author: Fuld, J. Chief Judge Conway

text:
    In the Matter of the Accounting of United States Trust Company of New York, as Trustee for William Bingham, II, Deceased, under Indenture of Oliver H. Payne, Respondent. Sidney W. Davidson et al., as Executors and Trustees under the Will of William Bingham, II, Deceased, et al., Appellants; Harry P. Bingham, Jr., et al., Respondents.
    Argued January 5, 1959;
    decided November 19, 1959.

      Leslie D. Dawson for appellants.
    I. The questions involved must be determined in accordance with the equitable rules of apportionment. (Equitable Trust Co. v. Prentice, 250 N. Y. 1; United States Trust Co. v. Heye, 224 N. Y. 242.) II. The distributions involved are extraordinary dividends for purposes of equitable apportionment between principal and income, and not stock splits. (Matter of Horrmann, 4 Misc 2d 156, 3 A D 2d 5; Matter of Fosdick, 4 Misc 2d 1003, 3 A D 2d 1000, 4 N Y 2d 646; Matter of Chapman, 208 Misc. 390; Matter of Bernard, 3 Misc 2d 31; Matter of Thoms, 3 Misc 2d 784, 4 Misc 2d 987; Matter of Berger, 6 Misc 2d 468; Matter of Harjes, 9 Misc 2d 792; Matter of Sanford, 4 Misc 2d 487.) III. In apportioning stock dividends a trustee must retain in principal sufficient of the dividend shares to maintain principal unimpaired, and the remainder of the shares must be distributed as income. (Matter of Osborne, 209 N. Y. 450; Bourne v. Bourne, 240 N. Y. 172; Matter of Hagen, 262 N. Y. 301; Dickinson’s Estate, 285 Pa. 449; Lueders Estate, 337 Pa. 155; Eisner’s Estate, 175 Pa. 143; Chase Nat. Bank v. Chicago Tit. & Trust Co., 271 N. Y. 602; Macy v. Ladd, 128 Misc. 732.) IV. The method of apportionment of a stock dividend does not depend upon the number of accounts in which a corporation has recorded its surplus, nor upon the name of the account against which the dividend is charged. (Eisner v. Macomber, 252 U. S. 189; Pratt v. Ladd, 253 N. Y. 213; Matter of Jackson, 232 App. Div. 425, 258 N. Y. 281; Barnes’ Estate, 338 Pa. 555; Estate of Duffill, 180 Cal. 748; Matter of Davis, 11 Misc 2d 372.) V. Even if the trustee’s proposed method of allocating the stock dividends of Borg-Warner and of Standard of Indiana were correct, the allocations were based upon erroneous figures. (Pratt v. Ladd, 253 N. Y. 213; Bourne v. Bourne, 209 App. Div. 419, 240 N. Y. 172; Jones v. Integrity Trust Co., 292 Pa. 149; Macy v. Ladd, 128 Misc. 732.)

      Bernard Newman, guardian ad litem for Belinda Bingham, and others, infants, respondents.
    I. The stock distributions were properly allocated in accordance with the sources from which the distributions arose — that portion derived from 1 ‘ capital surplus ’ ’ going to corpus and that part created from “ earned surplus ” allocated to income. (Matter of Lloyd, 292 N. Y. 280; Matter of Sanford, 4 Misc 2d 487; Matter of Fosdick,
      4 N Y 2d 646; Matter of Chapman, 208 Misc. 390; Matter of Thoms, 3 Misc 2d 784, 4 Misc 2d 987; Matter of Bernard, 3 Misc 2d 31; Matter of Berger, 6 Misc 2d 468; Matter of Harjes, 9 Misc 2d 792; Equitable Trust Co. v. Prentice, 250 N. Y. 1; City Bank Farmers Trust Co. v. Wylie, 273 N. Y. 304; Matter of Hagen, 262 N. Y. 301; Matter of Lissberger, 189 Misc. 277, 273 App. Div. 881, 298 N. Y. 934; Matter of Osborne, 209 N. Y. 450; United States Trust Co. v. Heye, 224 N. Y. 242; Bourne v. Bourne, 240 N. Y. 172.) II. On the record before the court below there was insufficient proof to challenge the inclusion of certain items in the capital surplus accounts. (Bourne v. Bourne, 240 N. Y. 172.)

      Alexis C. Coudert and John W. Dougherty, III, for Harry Payne Bingham, Jr., individually, respondent.
    I. The trustee acted according to law in allocating to principal that proportion of the distributed shares which was financed out of capital surplus. (Matter of Osborne, 209 N. Y. 450; United States Trust Co. v. Heye, 224 N. Y. 242; Macy v. Ladd, 128 Misc. 732; Thayer v. Burr, 201 N. Y. 155; Matter of Lissberger, 189 Misc. 277; Waterhouse Estate, 308 Pa. 422; Dupont v. Peyton, 15 Del. Ch. 255; Pratt v. Ladd, 253 N. Y. 213.) II. The Osborne rule is basically inequitable as applied to earnings, and should not be extended further to stock distributions attributable to capitalization of capital surplus. III. Distribution to the life beneficiaries of additional shares resulting from capitalization of capital surplus involves an additional element of unfairness to remaindermen not present where earnings only are involved, and renders even more undesirable any extension of the Osborne rule to shares issued after a transfer from capital surplus to capital stock. (Matter of Duell, 8 Misc 2d 114, 5 A D 2d 815.) IV. Appellants have not met the burden of proving that the companies in question improperly included items in their capital surplus accounts. (Bourne v. Bourne, 240 N. Y. 172.)

      Charles A. Buckley, Jr., guardian ad litem for Belinda Bingham and others, infants, in another accounting proceeding, amicus curiæ.

    I. Matter of Osborne must be applied to the entirety of an extraordinary stock distribution. (Equitable Trust Co. v. Prentice, 250 N. Y. 1; Matter of Osborne, 209 N. Y. 450; Matter of Chapman, 208 Misc. 390; United States Trust

      Co. v. Heye, 224 N. Y. 242; Pratt v. Ladd, 253 N. Y. 213; Matter of Davis, 11 Misc 2d 372; Macy v. Ladd, 128 Misc. 732.) II. Characterization of an extraordinary stock distribution as a “ stock split ” or a “ stock dividend ” is irrelevant to the issue. (Matter of Bernard, 3 Misc 2d 31.) III. The arbitrary write-up by the board of directors of Borg-Warner Corporation of the evaluation of their stock in B. C. Atkins & Co., Inc., must be rejected in determining legally recognized increment to the acquisition book value of the Borg-Warner stock which must be kept intact. (United States Trust Co. v. Heye, 224 N. Y. 242.)

      Cyrus S. Jullien and Edward J. McDonald for Elizabeth B. K. Carruthers and another, amici curiæ.

    I. The distribution of the additional shares in each of the two corporations was a stock dividend and not a stock split. (Matter of Fosdick, 4 N Y 2d 646; Matter of Horrmann, 3 A D 2d 5; Matter of Davis, 11 Misc 2d 372; Matter of Sanford, 4 Misc 2d 487; Matter of Thoms, 3 Misc 2d 784.) II. All extraordinary dividends payable from accummulated earnings of a company, whether payable in cash or in stock, belong to the life beneficiary unless they entrench in whole or in part upon the capital of the trust fund as received by the trustee. (Matter of Osborne, 209 N. Y. 450.) III. There is no distinction between capital surplus and earned surplus transferred to stated capital in connection with the distribution of a stock dividend. (United States Trust Co. v. Heye, 224 N. Y. 242; Macy v. Ladd, 128 Misc. 732; Matter of Hagen, 262 N. Y. 301; Matter of Bonbright, 186 Misc. 172.)
   Fuld, J.

This appeal presents once more the problem of allocation of stock distributions as between principal and income of a trust under the rule laid down in Matter of Osborne (209 N. Y. 450). For the first time, however, we are faced with the question whether that part of a stock distribution which is supported by a transfer of capital surplus represents a distribution of earnings within the meaning of that rule.

The trust with which we are concerned was established by Oliver H. Payne under an indenture executed in 1915. By its terms, the income was payable to William Bingham, II, for life and, on his death without surviving descendants, the trust was to terminate and the principal distributed to the then living descendants of Mary Payne Bingham, a sister of the settlor of the trust. The life beneficiary died in February of 1955 and, since he left no descendants, the surviving children of the settlor’s sister became entitled to the trust corpus.

The trustee brought this proceeding, pursuant to article 79 of the Civil Practice Act, to settle its accounts. The trust had contained 26,500 shares of the stock of the Standard Oil Company of Indiana and 4,100 shares of the stock of Borg-Warner Corporation. During Bingham’s lifetime, each of these companies effected an extraordinary stock distribution, in consequence of which the trust received an additional 26,500 shares from Standard and an additional 8,200 shares from Borg-Warner. The trustee divided' these shares between principal and income of the trust, and it was to the allocations thus made, and the method employed in arriving at them, that Bingham’s executors objected. The Appellate Division approved both method and result and, from its order (which modified Special Term’s determination insofar as it directed a reference), the objectants appeal to us as of right.

We turn, first, to the action taken by the two corporations in effecting the distribution of the additional stock certificates. In each instance, the company transferred to stated capital, or to its capital stock account, its entire capital surplus and sufficient earned surplus to support the additional shares at their par value in the capital stock account. To be more specific, Standard, with 16,229,856 additional shares of $25 par value stock to be issued, transferred $405,746,400 to the capital stock account. Of this, $174,612,840 was charged to the capital surplus account, leaving nothing in that account, and the balance of $231,133,560 was charged to the earned surplus account. In terms of percentage, 56.965% of the transfer to the capital stock account came from earned surplus and the balance of 43.035% from capital surplus. Borg-Warner, its stock having a par value of $5, passed a resolution transferring to stated capital 1 ‘ the total amount of capital surplus, including all paid-in surplus ”, and from earned surplus “ the balance necessary to increase the stated capital by an amount equal to $5 times the number by which the issued common shares [were] increased as a result of the reclassification of shares ”. And the company thereafter transferred to the capital stock account from capital surplus the sum of $21,340,734, exhausting that account, and from earned surplus the sum of $4,061,354 to cover, at $5 par, the 5,080,417 additional shares being issued. Again, in terms of percentage, 15.9882% of the transfer to the capital stock account came from earned surplus, the balance of 84.0118% being from capital surplus.

As already indicated, the trustee held 26,500 shares of Standard prior to the 1954 increase in the number of its shares and received certificates representing an additional 26,500 shares; and, having held 4,100 shares of Borg-Warner before that company increased its shares in 1955, the trustee received certificates representing an additional 8,200 shares.

The trust indenture before us makes no provision for the allocation of ‘1 stock dividends ’ nor does it elaborate on the meaning of the words “ rents, issues, profits and income ” in the provision granting such interests to the income beneficiary. Since the indenture was executed in 1915, long before the effective date of section 17-a of the Personal Property Law, the trustee was confronted with the question of whether any of the additional shares of Standard or Borg-Warner represented income of the trust and, if so, how many. It resolved the problem by applying to the shares involved (26,500 shares of Standard and 8,200 shares of Borg-Warner) the percentages in which earned surplus and capital surplus had contributed in each case to the necessary supplementation of the capital stock account, thereby arriving at the number of new shares which it regarded as representing a distribution or division of corporate earnings. And, having then ascertained that awarding such number of shares to income would not impair the “ intact value ” of the trust corpus within the meaning of the Osborne rule, it proceeded to allocate 56.965% or 15,095.73 shares of Standard to income, the balance of 11,404.27 shares to principal, and 15.9882% or 1,311 shares of Borg-Warner to income and the- balance, 6,889 shares, to principal. Objection to the allocations which were thus made came from the life beneficiary’s executors; the respondents, representing principal, were satisfied with the trustee’s action and took no appeal from the court determinations which approved it.

The parties have accepted the applicability of the Osborne rule and, in view of that, we are not required to consider whether the rule should be repudiated or restricted, as it, or some counterpart, has been by the courts and legislatures of other jurisdictions which had at one time applied a similar rule. (See, e.g., 3 Scott, Trusts [2d ed., 1956], § 236.3, pp. 1816-1817; Restatement, Trusts [Supp. 1948], § 236; Bowles v. Stilley’s Ex’r., 267 S. W. 2d 707 [Ky.]; Langdell v. Dodge, 100 N. H. 118; Cunningham Estate, 395 Pa. 1; see, also, Matter of Lindsay, 11 Misc 2d 374.) Our sole task is to determine whether the Osborne rule, fairly applied, required the trustee to allocate to the income beneficiary more stock than it had. '

The appellants claim, in effect, that, because some earnings were transferred to the capital stock account in each case, the entire accompanying increase in the number of shares represents a distribution or division of earnings to which the income beneficiary became entitled, except to the extent that it might reduce the intact value ” of the trust’s investment in particular shares. It is their submission that the income beneficiary is entitled to all earnings accumulated by the corporation since the trustee acquired the stock. And, although they must concede that, until the corporation effects a distribution of its earnings, the income beneficiary cannot obtain them, they contend that any distribution to its stockholders of cash or shares of the company’s own stock represents such a distribution of the corporate earnings. Their only concession to principal is that the trust’s “ intact value ” may not he impaired. The source of the distribution is deemed immaterial on the ground that principal is to be assured its ‘ intact value ’ ’; everything in excess of that, when issued by the company to its stockholders, is for the income beneficiary.

This is certainly not the rule of the Osborne case; indeed, it is a perversion of the “ intact value ” principle. Matter of Osborne and the decisions which followed it make it crystal clear that such “intact value” was intended as a minimum figure below which the corpus of the trust could not be reduced, not as a jumping-off place above which income could claim everything. The ‘ ‘ intact value ’ ’ principle was, in other words, designed as a safeguard of the rights of principal and a limitation on the rights of income, not, as the appellants would have it, as a limitation on the rights of principal.

The appellants’ suggestion that, by virtue of Osborne, an income beneficiary has such a claim upon corporate earnings that he can demand all corporate distributions, whatever their nature and whatever their source, until that claim has been made good, not only is unsupported by precedent, but is thoroughly unsound. In point of fact, the nature of each distribution is important and its source of particular significance. For example, an extraordinary dividend in property acquired by a corporation prior to the acquisition of its stock by a trust — or out of earnings accumulated prior thereto — is trust principal, even though the company may have accumulated earnings well in excess of the value of the dividend since that time. (See United States Trust Co. v. Heye, 224 N. Y. 242; Macy v. Ladd, 227 NN. Y. 670.) The distribution by the corporation of something which can be identified as capital may not be treated as a distribution of earnings, despite the fact that there have been earnings of equivalent or greater value accumulated during the life of the trust. This completely invalidates the appellants’ theory that all distributions which leave trust principal “ intact ” — i.e., which do not exceed corporate earnings realized after the acquisition of the stock by the trust — go to income. It makes clear the necessity for looking to the source of the “dividend” and determining whether that which is being distributed was, in fact, earned by the company since the trust acquired the stock and still retains its status as earnings. Obviously, we cannot trace specific dollars of earnings or of capital as they are received and disbursed, but that does not justify our treating all corporate distributions as distributions of earnings. If the appellants were correct and an income beneficiary were to be held entitled to anything issued by the corporation in excess of the “intact value ”, then, such a beneficiary would have to be given stock rights, identifiable capital assets whenever distributed and even shares issued in connection with what everyone would concede to be a stock split (in which no segregation of earnings or alteration of surplus accounts has taken place). None of these have we been willing to do (see, e.g., Matter of Hagen, 262 N. Y. 301, 306; Bourne v. Bourne, 240 N. Y. 172, 175-176; United States Trust Co. v. Heye, 224 N. Y. 242, supra, Baker v. Thompson, 224 N. Y. 592), nor should we be.

The rule which assigns to the income beneficiary stock issued against the capitalization of earnings is based on the proposition that the stock dividend is, in effect, a distribution of such earnings even though they are actually being retained in the business. (See Equitable Trust Co. v. Prentice, 250 N. Y. 1, 8, 12.) In reality, as the court observed in the Prentice case, “‘A stock dividend does not distribute property, but simply dilutes the shares as they existed before ’ ” (250 N. Y., at p. 12). The rule as applied has proved to be generous to the average income beneficiary since it has made no attempt to equate the true value of the stock to be received by him with the amount of earnings capitalized and, in addition, has ignored the fact that through receipt of the stock he obtains a proportionate interest not only in any remaining undistributed earnings and in corporate capital assets of every kind, but also in all earnings in the future.

Nor may we overlook the fact that, to the extent that the source of any stock dividend is capital surplus, there is no significant possibility of injury to the life tenant if the stock is retained as part of the corpus. A substantial part or, indeed, all of the capital surplus may never have represented earnings of the enterprise. A common instance is the so-called ‘ paid-in surplus ”, representing the difference between the par value or stated value of shares issued by the corporation and the actual consideration received by it for such shares. The Borg-Warner resolution which declared the stock dividend expressly referred to paid-in surplus as comprising part of the capital surplus to be transferred to capital for the issuance of the new shares. If the entire paid-in capital had been added to the statutory capital in the first instance, no one would even have suggested that the income beneficiary could assert any right to it. The circumstance that the same result is achieved in two steps can make no difference.

It is true that some capital surplus may have had its origin in what were once earnings. Frequently, capital surplus is created through the use of earnings to support ordinary stock dividends which the income beneficiary will already have received. A rule of the New York Stock Exchange, required and enforced by the Securities and Exchange Commission, demands that, when a stock dividend is declared, the earned surplus account of the corporation must be charged with the market value of the stock to be distributed, not merely its par or stated value. (See N. Y. Stock Exchange — Company Manual, § A-13; Rappaport, SEC Accounting Practice and Procedure [1956], p. 312.) Since, ordinarily, only par or stated value goes into the capital stock account, the excess of market value over par or stated value is transferred to capital surplus. The income beneficiary receives the shares thus capitalized. If capital surplus thus derived is subsequently transferred to the capital stock account to support a further issuance of stock, the award of any such stock to income would actually represent a double distribution to the income beneficiary of the identical earnings! Consequently, even if capital surplus is in part made up out of earnings capitalized in years gone by, it is generally accepted that the further transfer of such earnings from capital surplus to the capital stock account does not constitute such a capitalization of earnings as will call the Osborne rule into play. (Cf. Matter of Lissberger, 189 Misc. 277, affd. 273 App. Div. 881, motion for leave to appeal denied 298 N. Y. 934; Matter of Hagen, 262 N. Y. 301, 304, supra.)

Accepting, as we do, the prevailing view that a transfer from capital surplus to the capital stock account does not constitute a capitalization or distribution of earnings when that transfer represents 100% of the capitalization accompanying a stock distribution, it necessarily follows that we may not treat such a transfer as a capitalization of earnings simply because, as in the present case, it represents less than 100%.

To recapitulate. In Matter of Osborne (209 N. Y. 450, supra) and the cases preceding it, we adopted the fiction that the capitalization of accumulated earnings, when accompanied by the simultaneous issue of stock, is equivalent to the distribution of those earnings in the form of that stock. But even in Osborne we recognized the inequitable results which might stem from this artificial practice if unchecked (209 N. Y., at p. 475). However, instead of questioning the validity of the basic assumption that the entire new issue of stock in such cases represented a distribution of earnings, we devised the “ intact value ” principle as a sort of safety valve. Its efficacy, though, has become more and more questionable as economic conditions and corporate practices have changed. (See Tenney, Stock Splits, The Trustee’s Dilemma, Proceedings of Banking Law Section, N. Y. State Bar Assn., Jan. 29, 1959; Browning, Extraordinary Corporate Distributions under the New York Law of Trusts, 4 Syracuse L. Rev. 293.)

This does not mean that we need now decide whether an entirely new approach to the problem of corporate stock distributions is called for or whether the rules which we have followed are wrong and should be modified. As our discussion has made manifest, what the appellants contend for is an extension, rather than merely an application, of the Osborne' rule — a rule which already has been recognized as too favorable to the income beneficiary and has been repudiated by the Legislature of this State as to trusts created after 1926 (Personal Property Law, § 17-a) as well as by the legislatures and courts of many other jurisdictions that originally had adopted it. (See authorities cited, p. 8.)

In each of the instances here under consideration, there has been a partial capitalization out of earned surplus, which concededly represents a capitalization of earnings. A significant part of the total capitalization, however, has come from capital surplus, and it is impossible to identify this as earnings. Under the circumstances, it is our firm conclusion that the income beneficiary has been awarded the very maximum number of shares which he could possibly claim under any supportable theory and is entitled to no more of the stock than the trustee has apportioned to him. What has been done is consistent with our practice of arbitrarily identifying with those earnings which are capitalized in conjunction with a stock distribution all new shares that are supported by those earnings. With respect to the shares here involved, only 15.9882% of the Borg-Warner shares can possibly be identified with earnings not previously capitalized, and only 56.965% of the shares of Standard. The remaining shares can only be identified with ‘ ‘ capital surplus ’ ’ which would not by itself support an award of new shares to trust income even if it could be traced to undistributed earnings. These remaining shares, at least, belong to trust principal, and, since no basis has been shown for eliminating any items on the books of the corporations appearing in the capital surplus accounts (cf. Bourne v. Bourne, 240 N. Y. 172, 177, supra), the Appellate Division properly upheld the trustee’s allocations.

The order should be affirmed, with costs to all parties appearing separately and filing separate briefs, payable out of the estate.

Chief Judge Conway

(dissenting). By indenture dated September 7, 1915 Oliver H. Payne set up a trust for the benefit of William Bingham, II, measured by two lives in being. Under the provisions of the indenture, the trustee was to apply the ‘ ‘ rents, issues, profits and income ’ ’ of the trust fund to the use of the life beneficiary. The trust terminated on February 17, 1955 when the income beneficiary died. The trust having come to an end and the distribution of the corpus thereof having become necessary, the present proceeding was commenced under article 79 of the Civil Practice Act by the trustee, the United States Trust Company of New York, for a settlement of its final account and first supplemental account thereto.

During the life of the trust two extraordinary stock distributions were received by the trustee, one from the Standard Oil Company (Indiana), and the second from Borg-Warner Corporation. Special Term settled the final and first supplemental accounts, but expressly reserved for subsequent decision and settlement the proper allocation, between corpus and income, of those extraordinary stock distributions. Thereafter, objections were filed to the accounts, and the trustee’s proposed apportionment of the dividends was attacked. The objections were dismissed by Special Term, except for the question of whether certain items had properly been deemed capital surplus in trust contemplation. As to that question a reference was ordered, with the distribution of the shares, contingent upon the reference, held in abeyance pending it. On appeal, the Appellate Division modified by striking the provisions for the reference and ordering the shares held in abeyance to be distributed according to the formula of the trustee. It is that determination which we are here asked to review.

As long ago as 1915 it was said that the question as to whether stock dividends are to be treated as income (belonging to the life tenant) or as corpus (belonging to the remainderman) ‘ ‘ has perplexed the courts of both this country and England for a century.” (7 R. C. L., § 266, p. 289.) And, in an annotation appearing in the 1908 volume of L. R. A. (N. S.), the following comment was made concerning this problem: ‘ ‘ Few legal questions present greater intrinsic difficulties, or have called forth a greater contrariety of views and opinions, as well as of practical results * * (12 L. R. A. [N. S.], p. 769.) The passage of time has not served to eliminate or lessen the difficulties.

It goes without saying that whether in a particular case a stock dividend made by a corporation during the term of a life estate belongs to the life tenant or the remainderman, that is, is to be regarded as income or principal, is primarily a question of the settlor’s intention as manifested in the instrument by which, the trust was created. ‘ ‘ This is expressly or impliedly recognized by all of the cases on the subject.” (12 L. R. A. [N. S.], p. 769; see, also, 18 C. J. S., Corporations, § 471, p. 1123.) In the great majority of cases, however, the language of the will or of the trust instrument merely directs the payment of earnings ”, ‘ ‘ income ” or “ dividends ’ ’, or, as here, “rents, issues, profits and income”, to the life tenant. Such terms are not sufficiently explicit to enable the courts to ascertain the settlor’s intention concerning the distribution of stock dividends. The absence in the will or trust instrument of language disclosing the trustor’s intention concerning the ownership of stock dividends has resulted in the expression of wide and irreconcilable differences of opinion in this area (see 18 C. J. S., Corporations, § 471, p. 1123).

Notwithstanding the divergence of views, the courts are generally agreed that a dividend which is not a distribution of earnings, but of capital assets of the corporation, belongs to the remainderman and that any dividend derived from a mere enhancement of the value of capital assets belongs to the remainderman and not to the life tenant (18 0. J. S., Corporations, § 471, p. 1125; see, also, 14 C. J., Corporations, § 1257, pp. 829, 830).

With respect to the distribution of stock dividends representing earnings, as distinguished from capital assets, most jurisdictions follow one of three divergent rules, the so-called Kentucky rule, Massachusetts rule and Pennsylvania rule.

The Kentucky rule, in substance, is that in the absence of a manifested contrary intent by the trustor, a dividend declared out of earnings, whether' of stock or cash, ordinary or extraordinary, and regardless of the time that the fund from which the dividend is made was earned, goes in its entirety to the one entitled to the income at the time the dividend is declared (18 C. J. S., Corporations, § 471, subd. d, p. 1136; Hite’s Devisees v. Hite’s Executor, 93 Ky. 257).

Under the Massachusetts rule all stock dividends are considered capital going to the remainderman while all cash or property dividends, ordinary or extraordinary, are considered income belonging to the life tenant (18 C. J. S., Corporations, § 471, subd. b, p. 1126). This rule is predicated on the theory that there is an actual severance of the subject matter of the dividend from the corporate assets where cash and property dividends are involved, but that stock dividends involve only readjustments of the corporate structure, the corporate assets remaining the property of the corporation as fully as they were before (Minot v. Paine, 99 Mass. 101).

The Pennsylvania rule, or apportionment rule, as it is otherwise described, in essence, is that whether an extraordinary cash dividend or stock dividend declared during the term of the trust is to be considered as income belonging to the life tenant, or as capital belonging to the remainderman, is to be determined by the time, with relation to the commencement of the life term, when the fund out of which the dividend is declared accumulated. If the dividend is declared from earnings which accrued before the trust began, it is awarded to corpus; if it is declared from earnings which accrued thereafter, it is awarded to income; and, if it is declared from earnings some of which accrued prior to the commencement of the life of the trust and some of which accrued subsequent thereto, the dividend is to be apportioned accordingly (18 C. J. S., Corporations, § 471, subd. c, p. 1129; Earp’s Appeal, 28 Pa. 368).

The Supreme Court of Missouri has succinctly summed up the three rules as follows (Hayes v. St. Louis Union Trust Co., 317 Mo. 1028, 1043): “ The three doctrines may be summed up by saying the Massachusetts rule considers the character of the dividend, the Pennsylvania rule the source of the dividend, and the Kentucky rule the time of the dividend.” (Emphasis in original.)

Oddly enough, New York, during different periods, has followed all three rules. Prior to 1913 the Kentucky rule was in force in this State (Matter of Kernochan, 104 N. Y. 618). In 1913 we adopted the Pennsylvania rule (Matter of Osborne, 209 N. Y. 450; Ann. 50 L. R A. [N. S.] 510). Finally, in 1926 the Legislature amended section 17-a of the Personal Property Law, which amendment embodies the Massachusetts rule. By its terms the amendment applies only to trusts created subsequent to 1926. Inasmuch as the trust here came into being in 1915 while the Pennsylvania-Osborne rule was in force, it is that rule which must be applied and the parties have accepted the applicability of that rule. That being so, a more detailed consideration of the Pennsylvania rule is called for.

Judge Fuld properly points out that the parties herein have accepted the applicability of the Osborne rule, and that thus our sole task is to determine whether that rule requires an allocation of the shares of stock different from that proposed by the trustee. The parties, of necessity, accepted the Osborne rule as formulated by our court and as used by all the courts of our State. (See Pratt v. Ladd, 253 N. Y. 213.) So settled was the rule thought to be that no appeal of the identical issue present herein was even argued in our court in the Pratt case. Moreover, in Equitable Trust Co. v. Prentice (250 N. Y. 1), Chief Judge Cabdozo undertook to explain the Osborne rule (see quotation, infra). Finally, the Legislature in 1926 changed the Osborne rule by statute, but did not purport to make the provision retroactive. We construed it (Personal Property Law, § 17-a) to be prospective only. (Equitable Trust Co. v. Prentice, supra.) Under the Osborne rule, the shares of stock are not treated as the corpus of the trust. Bather, the value of the stock at the date of the inception of the trust is so treated. This value is described as the intact value. ‘‘ It is so named because that value is to be kept intact for the remaindermen in the various subsequent distributions of income that might impair it.” (Waterhouse’s Estate, 308 Pa. 422, 427; emphasis in original.) In Matter of Osborne, the intact value formula, which implements the Pennsylvania apportionment rule, was stated thus (209 N. Y. 450, 485):

The method of accomplishing this result [maintaining corpus intact in the face of extraordinary dividends] is not difficult. The intrinsic value of the 'trust investment is to be ascertained by dividing the capital and the surplus of the corporation existing at the time of the creation of the trust by the number of shares of the corporation then outstanding, which gives the value of each share, and that amount must be multiplied by the number of shares held in the trust. The value of the investment represented by the original shares after the dividend has been made is ascertained by exactly the same method. The difference between the two shows the impairment of the corpus of the trust * * * If the dividend is in stock the amount of impairment in money must be divided by the intrinsic value of a share of the new stock, and the quotient gives the number of shares to be retained to make the impairment good — the remaining shares going to the life beneficiary. Market value, good will and like considerations cannot be considered in apportioning a dividend.” (Emphasis added.)

As will be seen the intrinsic value, or the value to be kept intact, is book value, rather than market or any other value.

The intact value formula is succinctly explained in 130 A. L. B. (p. 544) as follows: “ * * * it involves a comparison of the book or intrinsic value of each share of stock as of the commencement of the life interest in the trust (determined by dividing the total capital and surplus accumulated at that time by the total number of shares of the corporation then outstanding) with the book or intrinsic value of each share after the dividend (determined by dividing the total of capital and surplus as it then stands by the original number of shares if the dividend is declared in cash, and by the total number of shares, new and old, if the dividend is in stock). If, upon such comparison it appears that the book or intrinsic value of each share after the dividend equals or exceeds its book value as of the commencement of the life interest in respect of the stock on which the dividend is declared, there is no impairment of ‘ intact ’ value, and the entire dividend goes to income; if the book or intrinsic value of each share after the dividend is less than at the time the original shares became subject to the life interest, the difference multiplied by the number of shares owned by the trust before the dividend shows the amount of an extraordinary cash dividend that must be awarded to corpus in order to .preserve intact value. If the dividend is a stock dividend so many of the new shares must be allotted to corpus as will make the total number of shares, old and new, retained by the trust at their new reduced book or intrinsic value, equal to the book value of the original shares as of the commencement of the life interest in respect of them.”

The Pennsylvania-Osborne rule is based on the presumption that the creator of the trust intended to confer every benefit upon the income beneficiary (since the life beneficiary is normally the principal object of the creator’s bounty) and to give to the remainderman only that value which at the death of the creator was legally or equitably represented by the stock. In discussing the cases applying the Pennsylvania-Osborne rule, Chief Judge Cardozo pointed up this concept of 1 ‘ presumable intention ” in the case of Equitable Trust Co. v. Prentice (250 N. YU. 1, supra) where he said (p. 8): “ The thought back of them is this: A surplus in the treasury of a corporation, even though not income for the shareholder, is potentially a fund that may be converted into income. The declaration of a stock dividend destroys this potential income, and turns the surplus into capital. The effect may be at times to thwart the plan of apportionment between life tenant and remainderman as conceived at the foundation. A founder of a trust has conveyed shares to a trustee to pay the income to a wife or child for life with remainder upon death to others. Did he mean in thus apportioning his estate that potential income might be cut down through the vote of the corporate managers so that the beneficiary never could resort to it, and principal increased to the profit of remainderman, perhaps unknown or unborn? We have thought that intention would be best promoted if the fund thus permanetly diverted were included in a gift of income.”

That, then, is the presumption upon which the Pennsylvania rule is based. Of course, the creator’s “ presumable intention ” cannot be effectuated until such time as the corporation declares a dividend. When it is declared, the courts are presented with the opportunity necessary to carry out the ‘ ‘ presumable intention.” The intact value formula is the means by which they do so.

There is one ramification to the Pennsylvania rule. That is, that the principal or corpus of the trust, i.e., the original book value of the shares, is not necessarily to remain static. Phrased differently, not every increase in the value of the trust estate is income. Any natural increase in the value of the trust estate remains principal. Gain by increment in capital valuation goes to principal.” (Matter of Hagen, 262 N. Y. 301, 305; see, also, United States Trust Co. v. Heye, 224 N. Y. 242.) Accordingly, as later cases disclosed, in applying the Osborne formula, increments to the book value after acquisition by the trust in the form of capital increases traceable to the original corpus must be added to the book value as it was at time of acquisition and the resulting value is the value to be kept intact.

With the foregoing principles in mind, we turn to the problem presented by the instant case.

It should be noted that the facts are not in issue, the parties having entered into a stipulation with respect thereto, including the accuracy of the facts contained in reports prepared by an accounting firm showing the adjustments in the capital, capital surplus and earned surplus of • the two corporations for the crucial periods.

Prior to December 1, 1954 the trustee held 26,500 shares of stock of Standard Oil Company (Indiana). On that date it received an additional 26,500 shares from the corporation. The distribution of these shares was'based upon a corporate resolution to the effect that “ a stock dividend of 100% on the capital stock of this company issued and outstanding, including treasury stock, be and hereby is declared payable out of capital surplus and the remainder out of earned surplus, on the 1st day of December, 1954 to stockholders of record at the close of business on the 25th day of October, 1954.” The distribution eliminated $174,612,840 of “ Capital in excess of par value” and $231,133,569 of ‘ ‘ Earnings retained and invested in the business.”

Prior to January 12, 1955 the trustee held 4,100 shares of stock in Borg-Warner. On that date it received an additional 8,200 shares from the corporation. The distribution of these shares was based upon the stockholders’ approval and a corporate resolution to the effect that the corporate officers are authorized and directed to transfer from the corporation’s capital surplus account (designated on the books as ‘ Capital in excess of par value ’) to stated capital the total amount of capital surplus, including all paid-in-surplus * * * and to transfer from earned surplus (designated on the books as ‘ Earnings retained for use in the business ’) to stated capital the balance necessary to increase the stated capital by an amount equal to $5 times the number by which the issued common shares are increased as a result of the reclassification of shares ”. The corporation thereupon transferred from the capital surplus account to stated capital the sum of $21,340,734, and from the consolidated retained earnings account the sum of $4,061,354, to cover the 5,080,417 additional $5 par value shares issued.

As to the Standard Oil shares: In arriving at a proposed division of these shares between corpus and income, the trustee proceeded on the assumption that to the extent that the additional shares had been charged against or capitalized out of “ capital surplus ”, the distribution was a stock split (to which corpus was entitled without regard to any apportionment formula), not a stock dividend• (to be submitted to the application of the intact value formula). Since $174,612,840 of the total of $405,746,409 capitalized had been charged against capital surplus, the trustee concluded that 43.0350%, or 11,404.27 of the additional shares, represented a stock split and belonged to corpus. The trustee then applied the intact value formula and found no impairment of corpus, as a consequence of which it determined that the balance of 15,095.73 shares belonged to income.

As to the Borg-Warner shares: In arriving at a proposed division of these shares, the trustee proceeded on the same assumption as in the case of the shares in Standard Oil, namely, that to the extent that the additional shares had been charged against or capitalized out of capital surplus, the distribution was a stock split, not a stock dividend. As $21,340,734 of the total of $25,402,088 capitalized has been charged against capital surplus, the trustee concluded that 84.0118%, or 6,888.97 of the additional shares, represented a stock split and belonged to corpus. The trustee then applied the intact value formula and found no impairment, as a consequence of which it determined that the balance of 1,311.03 shares belonged to income.

To restate, in brief form, the manner in which the trustee made its calculations: (1) it began with the assumption that, to the extent that the additional shares had been charged against ‘ ‘ capital surplus ’ ’, the distribution was a stock split rather than a stock dividend; (2) on the basis of that assumption the trustee immediately gave to corpus the prorata portion of the new shares charged by the corporation to its capital surplus; (3) it then applied the intact value rule, found no impairment of intact value, and, therefore, allocated the remaining shares to income.

Had the intact value formula been applied to the entire Standard Oil stock distribution of 26,500 shares, income would have received the entire distribution since the intact value (including capital increments) of such portion of the trust estate was not impaired by such distribution. As shown above under the trustee’s formula, corpus received 11,404.27 and income received 15,095.73 of the additional shares.

Had the intact value formula been applied to the entire Borg-Warner stock distribution of 8,200 shares, an impairment of intact value of the trust estate would have resulted. The impairment could be remedied by the addition of 4,463.9702 shares to corpus. The balance of 3,736.0298 shares would go to income. As shown above under the trustee’s formula, corpus received 6,888.97 shares and income received 1,311.03 of the additional shares.

Appended to this opinion is a detailed breakdown of the computations made by the trustee and by the objectants, as compiled in the brief amicus curice of a guardian ad litem of four infants interested in the estate of Harry Payne Bingham. The compilation is suostantially correct (as verified by the record, wherein the relevant figures are concededly correct) and is illustrative of what is written in this opinion.

The objectants-appellants argue that the intact value formula (which includes crediting corpus with capital increments) should have been applied to the entire Standard Oil and Borg-Warner stock distributions, with the results above indicated.

The crux of the controversy, then, is whether in determining the respective rights of income beneficiaries and remaindermen, a stock distribution, charged for corporate purposes in part against capital surplus and in part against earned surplus, (a) is a stock dividend — in which event objectants-appellants must prevail — or (b) is partially a stock split and partially a stock dividend in which event we must hold that the trustee applied the correct formula in allocating the stock.

In resolving the question we are obliged to concern ourselves with the substance of the transaction, not the form in which the corporation has seen fit to clothe it and not the name the corporation has chosen to confer upon it (Matter of Osborne, 209 N. Y. 450, 476, supra).

A stock dividend has been defined as one ‘ ‘ payable in the stock of the corporation declaring or authorizing the dividend ’ ’ and which ‘ merely evidences the transfer of an accumulated surplus to the capital account of the corporation” (4 White, Corporations [12th ed.], pp. 34-35); as a “dividend, capitalizing surplus ” (Equitable Trust Co. v. Prentice, supra); and, most recently, as a “ distribution of stock by a corporation to its stockholders evidencing and accompanied by the transfer of accumulated surplus to the corporation’s capital account * * * A stock split, on the other hand, results from the simple increase in the number of shares without altering surplus or segregating earnings ” (Matter of Fosdick, 4 N Y 2d 646, 653).

Undeniably the stock distributions made by Standard Oil and Borg-Warner were accompanied by transfers of accumulated surplus to the corporation’s capital accounts. Stated otherwise, the additional shares received by the trustee represented a capitalization of surplus, not merely, as in a stock split, a division of the previously owned shares into smaller components without any addition to the corporate capital. What gives rise to the dispute here is the fact that each of the two corporations involved had, for corporate purposes, divided its surplus between two accounts, one designated “ capital surplus ” and the other designated 1 ‘ earned surplus ’ ’, and that when the stock dividends were declared the directors directed them to be charged on the corporate books in part against each of those two accounts. Bearing in mind that under the intact value formula, based on the creator’s presumable intention, corpus is entitled to the original book value, as increased by increments in capital valuation, and income is entitled to all else, it becomes plain that no distinction may be based upon the name of the account out of which the surplus has been drawn to capitalize the new shares of stock. Capital, capital surplus, and earned surplus are merely bookkeeping entries on the records of the corporation. They cannot govern the substantive rights of those interested in a trust. What is capital to the corporation may be income to the trust and what is income to an ordinary shareholder may be corpus to a trust shareholder (McLouth v. Hunt, 154 N. Y. 179; Robertson v. de Brulatour, 188 N. Y. 301; United States Trust Co. v. Heye, supra; Equitable Trust Co. v. Prentice, supra; Pratt v. Ladd, supra). A profit recorded by a corporation on its “capital surplus” account may, for example, have resulted from what was originally an investment of earnings (earned after inception of the trust’s interest), which makes such profit income to the trust regardless of the fact that for corporate purposes it may be treated as a capital profit and be recorded under the title “ capital surplus.” The same is true of any profit which the corporation has discretion to charge to any surplus, but which, in trust contemplation, must be deemed to accrue to the life tenant. On the other hand, part of the “ earned surplus ” account reflected on the corporation’s boohs may be earnings that accrued prior to the inception of the trust, which, under the intact value rule, renders them corpus to the trust though they are obviously earned surplus to the corporation. What all of this means is that corporate names are an unreliable guide to the determination of the respective rights of the life tenant and remaindermen.

We would point up a further reason why the capital surplus, as recorded on the corporate books, is not automatically representative of the capital increments to which a trust corpus is entitled. The trustee contends that it is, of course — its assumption being that, because the corporation debits capital surplus on its books, it is giving out capital profits via the stock dividend. Such assumption ignores the nature of a dividend in shares (as opposed to one in cash or bonds or property). The corporation is giving out no particular portion of its assets; it is giving out prorata interests in all of its assets: stated capital, capital surplus and earned surplus. No matter what is charged on the books, the only things distributed are aliquot shares in everything on the books.

Undoubtedly, the unimportance of corporate labels is more readily apparent where the corporation has but one surplus account. For example, in this case if the corporations had placed all of their surplus into an account entitled “ earned surplus ’ ’ no one could deny the application of the intact value formula to the entire dividend. It was not until about 1920 that for corporate accounting purposes separate accounts were established designated as capital surplus ” and as earned surplus.” Prior to that time all increase, whether derived from capital profits or from ordinary earnings, was shown in a single ‘ ‘ surplus ’ ’ account or in a “ profit and loss ’ ’ account. Consequently, in the early cases where we were concerned with the apportionment of stock dividends the corporations involved had only one surplus account (which included both capital profits and ordinary earnings), and it was out of such a combined surplus account that the stock dividends were capitalized. Nevertheless, we at no time suggested that the stock dividends should be allocated to corpus to the extent that they may have been capitalized out of capital profits. The reason is clear. All that the remaindermen are entitled to is the original book value plus natural capital increments. The income beneficiary is entitled to everything else. Such is the Osborne rule. Whether the surplus is in one account, generally denominated ‘ ‘ surplus ’ ’, or in two accounts, denominated “ capital surplus ” and ‘ ‘ earned surplus ’ ’, the apportionment under the Osborne-intact-value formula must be made in the same way, with the same result on the respective property rights of the life beneficiary and of the remaindermen.

It appearing that the trustee erred in treating as a stock split so much of the stock distribution as was capitalized out of capital surplus, and that the intact value formula must be applied to the entirety of the stock distribution, the order of the Appellate Division approving the trustee’s account should be reversed. Under the intact value formula the 26,500 shares of the Standard Oil Company (Indiana) should be allocated wholly to income and the 8,200 shares of Borg-Warner Corporation should be apportioned between corpus and income as follows: 4,463.9702 shares to the corpus to remedy the impairment brought about by the stock dividend and the remaining 3,736.0298 shares to income.

I note that objectants-appellants have filed three notices of appeal. The relief sought by all three of them is the same, namely, our review of the Appellate Division disposition effected in an order of that court dated November 22, 1957. By the first notice of appeal objectants-appellants appealed from that order; by the second notice of appeal objectants-appellants appealed from Special Term’s order on remittitur which carried out the order of the Appellate Division and, in addition, ordered a second supplemental account covering a period beyond that which was involved on the appeal to the Appellate Division and which, therefore, is beyond that involved on the appeal to this court; finally, by the third notice of appeal object-ants-appellants appealed from a still later order of Special Term which provided for final discharge of the trustee and approved the trustee’s second supplemental account. This proceeding was brought to settle the trustee’s final account and the first supplemental account to it. The Appellate Division order finally settled such accounts and, so, is the order properly appealed to this court (Civ. Prac. Act, § 591, subd. 2). As indicated above, that order should be reversed and the matter remitted to Special Term for further proceedings in accordance with the opinion herein. The appeals from the subsequent orders of Special Term, dated March 12,1958, and May 16,1958, are superfluous and should be dismissed.

Judges Desmond, Dye, Van Voorhis and Burke concur with Judge Fuld; Chief Judge Conway dissents in an opinion in which Judge Froessel concurs.

Order affirmed.

      . Standard issued one additional share for every share of its capital stock outstanding — referred to as “a stock dividend of 100%” — and Borg-Warner issued two additional shares of its stock for each of its outstanding shares.

      . Some references in record indicate this figure was $405,746,409.

      . Application of the “ intact value ” principle, the court wrote in Matter of Osborne, simply requires that, “in all cases of extraordinary dividends, either of money or stock, sufficient of the dividend must be retained in the corpus of the trust to maintain that corpus unimpaired and the remainder thereof must be awarded to the life beneficiary ” (209 N. Y., at pp. 484-485).

      . By their acceptance of the trustee’s allocation to income of 15,095.73 shares of Standard and of 1,311 shares of Borg-Wamer, the respondents have confined the issue before us to whether the trustee has allocated too little to income or, conversely, too much to principal; the possibility that the trustee may have assigned too much to income and too little to principal is not in issue.

        . Where the dividend exceeds 25%, the Stock Exchange rule treats the distribution as a stock split rather than a stock dividend.


source: Caselaw Access Project

author: Fuld, J.

license: Public Domain

text:
    The People of the State of New York ex rel. Antonio Vanilla, Respondent, against Wilfred L. Denno, as Warden of Sing Sing Prison, et al., Appellants.
    Argued November 17, 1959;
    decided November 25, 1959.

      Louis J. Lefkowits, Attorney-General (Paxton Blair and Joseph J. Rose of counsel), for appellants.
    I. The Governor, acting in 1940, had the right to exact from the relator an agreement to submit to the jurisdiction of the Parole Board until the end of his sentence as originally pronounced. (People ex rel. Scarola v. Murphy, 5 N Y 2d 979; People ex rel. Cecere v. Jennings, 250 N. Y. 239; Fuller v. State, 122 Ala. 32; People ex rel. Mongno v. Lawes, 225 App. Div. 193; People ex rel. Ross v. Lawes, 227 App. Div. 464; People ex rel. Parker v. Brophy, 244 App. Div. 880; People ex rel. Kursynski v. Hunt, 250 App. Div. 378, 275 N. Y. 652, 303 U. S. 654.) II. Compensation earned for work performed confers no vested right protected against loss through parole violation. (People ex rel. Scarola v. Murphy, 5 N Y 2d 979; People ex rel. Kleinger v. Wilson, 254 App. Div. 406; People ex rel. Threadcraft v. Brophy, 255 App. Div. 823; People ex rel. Gariti v. Brophy, 255 App. Div. 823; People ex rel. Mahon v. Warden, 1 Misc 2d 267, 2 A D 2d 876; Wald v. Hiatt, 56 F. Supp. 504; Miller v. Hardwick, 229 F. 2d 164,- Morneau v. United States Bd. of Parole, 231 F. 2d 829, 351 U. S. 972.)

      Samuel Shapiro and Max Schultz for respondent.
    I. Relator’s contentions are consistent with determinations on prior applications. (Vanilla v. Moran, 188 Misc. 325, 272 App. Div. 859, 298 N. Y. 796; People ex rel. Lawrence v. Brady, 56 N. Y. 182; People ex rel. Sabatino v. Jennings, 221 App. Div. 418.) II. Reduction in relator’s sentence by compensation for labor performed was a matter of right in 1920 when crime was committed and in 1924 when sentence was imposed. (People v. Oliver, 1 N Y 2d 152; People ex rel. Adams v. Johnson, 44 Misc. 550; People ex rel. Schali v. Deyo, 181 N. Y. 425; People ex rel. Fershing v. Wilson, 174 Misc. 191, 259 App. Div. 957; People ex rel. Jackson v. Morhous, 286 App. Div. 939; People ex rel. Roache v. Carter, 181 App. Div. 833; People ex rel. Depew v. State Bd. of Parole, 187 Misc. 640.) III. Assuming arguendo the validity of board violation finding, since the relator as a matter of right earned compensation and relator has not committed later felony, his discharge was properly directed. IV. Assuming arguendo the validity of board violation finding, still the release agreement and discharge warrant authorize forfeiture of compensation only for after-discharge-committed-felony. (People v. Dethloff, 283 N. Y. 309; Matter of Tonis v. Board of Regents, 295 N. Y. 286; Kuhn v. Knight, 190 N. Y. 339; Matter of School Bd. of Brooklyn, 157 N. Y. 566; People ex rel. Killeen v. Angle, 109 N. Y. 564; Tucker v. Alexandroff, 183 U. S. 424.; Matter of Livingston, 121 N. Y. 94; People ex rel. Savings Bank v. Butler, 147 N. Y. 164; Fleischman v. Furgueson, 223 N. Y. 235; Taylor v. United States Cas. Co., 269 N. Y. 360.) V. The People-cited cases are inapplicable or are distinguished. VI. Assuming arguendo the validity of board violation finding, still relator has fully completed service of the imposed sentence. (People ex rel. Ingenito v. Warden, 267 App. Div. 295, 293 N. Y. 803.)
   Fuld, J.

The relator, now over 65 years old, was found guilty in 1924 of robbery, committed in 1920, and was sentenced to imprisonment for a definite term of 40 years as a second felony offender. In the ordinary course, his term would have expired on January 26, 1964. On July 1, 1940, after more than 16 years of continuous imprisonment, apparently without a single prison rule infraction, the authorities at Sing Sing Prison determined that the relator was entitled to ‘ ‘ commutation ’ ’ of 17 years, 11 months and 9 days for good behavior and “ compensation ” of 5 years, 6 months and 10 days for labor performed and that, by virtue of time already served and such earned reduction, he had fully served his term and recommended to the Governor that the sentence be reduced accordingly. Several weeks later, the Governor, following the recommendation, allowed the commutation and reduced the sentence. The release was conditioned upon the relator’s being “ subject to the jurisdiction and control ’ ’ of the Parole Board, the relator agreeing to such condition in an instrument signed on July 26, and, on August 7, 1940, he was released from prison on parole.

The relator remained at liberty for more than 17 years and, so far as appears, never had any brushes with the law. However, on September 16, 1957, he was taken into custody for violation of parole and a month later returned to Sing Sing. The Parole Board declared him delinquent as of the latter date and, after a hearing of charges, decided to hold the relator for a period of two years — until September, 1959 — for “ reconsideration only ”.

In May of 1958, the relator instituted this habeas corpus proceeding. It was his claim that, if he were credited with the “compensation” — of 5 years, 6 months and 10 days — for labor performed in prison prior to, his release in August, 1940, and with the ‘ ‘ compensation ’ ’ earned since his reimprisonment in September, 1957, he had fully completed his 40-year term and was entitled to his release by habeas corpus. The court at Special Term agreed with the position taken by the relator and directed his' discharge. The Appellate Division affirmed, although not unanimously, and the People appeal to us as of right.

Ooncededly, if the relator is entitled to be credited with compensation for labor performed, he is entitled to his release. Thus, we must decide whether he became entitled to such compensation as of right when it was allowed to him in August of 1940 upon his release from prison on parole.

Prisoners had long been allowed a ‘ commutation ’ ’ of sentence for good behavior, its grant or allowance resting in discretion and being a matter of grace. “Compensation” for labor performed while in prison, however, was quite different, both, in origin, purpose and method of. computation. Th.e con.cept came into our law in the year 1916 (L. 1916, ch. 358). It was only reasonable that the convicts who perform labor while in prison receive a consideration for such labor. This consideration could have taken the form of cash, but it was soon discovered — to cull from a brief submitted by the AttorneyGieneral in a case before the courts shortly after the 1916 amendment (People ex rel. Roache v. Carter, 181 App. Div. 833) — that “the method of money payment did not procure the diligence looked for in convict industries or supply the normal output expected ’ ’ and, accordingly, the Legislature provided for this so-called “ compensation

At any rate, subdivision 3 of section 230 of the Prison Law, by virtue of the 1916 enactment, prescribed that a definite sentence convict might earn a reduction of his term by “ compensation for efficient and willing performance of duties assigned to him ” of 10 days in each 30 days in which such duties are performed; provision was also made for an allowance of “ commutation ” for “good conduct”, progressively, up to seven months a year. The statute further provided that the Prison Board in each prison was to have the power to recommend that compensation be withheld as a punishment for offenses against the discipline of the prison. Significantly, though, it was explicitly stated that ‘ ‘ Compensation credited to a convict in the first instance, in his account, by the agent and warden, as provided in section two hundred and thirty, shall stand as the compensation allowed, unless withheld wholly or partly by the board as punishment, as above provided.” There was no corresponding-provision as to commutation. From these provisions and from the others in force from 1916 to 1926,. it seems clear that “ compensation ” once earned and credited in the convict’s “ account ” was irrevocable and automatically reduced the convict’s sentence — except in cases (1) where he violated prison rules (Prison Law, § 236), (2) where he escaped from prison (§ 238), and (3) where he was convicted of a felony later committed (§ 243).

Quite obviously, a distinction existed, under the 1916 statute — the one in force when the relator was sentenced — between commutation and compensation. In the Roache case (181 App. Div. 833, supra), decided in 1918, the court recognized that the convict was to be unconditionally discharged on the date when the time actually served plus “ the compensatory days ” equaled the term imposed (p. 835): “Where, then,” asked the court, “is the question? Is it not plain that, if the convict is allowed ten days in every thirty, the time will come when his days actually served, with the compensatory days, will equal the limit of his service? ” Under the statute as it read both in 1920, when the relator committed the crime of which he was later convicted, and in 1924, when he was sentenced, section 236 of the Prison Law provided that, while the Prison Board could withhold the compensation as punishment for dereliction of prison discipline, such compensation once credited amounted to a reduction of the sentence. It had the same effect as if the sentence had been pronounced for a lesser term, being the difference between the sentence pronounced and the amount credited as compensation. The State, through the Legislature, in effect, made a bargain with the prisoner that, if he would efficiently and willingly perform the duties assigned to him, his sentence would be reduced every 30 days and that, when he had served the amount of the reduced sentence, he would be entitled to his discharge. This was in the nature of a contract. Commutation, on the other hand, was simply a favor promised the prisoner which could be taken away in the event of misconduct. (See, e.g., People ex rel. Fershing v. Wilson, 174 Misc. 191, revd. on other grounds 259 App. Div. 957; see, also, People ex rel. Jackson v. Morhous, 286 App. Div. 939.)

The distinction between “compensation” and “commutation ’ ’ continued, as noted above, at least until 1926. In that year, section 230 of the Prison Law was amended (L. 1926, ch. 736) and a distinction made between convicts whose crimes were committed before July 1, 1926, as to whom compensation as a right was preserved, and convicts whose crimes were committed after that date, as to whom there was to be no such compensation. (Cf. Matter of O’Neil v. Thayer, 154 Misc. 333, 337, affd. 245 App. Div. 349, affid. 270 N. Y. 521.) And in the later amendatory statutes, the Legislature made it clear, by express provisions (L. 1929, ch. 243, amdg. Prison Law, § 237; L. 1935, ch. 902, § 16; L. 1948, ch. 631), that the rights thus preserved to pre-1926 prisoners were not to be affected retroactively.

We are here concerned solely with a credit attributable to compensation for labor performed by a prisoner convicted of a crime committed before July 1, 1926. That being so, section 230 of the old Prison Law applied and the rights thereunder acquired were not lost by the enactment of subsequent legislation or by the terms of the release agreement signed by him in July of 1940. In other words, the compensation of 5 years, 6 months and 10 days earned by, and credited to, the relator prior to his release on parole effected a reduction of his 40-year term to that extent. Since he did not violate any prison rules (Prison Law, § 236), did not escape from prison (§ 238) and was not convicted of a felony subsequently committed (§ 243), the compensation which he had earned may not be taken from him and, consequently, it follows that, as of July 7, 1958, when the writ of habeas corpus was sustained, he more than completed service of the 40-year term for which he had been imprisoned.

No decision of this court militates against our conclusion. In neither Vanilla v. Moran (298 N. Y. 796) nor People ex rel. Scarola v. Murphy (5 N Y 2d 979) was the question now before us considered. The first, wherein the present relator in 1946 brought an action for a declaratory judgment, decided only that Vanilla remained subject to the jurisdiction of the Parole Board following his release from Sing Sing Prison in 1940 and the Scarola case not only involved a crime committed after July 1, 1926, but had nothing to do with an attempt on the part of the authorities to take from a prisoner the credit for compensation already earned and credited.

The order appealed from should be affirmed.

Chief Judge Conway and Judges Desmond, Dye, Froessel, Van Voorhis and Burke concur.

Order affirmed.

      . Since our decision is thus limited, it is hardly necessary to add that we are not to be taken as passing upon the rights of prisoners who committed crimes after July 1, 1926.


author: Desmond, J. Bubke, J.

text:
    The People of the State of New York, Respondent, v. William E. Lyons, Appellant.
    Argued October 6, 1959;
    decided November 25, 1959.

      William E. Lyons, appellant in person.
    The evidence presented by the People did not establish the guilt of defendant beyond a reasonable doubt. (People v. Kupprat, 6 N Y 2d 88; Shirley v. Larkin Co., 239 N. Y. 94; Ward v. Clark, 232 N. Y. 195; Shuman v. Hall, 246 N. Y. 51; Metzger v. Cushman’s Sons, 243 N. Y. 118; Bull v. Drew, 286 App. Div. 1138; Anderson v. Burkardt, 275 N. Y. 281; Alphin v. Dudish, 8 A D 2d 567.)

      John M. Braisted, Jr., District Attorney (Ralph Di lorio of counsel), for respondent.
    Defendant’s conviction is supported by the evidence and the law.
   Desmond, J.

Turning from one street into another at an intersection described as ‘‘ very busy ’ ’ and ‘ ‘ very dangerous ’ ’ and equipped with no fewer than six three-phase traffic lights, defendant (as the officer swore and defendant admits) failed to give any turn signal. The only possible question on this appeal is as to the sufficiency of the proof of the statutory element: ‘ ‘ iii the event any other traffic may be affected by such movement ” (Vehicle and Traffic Law, § 1163, subd. [a]). The record shows that the police officer supplied that proof.

The officer swore that he could see about 700 feet to the east (from which direction defendant’s car came) and that there were automobiles behind defendant coming from that easterly direction. The policeman did not know just how far away those other cars were but they were, of course, within his 700 feet of visibility. If, just before defendant made his unsignalcd turn, those cars behind him were moving no faster than 25 miles per hour, they would, when defendant suddenly and without notice slowed and turned, come up behind defendant in 15 or 20 seconds, at most. His was, therefore, precisely the kind of heedless driving with which the statute deals.

On defendant’s own testimony, this was not a situation where there was no traffic at all on the street. He himself testified that shortly before he turned he had to wait for other cars coming into the street and that he had to slow up to let them pass. If all this does not make out a violation, it must be that there is no violation without an actual collision.

In the month in which this appeal was argued (October, 1959) there were 231 highway deaths in this State. The times call for tight, not loose, application of these simple, easy-to-obey traffic rules.

The judgment should be affirmed.

Bubke, J.

(dissenting). We do not find sufficient evidence in the record to indicate a violation of section 1163 of the Vehicle and Traffic Law (failure to signal). That section reads in part: “ No person shall so turn any vehicle without giving an appropriate signal in the manner hereinafter provided in the event any other traffic may be affected by such movement.” (Emphasis added.)

The underlying purpose of the Vehicle and Traffic Law is order and safety. There is no question that the requirements pertaining to manual and mechanical signals contribute significantly to this stated object. However, the requirements of each section must be given a reasonable construction in the light of legislative intent and the surrounding facts and circumstances. The pertinent provision of the section of the statute we are considering is self-explanatory. It evidently requires an appropriate signal, not under any and all circumstances, but only in the event that other traffic may be affected by such movement. This is also apparent from an examination of a complementary section of the Vehicle and Traffic Law, which, prior to the enactment of section 1163, required, without qualification, the use of directional signals when making any turn. (Vehicle and Traffic Law, § 15, subd. 18.) However, with the enactment of section 1163 (L. 1957, ch. 698), subdivision 18 of section 15 was amended so as to omit this unqualified provision (Vehicle and Traffic Law, § 15, subd. 18, as amd. by L. 1957, ch. 698, § 18). The Legislature has, therefore, made express its recognition of the fact that there may be instances when no signal is required. Of course, while this may more frequently take place in the less densely populated and lightly traveled areas of the State, it may indeed occur anywhere.

In order to obtain a conviction under the statute, therefore, the proof must show beyond a reasonable doubt not only that appellant failed to give a signal before turning, and the existence of other traffic, hut also the presence of other traffic that might he affected hy such movement.

The proof of the elements of the violation involved depend solely on the testimony of the patrolman. On direct examination he made no reference to any other traffic in the area concerned. Indeed, as is apparent from the record, the patrolman was under the erroneous assumption that evidence of a mere failure to signal was sufficient to establish a violation. Under cross-examination by the appellant, the officer’s testimony was vague, inconclusive and evasive. Although he testified that there were vehicles proceeding west behind appellant, he could not, or would not, estimate their distance, despite the fact that he earlier admitted an unobstructed view of approximately 700 fe'et. In response to questions regarding traffic conditions on Richmond Avenue, the officer’s frank admission was “I don’t know ’ ’.

The only evidence from which an inference might be drawn of the existence of other traffic at times is the fact that six traffic lights were situated at the intersection. However, the incident in question took place on a Sunday afternoon in February, and the appellant unequivocally testified that there were no moving vehicles following or approaching him.

We do" not believe the proof offered by the People establishes appellant’s guilt beyond a reasonable doubt. Even if the officer’s testimony were given a most favorable interpretation, there is still a lack of sufficient evidence of a most essential element (i.e., affected traffic) of the violation in question. The express language of the statute indicates the circumstance under which it is applicable. While it obviously encompasses more than merely heavy traffic, it is.equally obvious that it has no application when there is no affected traffic. In view of the fact that this distinction was totally disregarded, an affirmance of the conviction would be a subversion of the express intention of the Legislature.

Accordingly, the judgment appealed from should be reversed and the complaint dismissed.

Chief Judge Conway and Judges Dye and Fboessel concur with Judge Desmond; Judge Bubke dissents in an opinion in which Judges Fuld and Van Voobhis concur.

Judgment affirmed.


author: Dye, J.

text:
    The People of the State of New York, Appellant, v. Margaret B. Alexander, Respondent. The People of the State of New York, Appellant, v. Margaret M. Alexander, Respondent.
    Argued October 19, 1959; decided
    November 25, 1959.

      Harry G. Herman, County Attorney (Irving Libenson of counsel), for appellant.
    I. The County Court erred in considering and determining an issue not raised by the motion to dismiss the informations or the affidavit of errors. (People v. Mason, 307 N. Y. 570.) II. The County Court erred in ruling that defendants must be given notice of ordinance. (Cherubino v. Meenan, 253 N. Y. 462.) III. The County Court opinion was correct in determining that the Westchester County Park Commission had the authority to restrict the use of its parkways and the regulation of traffic thereon. (People ex rel. Cavanagh v. Waldo, 72 Misc. 416, 149 App. Div. 927.) IV. A reasonable ordinance, adopted by the Park Commission to eliminate traffic danger, is valid. (Tamburrino v. Sterrick Delivery Corp., 241 App. Div. 221; Jones Beach Blvd. Estate v. Moses, 268 N. Y. 362; Commissioners of Palisades Interstate Park v. Lent, 240 N. Y. 1; Arrow Carrier Corp. v. Traffic Comm, of City of N. Y., 198 Misc. 1112; People v. Rosenheimer, 209 N. Y. 115; Madison Prods. Co. v. Coler, 242 N. Y. 467; Cronin v. People, 82 N. Y. 318; Cities Serv. Oil Co. v. City of New York, 5 N Y 2d 110.)
    No appearance for respondents. ‘
   Dye, J.

By separate informations, the within defendants have been charged with violating section 49 of article 5 of the Westchester County Park Commission General Ordinance "No. 3. Margaret B., the mother, has been charged with violation of subdivision 1 thereof in that she permitted her daughter, Margaret M., to operate her automobile on the Saw Mill River Parkway within the Village of Pleasantville, and the daughter, Margaret M., has been charged with violation of subdivision 2 thereof in that she received instructions to operate, under a learner’s permit, a motor vehicle on the Saw Mill River Parkway in the Village of Pleasantville, being in an area not designated for such purpose by the Park Commission.

Before the Court of Special Sessions of the Village of Pleasantville, counsel for defendants moved to dismiss each information on the sole ground that the Park Commission did not have authority to adopt and enforce the ordinance in question. The Police Justice presiding granted each motion and adjudged that each defendant was not guilty as charged. However, upon appeal by the People to the Westchester County Court, the learned County Judge affirmed the determination of the Court of Special Sessions, not because the Park Commission was without power to adopt and enforce the challenged ordinance as held by the Police Justice, but rather because it did not appear that the defendants had notice that a violation of the regulation might result in a criminal proceeding. From that determination the People now appeal to this court by permission.

Subdivisions 1 and 2 of section 49 of article 5 of General Ordinance No. 3 adopted by the Westchester County Park Commission read as follows:

“ 49. Drivers. (1) No person having a motor vehicle or motorcycle in his care, or under his control, shall permit any person to operate the said motor vehicle or motorcycle upon any drive or within any park, without first having ascertained whether the' said person is duly licensed to operate motor vehicles and/or motorcycles within the meaning of the vehicle and traffic laws of the State of New York.
(2) The instruction of persons learning to operate motor vehicles or motorcycles, either under a New York State learner’s permit or otherwise, is prohibited in all parks, and upon all parkways, except at such places, and at such times, as may be designated by the commission.”

The right to restrict the use of its parkways and the regulation of traffic thereon is part of the authority granted the Park Commission by sections 472 and 498 of the Westchester County Administrative Code (see, also, Vehicle and Traffic Law, former § 90, subd. 7). This power to regulate the use of parkways in no way encroaches upon the power to license which belongs exclusively to the Commissioner of Motor Vehicles, since the Legislature specifically provided that persons driving with learner’s permits, and their licensed instructors, shall be liable for any breach of the Vehicle and Traffic Law “ or of any local ordinance, rule or regulation ” (Vehicle and Traffic Law, § 20, subd. 4, par. b). In view of the traffic conditions on the Saw Mill River Parkway the prohibitions directed at persons driving with learner’s permits, and their instructors, are not unreasonable.

The question of whether notice, actual or constructive, was given to respondents need not detain us since the motion to dismiss was directed solely to the authority of the Park Commission to enact the challenged ordinance. In this state of the record we do not pass on whether the ordinance was published in accordance with section 499 of the Westchester County Administrative Code.

The orders are reversed and the informations reinstated.

Chief Judge Conway and Judges Desmond, Fuld, Fboessbl, Van Voorhis and Burke concur.

In each action: Order reversed and the information reinstated.


author: Burke, J. Van* Voorhis, J.

text:
    The People of the State of New York, Appellant, v. Prince Jagendorf Greene, Inc., Respondent.
    Argued October 6, 1959;
    decided November 25, 1959.

      Charles H. Tenney, Corporation Counsel (John A. Murray and Seymour B. Quel of counsel), for appellant.
    The People made out a prima facie case since the evidence adduced clearly established that defendant violated the rules of the Department of Air Pollution Control. Under these circumstances, defendant was guilty as charged and the Appellate Part erred in dismissing the complaint. (United States v. 100 Barrels of Vinegar, 188 F. 471; People v. Rickard, 48 App. Div. 408.)
    No appearance for respondent.
   Burke, J.

The People appeal by permission from the reversal by the Court of Special Sessions, Appellate Part, of a conviction of defendant in Magistrates’ Court for a violation of the Rules and Regulations of the Department of Air Pollution Control adopted pursuant to chapter 47 of the Administrative Code of the City of New York.

The rules prohibited the sale or transportation of any solid fuel with a volatile content in excess of 24% on an ash- and moisture-free basis for hand-firing equipment (Rules of Department of Air Pollution Control, rules 14.3, 14.3.2, 14.4).

The charge is that defendant sold bituminous coal having a volatile content of 31.44% at the premises known as 158 East 100th Street, New York City, for consumption in hand-fired fuel burning equipment.

The basis for the reversal was that the sample of coal taken by the inspector for analysis by the city’s chemist was, according to a specific standard which was allegedly prescribed by the department, too small to be representative of the bulk of the coal sold.

The evidence presented in support of the charge shows that at least 4 increments of coal weighing between 8 to 15 pounds were taken from different parts of the batch in the truck as the coal came down the chute. Each increment was put on a tarpaulin and partly pulverized with a tamping device to reduce the size of the coals. The coal pile on the tarpaulin was quartered and half of the quartered part discarded. This procedure was repeated until the quantity was reduced to two or three pounds. Then the sample was mixed and the mixture was placed in two wax containers which were sealed at that time. One container was given to the driver for delivery to the coal company and the other container was delivered to the city’s laboratory. The chemist, whose qualifications were not challenged, testified that when tested the sample delivered contained 31.44% volatile matter on an ash- and moisture-free basis. The defendant rested without calling witnesses or offering proof to controvert the evidence submitted by the People. The motion to dismiss the information was made on the sole ground that the city had failed to follow the procedures for testing of the American Society for Testing Materials.

Defendant’s argument is predicated on the contention that the Department of Air Pollution Control adopted a specific standard of testing when it included in its rules a definition of “ Volatile matter” as “ The gaseous constituent of fuels as determined by standards of American Society for Testing Materials ” (cf.' Rules and Regulations of the Department of Air Pollution Control, § 0). The American Society for Testing Materials procedure under this standard of testing provided for the taking of a gross sample of not less than 90 pounds, consisting of a minimum of 9 increments, each increment weighing not less than 10 pounds (American Society for Testing Materials, designation D 980-53).

We believe that the city satisfied the obligation imposed on it when it adduced testimony which disclosed that the sample coal which concededly was to be used in hand-fired equipment, when analyzed, exceeded the permissible content.

The defendant’s decision to base its defense on an alleged noncompliance on the part of the department with a specific procedure for the sampling and analysis of coal for volatile matter was ill advised.

In cases where the applicable statute does not specifically prescribe the procedure to be used in testing, the courts accept evidence of methods of testing made by recognized processes. But even if we assume that it was the intention of the board to adopt the standards of the American Society for Testing Materials as a standard of testing, the board is not limited to the standards mentioned, but may give evidence of any tests shown to be accurate. (United States v. One Hundred Barrels of Vinegar, 188 F. 471 [U. S. Dist. Ct., Minn.]; see, also, United States v. 449 Cases, Containing Tomato Paste, 212 F. 2d 567 [C. A. 2d]; United States v. Two Hundred Cases of Canned Salmon, 289 F. 157 [U. S. Dist. Ct., S. D. Tex].)

The People during the argument on the motion to dismiss the information said the department used the Special Purpose Sampling Procedure” (American Society for Testing Materials, designation D 492-48). It contends that special accuracy was required as to the degree of volatile matter in the sample. Pursuant to this designation, the sample was allegedly “ taken in accordance with the United States Bureau of Mines method or its equivalent, and ’ ’ was ‘ ‘ placed in a moisture-tight container ” (cf. American Society for Testing Materials, designation D-383-38, § 5, subd. [b]). This method specified that, in collecting a gross sample for ‘ ‘ slack or small sizes of anthracite, increments as small as five to ten pounds may be taken, but run-of-mine, or lump coal, the increments should be at least ten to thirty pounds depending on the size and weight of the pieces of coal and impurities being sampled ” (TI. S. Bureau of Mines Technical Paper, No. 133 — George S. Pope).

The court below had no evidence before it which indicated that that procedure of testing used could not reasonably and accurately determine the volatile content. Hence the reversal of the conviction on the grounds asserted is not supported by any proof. Although there is nothing, in the record to cause doubt as to the methods employed by the Department of Air Pollution Control, we think that proof should be taken as to the adequacy and accuracy of the test.

Inasmuch as a sample similar to the test sample was delivered to the defendant at the time of inspection, defendant may have an expert both check the results of the People’s test and give testimony as to whether the method used was designed to fulfill the purpose of the statute.

The order of. Special Sessions is accordingly reversed and a new trial ordered.

Van* Voorhis, J.

(dissenting). The People have appealed from the reversal by the Court of Special Sessions, Appellate Part, of a conviction of defendant in Magistrates’ Court of violating rule 14.4 of the Rules and Regulations of the Department of Air Pollution Control adopted pursuant to chapter 47 of the Administrative Code of the City of New York. Specifically the charge is that defendant sold bituminous coal at the premises known as 158 East 100th Street for consumption in the hand-fired fuel burning equipment, having a volatile content of 31.44% against the mandate of rule 14.3.2 limiting the volatile content to not more than 24% for this purpose.

The reversal by Special Sessions was on the ground that

The People failed to make out a prima facie case in that the Department of Air Pollution Control did not meet its own standards and procedures in making the tests.”

In other words, according to the standards and procedures prescribed for the purposes of the rule which defendant is charged with having violated, the sample of coal taken for analysis was not established to have been representative of the volatile content of the bulk of this delivery of coal by defendant at this address.

This prosecution is not for the emission of smoke of prohibited density. It has nothing to do with sampling for the, purposes of the United States Bureau of Mines. The information charges the delivery of coal with an excessive volatile content as defined by the Rules and Regulations of the Department of Air Pollution Control of the City of New York. Under these rules, volatile matter is defined as “ The gaseous constituent of fuels as determined by' standards of American Society for Testing Materials.” There can be no question concerning what these standards are, nor that the city failed to comply with them in taking the sample of coal for analysis as the basis of this prosecution. The department’s rules referred directly to designation D 980-53 of the American Society for Testing Materials, entitled “ Sampling and Analysis of Coal fob Volatile Matter Determination in Connection with Smoke Ordinances.” It was adopted in 1953. The scope is defined as covering ‘ ‘ the sampling and analysis of coal for volatile matter determination reported on the moisture- and ash-free basis in connection with smoke ordinances regarding permissible volatile matter content of solid fuels.” The paragraph entitled “ Procedure ” states: ‘ ‘ The content of volatile matter of a specific lot of coal shall be determined by analyzing a gross sample of not less than 90 lb., consisting of a minimum of nine increments, each increment weighing not less than 10 lb.”

The reason for this procedure is evidently to insure that the analysis of the sample will be representative of the bulk of the coal delivered. If not enough increments are taken — an increment being simply one shovelful of coal— and if the increments are not large enough in quantity, the person who collects the samples can cause the result of the test to be good or bad as he likes. There is certain to be some coal in the batch which is of better quality than the average and other that is worse. The purpose of the American Society for Testing Materials in'requiring a gross sample of not less than 90 pounds, consisting of a minimum of nine increments, each increment weighing not less than 10 pounds, was evidently to be sure that the sample would conform to the average quality of the coal delivery. Otherwise no useful purpose would be served in making* the test. That was the manifest object of the city’s Department of Air Pollution Control in prescribing this method. Unless the method is followed which the city has prescribed as essential to establish the alleged violation, the New York City Court of Special Sessions was clearly right in holding that the People fail to make out a prima facie case.

Even if the Department of Air Pollution Control were not to be held to its own standards and procedures and if other methods of testing were to be sanctioned, the respondent has not been proved guilty of this offense in view of the circumstance that the record is devoid of any evidence that the method of sampling which was pursued in this case furnishes a true index of the quality of the bulk of the coal that was delivered by respondent at the time and place specified.

The order appealed from should be affirmed.

Chief Judge Conway and Judges Desmond, Dye and Fuld concur with Judge Burke; Judge Van Voorhis dissents in an opinion in which Judge Froessel concurs.

Order reversed, etc.