter (paragraph 7) confers upon the board of directors the power without the assent or vote of the stockholders to fix the amount to- be reserved for the working capital. The by-laws use the same expression. The complainant argues that this authority, as well as the like authority in the statute (P. L. 1901 p. 246 § 17 of the act of 1896) goes only to the extent of permitting the directors to establish by resolution an amount to which additions may be made from time to time by virtue of the same authority, but that the fund once built up may not be diminished except by the consent of the common shareholders.

The statute contemplates annual dividends. It likewise contemplates at the time these annual dividends are declared that the body to which the function may be committed by the charter or by-laws — either the directors or the stockholders — shall ascertain whether any additional working capital may be needed in the company’s business, and if so, to provide it out of the profits of the business, and so annually to fix the amount which may be so needed. Manifestly this amount may vary. It may be large one year and small the next. In the case of a corporation which had issued common-stock only there could be no question. In such a case the directors or stockholders, as the case might be, would reduce the working capital and divide the reduction as a dividend among the stockholders. The words of the statute are no different in the case of a corporation which has issued preferred stock, and the rule must be analogous.

The trend of judicial thought on this point will be found in Vice-Chancellor Stevenson’s opinion in Stevens v. United States Steel Co., 68 N. J. Eq. (2 Robb.) 382.

I do not think that any important change was made in the power of the directors by the amendment to the by-laws in 1906, whereby specific authority was given to them to increase, diminish and vary the amount of the working capital, neither do I find in the statute or the documents in the case any direction to refer the question to the stockholders.

But, says the complainant, although the working capital may be reduced by the directors, the reduction belongs to the common stockholders, and must be divided among them, to the exclusion of the preferred stockholders. I find no appropriation of this kind in the statute nor in the charter or by-laws of the company. In my opinion, any amount taken from actual working capital, or from “reserve for additional working capital,” is at once restored to the'character that it originally bore. It was either “surplus” or '“net profits” or “surplus net profits,” when it was first dealt with by the directors, and probably appeared on the books in the profit and loss account as a surplus. It is 'now dealt with again. The bookkeeping process is reversed by an entry made by the treasurer, and this should restore the former situation. As a matter of "bookkeeping, its place would be in the profit and loss account, or in some other special account in which it would show as a surplus; and it would be applicable to the payment of any and all dividends that the board of directors might lawfully declare.

It is claimed on the part of the complainant that the preferred stock dividends for any fiscal year must be declared and paid out of the profits made by the company during that same fiscal year; that is to say, that profits made during the fiscal year ending in 1904, cannot be paid out in dividends to the preferred stockholders which might be declared during the fiscal year ending in 1905 or 1906. This position is entirely at variance with the charter and the stock certificates, both of which provide that the preferred stock shall be entitled “out of any and all surplus net profits,” whenever declared by the board of directors to noncumulative dividends, &c. I think that this means that the directors may use any surplus profits arising from the operation of the company’s business, whenever made, to pay lawfully-declared dividends on the preferred stock, no matter when they shall have been so lawfully declared. The case of Elkins v. Camden and Atlantic Railroad Co., 36 N. J. Eq. (9 Stew.) 233, does not apply because of the difference in the wording of the charter.

I therefore conclude that the bill of complaint is without equity, and unless the complainant can amend in such manner as to avoid the objections now'presented, it must be dismissed.


text:
    Elias Berla v. Florence R. Strauss et al.
    [Submitted August 1st, 1908.
    Decided September 12th, 1908.]
    1. Upon a bill filed by one former copartner against the devisees of another deceased copartner to obtain a decree establishing a resulting-trust in favor of the complainant in respect of a lot of land the title to which had stood in the name of the firm but was afterward acquired by sqch deceased copartner, upon the ground that the purchase by such deceased copartner was with the joint funds of the firm of which the complainant and deceased copartner were members,- and that the purchase inured to the benefit of the, complainant to the extent of an undivided half interest therein, and praying- that the deceased copartner’s devisees be compelled to transfer to the complainant a half interest in the land, and account for all transactions concerning the property since the title was acquired by the deceased copartner, evidence examined and— Held, insufficient to prove the case laid in the bill.
    2. The burden of proof is on the complainant, very strongly, in view of the circumstance of the death of his copartner, and his not bringing his suit until after such copartner’s death, or until the lapse of about twelve years from the date of the questioned transaction.
    3. The evidence upon which a court may go to establish a resulting-trust must not only satisfy the burden of proof, but must be clear and convincing.
    4. The great delay suffered by the complainant in the presentation of his claim to the court not accounted for, and his failure to make any demand upon the deceased copartner in his lifetime, is still another reason why he should be charged with the utmost burden of proving his case thoroughly.
    5. Inasmuch as the bill will not lie as a bill to enforce a resulting trust, it will not be retained and an amendment thereof permitted, for the purpose of settling partnership accounts, because to change it into a partnership bill would require fundamental changes which -only should be asserted by a new or original bill.
    6. A dismissal of the bill carries with it the claim for an accounting.
    On final hearing on bill, answer, replication and proofs.

      Mr. Samuel Kalisch and Mr. Ghauncey G. Parker, for tire complainant.

      Mr. Louis Hood, for the defendant.
   Howell, V. C.

The hill in this case is filed for the purpose of having this court decree a resulting trust in favor of the complainant in a tract of land in the northern part of the city of Newark. Some time in 1891 the complainant, Berla, with Barnard Strauss and Samuel A. Smith became partners under the firm name of Strauss, Smith & Berla and were engaged in the manufacture of fertilizers upon the plot of land in question. The title to the land was in a corporation known as the Newark Sanitary and Manufacturing Company. This company in 1891 mortgaged the premises in question to August Rommel to secure the sum of $13,000, payable in four years, with interest. The Newark Sanitary and Manufacturing Company got into financial difficulties and on September 36th, 1893, the land owned by it was sold by the sheriff of the county of Essex under a common law execution to Strauss, Smith & Berla, and a deed made to them as tenants in common on that day. The firm of Strauss, Smith & Berla continued to occupy the premises until some time in the year 1895, when they removed to another part of the city. They still retained title to the said lands, subject to the said mortgage. Eor some default in the payment of interest, the mortgagee in October, 1895, begani a suit for the foreclosure of his lien. This suit, however, was settled by the payment of the arrears of interest and the costs. Mr. Rommel died in 1896 still the owner of the mortgage in question, leaving a will and appointing executors, who, on August 12th, 1896, instituted proceedings anew for the foreclosure of the said mortgage, in which proceedings there was a final decree and execution in February of 1897. On April 7th, 1897, Rommel’s executors assigned the mortgage and the decree thereon to Joseph Rice, of Trenton, who was the father-in-law of Strauss, in consideration of the sum of $10,400 paid by Strauss to Rommel’s solicitor. On April 23d the property was sold by Sheriff Doremus by virtue of the execnlion in the foreclosure proceedings and a deed of conveyance was made to Rice by the sheriff on May 1st, 1897. Rice held the title until January 3d, 1900, when he made a conveyance to Strauss by deed dated on that day, but not recorded until October 6th, 1900.

While Strauss, Smith & Berla were the owners of the fee of the said lands they obtained from the riparian commissioners of the state a lease of the riparian rights' which was by its terms convertible into a grant upon certain terms and conditions therein set out. On September 4th, 1900, Berla, the complainant, and Smith executed an assignment of this lease to Strauss. Strauss then applied for á riparian grant and received it on September 20th, 1900. Strauss died in 1906, leaving a widow and one child, who are made the defendants to this suit. Both have answered. The complainant’s case is that immediately after the beginning of the first foreclosure suit in October, 1895, Strauss, Smith & Berla discussed between themselves the advisability of raising a fund to pay off the Rommel mortgage; that Strauss stated to his partners that this transaction would require about $2,750 from each of them; that Smith made his note to the order of Strauss for $2,746.67, dated December 12th, 1895, and that Berla about the same time gave Strauss $250 in cash and his note for $2,500, dated December 11th, 1895, and that with these amounts and an equal amount to be contributed by Strauss he was to negotiate for the purchase or redemption of the $12,000 mortgage held by Rommel. The Smith note matured on April 12th, 1896, and was renewed on April 13th, 1896, for $2,596.67, he having paid $150 at the date of the renewal. About the time the second note made by Smith matured, he found himself on account of financial embarrassment unable to maintain his place in the enterprise and he thereupon transferred or surrendered his interest to Strauss and Berla, who undertook to discharge the obligation of the Smith note and release Smith therefrom. It may be said at this point that the Smith note was paid by Strauss and Berla, each paying one-half thereof. The bank account in which the Smith note appears was kept in the Merchants National Bank of Newark, in the name of Elias Berla, but the transactions were wholly, so Mr. Berla says, on the joint account of himself and. Strauss.

The Berla note for $2,500, dated December 11th, 1895, was discounted by the German National Bank, and the proceeds thereof placed to the credit of Strauss. This note was renewed at periods of four months until September 16th, 1904, on which day Berla made his last renewal. This last note was for $375 and was paid at its maturity on January 16th, 1905.

There is no evidence whatever that Strauss kept this fund separate from his other moneys or that he ever actually contributed any money of his own to any such fund. The.theory of the bill is that when Strauss purchased the mortgage and when he subsequently purchased the land in the foreclosure proceedings under the same mortgage he made the purchase with these joint funds and that the purchase inured to the benefit of Berla to the extent of an undivided half interest therein, Smith’s interest having been eliminated as early as 1906, and the prayer is that the Strauss devisees may be compelled to' transfer to Berla a half interest in the land, and that they may account to Berla for all the transactions concerning the property since the title was taken by Eice and subsequently by Strauss.

There are, however, some facts which militate strongly against the complainant’s view of the case.' The first that I shall consider are the transactions relating to the Smith note of December 12th, 1895. As has been said, this note was discounted by the Merchants National Bank, the date of the discount being December 18th, 1895, and so far as there is any record of this note it appears in an account kept in the name of Elias Berla in that bank. The account shows the original discount of the note on December 18th, 1895, its renewal on April 15th, 1896, and beyond this we have no history of the note whatever, excepting that Mr. Berla testifies that it was eventually paid by him and Mr. Strauss equally. An examination of the merchants bank account in connection with the checks and vouchers shows that nearly if not quite all the money that was derived from the Smith note was paid out during the year 1896, a year or more before the foreclosure sale, probably for the general firm expenses, and that no portion of it was used or could have been used by Mr. Berla, who had charge of the account, for the purchase of the lands in question. Mr. Berla says in his testimony, at page 67, that not a dollar of tire proceeds of that original Smith note went to Mr. Strauss individually, but that it went for the benefit of the partnership.

The foreclosure suit went to a final decree on February 10th, 1897. When the sale took place April 20th, 1897, the amount due on the decree for the mortgage debt, interest and costs, was $12,683.41. The mortgage and the decree were assigned to Rice on April 7th, 1897, at which time Strauss paid the complainant’s solicitor therefor $10,400. According to the complainant’s theory he should have been called upon to furnish one-half of that money or $5,200. So far as I can see from the testimony, the only money that he claims to have furnished was $2,750 (cash, $250; note, $2,500), because I think it sufficiently appears that no substantial portion of the proceeds of the Smith note could, by any probability, have gone into- the transaction, and he thus permitted Strauss to advance from his own funds $.2,450 on account of this purchase, which the complainant, according to his own theory of the case, should have advanced out of his own funds.

Another fact concerning which there is no dispute, which is inconsistent with the complainant’s theory, is the series of transactions relating to the riparian rights appurtenant to the property in question. Strauss, Smith & Berla had a lease of the riparian rights which were converted into a grant to Strauss on September 20th, 1900. In order to obtain the grant it appears that it was necessary for Strauss to first obtain from his partners a transfer of the lease. Such a transfer was executed by Mr. Berla, the complainant, and Mr. Smith, to Mr. Strauss, on September 4-th, 1900, and the .execution acknowledged before a master in chancery in the office of Strauss’ solicitors. When the grant was añade, Strauss paid to the state the sum of $1,100 therefor, one-half of which, according to the complainant’s theory, should have been paid by him; yet although he executes in due form a solemn instrument of assignment which enables Strauss to obtain a grant, he does not appear to have made any inquiry as to the reason why the assignaneart was made or what Strauss intended to do with it, or why it was made to Strauss and not to Eiee, nor did he inquire as to the expense, or whether any portion of it was to be charged up against him.

The complainant cannot saj' that he expected that these large items of expense would be obtained from sales of the property. He appears not to have made any inquiry about the property or its disposition until after Strauss’ death, and he did not know until the summer of 1906 that Strauss had sold a portion of the land to Maas & Waldstein. It does not appear that Strauss ever made any demand on Berla for any portion of the moneys which he was paying out on account of this property, showing that he had no idea that Berla had any interest or claimed any interest in the propert3r.

The evidence relating to the promissory note made by Berla to Strauss for $2,500 is that of Mr. Berla alone, and while the bank account of the German National Bank apparently shows that this money went eventually to Mr. Strauss, I am not satisfied, in view of the circumstances of the case as above recited, to so appropriate it. It was not enough to pay for the half interest in the mortgage which Mr. Berla now claims, and while it would be unfair to charge Mr. Berla with an attempt to overreach the estate of a deceased person who is not here to tell his own story about it, I feel that I must apply the ordinary rules concerning the burden of proof. The burden of proof is on the complainant, and in fact is on him very strongly in view of the circumstance that Mr. Strauss is dead and that Mr. Berla did not bring his suit until after the death of Mr. Strauss or until after the lapse of about twelve years from the date of the transaction. The evidence upon which a court may go to establish a resulting trust must not only satisfy the burden of proof, but must be clear and convincing. Whatever the fact may be, it is very clear from the circumstances that Mr. Strauss, who was well known in Newark as an upright business man, had no idea that anyone was interested in the property besides himself. There is still another reason why the burden of proof should be put up sharply to the complainant, and that is because of the great delay suffered by him in the presentation of his claim to the court.' The delay is not accounted for, nor is there any reason given why the complainant did not make a demand upon Mr. Strauss in his lifetime. It may be that the great friendship which existed between these two men might have operated to prevent any writings being made with reference to the transaction, but it will hardly excuse the complainant in the present circumstances from being charged with the utmost burden of proving his case thoroughly.

I must therefore conclude that the complainant has not proved the case laid by his bill, and that he can have no relief upon the theories which I have discussed.

It is urged by the complainant that even though the bill will not lie as a bill to enforce a resulting trust, yet that it will lie for the purpose of settling partnership accounts, and that the bill should be retained, and, if necessary, amended for that purpose in case the court should think that it failed of its original purpose. I have read the bill with reference to this suggestion and conclude that it ought not to be held as a partnership bill. To change it into a partnership bill would require fundamental changes which only should be asserted by a new and an original bill. I will therefore advise a decree that the bill be dismissed.

A dismissal of the bill carries with it the claim for an accounting, which I have not discussed, but, of course, it is quite evident that if the main case falls there can be no accounting.


text:
    Max Rodburg v. Morris Lamachinsky.
    [Decided October 1st, 1908.]
    1. Where it appeared that the complainant and 'defendant were partners in the business of selling coal in the city of Newark, and upon the dissolution of the copartnership the defendant executed a receipt and release to the complainant inserting therein this covenant: “I further bind myself not to open or go in the coal business in the city of Newark, either in my own name, or in anybody else’s name, where I shall be connected or benefited, by and for a term of five years from date”' — Held, that such covenant restricts the defendant from being connected with any coal business in Newark, from which he may derive any benefit, whether such business shall be conducted in his name, or in the name of anybody else, for the term of five years.
    2. It appearing that shortly after the execution of this covenant the defendant entered the employ of one P., and at once began to sell coal for his employer, in paper bags, to retail grocers, being benefited by the receipt of thirty-five cents per ton for every ton of coal he might sell —Held, that the defendant had thereby violated such covenant, and that an injunction should be issued against him.
    On final hearing on pleadings and proofs.

      Mr. Frank W. Long, for the complainant.

      Mr. Philip J. Scholland, for the defendant.
   Howell, V. C.

In this case the injunction praj^ed for in the bill should issue.

The complainant and defendant were partners in the business of selling coal. The complainant had formerly carried on the same business alone. When the defendant came into the business as a partner he undertook to manage that part of the business, which consisted of selling coal in small quantities in paper bags to retail grocers. The defendant was engaged in this branch of the business for several months and had an opportunity to become acquainted with the customers of the .complainant, who formerly had patronized this branch of the business.

The parties did not agree, and in August, 19Ó8, it was orally agreed between them that the partnership should be dissolved; that tfie complainant should repay to the defendant a sum about equivalent to the amount which he had contributed to the business, but- that inasmuch as he could not pay this amount at once the defendant should continue to sell coal in paper bags to grocers until the complainant could raise the necessary funds. The complainant was ready to close the bargain on September 14th, 1908, on which day the complainant paid to the defendant a sum of money, less than had been agreed on, and defendant executed a receipt and a release to the complainant in which he inserted this covenant: “I further bind myself not to open or go in the coal business in the city of Newark, either in my own name, or in anybody else’s name, where I shall be connected or benefited, by and for a term of five years from date.”

Shortly after the execution of this covenant the defendant entered the employ of one Patoker, and at once began to sell coal for his employer, in paper bags, to retail grocers, or, in other words, to carry on the same occupation which he had car- • ried on while he was a partner with complainant.

The covenant as I read it restricts the defendant from being-connected with any coal business in Newark from which he may receive any benefit, whether such business shall be conducted in his name or in the name of anyone else, for the term of five years. This being the construction of the covenant, it is quite plain that the defendant has violated it. He is engaged in a coal business which is being carried on in the name of Patoker, from which he, the defendant, is being benefited by the receipt of thirty-five cents per ton for every ton of coal which he may sell.

I will advise a decree in' accordance with these views.