Court Decides Effect of Divestiture of AT&T Stock

This is the first New York decision to consider the effect of the recent AT & T divestiture on a bequest of AT & T stock. This is a proceeding brought by co-administratrix, for a construction of article “SECOND” of the testatrix’s last will and testament. The testatrix died on September 13, 1985 at the approximate age of 89. The last will and testament of the testatrix, dated February 6, 1982 and a codicil thereto, dated September 27, 1984, were admitted to probate by this court on December 2, 1986. Letters of administration were issued to the petitioner and the respondent.

Article “SECOND” of the testatrix’s will reads as follows: “SECOND: I give and bequeath to each of the following legatees the following number of shares of capital stock of American Telephone and Telegraph Company owned by me at the time of my death …” and thereafter names seventeen legatees, each to receive varying numbers of shares. A total of 1,625 shares of stock were bequeathed under Article “SECOND.” The petitioner is a legatee of 350 shares. Under Article “SIXTH”, the testatrix bequeathed the residue of her estate in equal shares to and among the heirs and the petitioner. It is undisputed that the testatrix owned 2,262 shares of AT & T stock at the time of execution and at the time of death. Therefore, 637 shares pass under the residuary.

The value of the testatrix’s gross estate is approximately $600,000 comprised primarily of stocks, valued at approximately $350,000.00, a house and property, valued between $175,000 to $225,000, jewelry and miscellaneous items, valued at approximately $9,500.00 and two bank accounts, in the amount of approximately $15,000. The testatrix’s closest relatives are four first cousins, once removed, of which only one receives a bequest under the will. The need for a construction arises as a result of the reorganization of AT & T, which occurred between the date of the execution of the will, February 6, 1982, and the date of the testatrix’s death, September 13, 1985.

Until 1982, AT & T had a monopoly over the U.S. telecommunications industry, providing both local and long distance telephone service and severely curtailing competition in this industry. As a result, the U.S. Government instituted two antitrust actions against AT & T and Western Electric Co. Inc., requesting, amongst other relief, the divestiture from AT & T of its holdings in twenty-two operating companies, i.e. subsidiaries, and thereby stripping AT & T of its local telephone functions. As of 1980 AT & T owned all of the outstanding stock of the operating companies, with minor exceptions. Under the terms of a judicially approved consent decree, and a judicially implemented plan of reorganization incorporated thereto, AT & T agreed to combine its twenty-two operating companies into seven regional holding companies (hereinafter referred to as RHCs), and AT & T was to divest itself of its holdings therein. Under the terms of the plan of reorganization, AT & T would transfer to each RHC, in exchange for the latter’s voting stock, the stock of the appropriate operating company and other assets. In turn, AT & T would distribute to its stockholders, one share of each of the seven RHC’s for every ten shares of AT & T stock owned by AT & T stockholders. Fractional shares would not be issued but would be aggregated and sold and the cash proceeds distributed to the stockholders. The divestiture was effective as of January 1, 1984, and according to the petitioner, shareholders were issued stock certificates for the seven RHCs on February 15, 1984.

telecommunications industry, providing both local and long distance telephone service and severely curtailing competition in this industry. As a result, the U.S. Government instituted two antitrust actions against AT & T and Western Electric Co. Inc., requesting, amongst other relief, the divestiture from AT & T of its holdings in twenty-two operating companies, i.e. subsidiaries, and thereby stripping AT & T of its local telephone functions. As of 1980 AT & T owned all of the outstanding stock of the operating companies, with minor exceptions. Under the terms of a judicially approved consent decree, and a judicially implemented plan of reorganization incorporated thereto, AT & T agreed to combine its twenty-two operating companies into seven regional holding companies (hereinafter referred to as RHCs), and AT & T was to divest itself of its holdings therein. Under the terms of the plan of reorganization, AT & T would transfer to each RHC, in exchange for the latter’s voting stock, the stock of the appropriate operating company and other assets. In turn, AT & T would distribute to its stockholders, one share of each of the seven RHC’s for every ten shares of AT & T stock owned by AT & T stockholders. Fractional shares would not be issued but would be aggregated and sold and the cash proceeds distributed to the stockholders. The divestiture was effective as of January 1, 1984, and according to the petitioner, shareholders were issued stock certificates for the seven RHCs on February 15, 1984.

As previously mentioned, the testatrix owned 2,262 shares of AT & T stock at the time of her death, which had a date of death value of $47,366.00. Further, at the time of her death, the testatrix owned 226 shares of stock in six of the RHCs and 678 shares in Bell South, an RHC which split three for one on May 7, 1984. The total date of death value of the shares held in the seven RHCs was $115,697.00.

On the date the will was executed, February 5, 1982, AT & T stock was listed on the NYSE at 57 3/4. On the date the codicil was executed, September 27, 1984, AT & T was listed at 20, and the shares in the seven RHCs ranged between 63 3/8 to 77 1/8, with the exception of Bell South, listed at 32 3/8 because of the three-for-one split. On the date of death, September 13, 1985, AT & T was listed at 20 7/8. Therefore, as a result of the divestiture, the value of AT & T stock was significantly diminished.

The issue before the court is whether the pre-residuary legatees of the AT & T shares under Article “SECOND” are entitled to a proportionate interest in the additional shares in the RHCs or whether those additional shares pass under the residuary clause. The petitioner, who receives 350 shares of AT & T stock, in addition to a 1/5 share in the residue, argues that the legatees under Article SECOND are entitled to a proportionate interest in the shares of the seven RHCs in light of the diminished value of the AT & T stock between the date of execution and the date of death. The respondent, a residuary legatee, contends that the language of Article SECOND, wherein the decedent disposed of her AT & T stock owned by her “at the time of her death”, reveals an intent to limit the disposition to only the AT & T stock owned at the time of her death, and does not include the shares of stock in the RHCs.

As a result of the divestiture and the issuance of additional shares, the subject matter of the stock bequests has become ambiguous. Where a latent ambiguity exists, the general rule is to ascertain the testator’s intent. Although the courts uniformly state that intent controls, where a stock bequest is involved, they differ as to the appropriate principles to apply in ascertaining the testator’s intent. Specifically, the decisions suggest that the courts have been applying ademption or abatement principles or “labels” where in strictness there is no ademption or abatement issue present. The problem is exacerbated by another general rule that the utilization of ademption principles has nothing to do with intent, and often works to frustrate the testator’s intent. Recognizing that ademption principles often produce a result contrary to the testator’s intent, the courts, under the guise of applying these principles, come to result-oriented constructions, based on the testator’s intent, and, in effect, disregard these principles. Therefore, this court would be inclined to peremptorily disregard ademption principles and resolve the instant matter by ascertaining the testatrix’s intent, if it were not for the fact that the only New York case which has considered the effect of a divestiture on a stock bequest in the context of a will construction proceeding was decided by the Court of Appeals wherein Justice resorted to ademption principles where admittedly there was no ademption issue present.

This court is of the opinion that where there is no ademption issue, as in the instant case, there is no need to rely on the ademption principles referred to in Matter of Brann, supra, where the testator’s intent is manifested by the langua of the will itself and the circumstances surrounding the execution of the will and the codicil. Further, upon review of the facts presented, the distinctions with Brann will become evident and significant, rendering Brann inapplicable here. It should be noted that at least one court has expressly determined the Brann “substantial identity” test to be of “doubtful assistance” in resolving a matter almost identical to the instant case.The court, therefore, must determine the testatrix’s intent from the language of the will and the circumstances surrounding execution of the will and codicil.

Under the terms of her will, the testatrix bequeathed 1,625 shares of AT & T stock “owned by me at the time of my death.” The respondent argues that the above quoted language somehow should operate as to limit the bequest to only the shares of AT & T stock. The court determines that the only significance to be placed on that language would be in determining whether the bequest was specific or general, were the court to resort to such labels. As stated in Matter of Volckening, where the court addressed the issue of stock splits in an abatement matter: “The theory is that if the disposition is “general,” testator is expressing his intention as of the date of death; the disposition therefore carries with it only the number of shares specified in the will. On the other hand, if the disposition is specific, testator is expressing his intention as of the date of execution of the will, it therefore carries with it all stock splits occurring thereafter.”

Of significance, however, is the fact that the bequeathed AT & T stock was valued at 57 3/4 a share on the date of execution, decreasing to 17 3/4 (when issued) on the date of the divestiture, and only 20 7/8 on the date of death. This suggests that AT & T’s holdings in the subsidiaries formed an inherent part of the value of the AT & T shares. Further, the stockholders were entitled to the additional shares solely by virtue of their ownership of AT & T stock. The additional shares in the seven RHCs represented AT & T holdings, and the shares were given to AT & T and distributed by AT & T.

Under the terms of the will, there are 17 stock legatees who share 1,625 shares of AT & T stock and only 5 residuary legatees, who share 617 shares of AT & T stock. It cannot be convincingly argued that the testatrix intended to give these five legatees an additional $115,697.00 worth of stock where they were to receive significantly less AT & T stock than the – stock legatees. Further, the residuary legatees share a substantial estate exclusive of the AT & T stock and the shares in the RHCs. The court is not confronted with the situation that existed in Matter of Brann, where there was no residuary estate and therefore no funds from which to pay the monetary bequests, had the court found that the additional shares were not to pass under the residuary clause.

The fact that the testatrix executed a codicil subsequent to the issuance of the additional shares does not dictate a contrary result. The only clear purpose of the codicil was to replace a deceased residuary legatee. The testatrix did not add any additional bequests where as in Brann, the testatrix added bequests which could not have been satisfied unless the additional shares were deemed part of the residuary.

Accordingly, the court, therefore, holds that the testatrix intended the seventeen pre-residuary legatees of AT & T stock to have a proportionate amount of the shares in the seven Regional Holding Companies.

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