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SAMPLE BUSINESS TRUST

American Jurisprudence, 2d Edition, Volume 13, Business Trusts

[Incomplete, Only Pages 371 ~ 458 reproduced here ... view the last 10 pages on the subject at your local law library.]

BUSINESS TRUSTS

 

Scope of Topic:  This article considers the business or “Massachusetts” trust, an organization created voluntarily by a trust instrument whereby trustees manage the trust estate for the benefit of holders of transferable certificates representing their proportionate interests and rights in the proceeds and corpus of a trust estate. Matters treated include the creation, organization, and duration of a business trust; the nature,  attributes, and liability of the trust estate; share-holders, members, or cestuis que trustent, and their rights, shares, and liabilities-ties; trustees, officers, and agents of such a trust, and their powers, rights and liabilities; taxation and governmental regulation of business trusts; the termination, dissolution,  reorganization, and merger of such trusts;   and practice and procedure in cases involving business trusts, insofar as peculiarly relevant or distinctively applied to such trusts.

 

Treated elsewhere are other forms of business organizations  (see such topics as 6 Am Jur 2d, Associations  and  Clubs;  Corporations;  Foreign  Corporations; Joint Stock Companies; Partnership).

 

Federal Aspect:  Business trusts are subject to bankruptcy proceeding and may be reorganized in bankruptcy (see 9 Am Jur 2d, Bankruptcy).

 

+ Table of Parallel References see p vii. +

                       

 

I. DEFINITIONS AND NATURE; VALIDITY

A.  In General (§§ 1-7)

B.  Other  Organizations  and  Relationships  Compared and  Distin-guished (§§ 8-12)

II.  CREATION, ORGANIZATION, AND DURATION (§§ 13-21)

III.  SHARES AND CERTIFICATES (§§ 22-29)

IV. SHAREHOLDERS, MEMBERS, OR CESTUIS QUE TRUSTENT

A. In General (§§ 30,31)

B. Rights and Powers (§§32,33)

C. Liability for Trust Debts and Obligations (§§ 34-40)

D. Rights and Liabilities Inter Se (§§ 41,42)

V.  TRUSTEES, OFFICERS, AND AGENTS

A.  In General (§§43-48)

B. Powers and Functioning (§§49-60)

C. Duties and Liabilities (§§ 61-73)

VI. LIABILITY OF TRUST ESTATE, AND AVAILABILITY OF TRUST PROPERTY, TO CREDITORS (§§6 74-76)

VII. REGULATION (§§ 77-82)

VIII. TAXATION

A. In General (§§ 83-86)

B. Federal Taxes (§§ 87-91)

IX. TERMINATION AND DISSOLUTION (§§ 92-94)

X. RECEIVERSHIP; REORGANIZATION OR MERGER (§§ 95-97)

 

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BUSINESS TRUSTS                              13 Am. Jur 2d

 

XI. PRACTICE AND PROCEDURE

A. Actions Between Trust and Third Persons (§§ 98-103)

B. Shareholders’ Actions (§§ 104-107)

           

 

I. DEFINITIONS AND NATURE; VALIDITY

 

A. In General

 

§   1.   Definitions and terminology

§   2.   Origin and development of business trusts

§   3.   Nature and attributes

§   4.   —As a legal entity

§   5.   Advantages and disadvantages of business trusts form of organization

§   6.   Validity of, and efficacy as, business trust

§   7.   What law governs

 

B.   Other  Organizations  and  Relationships  Compared  and  Distin-guished

 

§   8.  Generally

§   9.  Corporations

§ 10.  Partnerships

§ 11.  —Tests for determining true nature of organization; “control test”

§ 12.  Joint-stock companies

 

II.  CREATION, ORGANIZATION, AND DURATION

§ 13.  General

§ 14.  The trust instrument

§ 15.  — Construction

§ 16.  — Recording

§ 17.  — Amendment

§ 18.  Name and seal

§ 19.  Bylaws

§ 20.  Purpose or business

§ 21.  Duration

 

III.  SHARES AND CERTIFICATES

§ 22.  Generally

§ 23.  Classes of shares: participation agreements

§ 24.  Subscription or purchase

§ 25.  — Effect of fraud, misrepresentation, or violation of law, generally

§ 26.  — What amounts to fraud or misrepresentation

§ 27.  Transfer or pledge

§ 28.  — Effectuation of transfer

§ 29.  Bequest or inheritance

 

IV.  SHAREHOLDERS,MEMBERS, OR CESTUIS QUE TRUSTENT

 

A. In  General

 

§ 30.  Generally

§ 31.  Eligibility

B. Rights and Powers

 

§ 32.  Generally

§ 33.  Proprietary interests

 

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13 Am Jur 2d                             BUSINESS TRUSTS

 

C.  Liability for Trust Debts and Obligations

 

§   34. Generally

§   35. Liability for torts

§   36. Nature and degree of control sufficient to impose liability

§   37. Provisions of trust instrument or contract negativing or limiting liability

§   38. — Effect of notice or lack of notice

§   39. — Sufficiency of notice

§   40. — Contractual limitations, recitals, and references

 

D.  Rights and Liabilities Inter Se

§   41. Generally

§   42. Contribution

 

V. TRUSTEES, OFFICERS, AND AGENTS

A. In General

 

§   43. Generally; eligibility

§   44. Status

§   45. Designation or election; term of office

§   46. Compensation

§   47. Right to reimbursement or indemnity

§   48. Resignation, removal, or replacement; death or disability

 

B.  Powers and Functions

1.  In  General

§   49. Generally

§   50. Manner of functioning by trustees; unanimous, joint, or individual action

§   51. Delegation of powers; appointment of officers and agents

§   52. Ratification or acquiescence by trustees

§   53. Knowledge or dereliction of trustees as imputable to trust

2.  Particular Powers and Function

§   54. Making contracts and incurring debts, generally

§   55. Acquisition, administration, and disposition of trust property

§   56. — Leases and encumbrances

§   57. — Sales and conveyances

§   58. Making and issuing evidences of indebtedness

§   59. Compromise and settlement of claims

§   60. Assessments

C.  Duties and Liabilities

1.  To the Trust and Shareholders

§   61. Generally; fiduciary relationship

§   62. Care and skill required; liability for negligence or misconduct

§   63. Trustee dealing individually with trust or shareholders

§   64. — Sale of trustees’ property to trust

§   65. Rights in property or benefits acquired by trustee

2.  To Third Persons

§   66. Generally

§   67. Debts and contracts

§   68. Torts

§   69. Agreements with creditors as to immunity or liability of trustees; indication of representative capacity

 

373

 


 

BUSINESS TRUSTS                                   13 Am Jur 2d

 

§ 70.  Trust instrument provisions as to liability or trustee

§ 71.  — Effect and sufficiency of notice

 

3. Rights and Liabilities of Trustees Inter Se; Liability

for Acts of Other Trustees

§ 72.  Individual rights and liabilities of trustees inter se

§ 73.  Liability for acts or defaults of cotrustees, predecessors, or successors.

 

VI.  LIABILITY OF TRUST ESTATE, AND AVAILABILITY OF

TRUST PROPERTY, TO CREDITORS

§ 74.  Generally

§ 75.  Effect of stipulations regarding liability

§ 76.  Trustee’s right to indemnity or reimbursement as available to creditors

VII.  REGULATION

§ 77.  Generally

§ 78.  Under statues relating to corporations generally

§ 79.  Under statutes relating to foreign corporations

§ 80.  Under blue sky laws and securities acts

§ 81.  — Consequences of, and who may assert, violation of statute

 

§ 82.  — Federal securities acts

VIII.  TAXATION

A.  In General

 

§ 83.  Generally

§ 84.  Taxation as partnership or corporation, generally

§ 85.  Franchise or excise tax

§ 86.  Taxation of shares or dividends

 

B.  Federal Taxes

§ 87.  Generally

§ 88.  Tests to determining whether trust is “association”

§ 89.  — “Business” test

§ 90.  — Corporate similitude; use of corporate forms or procedures

§ 91.  — terms of trust instrument,or activities of trustees

 

IX.  TERMINATION AND DISSOLUTION

§ 92.  Generally

§ 93.  Grounds for, and circumstances warranting,equitable action and relief

§ 94.  Scope of equitable relief

 

X.  RECEIVERSHIP; REORGANIZATION OR MERGER

§ 95.  Receivership

§ 96.  Reorganization or merger, generally

§ 97.  Incorporation; merger with, or transfer to, corporation

 

XI.  PRACTICE AND PROCEDURE

A.  Actions Between Trust and Third Persons

§ 98.  Generally; Jurisdiction and venue

§100. Parties defendant

 

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13 Am Jur 2d                                      BUSINESS TRUSTS                                     § 1

 

§ 101. Process

§ 102. Pleading and proof

§ 103. Trial and judgment

B. Shareholders’ Actions

§ 104.   Generally

§ 105.   Representative or derivative actions, generally

§       106.         — Proper or necessary parties

§ 107.   Accounting

                       

I.  DEFINITIONS AND NATURE; VALIDITY

 

A. In General

§ 1. Definitions and terminology.

One of the distinctive devices by means of which individuals may combine their resources to operate a business for profit is the so-called business trust, or “Massachusetts trust.”1 which may be comprehensively defined as an unincorporated business organization created by an instrument by which property is to be held and managed by trustees for the benefit and profit of such persons as may be or may become the holders of transferable certificates evidencing the beneficial interest in the trust estate.2  Such an organization has also been frequently termed a “common-law trust,”3 but this phrase is not descriptive of any of the peculiar characteristics of such organizations.4

Business trusts are excluded from the coverage of the Restatement of the Law of Trusts, wherein it is pointed out that the business trust is a special kind of business association and can best be dealt with in connection with other business associations.5 Under the Uniform Commercial Code, the term”organization.” unless the context otherwise requires, is defined to include a business trust.6

 

1.  So called because this type of organization has reached its fullest and most extensive use in that state. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

 

2.  Annotation:   156 ALR 27.

The Supreme Court of the United States has defined the Massachusetts trust as a form of business organization, common in that state, consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided.  Hecht v Malley, 265 US 144, 68 L ed 949, 44 S Ct 462.

 

A trust of this nature is created when several persons transfer the legal title in property to trustees, with power vested in the latter to manage and control the property and business and to pay the profits of the enterprise to the creators of the trust or their successors in interest.  Goldwater v Oltman, 210 Cal 408, 292 P 6214, 71 ALR 871.

 

3.  See, for instance . Brown v Donald (Tex

Civ  App) 216 SW 2d 679; State ex rel. Calvin v. Paine. 137 Wash 566, 243 P 2; 247 P 476, 46 ALR 163.

 

4.  Willey v W. J. Hoggson Corp. 90 Fla 343, 106 So 408.

 

The basis for the terminology “common-law trust” in this connection, is not that such organizations are the creatures of the common law, as distinguished from equity, but that they are created under the common law of contracts and do not depend upon any statute.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

5.  Restatement, Trusts 2d § 1.  Comment b. wherein it is further explained that although many of the rules applicable to trusts are applied to business trusts, yet many of the rules are not applied, and there are other rules which are applicable only to business trusts.

 

It is appropriate to treat business trusts on a somewhat different basis than private trusts.  Swartz v Sher, 344 Mass 636, 184 NE2d 51, citing restatement.

 

6.  Uniform Commercial Code §1-201 (28). For  a  list  of  jurisdictions  which  have

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§ 2                             BUSINESS TRUSTS                                 13 Am Jur 2d

 § 2.  Origin and development of business trusts.

The application of trust principles to the conduct of commercial enterprise is said to have originated in Massachusetts as a result of inability to secure corporate charters for acquiring and developing real estate without a special act of the legislature.7  Also, it has been said that the type of organization commonly denominated “Massachusetts trust” originated because of the hostility of some states toward corporations and out of a desire to secure some of the advantages of incorporation without incurring the burdens and restrictions thereto.8  In any event, the Massachusetts trust has reached its fullest development and use in that state.9

The jurisprudence on the subject has brown up in comparatively recent years, although the law reports contain several instances of the use of this form of commercial enterprise more than a century ago.10  As certain inherent advantages11 of the business trust over the other forms of commercial enterprise gained recognition, it was adopted to a wide range of business operations.  Many large and well-known concerns have carried on their businesses under this form of organization.12 and it is interesting to note that the popular use of the term “trust” in connection with monopolies and combinations in restraint of trade, is traceable to the employment of the business trust form of organization by some of the best known of such combinations.13

 

§ 3.  Nature and attributes.

The distinctive features of the business trust are indicated in the definition thereof.14   It is unincorporated. although for the purposes of regulatory statutes or by express statutory inclusion it is sometimes treated as a corporation for certain purposes.15 It is created by the voluntary act of the parties and is based on contract.  It is intended for the purpose of carrying on some kind of business or commercial activity for profit.  Indeed, the profit-making function is one of the most significant characteristics of the business trust.  Title to the capital of the organizations vested in trustees.16 who usually manage the affairs of the trust.  The beneficial interests in the trust estate and in the profits are evidenced by transferable certificates, similar to corporate shares,17  and the existence or life of the organization is not affected by the death or disability of a member or shareholder or by the sale or transfer of his interest.18

 

adopted the Uniform Commercial Code, see Am Jur 2d Desk Book, Document 130 (and supp.)

Annotation: 156 ALR 13.

 

7. State Street Trust Co. v Hall, 311 Mass 299, 41 NE2d 30, 156 ALR 29.

Annotation: 156 ALR 29

 

8. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

 

9. Goldwater v. Oltman, supra: Schumann-Heink v. Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; Lindeke Land Co. v Kalman, 190 Minn 601, 252 NW 650, 93 ALR 1393; Baker v. Stern, 194 Wis 233, 216 NW 147, 58 ALR 462.

 

10. Ward v Davis, 5 NY Super Ct (3 Sandf) 502 (trust created in 1836); Yeaman v. Galveston City Co. 106 Tex 309, 167 SW 710 (trust organized in 1837); Durkee v Stringham, 8 Wis 1 (trust organized 1837).

Annotation: 156 ALR 29.

11. § 5, infra.

 

12. Annotation: 156 ALR 29 (listing some of these organizations).

 

13. The “Standard Oil Trust” was involved in Rice v Rockefeller, 134 NY 174, 31 NE 907, and in State ex rel. Watson v Standard Oil Co. 49 Ohio St 137, 30 NE 279.

The “Sugar Trust” was involved in People v North River Sugar Ref. Co. 121 NY 582, 24 NE 834.

 

14. § 1, supra

 

15.  §§ 78 et seq., 84 et seq., infra.

 

16.  §§ 55, infra.

 

17.  § 22, infra

 

18.  §§ 27, 29, infra.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 4

 

Basically, a business trust has been said to be merely the application of an ordinary trust to the purpose of operating a commercial enterprise: when an express trust is so used, it is known as a business trust.19  Accordingly, equitable principles governing trust estates generally underlie business trusts as well,20 although business trusts and ordinary trusts are not always governed by the same principles.1 And in some respects, business trusts closely resemble both partnerships and corporations.2  Aside from any question of mere terminology, some courts treat business trusts as partnerships for the purpose of determining the liability of shareholders for the debts of the trust.3  However, regardless of its similarity to an ordinary trust, to a partnership, and to a corporation, the general opinion is that the business trust should be regarded as sui generis.4

It must be remembered that the nature and legal status of a business trust is not an absolute and invariable factor, but depends to a large degree upon the purpose for which the inquiry is made and upon the direction from which the matter is approached,5 and it has been said that the character of such a trust is to be determined from the trust instrument.6  The essential nature of a business trust is not affected by the smallness of the number of participants,7 nor by the limited scope of its business.

§ 4.  — As a legal entity.

There is a difference of opinion on the question whether a Massachusetts or business trust is a distinct legal entity.  Some courts answer the question in the affirmative,8  and some statutes designate or recognize the organization as a

 

19.  Goldwater v. Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

 

Annotation: 156 ALR 28,30.

 

“Because a new use is being made of the trust does not mean new principles of law are to be applied in determining the rights of the trustees, the cestuis que trust or persons dealing with the trustees.” Schumann-Heink v. Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

20. McCamey v. Hollister Oil Co. (Tex Civ App) 241 SW 689, Affd 115 Tex 49, 274 SW 562.

1.  § 8, infra.

 

2. It has been said that a business trust is hybrid in nature, savoring of both corporation and partnership.  Oklahoma Fullers Earth Co. v. Evans, 179 Okla 124, 64 P2d 899.

Such organizations have been referred to as partnerships which masquerade as corporations.  Hoey v. Coleman (C) 46 F 221.

 

3.  § 34, Infra.

 

4.  Thomie v. Sound view Pulp Co, 181 Wash 1, 42 P2d 19.

A business trust is a distinct form of organization,which for some purposes, must be differentiated from both ordinary partnerships and corporations.  State Street Trust Co. v. Hall, 311 Mass 299, 41 NE2d 30, 156 ALR 13.

See also 37 Yale LJ 1119.

As to distinctions concerning corporations and partnerships, see §§ 9-11, infra.

5. See Burk-Waggoner Oil Assoc. v. Hopkins (DC) 296 F 492, Affd 269 US 110, 70 L ed 183, 46 S Ct 48.

 

6.Re Associated Trust (DC) 222 F 1012.

 

Practice Aids.—Trust instrument provision as to character of organization. 3 Am Jur Legal Forms 3:1,3:12.

 

7.  Helvering v. Coleman-Gilbert Associates, 296 US 369, 80 Led 278, 56 S Ct 283.  These cases involved federal taxation.

 

8.  Helvering v. Combs, 296 US 365, 80 L ed 275, 56 S Ct 287.

 

9.  National City Finance Co. v.Lewis (Cal App) 3 P2d 316, reh den 4 P2d 163, and superseded 216 Cal 254, 14 P2d 298; Beilin v. Krenn & Dato, 350 Ill 284, 183 NE 330; Hemphill v. Orloff, 238 Mich 508, 213 NW 867, 58 ALR 507, Affd 277 US 537, 72 L ed 978, 48 S Ct. 577.

 

Annotation: 156 ALR 32.

 

A business trust has been said to be a quasi-legal entity, separate and distinct form the members who compose it.  Brown v. Bedell, 263 NY 177, 188 NE 641, reh den 264 Ny 453, 191 NE 510, motion den 264 NY 513, 191 NE 541.

A common-law trust association has been held to be capable of taking and holding title to property, so as to support a conviction of its employee for  embezzlement.  Ridge v. State, 192 Ind 639, 137 NE 758.

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§ 5                                         BUSINESS TRUSTS                          13 Am Jur 2d

 

distinct legal entity.10  A business trust may, under the Bankruptcy Act, be adjudicated a bankrupt on a voluntary or involuntary petition.11

Other courts (and sometimes the same courts in other decisions) have taken the view that a business trust is not a distinct legal entity,12 even where a statue permits the maintenance of an action at law against a business trust.13  But even in a jurisdiction so holding, it has been held that where trustees of a business trust, pursuant to their authority under the trust instrument, adopt a trust name and a conditional sales contract is assigned to them in that name, the assignment is not made to a nonentity but is effectively made to the trustees in the name under which they have chosen to do business, and they, in the capacity as trustees, may bring an action to recover damages for the breach of the contract.14

 

§ 5. Advantages and disadvantages of business trust form of organization.

As compared with other forms of commercial enterprise, the business trust exhibits certain advantages which have made it an attractive means of conducting a business.    From the great body of equity juris prudence relating to trusts it derives  the heritage of flexibility and adaptability, and of direct action an personal responsibility on the part of the trustees.  Being created by the act of the parties and  governed by the terms of their agreement, a business trust is a  general and as elastic as  a contract.15 The latitude of the powers and activities of the trustees of a business  trust is greater than that  of ordinary trustees.16  Founded in equity, a business trust  enjoys the advantage that the trustee may avail himself of one of the few exceptions  to the general principle that courts will not declare future rights, and  he may apply  to a court of equity for directions in the execution of the trust17 or maintain a suit for a

 

10.  A statute attributing to a business trust association the characteristics of a legal or corporate entity does not involve any unconstitutional impairments of the obligation of contract.  American R. Exp. Co. v. Asher, 218 Ky 172, 291 SW 21.

It has been suggested that a statute specifically authorizing unincorporated associations, enacted subsequent to decisions holding business trusts not to be corporations, recognizes the business trust as a legal entity.  Edwards v. Belknap, 66 Idaho 639, 166 P2d 451.

It was said in Williams v. Schulte (Mo App) 103 SW2d 543, that a common-law trust is regarded as a legal entity, the court referring to a statute authorizing suit against such a trust in the name it has selected.

 

11.  See 9 am Jur 2d, Bankruptcy § 140.

 

12.  Manufacturers’ Finance Trust v. Collins. 227 Mo App 1120, 58 SW2d 1004 (right to prosecute action in trust name); Gordon Campbell Petroleum Co. v. Gordon Campbell-Kevin Syndicate, 75 Mont 261, 242 P 540 (general statement in case involving power of trustees to contract on behalf of the trust estate); Fisheries Co. v. Mc Coy (Tex Civ App) 202 SW 343.

Annotation: 156 ALR 32.

Business trusts are not entities apart from the trustees.  Swartz v. Sher, 344 Mass 636, 184 NE2d 51.

Such a trust has no legal existence, apart

from its trustees, so far as concerns the right of contracting parties to recover on a contract made in the name of the trust.  Linn v. Houston, 123 Kan 409, 255 P 1105.  And see Fitch v. United Royalty Co. 143 Kan 486, 55 P2d 409.

It is quite true that a business trust is not a legal entity for the purpose of making a contract.  Schwartz] v. Abbott Motors, Inc. 344 Mass 28, 181 NE2d 334, citing Peterson v. Hopson, 306 Mass 597, 29 NE2d 140, 132 ALR 1.

 

13.  Dolben v. Gleason, 292 Mass 511, 198 NE 762.  And see Peterson v. Hopson, 306 Mass 597, 29 NE2d 140, 132 ALR 1.

Annotation: 156 ALR 33.

Other than for purposes of being sued, a business trust is not a legal entity.  Commissioner of Corp & Taxation v. Springfield, 321 Mass 31, 71 NE2d 593.

 

14.  Schwartz-Heink v. Folsom, 344 Mass 28, 181 NE2d 334, wherein the court said that nothing in Peterson v Hopson, 306 Mass 597, 29 NE2d 140, 132 ALR 1, is at variance with these principles.

 

15.Schumann-Heink v. Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

16.  Ashworth v. Hagan Estates, 165 Va 151, 181 Se 381.

 

17.  Annotation: 156 ALR 50, 231.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 6

 

declaratory  judgment to establish the meaning and intent of the trust instrument.18

One of the objects of business trusts is to obtain for the associates most of the advantages of corporations. without the authority of any legislative act and with freedom from the restrictions and regulations generally imposed by law upon corporations.19  Where these aims can be realized the business trust enjoys a definite advantage over the corporation.  However, for a number of years there has been a tendency to subject business trusts to the same regulations and taxes or executions as are imposed upon corporations.  But although the advantages enjoyed by such trusts in these respects are not so pronounced as formerly, they still occupy in some states a more favorable position than do corporations with respect to taxation and statutory regulations.20  And in some instances, the shareholders of a business trust enjoy an even greater immunity from personal liability than is accorded to stockholders of corporations.1

The principal advantages which the business trust has over partnerships are its centralized management, the introduction of large numbers of participants, the possibility of transferring beneficial interests without affecting the continuity of the enterprise,2 the fact that the death or disability of a shareholder does not terminate the trust,3 and the immunity of shareholders from personal liability under some conditions.4

On the other hand, the possible liability of shareholders is a serious disadvantage of business trusts in some jurisdictions.  In many states the shareholders are personally liable, as partners, for the debts of the trust, where the management of the affairs of the trust.5  However, in most states the parties may avoid liability by vesting in the trustees the exclusive management of the business, free from the control of the shareholders,6 at least where the trust instrument specifically exempts them from personal liability,7 and in all jurisdictions they may effectively guard against liability by agreement with creditors, as by making their personal immunity a condition of the contract or obligation.8

§ 6. Validity of, and efficacy as, business trust.

Broadly speaking, business trusts are regarded as legal and valid,9 at least

 

18.  Dunbar v Redfield, 7 Cal 2d 515, 61 P 2d 744.

 

19.  Ashworth v Hagan Estates, 165 Va 151, 181 SE 381.

 

20.  See §§ 77 et seq.,83 et seq,. infra.

 

1.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

 

2.  Morrissey v Commissioner of Internal Revenue, 296 US 344, 80 L ed 263, 56 S Ct 289.

 

3.  See Spotswood v Morris, 12 Idaho 360, 85 P 1094; Hassack v Ottawa Development Assoc. 244 Ill 274, 91 NE 439.

The chief advantages of this form of organization  are  their comparative  freedom  from regulation  and  from  corporation  taxation,  freedom  of  the  members  from the personal liability  which  is imposed upon partners, and the  fact  that the  trust does  not  dissolve,  as does a partnership, upon the transfer of a

share or upon the death, insanity,or bankruptcy of a member.  Goldwater v Oltman, 210 Cal 400, 292 P 624, 71 ALR 871.

4.  §§ 34 et seq., infra.

5. § 34, infra.

 

In a few jurisdictions they are liable irrespective of the power of control. §34, infra.

6.  §§ 34 et seq,. infra.

7.  § 37, infra.

8.  § 40, infra.

 

9.  Hemphill v Orloff, 277 US 537, 72 L ed 978, 48 S Ct 577 (Investment Trust); Dunbar v Redfield, 7 Cal 2d 919, 61  P2d 744 (construction of trust instrument);   Beilin  v  Krenn  & Dato 350 Ill 284,  183  NE  330  (validity of contract for sale of trust lands);   State Street Trust Co. v Hall, 911 Mass  299,  41  NE2d  30,  156  ALR  73,   Marson  v  Sylvester,   292   Mass   352,   189 NE  44  (immunity  of  trustee);    Wm.

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§ 6                        BUSINESS TRUSTS                                    13 Am Jur 2d

 

in the sense that such organizations are not, by reason of their nature, illegal10 or contrary to public policy.11  While business trusts are subject to the general principles of law governing the legality of contracts and trusts, and must conform with the public policy of the state in all particulars, a court will not declare such a trust void unless impelled to do so by clear and firmly established principles.12  It has been held that public policy is not offended by permitting a business to be carried on by trustees who limit their liability to the trust estate,13 nor, under the prevailing view, do statutes authorizing limited liability partnerships and corporations by implication prohibit the creation of other types of organizations, such as business trusts, enjoying similar immunity by virtue of the common law.14  A business trust is not invalid because there was no compliance with statutes relating to incorporation,15 nor does such a trust violate any policy evidenced by statutes of this kind.16  The motive in forming such a trust is generally not considered by the courts in determining validity, and it has been held that a business trust is not rendered illegal because of the fact that it was formed for the express purpose of reducing or avoiding taxation.17  Such an organization will not be condemned as an attempt to take advantage of the corporate immunities without assuming the burdens and obligations connected with corporations.18  Properly speaking, the retention by the shareholders of the power of control over the trustees does not have the effect of invalidating the trust, regardless of the other consequences thereof.19

The  fact  that  persons  appointed  as  trustees are  shareholders  in  the trust does  not  affect  the  validity  of  the  trust.20    However,  it has been held that

 

Lindeke Land Co. v Kalman, 190 Minn 601, 2525 NW 650, 93 ALR 1393 (liability of trustees on lease);  Darling v Buddy, 918 Mo 784, 1 SW2d, 163, 58 ALR 493 (liability of shareholders); Brown v Bedell, 263 NY 177, 180 NE 641, ren den 264 NY 453 191 NE 541 (expressly recognizing the validity of business trusts, but holding that the organization involved in this case was not a true trust, but created the relationship of principal and agent);  Pennsylvania Co. v Wallace. 346 Pa 992, 31 A2d 71, 156 ALR 1; Baker v Stern, 194 Wis 233, 216 NW 147, 58 ALR 462 (proceeding directly involving validity of trust).

 

Annotation: 156 ALR 54.

 

The conclusion that business trusts are generally valid is reached more readily where such trusts are recognized as valid by legislative act.  Baker v Stern , supra.

 

A statute of Oklahoma expressly authorizes the creation of a trust to carry on and conduct any lawful business designated in the instrument of trust, and generally to do any lawful act in relation to such trust property which any individual owning the same absolutely might do. Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561.

 

10.  Phillips v Blatchford, 137 Mass 510.  And see Roberts v Aberdeen-Southern Pines Syndicate, 198 NC 381, 151 SE 865, 71 ALR 885.

 

Walburn v Ingilby, 1 Myl & K 61, 39 Eng Reprint 604.

Annotation: 156 ALR 57.

11.  Baker v Stern, 194 Wis 233, 216 NW 147, 58 ALR 463 (proceedings directly involving validity of trust).

 

12.  Liberty Nat. Bank & T. Co. v New England Investors Shares (DC Mass) 25 F2d 493 (law of Massachusetts).

 

13.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

14.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

 

15.  Hodgkiss v Northland Petroleum Consolidated, 104 Mont 328, 67 P2d 811.

 

16.  State ex rel, Knox v Edward Hines Lumber Co. 150 Miss 1, 115 So 598.

 

17.  Weeks v Sibley (DC) 269 F 155; Phillips v Blatchford, 137 Mass 510.

 

18.  Narragansett Mut. F. Ins. Co. v Burnham, 51 RI 371,  154 A 909, wherein the court said; “It is not an evasion of legal responsibility to take what advantages may accrue from the choice of any particular form of organization permitted by the law.

 

19.  Hart v Seymour, 147 Ill 598, 35 NE 246 (at least, where the shareholders have never exercised such powers).

 

20.  Commercial Casualty Ins. Co. v Pearce, 320 Ill App 221, 50 NE2d 434; Darling v Buddy, 318 Mo 784, 1 SW2d 163, 58 ALR 493.

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13 Am Jur 2d                              BUSINESS TRUSTS                                         § 6

 

there  can be no valid business trust, at least for the purpose of exempting the shareholders from personal  liability,  where  all  of the shareholders are trustees and the trustees  and  shareholders   are identical persons,1 although the organization may subsequently become valid when persons other than the trustees become shareholders.2

 

In  no  jurisdiction  are  business  trusts,  as  such,  held  to  be  totally invalid in  the sense that  no effect  whatever  will  be  given  the  trust  instrument  and the parties will be treated as strangers.    However, the courts frequently deal in terms of   “validity” with the question  whether a business trust has achieved a particular  purpose,  such as to insulate  shareholders  from personal  liability,  or  to  obtain  corporate  advantages  without  corporate  burdens,  or  the  like.3   In some  few  jurisdictions  an  organization  in  the form of a business trust  is regarded as a corporation;4 or  as  a  partnership,  for the purpose of determining the  individual liability  of  shareholders;5  or  as  a  company  or  association  for  the  purposes  of  the  blue sky  law.6    Under yet another view the conduct of business  by  a  business  trust  which  has  neither  incorporated  nor  complied  with  laws  applicable to  trust  companies  is  held  to  be an  unlawful  usurpation of  corporate  powers  by  the  trustees.7    However,  only  the  state can complain of   such  unlawful  assumption of  corporate  functions,  and,8   at  least  as  between the  members  and  parties  to  the  trust  instrument,  the  courts  will give effect to  the  provision  there of  according  to  the  general  principle  of  contract  law.9

 

1.  Enochs & Flowers v Roell, 170 Miss 44, 154 So 299.

 

2.  As soon as other parties became holders of beneficial interests so that their estate and that of the trustees were separate and distinct and the trustees were in fact trustees for them as well as for themselves, then life was thereby imparted to the trust agreement and it became a valid instrument.  Henry G. Taussig Co. v Poindexter, 224 Mo App 580, 30 SW2d 635.

 

3.Annotation: 156 ALR 52, 54.

 

4.  Business trusts are regarded in Kansas as corporations, and it is said that the only way in which the members of such an organization may secure for themselves immunity from personal liability is to comply with the laws of the state with respect to incorporation, or else to follow the statutes relating to limited partnerships.  Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158.  However, the existence of the organization is given some legal recognition and effect in this state. Beltz v Griggs, 137 Kan 429, 20 P2d 510 (sustaining the power of the trustees to hold and convey title to real estate); Hamilton v Young, 116 Kan 128, 225 P 1045. 35 ALR 496 (holding a Massachusetts trust executing a promissory note in a representative capacity).

 

Annotation: 156 ALR 59.

 

5.  See Ing v Liberty Nat. Bank, 216 Ky 467, 287 SW 960; Standard Drilling Co. v Slate. 203 Ky 599, 262 SW 969.    But even in this jurisdiction a  provision of  the  trust  instrument purporting to exempt shareholders from pers

sonal liability will  be given effect as against one who was one of the organizers of the trust and who had notice of the provision.  Dunning v Gibbs, 213 Ky 81, 280 SW 483.

Annotation: 156 ALR 60.

 

In Texas the view is held that a business trust is, at least in relation to outsiders, in effect a partnership, so, that provisions of the trust instrument purporting to limit liability of the shareholders for debts of the trust are of no effect.  Thompson v Schmitt, 115 Tex 53, 274 SW 554. Annotation: 156 ALR 60.  However, as between the parties to the trust agreement, it appears that the trust relationship will be recognized. Culp v Robey (Tex Com App) 299 SW 816; Burton v Ross (Tex Com App) 292 SW 207. Annotation; 156 ALR 61.

 

6.  King v Com. 197 Ky 128, 246 SW 162m 27 ALR 1159.

 

7. State ex rel. Colvin v Paine, 137 Wash 566, 243 P 2, 247 P 476, 46 ALR 165; State ex rel. Range v Hinkle, 126 Wash 581, 219 P 41.

Annotation: 156 ALR 61.

Declarating a common-law trust or business trust to be a corporation does not deprive anyone of property without due process nor deny to anyone the equal protection of the laws.  State ex rel. Colvin v Paine, 137 Wash 566, 243 P 2, 247 P 476, 46 ALR 165.

 

8.  Thomie v Soundview Pulp Co. 181 Wash 1, 42 P2d 19; Haynes v Central Business Property Co. 140 Wash 596, 248 P 1057

 

9.  Thomie v Soundview Pulp Co. 181 Wash 1, 42  P2d 19,   wherein the court stated that,  as

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§ 7                                         BUSINESS TRUSTS                             13 Am Jur 2d

 

§ 7 What law governs.

 

It is generally held that an instrument creating a business or Massachusetts trust should be construed by the law of the state where the trust was organized.10  And a statute of the state in which a trust was organized, authorizing suit and attachment against such a trust and providing a specific manner for service of process, has been held to be applicable in an action in another state,11 and failure to comply with the stipulated method of service of process has been held to confer, on the court of the forum state, no jurisdiction of an action against a business trust.12  On the other hand, the fact that by the law of the state where a business trust was organized it would not be treated as a corporation for the purpose of service of process has been held not to prevent the application of a local statute authorizing service on a trust as a foreign corporation.13

 

The law of the state wherein a business trust was organized will not be applied to produce a result contravening the public policy of the forum state.  Accordingly, courts have refused, as violative of public policy of the forum state, to give effect to provisions of trust instruments executed in other states purporting to exempt shareholders from personal liability for the debts of the trust.14  It has been held otherwise, however, where the state of the forum had no settled law on the subject.15

 

It has been held that the validity of a business trust the property of which consists of personality is to be determined by the law of the domicil of the persons creating the trust, and that if the trust is valid there, it is valid everywhere.16  This is especially so where the trust instrument expressly provides that the rights and duties of the parties are to be determined according to the laws of the state of their domicil.17

 

between the members and the trustees, the trust instrument presents simply a question of contract augmented by a question of agency, to e determined by the rules pertaining to those subjects, and the intention of the parties as expressed in the instrument will govern.

Annotation:  156 ALR 62.

 

10. Re Associated Trust (DC) 222 F 1012l; Marchulonis v Adams, 97 W Va 517, 125 SE 340 (trust instrument construed under Massachusetts law in action for personal injuries).

Annotation: 156 ALR 34.

 

The character of a business trust organized in another state will be determined, for the purposes of suit against it, by the law of the state where it was organized, and not by the law of the forum.  Textile Properties v M. J. Whittall Associates, 157 Misc 108, 282 MYS 17.

 

11.  Textile Properties v M.J> Whittall Associates,supra.

 

12.  Vischer v Dow Jones & Co. 325 Ill App 104, 59 NE2d 884.

 

13.  Harris v United States Mexico Oil Co. 110 Kan 532, 204 P 754, error dismd 260 Us 694, 67 Led 467, 43 S Ct 11, cert den 260 US 720, 67 L ed 480, 43 S Ct 11.

 

14.   Farmers  &   M.  Nat.  Ban k v  Anderson,  216  Iowa     988,    250  NW   214,    refusing   to  apply  the law  of  Texas, which

ordinarily would have been applicable, by which the shareholders of a business trust are held liable as partners notwithstanding provisions in the trust instrument expressly negativing such liability, since this view was fundamentally contrary to the well-established rule of the forum that the existence of a partnership depends upon an agreement, express or implied, for mutual liability for losses, and that such liability cannot exist where, as here, there is an express stipulation against it.

Annotation: 156 ALR 121.

 

The established public policy of the forum is supreme, and will not be relaxed upon the ground of comity to enforce contracts which contravene such policy,even though such contracts are valid where made.  Means v Limpia Royalties (Tex Civ App) 115 SW2d 468.

 

15.  Marchulonis v Adams, 97 W Va 517, 1125 SE 340, holding that the law of Massachusetts, where the trust was organized, governed the construction of the trust instrument for the purpose of determining the liability of shareholders for the torts of the trust.

 

16.  Liberty Nat. Bank &n T. Co v New England Investors Shares (DC) 25 F2d 493 (involving law of Massachusetts).

 

Annotation: 156 ALR 54

 

17.  Liberty Nat. Bank & T. Co. v New England Investors Shares, supra.

382

 


 

13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 8

 

B. Other Organizations and Relationships

Compared and Distinguished

 

§ 8 Generally.

 

Business trusts differ from ordinary trusts in that the primary purpose of the Massachusetts or business trust is to conduct a business for profit, while the object of the traditional trust is to hold and conserve particular property and its powers are incidental to this purpose.18  Accordingly, business trusts are excluded from the coverage of the Restatement of the Law of Trusts,19 although  broad trust principles apply, to a certain extent, with regard to business trusts.20

 

The shareholders in a business trust will not be treated as mere co-owners of the trust property,1 nor is a business trust  a joint adventure.2  And the fact that the declaration of trust designates the trustees as “joint tenants” does not make them such.3

 

Although business trusts are, in some jurisdictions, treated as associations or considered to be associations for particular purposes, for example, for federal tax purposes,4 business trusts may, properly speaking, be distinguished from associations.  The relationship between members of a true association involves an element of mutual association and organization which does not necessarily exist between the shareholders of a business trust.  Thus, it has been held that an organization created by an instrument of trust settling absolute title and control of property, and complete supervisory powers, in trustee, and giving shareholders no rights other than to receive dividends and share in the property upon dissolution of the business, cannot be deemed an association of the shareholders as contemplated by a statute providing for suit, attachment, and service of process against an association as if it were a corporation.5

 

A “sociedad anonima” of the Philippine Islands, although said to have no exact  counterpart in our law, apparently bears a close resemblance to a business trust.

 

18. Morrissey v Commissioner, 296 US 344, 80 L ed 263, 56 S Ct 289.

Rules, evolved to govern the traditional type  of trust, cannot be carried over and applied  without change in the field of business trusts created not to conserve an estate of guarantee a steady income to certain beneficiaries, but to aggregate capital contributions of the associates for the purpose of conducting an extensive and complex business which ordinarily would be carried on by a partnership or a corporation.  Bomeisler v M.Jacobson & Sons Trust (CA1 Mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61.

 

19. § 1, supra.

 

20.  §§ 3, 5, supra.

 

1.  Ricker v American Loan & T. Co. 140 Mass 346, 5 NE 284.

 

2. Polk v Chandler, 276 Mich 527, 268 NW 732; Darling v Buddy, 318 Mo 784, 1 SW2d 163, 58 ALR 493.

Annotation: 156 ALR 35.

A joint adventure is essentially a combination of persons for the purpose of carrying out some single business enterprise or some special transaction for profit, and is treated as a partnership covering that particular transaction or enterprise and controlled largely by the principles applicable to partnerships.  See Joint Adventure.

 

3.  Re Rainbow Family Laundry Co. (DC Ref) 47 Am Bankr Rep (F) 655.

 

Annotation: 156 ALR 35.

 

4. §§ 87 et seq., infra.

 

5.  Bouchard v First People’s Trust, 253 Mass 351, 148 NE 895, holding that such shareholders lacked the essential element of organization contemplated by the word “association.”

 

6. See Perkins v Benguet Consol. Min. Co. 55 Cal App 720, 132 P2d 70, cert den 319 US 774, 87 L ed 1721, 63 S Ct 1435.

383

 


 

§ 9                                            BUSINESS TRUSTS                          13 Am Jur 2d

 

§ 9 Corporations.

 

It is generally held, so far as pure legal principle is concerned and apart form any declaration to the contrary in a statute or constitution,7  that a  Massachusetts or business trust is not a corporation,8 inasmuch as there are obvious, important, and fundamental differences between the two types of organizations.9  But while a business trust is not a corporation, it has  some of the attributes of a corporation10 and is similar in its practical effect,11  Thus, the corpus of the trust corresponds to the capital of the incorporated company; the trustees, to the board of directors; the beneficiaries, to the stockholders; the beneficial interests, to shares of stock; and the declaration of trust, to the charter.12

7.   As to statutory and  constitutional provisions, see the discussion infra, this section.

 

8.  Page v Arkansas Natural Gas Corp. (CA8) 53 F2d 27, affd 286 Us 269, 76 L ed 1098, 52 S Ct 507; Swartz  v  Sher, 344 Mass 636, 184 NE2d 51;   Ricker  v American Loan & T. Co. 140 Mass 346, 5 NE 284 Michigan  Trust Co. v  Herpolsheimer,  256  Mich  5 89, 240 NW 6 (in absence of statue); Roberts v Aberdeen-Southern Pines Syndicate, 198 NC 381, 151 SE 865; State ex rel. Combs v Hopping Invest. Co. (Okla) 269 P2d 997;  Bank of Commerce & T. Co. v McCabe, 164 Tenn 591, 51 SW2d 850.

 

Annotation: 156 ALR 35.

 

9.  In the first place, corporations are created by charter or franchise, while a business trust owes its existence to the will and agreement of its organizers, and is not formed under the laws relating to the organization of corporations.  Hoey v Coleman (CC) 46 F 221; Hoadley v Essex County, 105 Mass 519; Roberts v Aberdeen-Southern Pines Syndicate 198 NC 381, 151 SE 865. Annotation; 156 ALR 36.

 

The business trust is fundamentally different from the corporation.  The stockholders of the corporation control,through the board of directors, the business of the corporation, while the unit holders of a business trust have no mutual  rights and obligations and do not control the action of the trustees.  The trustees of a business trust are analogous to the directors of a corporation in that both are the managers of the business of their respective institutions, but a trustee is the holder of the legal title of the trust estate and deals with its] as principal, subject only to an equitable obligation to account to the beneficiaries of the trust estate, while a director does not deal with the funds of the corporation as principal but as the agent of the company.  A trustee is personally liable on his contract, but a director is not as long as he acts within his authority. A trust is no entity at all, while a corporation is an artificial person.  A trust is an estate, the legal title to which vested in a trustee and the equitable title to which is held by individuals who bear no contractual relations among themselves.  A corporation is an artificial body composed of individuals who own its capital stock and whose rights and liabilities are fixed by statute.

Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

Trust shareholders are often held personally liable for the debts of the trust, while stockholders in a regularly formed corporation are not so liable. State v Cosgrove, 36 Idaho 278, 210 P 393.in Darling v Buddy, 318 Mo 784, 1 SW2d 163, 58 ALR 493, holding that a business trust was not a corporation under a constitutional definition of the term “corporation” as including all joint-stock companies or associations having any powers or privileges not possessed by individuals or partnerships, the court said: “In our view, the cases mentioned,and the constitutional and statutory provisions cited, do not apply here to the subscribers who are not associated in the ownership of property, or in any way in its management or control, since both the title and the property and the control (are) vested in the syndicate managers.”

 

10.  Rice v Rockefeller, 134 NY 174, 31 NE 907; Roberts v Aberdeen-Southern Pines Syndicate, 198 NC 381, 151 SE 865.

Annotation: 156 ALR 37.

 

Business trusts share with corporations the characteristics that title to the property is not vested in the holders of the beneficial interests, there is centralized management, there may be transfers of beneficial interests, the liability of shareholders is limited, and the continuity of the organization is not interrupted by the death of a shareholder.  State Street Trust Co. v Hall, 311 mass 299, 41 NE2d 30, 156 ALR 13.

Like a corporation, a business trust has its own profits and losses, and the shareholders, like stockholders, have none, except through the medium of the trustees and in the form of dividends or assessments. Brown v Bedell, 263 NY 177, 188 NE 641, reh den 264 NY 453, 191 NE 510, motion den 264 NY 513, 191 NE 541.

 

An elaborate comparison between trusts and corporations is made by Prof. Wilgus in 13 Mich L. Rev 71, 205.

 

11.  Swartz v Sher, 344 Mass 636, 184 NE2d 51.

 

12.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

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13 Am Jur 2d                                    BUSINESS TRUSTS                                 § 10

 

Business trusts are sometimes and for some purposes, by constitution or statute,  placed in the same category as corporations or,  by definition, classified as such.13    But the fact that such a trust is regarded as a corporation for certain purposes,  for example,   for the purpose of determining the individual liability of the members or trustees,   does not mean that the corporate analogy will be indiscriminately applied or that the organization will be treated as a corporation for all purposes,14   and such provision has been held not to render illegal a business trust on the ground that it was a corporation within the definition and did not comply with the statutory provision with respect to corporations.15

 

§ 10. Partnerships.

It  is  often  stated  generally that  business  trust is  not  a  partnership and  that  the  members  or  shareholders  thereof  are  not  partners.16  But while  there  are  essential  differences  between  a  business  trust  and  an ordinary  partnership,17  certain  courts  have  stated  generally  that  business  trusts  are  partnerships  and  that  the  members  or  shareholders thereof   are   treated   as   partners.18       It  is  to  be  noted,   however,   that  the  question  whether  a  particular  business  trust  is,  in  legal  contemplation,   partnership,   may  depend  upon  the  situation   in   which_

 

13. Nedeau v United Petroleum, 251 Mich 673, 232 NW 202 (within meaning of statute requiring corporations to file reports and pay fees); Hemphill v Orloff, 238 Mich 508, 213 NW 867, 58 ALR 507, affd (within statute regulating foreign corporations doing business in the state).

Annotation: 156 ALR 37.

 

In Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158, a business trust was, under the constitutional provision therein involved, held to be in the nature of a corporation.  Generally, as to the rule in this jurisdiction, see § 6, supra.

 

14.  Kresberg v International Paper Co. (CA2 NY) 449 F2d 911, cert den 326 US 764, 90 L ed 460, 66 S Ct 146; Hamilton v Young 116 Kan 128, 225 P 1045, 35 ALR 496 (under a constitutional provision defining the term “corporation” so as to include all associations and joint-stock companies having powers and privileges not possessed by individuals or partnerships).

 

15.  Hodgkiss v Northland Petroleum Consolidated, 104 Mont 320, 67 P2d 811 (holding the constitutional provision to intend a definition of the term as applied to that particular article of the constitution, and not to extend to every statutory provision relative to corporations).  And see Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

Annotation: 156 ALR 38.

 

16.  Crocker v Malley, 249 US 223, 63 L ed 573, 39 S Ct 270, 2 ALR 1601 (for purposes of federal tax); Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485 (involving liability of shareholders for debts); City Bank Farmers’ Trust Co. v Graves, 272 NY 1, 3 NE2d 612, 108 ALR 333 (involving an excise tax on such a trust);   Rhode Island

Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273 (liability of shareholders for debts of the trust).

Annotation: 156 ALR 39.

 

17.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485, involving personal liability of shareholders on contract of the trust.

 

In an ordinary partnership membership is limited to those people selected by the individual partners for their personal qualifications, a new  partner cannot be introduced without the consent of the other partners, and without the consent  of the other partners, and the death of a partner dissolves the partnership;  but none of these characteristics are applicable to a business trust with transferable shares. State Street Trust Co. v Hall, 311 Mass 299, 41 NE2d 30, 156 ALR 13.

 

One of the principal features distinguishing a business trust from a partnership is that in the former the legal title is in the trustee, with certain equitable or beneficial rights in others. Liquid Carbonic Co. v Sullivan, 103 Okla 78 p 561, involving liability of shareholders.

 

18.  Willey v W.J. Hoggson Corp. 90 Fla 343, 106 So 408 (holding that all shareholders, as partners, must be joined in an action a by or on behalf of the trust);  Ing v Liberty Nat. Bank 216 Ky 467, 287 SW 960 (involving liability of members for debts);  American Nat. Bank v Reclamation Oil Producing Asso. 156 La 652, 101 So 10 (liability of shareholders for debts);  Thompson v Schmitt, 115 Tex 53, 274 SW 554 (involving liability of shareholders for debts);  Means v Limpia Royalties (Tex Civ App) 115 SW2d 468 (involving personal liability of shareholders).

 

Annotation; 156 ALR 39.

(13 Am Jur 2d)—25                                                                                            385

 


 

§ 11                           BUSINESS TRUSTS                                    13 Am Jur 2d

 

the question is presented and the purposes for which it is to be determined.  Accordingly, general statements as to the status of business trusts, such as the statement that they are governed by the rules applicable to ordinary partnerships, should be considered in their context and not extended  to the determination of an issue different from that in the mind of the court uttering the statement.19  Furthermore, the question whether a strict trust or a partnership is created has been said to depend upon the language of the trust instrument involved in each case.20

In Massachusetts and some other jurisdictions such trusts are treated as partnerships for certain purposes where the power of control over the property and business of the trust is vested in the shareholders.1  But even in a jurisdiction which is strict in holding shareholders of business trusts liable as partners for the debts of the organization, it is held that they are not partners between themselves or as against the trustees.2

 

§ 11. —Tests for determining true nature of organization; “control test.”

According to the prevailing modern view, the question whether a trust instrument gives rise to a partnership or to a true business trust depends upon such additional elements as an intention or agreement of the parties to share losses and to become partners, and not merely or exclusively upon their right to participate in profits.3

The criterion most frequently applied in determining whether an organization in the form of a Massachusetts or business trust is, in legal effect, a true trust or partnership, and which is particularly applied in determining whether  or not shareholders are liable as partners for the debts of the trust,4 is the “control test.”  According to this doctrine, whether an organization in the form of a business trust is a true trust or a partnership depends upon the manner in which the business  is to be conducted and upon the repository of the ultimate power of control over the affairs and property of the concern.  If, under the trust instrument, the trustees are vested with title to its property and with the exclusive right to manage its business and conduct its affairs free from the control of the shareholders, the organization treated as a trust; but if the trustees are subject to the control of the shareholders in these particulars and the shareholders have the real mastery over the affairs of the concern,  the  organization  is treated as a partnership and the shareholders as partners.5

 

19. State Street Trust Co v hall, 311 Mass 299,41 NE2d 30, 156 ALR 13.

 

20.  Betts v Hackathorn, 159 Ark 311, 252 SW 602, 31 ALR 847, involving personal liability of trustees and shareholders.

 

Practice Aids.—Trust instrument provision negativing partnership relation. 3 Am Jur Legal Forms 3:1, 3:13.

 

1.  § 11, infra.

 

2.  Davis v Hudgins (Tex Civ App) 225 SW 73.

Annotation: 156 ALR 41.

A business trust is treated as a partnership only for the purpose of fixing the liability of the shareholders to third parties, and as between the members of shareholders the trust_

agreement is binding and the organization will not be treated as a partnership.  Ziegelmeyer v Joyce (Tex Civ App) 97 SW2d 346, for purpose of fixing venue of action.

 

3.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871 (involving personal liability of shareholders and trustees); Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485 (involving personal liability of shareholders).

 

Annotation: 156 ALR 42.

 

4.  § 34, infra.

 

5.    Hecht v  Malley,  265  US  144,  68  L ed  919,  44 S Ct 462 (for purposes of federal taxation); Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 87; Schumann-Heink v

386

 


 

13 Am Jur 2d                             BUSINESS TRUSTS                                        §11

 

The fact that by the term of the trust instrument the trustees, and not the shareholders, are the master, is indicative of  true trust and not of the partnership.6  On the other hand, where the instrument constitutes the trustees merely managing agents and not principals, the organization will be treated as a partnership,7 and this result follows, although the control is to be exercised by and through a business manager, where he is the agent of the beneficiaries for this purpose.8

It is generally held that under the control test, control is to be measured by the potential residing in the shareholders under the terms of the trust by the potential residing in the shareholders under the terms of the trust instrument, rather than by the degree to which it has been actually exerted.9

Factors indicative of ultimate control of a business trust, and hence whether it is in legal contemplation a true trust or a partnership, include the right of the shareholders to annually or regularly elect trustees, to remove the trustees at any time without cause and fill vacancies caused by the removal, to amend or terminate the trust, and to direct the action of the trustees.10  These are treated in detail under the discussion of the shareholders liability, where the question of trust or partnership is particularly apposite.11  It may be noted, however, that in resolving this question the courts generally refer to a combination of factors rather than to any single factor as constituting the ultimate power of control.12

Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; Hamilton v Young 116 Kan 128, 225 P 1045, 35 ALR 496 ( involving liability of trust officers on note); First Nat. Bank v Chartier, 305 mass 316, 25 NE2d 733; Downey Co. v Whistler, 284 Mass 461, 188 NE 243 (involving liability of successor trustees as partners); Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493; Goubeauz v Krickenberger, 126 Ohio St 302, 185 NE 201(involving application of statue requiring partnerships to file a certificate of fictitious name); Earlsboro Gas Co. v Vern H. Brown Drilling Co. 175 Okla 320, 52 P2d 730; Narragansett Mut. F. Ins. Co. v Burnham, 51 RI 371, 154 A 909 (for purpose of taxation).

 

Annotation: 156 ALR 43.

 

In the leading case of Williams v Milton,  215 Mass 1, 102 NE 355, the court adopted the control test, holding that where titles to the property and the exclusive management and control of the trust business are vested in the trustees, and the sole right of the shareholders is to have the property administered in their interest by the trustees and to receive the income from the business and property and their share of the corpus when the trust come to an end, the organization is a trust and not a partnership. The question involved in this case was whether the trust amounted to a partnership for the purpose of taxation.

 

6. Williams v Milton, supra, involving taxation.

 

7.  Neville v Gifford, 242 Mass 124, 136 NE 160, involving liability of shareholders.

Annotation: 156 ALR 45.

 

“The true test of such a trust seems to be to determine whether the relation between_

the parties is that a principal and agent or trustee and beneficiary, and whether the subscribers are separated from direct interest, ownership, and control of the property and affairs of the trust.”  Brown v Bedell, 263 NY 177, 188 NE 641, reh den 264 NY 453, 191 NE 510, motion den 264 NY 513, 191 NE 541, involving liability of members.

 

8.  Engineering Service Co. v Longridge Investment Co. 153 Cal App 2d 404, 314 P2d 563, followed in Barriffi v Longridge Development Co. 156 Cal App 2d 192 (title to property held by trustee but control vested in three named representatives of the beneficiaries); Bernesen v Fish, 135 Cal App 588, 28 P2d 67.

 

9.  Goubeauz v Krickenberger, 126 Ohio St 302, 185 NE 201(right to sue in trust name without filing certificate of fictitious name);  Marchulonis v Adams, 97 W Va 517, 125 SE 340 (involving liability of shareholders for the torts of the trust).

Annotation: 156 ALR 46.

 

To characterize a business trust as a partnership on the ground of control retained by the shareholders, it is not necessary that the power of control should be actually exercised, but is sufficient if the power is given or reserved, though never exercised.  Simson v Klipstein (DC NJ) 262 F 823, right of trustees to maintain action.

 

10.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871

Annotation: 156 ALR 46, 114 et seq.

 

11.  § 36, infra.

 

12.  § 36, infra.

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§ 12                                          BUSINESS TRUSTS                              13 Am Jur 2d

 

§  12.  Joint-stock companies.

 

Although the business trust has been referred to as a joint-stock company or association in a number of cases (most of which were decided relatively early in the history of such trusts),13  and although it has been treated as such in one state,14  such a trust is generally held not to be a joint-stock company or association.15  The relationship between shareholders and managers is basically different in the two institutions.  In a joint-stock company the mangers are agents for the shareholders, but in the case of a business trust the trustees are principals and the shareholders are cestuis que trustent,16  and it has been said that it would unnatural to group together the beneficiaries and the trustees of a Massachusetts real-estate trust ant to convert them into a joint-stock association by uniting their contrasted functions and powers.17  Nevertheless, an attempt to create a business trust may result in an organization in the nature of a joint-stock company where the shares are evidenced by transferable certificates, the trustee is divested of control and made subservient to the beneficiaries, the management of the associations is vested in a committee, and it is apparent that the parties do not intend to create a partnership.18

II. CREATION, ORGANIZATION, AND DURATION

§ 13. Generally.

Massachusetts or business trusts are created by the act and agreement of the parties, and do not depend upon statutory law for their validity.  A trust of this nature  is  generally  established  by  execution  of  a  trust instrument by one or more  trustees who  hold or will receive the corpus of the trust, setting forth the term of the trust, details of the organization, and the manner of conducting business.

Although   the business  of  the  trust is usually managed by the trustees in whom  is  vested  the title to the trust property,  for  the benefit  of  the holders  of  transferable certificates of beneficial interest,  sometimes the  management_

13. See for instance, Clagett v Kilbourne, 1 Black (US) 346, 17 Led 213; Holt v Blake, 47 Me 62.

Annotation: 156 ALR 47.

 

14.  A business trust engaged in the mercantile business is a joint-stock company under a statue governing such companies, and the shareholders are liable as partners, although the trust instrument vests exclusive control over the trust property and business in the trustees and purports to exempt the shareholders from personal liability.  Thompson v Schmitt, 115 Tex 53, 274 SE 554.

A Massachusetts trust is usually nothing more or less than a joint-stock association. Continental Supply Co. v Adams (Tex Civ App) 272 SW 325, error ref.

 Annotation: 156 ALR 48.

 

15.  Crocker v Malley, 249 US 223, 63 L ed 573, 39 S Ct 270, 2 ALR 1601(for purpose of federal taxation); Betts v Hackathorn, 159 Ark 311, 252 SW 602, 31 ALR 847; Bouchard v First People’s Trust, 253 Mass 351, 148 NE 895.

Annotation: 156 ALR 48.

 

16.  Betts v Hackathorn, 159 Ark 311, 252 SW 602, 31 ALR 847.

“If we take the unincorporated joint-stock association, abolish the board of managers or directors, and vest the management directly in the trustees, who hold legal title to all the property, we have the so-called business trust.” Magruder, 23 Columbia L Rev 423, 425.

 

17.  Crocker v Malley, 249 US 223, 63 L ed 573, 39 S Ct 270, 2 ALR 160.

 

18.  Earlsboro Gas Co. v Vern H. Brown Drilling Co. 175 Okla 320, 52 P2d 730, liability of shareholders for debts incurred by the association.

 

19.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871;  Morriss v Finkelstein (Mo App) 127 SW2d 46.

 

20.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

Annotation: 156 ALR 63.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 15

 

is vested in other persons named as officers or as a board.1  The flexibility of the business trust admits considerable latitude in adapting the organization to unusual requirements of the particular enterprise.2

 

§ 14.

A business trust is formed under, or on the basis of, an instrument or declaration of trust,3  which must conform to the statutory and other requirements relating to trusts generally and should be executed in the same manner as are other trust instruments and contracts.  The formalities to be observed in the execution and acknowledgment of the instrument depend upon the character of the property involved and upon the provisions of local statutes.  Where no real estate is involved and there is no statute requiring a writing, it is even possible (though of course never advisable) to create a business trust by parol agreement.4

No special form need be followed in creating a Massachusetts or business trust.  It is even possible to create such a trust with out the use of the word “trust” or “trustee” where the intention to do so appears from the instrument as a whole.5  The trust instrument should, however, embody all the elements necessary to constitute a business trust.  There should be an unequivocal declaration of trust, a vesting of title in named trustees, a description of the character of the business to be carried on, an outline of the powers and duties of the trustees, provisions for the tenure an election of trustees and for the issuance of certificates of beneficial interest and the transfer thereof, with a statement of the rights of shareholders with respect to profits and dividends  If desired, kthere may be provisions fixing the term and duration of the trust and limiting or negating the liability of shareholders and trustees to third persons.6

The members and trustees are entitled to have the trust instrument applied according to its terms, so long as it does not offend the law or public policy of the state.7  But the parties to the trust instrument may, so far as concerns their rights as among themselves, waive the provisions of the trust instrument.8

 

§15.  —Construction.

In the construction of a business trust instrument, the intention of the parties,

 

1. American.  Exp. Co. v Asher, 218 Ky 172, 291 SW 21.

 

2.  For example, the trust instrument may authorize the trustee to create a subsidiary auxiliary trust. Berlin v Krenn & Dato, 350 Ill 284, 183 NE 330.

 

3.  Hecht v. Malley, 265 US 144, 68 L ed 949, 44 S Ct 462; Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

4. Annotation: 156 ALR 64.

 

As to requirements with regard to trust instruments generally, see Trusts.

 

5.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

Annotation: 156 ALR 65.

 

Furthermore, it is not necessary that all of the conditions of the trust be expressed in_

a single document. So the fact that certain property acquired by a business trust is not descrived in the declaration trust does not defeat the title of the trust estate, where it is adequately described in the conveyance to the trust.  Hodgkiss v Northland Petroleum Consolidated, 104 Mont 320, 67 P2d 811 .

 

6. Annotation: 156 ALR 73.

 

Practice Aids.—Declarations and articles of business trusts.  3 Am Jur Legal Forms 3:1-3.26.1. Annotation: 156 ALR 65.

 

7.  Hamilton v Young, 116 Kan 128, 225 P 1045, 35 ALR 496; Reffon Realty Corp. v Adams Land & Bldg. Co. 128 Md 656, 98 A 199.  And see Hassack v Ottawa Development Asso. 244 Ill 274, 91 NE 439.

Practice Aids.—Provision that trust instrument shall be binding on shareholder. 3 Am Jur Legal Forms 3:104, 3:105.

 

8.  Smith v Moore, 129 Mass 222.

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§ 16                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

as expressed in the instrument, will govern.9  While ordinary deeds of trust are construed strictly in order to afford the maximum protection to the beneficiaries it has been held that instruments creating business trusts are to be construed as analogous to a corporation charter and as broadly interpreted, so far as concerns the powers of the trustees.10

An express provision of the trust instrument that the rights and duties of the several parties shall be determined according to the law of the state of the domicil of the persons creating the trust has been given effect in determining these matters,11 as has a provision that the trustees shall have the power to construe the instrument and that their construction shall be final and conclusive.12

The trust instrument will be construed, if possible, as prohibiting the trustee from doing, on the things therein specified as the business or activities of the trust.  Also, a declaration of trust will not be construed as rendering the trustees immune from accounting for their conversion or misappropriation of the assets of the trust, if any other construction can be given the language.14

§ 16. —Recording.

The necessity, permissibility, and effect of recording a business trust instrument depend upon local statutes.  An authorized recording of such an instrument has been held to constitute notice to persons dealing with the  trust.15  However, the recording of the trust instrument does not give constructive notice of the contents thereof to parties dealing with the trust, where the instrument is not such as is required or entitled to be recorded.16

9.  Thomie v Soundview Pulp Co. 181 Wash 1, 42 P2d 19.

 

10.  Bomeisler v M. Jacobson & Sons Trust (CA1 mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61.

 

11.  Liberty Nat. Bank & T. Co. v New England Investors Shares (DC) 25 F2d 493.

 

12.  Lambach v Anderson, 228 Iowa 1173, 293 NW 505.

 

13.  Oil Fields Corp. v Dashko, 173 Ark 533, 294 SW 25, cert den 275 US 518, 72 L ed 419, 48 S Ct 85, reh den (US) 72 L ed 1016, 48 S Ct 206, wherein the court said; “Certainly those who became beneficiaries under the terms of the trust instrument had the right to expect the trustee, so long as he was engaged in the character of business set forth in . . . the trust instrument, to conduct same not for his individual and private account, but solely for the beneficiaries.”

 

14.  Palmer v Taylor, 168 Ark 127, 269 SW 996, holding that a provision of a declaration of trust that the shareholders shall not have a right to call for a partition, for a dissolution of the trust, or for an accounting, will be construed as being intended to give permanency to the trust, and not as giving the trustees the right to convert or misappropriate the assets of the trust or to enjoy immunity from accounting thereof.

 

Annotation:  156 ALR 157.

A provision of the trust instrument that the trustee should be liable only “for the result of his own gross negligence or bad faith” was held not to relive such trustee from liability for his willful diversion of funds. Digney v Blanchard, 226 Mass 335, 115 NE 424.

 

15.  Re Rainbow Family Laundry Co. (DC Ref) 47 Am Bankr Rep (F) 635.

 

Annotation: 156 ALR 72.

 

Apparently one dealing with a trustee in his individual capacity, with respect to land the title to which was wrongfully taken by the trustee in his own name, is not charged with notice of the provisions of the trust instrument limiting the trustee’s powers in this respect, unless the trust instrument is recorded in the county where the land is situated.  See Oil Fields Corp. v Dashko, 173 Ark 533, 294 SW 25, cert den 275 US 518, 72 L ed 419, 48 S Ct 85, reh den (US) 72 L ed 1016, 48 S Ct 206.

 

16.  Hunter v Winter, 268 Ill App 487; Continental Supply Co. v Adams (Tex Civ App) 272 SW 325; Harvey Co. v Braden (Tex Civ App) 260 SW 655.

Recording of a declaration of trust does not necessarily charge third parties with notice of its provisions. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

The specific statutory requirements in this state governing filing declarations of business trusts  and  their   annual   reports   provide   the

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 17

 

The failure to record the declaration of trust as required by state law has been held not to deprive the trustees of the powers expressly conferred upon them by the terms of the trust.17

 

§ 17. —Amendment.

 

The power to amend the business trust instrument or to change the terms of the trust depends upon the provisions of that instrument,18 which will usually provide for the amendment of the trust by the trustees or by the shareholders, or by the former with the assent of the latter.

Business trusts would seem to be subject to the general rule applying to ordinary trusts, that in the absence of a provision to the contrary therein the instrument cannot be modified or amended except with the consent of all the parties.19  Moreover, a non assenting shareholder in a business trust has been held not to be bound by a fundamental change in the character of the trust from a profit to a nonprofit organization, and to be instilled to recover from  that reorganized trust and its trustees the face value of his certificates with legal interest.20

Where trust managers seek the approval of the shareholders of a proposed amendment to the trust instrument, they owe the duty of a full and fair disclosure of all pertinent facts to the shareholders.1

 

§ 18.  Name and seal.

The business trust normally derives its name from the declaration of trust, although the trustees may be given the authority to select a name for the organization for business purposes.2    In the absence of a statute prohibiting it, a business trust may adopt and carry on business and make contracts under an assumed name, trade name,3 which may be entirely fictitious.4

 

public with reasonable means of obtain information of such trusts.  Recording the trust agreement in the registry of deeds places upon that record the terms of such a trust sufficiently to apprise purchasers of the trustees power.  But in the absence of a specific statutory requirement that a certificate of the issue of shares of such a trust be recorded in the registry of deeds, no such obligation to record exists by implication, and such recording is not essential to a showing upon the record that the trust exists.  Swartz v Sher, 344 Mass 636, 184 NE2d 51.

 

17. Gutelius v Stanbon (DC) 39 F2d 621.

 

18.  See generally annotation: 128 ALR 1173 et seq.

 

Practice Aids.— provisions as to amendment. 3 Am Jur Legal Forms 3:1. 3:7. 3:65, 3:66.

 

19.  See Dunbar v Redfield, 7 Cal 2d 515, 61 P2d 744, wherein the evidence was held to sustain a finding that the shareholders assent to the amendment of the trusts instrument was not procured by fraud on the part of the trustees.

As to trusts generally, See Trusts (1st ed § 68).

 

20.  Memorial Park v Vaugn, 191 Okla 50, 126 P2d 711.

 

1.  Where  trust  managers,   in  notifying  the

beneficiaries of a proposed amendment to the trust instrument, do more than briefly specify the nature of the proposed amendment, as directed by the trust instrument, and became advocates for the adoption of the amendment.  It then becomes their duty to make full and fair disclosure t the shareholders of all facts upon which the shareholders must exercise their judgment in determining whether to approve or disapprove the amendment; and an amendment adopts without full disclosure is ineffective and void. Shapiro v Chicago Title & Trust Co. 328 Ill App 650, 66 NE2d 731.

 

2. Hamilton v Young 116 Kan 128, 225 P 1045, 35 ALR 496; Schwartz v Abbott Motors, Inc. 344 Mass 28, 181 NE2d 334 (wherein the declaration of trust provided that the trustees could act “under the name of Community Acceptance Co., or such other name or names as the Trustees may from time to time adopt”).

 

Practice Aids: —Trust instrument provisions as to name or change of name. 3 Am Jur Legal Forms 3:1. 33. 3:68.1.

 

3.  Hamilton v Young 116 Kan 128, 225 P 1045, 35 ALR 496;  Rand v Farquhar, 226 Mass 91, 115 NE 286; Hodgkiss v Northland Petroleum Consolidated, 104 Mont 320, 67 P2d 811 .

Annotation: 156 ALR 78.

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There is no legal inhibition on the power of trustees of a business trust to adopt a business name or style for  the transaction of the affairs of the trust, Bellin v Krenn & Dato, 350 Ill 284, 183 NE 330.

The use of an adopted name by the trust is not only convenient but often avoids confusion and ambiguity as to the capacity in which the trustees make contracts and carry on the business, General American Oil Co. v Wagoner Oil & Gas Co., 118 Okla 183, 247 P 99.

The adoption and use by a business trust of a name indicating its trust character does not violate a statue prohibiting the assumption of a fictitious corporate name.  Venner v Chicago City R. Co. 258 Ill 523, 101 NE 949, in which the name “ Chicago City and Connecting Railways Collateral Trusts” was held not to imply a corporation.

 

4,  General American Oil Co. v Wagoner Oil & Gas Co., 118 Okla 183, 247 P 99.

 

See 13 Mich L Rev 208, 209.

The right of trustees of a trust created for business purposes to adopt a name for the conduct of their business is no less than the right universally conceded to individuals, partnerships, and corporations.  In this respect, the principles of agency are not involved. Schwartz v Abbott Motors, Inc. 344 Mass 28, 181 NE2d 334.

 

5.  National City Finance Co. v Lewis (Cal App) 3 P2d 316, reh den (Cal App) 4 P2d 163, and superseded 216 Cal 254, 14 P2d 298.  And see General American Oil Co. v Wagoner Oil & Gas Co., 118 Okla 183, 247 P 99.

Annotation: 156 ALR 79.

6.  Kadota Fig Asso. v Case-Swayne Co. 73 Cal App 2d 796, 167 P2d 518; Goubeauz v Krickenberger, 126 Ohio St 302, 185 NE 201.

 

7.  See Spotswood v Morris, 12 Idaho 360, 85 P 1094; Superior Oil & Ref. Syndicate v Handley, 99 Or 146, 195 P 158.

 

Annotation: 156 ALR 79

 

Practice Aids: —Authorization of trustees to adopt and use seal. 3 Am Jur Legal Forms 3:68.

 

 

8.    See Spotswood v Morris, 12 Idaho 360, 85 P 1094; Horgan v Morgan, 233 Mass 381, 124 NE 32.  See also First Nat. Bank v Chartier, 305 mass 316, 25 NE2d 733 in which there was no formal trust deed or agreement, other than bylaws.

 

Practice Aids: —Trust instrument provisions as to adoption, amendment, and repeal of bylaws. 3 Am Jur Legal Forms 3:64

 

9.  Annotation:  156 ALR 75.

 

10.  In Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871, it was said that the law “is not static, but is ever growing and expanding, and in recent years this form of handling property has been extended to nearly every field of activity.”

 

11.  § 1, supra.

 

12.  §§ 77 et seq., infra.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 21

 

carrying on any kind of lawful business activity that individuals, partnerships, or corporations might engage in,13 as is evident from a consideration of the wide variety of business pursuits for which business trusts have been organized.14

 

§ 21. Duration15.

 

The  duration  of  a business  trust  may  properly  be,  and  generally  is, specified  by  the terms  of  the  instrument  of  trust.16    However,   in the absence  of statute17  there  seems to  be  no  legal necessity  for  limiting the  term  of  a  business  trust.   It  is  generally  held  that  a  business trust  which  is  to continue for  an  indefinite  period  does  not  violate  the  rule  against  perpetuities  nor  that  against restraints  of   alienation,   since  these  rules  are  directed  solely  against  remoteness  of  vesting  and  suspension or withholding of the power of alienation, and all interest provided  for in   the property  of  such  a  trust vest  immediately and  may be conveyed or transferred  by  the owners thereof.18   This is especially clear

13.Annotation: 156 ALR 79.

In jurisdictions which view business trusts as organizations in the nature of corporations, it has been said that they should be limited to business purposes allowed to private corporations under general laws.  Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158.  But a later holding indicates that business trust are less handicapped with ultra vires problems than corporations.  Linn v Houston, 123 Kan 409, 255 P 1105.

 

14.  See the following illustrative cases; Helvering v Colman-Gilbert Associates, 296 US 396, 80 L ed 278, 56 S Ct 285 (operation and management of apartment houses); Helvering v Combs, 296 US 365, 80 L ed 263, 56 S Ct 289 (oil well development); Morrissey v Commissioner of Internal Revenue, 296 US 344, 80 L ed 263, 56 S Ct 289  (construction and operation of golf course); Crocker v Malley, 249 US 223, 63 L ed 573, 39 S Ct 270, 2 ALR 1601 (real-estate business);  Elliot v Freeman, 220 US 178, 55 L ed 424, 31 S Ct 360 (purchase, improving, holding, and selling land and buildings, and operating an office building with elevator service, janitor service, etc.);White v Hornblower (CA1 Mass) 27 F2d 777 (liquidation of corporation);  Palmer v Taylor, 168 Ark 127, 269 SW 996 (manufacturing); Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871(production of motion pictures);  Charles Nelson Co. v Morton, 106 Cal App 144, 288 P 845 (building and equipping racing speedway);  Wilmer & Co. v Downs Inc. 77 Colo 377, 237 P 155 (mining);  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485 (real-estate business); Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158(road-construction enterprises) ; Hamilton v Young, 116 Kan 128, 225 P 1045, 35 ALR 496(manufacturing, producing, and refining oil);   Schwartz v Abbot Motors, Inc. 344 mass 28, 181 NE2d 334 (business of making loans with or without security);  First Nat. Bank v Chartier, 305 mass 316, 25 NE2d 733 (loan and mortgage business);  Hemphill v Orloff, 238 Mich 508, 213 NW 867, 58 ALR

507, affd 277 US 537, 72 L ed 978, 48 S Ct 577 (dealing in commercial paper);  People v Clum, 213 Mich 651, 182 NW 136, 15 ALR 253 (collection of accounts for members);  Wm. Lindeke Land Co. v Kalman, 190 Minn 601, 252 NW 650, 93 ALR 1393 (restaurant business);  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493 (acquisition and operation of railroad);  Memorial Park v Vaugn, 191 Okla 50, 126 P2d 711 (cemetery business);  Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561 (manufacturing and bottling);Yeaman v. Galveston City Co. 106 Tex 389, 167, SW 710 (promotion of establishment of city); Connally v Lyons, 82 Tex 664, 18 SW 799 (general merchandise);  Lowman v Guie, 130 Wash 606, 228 P 845 (publication of newspaper).

Annotation: 156 ALR 80-82.

 

Practice Aids: —Purpose provisions, see instruments. 3 Am Jur Legal Forms 3:1, 3:13-3:26.1.

 

15.  As to termination and dissolution, see §§ 92-94, infra.

 

16.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Mallory v Russell, 71 Iowa 63, 32 NW 102.

 

Practice Aids: —Trust instrument provisions as to duration of business trust. 3 Am Jur Legal Forms 3:1, 3:63, 3:L114, 3L:115.

 

17.  See Hauser v Catlett, 197 Okla 668, 173 P2d 728, 229 P 561, involving an Oklahoma statute authorizing the creation of express trusts, including business trusts, requiring that such trusts be limited in duration either to a definite period of not to exceed 21 years or to the period of the life or lives of the beneficiary or beneficiaries thereof, and requiring that the trust instrument shall specify the period of duration.

 

18.  Hart v Seymour, 147 Ill 598, 35 NE 246;  Hedgekiss v Northland Petroleum Consolidated, 104 Mont 328, 67 P2d 811; Baker v

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§ 22                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

where the business of the trust, and its main object and purpose, are to develop and sell its real property.19

 

 

III. SHARES AND CERTIFICATES

 

§ 22.  Generally.

 

The proportional equitable ownership interest of each cestui que trust in a business trust is usually evidenced by a certificate known as a share, stock share, certificate, or receipt.20  The certificate is a muniment of title and evidence of the ownership of stock,1 and it has been said that such certificates are not chattels but are evidence of intangible rights which have some of the characteristic qualities of chattels.2

 

The  courts  have  taken  somewhat  different  views  of  the  nature  of  a shareholder’s  rights  in   the  trust  estate,  depending  to some  extent  upon  the purpose  of  the  determination.  Thus,  the  interest  of  a  shareholder  in  a business  trust  has  been  said  to  constitute  personality and  not  real  estate, although  the trust estate consists largely of real property,3 and notwithstanding the  frequent statement that shareholders have an equitable interest in the trust  property.4 However, for purposes of taxation it has been held that shares  in a Massachusetts trust  partake of  the  nature  of  the  trust  property  and  are real or personal property accordingly as the property of the trust is, actually  or  under

 

Stern, 194 Wis 233, 216 NW 147, 58 ALR 462.

Annotation: 156 ALR 76.

The entire ownership is never for a moment uncertain or unvested, and at any time each owner can freely dispose of his property or it can be transferred to his creditor by the ordinary processes of the law or the trust can be terminated at the will of the owners of the equitable interest.  Howe v Morse, 174 Mass 491, 55 NE 213.

A provision of a trust instrument giving shareholders the right at any time to terminate the trust and to acquire absolute ownership of a portion of the trust property is sufficient to prevent a perpetuity or an illegal restraint upon alienation.  Liberty Nat. Bank & T. Co. v New England Investors Shares, Inc. (DC Mass) 25 F2d 493.

 

19. Hart v Seymour, 147 Ill 598, 35 NE 246.

 

20.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871;  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

Annotation: 156 ALR 87.

These certificates, which resemble certificates for shares of stock in a corporation and are issued and transferred in like manner, entitle the holders to share ratably in the income of the property and, upon termination of the trust, in the proceeds.  Hecht v Malley, 265 US 144, 68 L ed 949, 44 S Ct 462.

Transferable certificates of shares in a business trust are equitable choses in action bearing a close resemblance to certificates of stock

in a corporation.  Goodhue v State Street Trust   Co. 267 Mass 28, 165 NE 701.

Designation of the shareholder’s certificates as “unit certificates” does not change their real character, since they are essentially certificates of stock in the association in spite of that designation.  Continental Supply Co. v Adams (Tex Civ App) 272 SW 325, error ref.

Practice Aids: —Trust instrument provisions as to shares or certificates. 3 Am Jur Legal Forms 3:1. 3:9, 3:10,3:37, 3:38, 3:85-3:96.

1. Yeaman v Galveston City Co. 106 Tex 389, 167 SW 701.

 

3.  Mallory v Russell, 71 Iowa 63, 32 NW 102 (holding that the wife of a deceased cestui que trust cannot claim power in  land held by the business trust); Pittsburg Wagon Works’ Estate, 204 Pa 432, 54 A 316 (holding that the interest of a member cannot be sold under execution as real estate);  Parker v Mona-Marie Trust (Tex Civ App)g 278 SW 321 (holding such shares to be personal property and, accordingly, to convey no interest in an oil lease, this being regarded as real property);   Stephenson’s Estate, 171 Wis 452, 177 NW 579 (for purposes of taxation).

 

4.  See Atty. Gen. v New York, N. H. & H. R. Co. 198 Mass 413, 84 NE 737, stating that shareholders are “equitable tenants in common.”

Generally as to right of shareholders in property of the trust, see §34, infra.

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the principle of equitable conversion.5  And a certificate of shares in a true business trust has been held to be not a “security,” within the meaning of a taxing statute, but a muniment of title to an equitable interest in the real estate constituting the trust res.6

In the absence of statutory provisions to the contrary it would appear that shares in a business trust are not subject to execution or attachment for the debts of the shareholder.7

The shares of business trusts are sometimes listed and dealt in on stock exchanges.8

 

§ 23. Classes of shares; participation agreements.

As in the case of corporations, business trusts may be empowered to issue preferred as well as common stock, to issue more than one class of either type, and to issue no-par share.9  The character and terms of such shares are usually prescribed by the trust instrument, and their form is similar to that of the shares of corporations.10

Business trusts organized for the purpose of producing oil sometimes issue, in addition to the ordinary trust shares, participating agreements entitling the holders to a certain share of the oil produced.11  The distinction between such participation agreements and ordinary certificates of beneficial interest will be observed by the courts.12

 

§ 24.  Subscription or purchase.

The trustees of a business trust are usually given the power to receive subscriptions  to  shares  in the  trust and  to sell  and  issue  such  shares.13   It  has

5.  Bartlett v Gill (DC) 221 F 476, affd (CA1) 224 F 927.

The certificate holders are the ultimate proprietors of the property of the trust, and their rights constitute not choses in action but a substantial property right.  Peabody v Treasurer, 215 Mass 129, 102 NE 435, involving inheritance tax on shares.

The nature of the interest of a shareholder in a Massachusetts trust, the entire estate of which consisted of real property, was held to be an equitable interest in land, for the purposes of legacy and inheritance taxes.  Baker v Commissioner of Corporations & Taxn. 253 Mass 130, 148 NE 593, involving an organization that was a true trust, and not a partnership.

 

6.  Narragansett Mut. F. Ins. Co. v Burnham, 51 RI 371, 154 A 909.

 

7.Annotation: 156 ALR 97.

The interests of shareholders in a business trust have been held not to be attachable in an action at law, since they can be reached only through proceedings in equity.  Hussey v Arnold, 185 Mass 202, 70 NE 87.

 

8.  See Reffon Realty Corp. v Adams Land & Bldg. Co. 128 Md 656, 98 A 199 (involving shares of the Adams Express Company);  Venner v Great Northern R. Co. 117 Minn 447, 136 NW 271;  Rice v. Rockefeller, 134 NY 174, 31 NE 907.

 

9.  Morrissey v Commissioner of Internal

Revenue, 296 US 344, 80 L ed 263, 56 S Ct 289;  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485;  Bouchard v First People’s Trust, 253 Mass 351, 148 NE 895;  People v Clum, 213 Mich 651, 182 NW 136, 15 ALR 253.

Annotation: 156 ALR 89.

 

10.  People v Clum,, supra, setting out form for such certificates.

Annotation:  156 ALR 89.

 

Practice Aids:  —Certificate of preferred shares.  3 Am Jur Legal Forms 3:87.

 

11.  See Shiffman v Richfield Oil Co. 8 Cal 2d 211, 64 P2d 1081;  Julian v Schwartz, 16 Cal App 2d 310, 60 P2d 887.

 

12.  Shiffman v Richfield Oil Co. 8 Cal 2d 211, 64 P2d 1081, holding that a reference to such participation agreements by the owner thereof in a pleading as “certificates” and as “beneficial interests in said trusts” will not preclude him from asserting that the agreements are not certificates of beneficial interest.

 

13.  See Yeaman v. Galveston City Co. 106 Tex 389, 167, W 710, holding that the conveyance by the trustees of the land constituting the capital of the trust does not end their power to sell shares in the trust.

 

Annotation: 156 ALR 90.

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§ 22                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

been held that sales of certificates of shares in a business trust are not governed by the Uniform Sales Act, except the statute of frauds embodied therein.14   And in a jurisdiction regarding business trusts as being in the nature of corporations, a sale of shares is not the equivalent of doing business within the intendment of a statute requiring foreign corporations to qualify in a certain manner before doing business within the state.15   However, shares of a business trust have been held to be within the operation of a statute prescribing certain conditions for the sale of stock of any corporation, company, or association.

The  trustees may maintain an action to recover the amount due on subscriptions to shares,17  or at least so much thereof as is necessary to enable the trustees to  satisfy  obligations  incurred  by them  on  the strength of the subscriptions.18  And in like manner it has been held that  a  creditor of a business trust  may  maintain  a  suit in equity  to require the trustees to collect, and the subscribers to pay,  amounts  due  and  unpaid on  subscription  agreements, under  the theory that  subscriptions  to  capital stock  of  the  business trust  are capital  assets  which, upon insolvency of the trust,  constitute  a  trust  fund for  the payment of its debts.19     Such a suit will not be abated because the statute of limitations has run on subscribers’ notes evidencing the unpaid portions of their subscriptions, since the action is founded on the subscribers’ continuing obligation to pay their agreed portions of  the capital of the trust rather than on the notes given as evidence of their obligations.20

Whether or not the trustees of a business trust have the right to repurchase its own shares depends upon the terms  of  the trust instrument.   Such a repurchase, for the purpose of cancellation,  has  been held not to be improper.1   Also, it has been held  that  a  subscriber  for shares in a business trust may enforce an agreement made by  the  president and  trustee of the  trust  that  if  the subscriber  became dissatisfied the trust would take back the stock and refund the purchase price.2    However,  the  trustee  of  a  business trust has been held not to be personally liable on a guaranty to a subscriber executed in the name of the trust contemporaneously with the purchase of shares, where  the bylaws of the trust exempted the trustees and shareholders from personal  liability on any engagement or contract made on behalf of the trust.3

 

§ 25. —Effect of fraud, misrepresentation, or violation of law, generally.

Upon a proper showing of fraud inducing his subscription, a subscriber to shares in a business trust may rescind the subscription and recover the_

Practice Aids:—Trust instrument provisions as to sale or issuance of shares by trustees.  3 Am Jur Legal Forms 3:1, 3;10, 3:37, 3:58.

 

14.  Goodhue v State Street Trust Co. 267 Mass 28, 165 NE 701.

 

15.  Home Lumber Co. v Hopkins, 107 Kan 153, 190 P 601, 10 ALR 879.

 

16.  People v Clum, 213 Mich 651, 182 NW 136, 15 ALR 253.

Generally as to blue sky laws or securities acts, see §§ 80-82, infra.

 

17.  See Cross v Jackson, 5 Hill (NY) 478.

 

18.  Dunbar v Broomfield, 247 Mass 372, 142 NE 148.

19.  Bartelt v Lechmann (Tex Civ App) 207 SW2d 131, 11 ALR 2d 1374, error ref, involving trust instrument containing stipulation against personal liability of shareholders and trustees and providing for non accessibility of the stock only tot he extent that it was paid for.

 

20.  Bartelt v Lechmann, supra.

 

1.  Cohen v United States Trust Securities Corp. 314 Mass 152, 40 NE2d 282.

 

2.  Mims v Stephens County-Ranger Oil Co. (Tex Civ App) 268 SW 1014.

 

3.  Burton v Ross (Tex Com App) 292 SW 297.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 26

 

amount paid by him thereon, or he may maintain an action for damages.  By electing to sue for damages the subscriber precludes himself from thereafter rescinding the contract of subscription.5  The subscriber may, of course, waive any fraud inducing him to purchase the shares, and may ratify the contract of subscription,6 but he cannot speculate upon the success of the venture by waiting until events disclose whether or not it will be to his interest to rescind.7  It has been held that a shareholder cannot withdraw his subscription after he has paid for his shares and permitted the use of the subscription as a part of the capital of the trust, as against a creditor of the trust, even on the ground of fraud, where the creditor is without notice of the fraud.8  And in the absence of fraud or misrepresentation a subscriber cannot hold a promoter liable for the amount paid for shares in the trust merely because the project failed.9

One induced to purchase shares in a business trust which has violated the law by its failure to comply with the Blue Sky Law may rescind the subscription and recover back the price paid thereon.10  This is clear where the non-compliance with the statute renders the shares and the sale thereof void.11  Such a subscriber is not in pari delicto,12 and he is not to be precluded from asserting the invalidity of the sale of shares, on grounds of ratification or estoppel.13  The trust cannot recover on a note given for the purchase price of shares sold in violation of such a statute.14

 

§ 26. —What amounts to fraud or misrepresentation.

The sale  of  shares  in  a  Massachusetts  or  business  trust  is  not  fraudulent per se,  so  a  to  entitle  the  subscriber  to  recover  damages  for  fraud  or  deceit on  the  sole  ground  that  the  organization  was  a  business  trust  and  not  a corporation,  in  the  absence  of  a  showing  that  there  was  a  misrepresentation in  this  respect  and  that  the  misrepresentation  that  the  shares  were  those  of a  corporation  was  material  to  the  subscriber.15   But  a  false  representation  by  a  person  selling  shares  in  a  business  trust  that  the  organization  was  a  corporation  organized  under  the  laws of  the  state has  been  held  to  constitute  such  a  material  misrepresentation as would constitute  a defense to an action

4.  A shareholder may maintain an action against the trust based on fraud and misrepresentation in inducing her to subscribe for the shares, without any accounting or dissolution of the trust.  Wineinger v Farmers’ & Stockmen’s Loan & Invest. Asso. (Tex Civ App) 278 SW 932, affd (Tex Com App) 287 SW 1091.

 

5.  Cleaves v Thompson, 122 Kan 43, 251 P 429.

 

6.  See Cleaves v Thompson, supra.

 

7.  See Moragan v Union Bank, 266 Ill App 315, affd 352 Ill 503, 186 NE 182.

 

8.  Reeves v  Powell (Tex Civ App) 267 SW 328, stating that since the subscriber had permitted his stock contribution to be used by the trustees to carry on trust business, he would be held to have acquiesced in the fraud.

 

9.  McCrea v Day, 143 Neb 538, 204 NW 56.

 

10.  Reilly v Clyne, 27 Ariz 432, 234 P 35,

40 ALR 1005; Landwehr v Lingenfelder (Mo App) 249 SW 723; Schmidt v Stortz, 208 Mo App 3439, 236 SW 694.

 

11.  Barrett v Gore, 88 Cal App 371, 263 P 564.

 

Annotation: 156 ALR 91.

 

12.  Reilly v Clyne, 27 Ariz 432, 234 P 35, 40 ALR 1005;  Landwehr v Lingenfelder (Mo App) 249 SW 723;  Schmidt v Stortz, 208 Mo App 3439, 236 SW 694.

 

14.  Reilly v Clyne, supra.

 

15.  Erisman v McCarty, 77 Colo 289, 236 P 177, stating that the question whether it was material to a plaintiff to have stock in a corporation instead of a business trust, so as to entitle him to recover on the ground of misrepresentations in this connection, is a question which is ordinarily for the jury.  Annotation: 156 ALR 92.

397

 


 

§ 27                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

on a note by one other than a holder in due course, where the shareholders in such a trust were not accorded the same immunity from liabilities as were stockholders in a corporation.16

A provision of the declaration of trust to the effect that shareholders shall not have the right to call for a partition or division, a dissolution of the trust, or an accounting, is not on its face fraudulent so as to entitle subscriber of shares in the trust to a rescission of their subscription, nor is a provision authorizing the expenditure of 30 percent of sums collected by the trust as commissions for selling stock and for promotion purposes.17  And the breach of a promise made by promoters and trustees to a subscriber for shares that the trust would buy printed matter amounting to a certain sum from the subscriber does not entitle the latter to a rescission of his subscription contract in an action based on fraud and misrepresentation and not for damages for breach of the contract as to the printed matter.18

Where the promoters and trustees of a business trust have grossly and fraudulently exaggerated the value of a lease transferred to the trust, shareholders may maintain and action against such persons for the cancellation of the transfer, the rescission of their subscription contracts, and the recovery of the price paid for their shares.19  But the improper appropriation by trustees of property of the trust is not a ground for the rescission of a prior sale of stock to subscribers.20

One who is induced to purchase shares in a business trust by false representations that the organization has complied with the Blue Sky Law may recover back the amount paid for the shares.1

 

§ 27. Transfer or pledge.2

One of the distinctive features of the business trust, as compared to an ordinary trust or a partnership, is the transferability of its shares; it is in no way illegal to provide for transferable shares,3  and instruments declaring business trusts usually contain such a provision.4  Statutes prohibiting or restricting the transfer of interests in trusts have been held not to apply to business trusts.5

It is competent to provide in the trust instrument that the shares of a business trust  must  be  offered  to  the  trustees before being transferred to outsiders.6

16.  Farmers State Bank v Rueschoff, 121 Kan 784, 250 P 335.

 

17.  Palmer v Taylor, 168 Ark 127, 269 SW 996.

 

18.  Palmer v Taylor, supra.

 

19. Web v Shea, 149 Ark 406, 232 SW 602, holding also that the relief in such a case is not limited to the profits secretly obtained by the trustees and promoters but may extend to a recovery of the full price paid for the shares by the plaintiff.

 

20.  Palmer v Taylor, 168 Ark 127, 269 SW 996.

 

1.  Schmidt v Stortz, 208 Mo App 3439, 236 SW 694.

 

2.  As to bequest or inheritance, see § 29, infra.

 

3.  Hossack v Ottawa Development Asso. 244

Ill 274, 91 NE 439;  Swartz v Sher, 344 Mass 636, 184 NE2d 51 (recognized);  Phillips v Blatchford, 137 Mass 510.

 

4.  Practice Aids: —Trust instrument provisions as to transferability or assignability of shares. 3 Am Jur Legal Forms 3:1, 3:2, 3:91, 3:92.

 

—Assignment of shares. 3 Am Jur Legal Forms 3:93.

 

5.  Baker v Stern, 194 Wis 233, 216 NW 147, 58 ALR 463.  See also Liberty Nat. Bank & T. Co. v New England Investors Shares (DC) 25 F2d 493 (law of Massachusetts).

Annotation:  156 ALR 93.

 

6.  Hecht v. Malley, 265 US 144, 68 L ed 949, 44 S Ct 462, before transfer to persons outside the family which organized the trust.

 

A form of such a provision appears in Fairfield Holding Corp. v Souther, 258 Mass 540, 155 NE 639.

398

 


 

13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 28

 

A provision requiring that any shareholder or his personal representatives desiring to sell and transfer his shares in the trust should file with the trustees a bona fide offer from the proposed purchaser, and giving the trustees the right to purchase the shares at the price offered within a period of ten days, is valid.7  Where this is done and the trustees do not elect to purchase the shares, the may be compelled to transfer the shares to the offeror on their books.8

If the trustees fail to make a periodic valuation of the shares of the trust as required by the trust instrument, as a basis for their acquisition of the shares of a memeber who dies or withdraws, the court may determine the true value of such shares.9

 Shares in a business trust may be pledged by the owner thereof,10 and it has been held that they may be pledged without complying with a provision of the trust instrument requiring a transfer on the records of the trust and the issuance of a new certificate where there has been a “transfer” of shares.11

 

§ 28. —Effectuation of transfer.

Instruments creating business trusts usually prescribe the manner in which a transfer or assignment of shares therein is to be effectuated12.  These provisions are binding upon purchasers of shares13 as well as upon  other persons.  Thus, it has been held that the trustees of a business trust may refrain from transferring certificates on the books of the trust until the procedure prescribed for transfer has been followed, and may withhold payment of dividends to the parties to a transfer of shares unperfected on the books of the trust, however, the transfer is good, and actual knowledge thereof will charge the trustees with liability for dividends paid to the transferor thereafter.15

The trustees of a business trust may be compelled to recognize and enter on their books a transfer of shares made in accordance with the trust instrument.16  Upon the presentation of the certificate endorsed in blank with the genuine signature of the owner, the trust is under duty to transfer the shares_

 

7.  Fairfield Holding Corp. v Souther,  supra.

 

8.  Fairfield Holding Corp. v Souther,  supra, although the offer was made by a corporation as agent for another person.

 

9.  Dooley v Resnik, 256 Mass 205, 152 NE 231.

 

10.  Snow v Hogan, supra, in which the pledge was attacked as fraudulent by creditors of the shareholder.

 

12.  Practice Aids,—3 Am Jur Legal Forms 3:1, 3:91, 3:92.

 

13.  Wimer & Co. v Downs, Inc. 77 Colo 377, 237 P 155.

 

A provision of a trust instrument requiring a notation of a “transfer” of shares on the books of the trust, and the issuance of new shares, does not apply to a pledge of such shares. Snow v Hogan, 312 Ill App 636, 38 NE2d 934, the court stating that neither law nor custom require the issuance of a new certificate upon a mere pledge.

14.  Baar v Fidelity & Columbia Trust Co. 302 Ky 91, 193 SW2d 1011.

 

15.  Trust instrument provisions to the effect that possession of a certificate shall not vest ownership of the shares represented thereby in any person other than the one in whose name the certificate is issued, as between the trustees an such holder, until the transfer is duly made on the books of the trustees, will not relieve the trustees form liability for wrongfully paying dividends to a previous owner of the stock after they come into knowledge of the transfer. Baar v Fidelity & Columbia Trust Co., supra.

 

16.  Fairfield Holding Corp. v Souther, 258 Mass 540, 155 NE 639;  Rice v. Rockefeller, 134 NY 174, 31 NE 907.

Where the trust instrument provides for the transfer of shares on the books of the trusts, the trustees, although given absolute and sole supervision of the affairs of the trust, have no right to control the sale of shares and no power to refuse to transfer them on the books of the trust, where the holder complies with the requirements of the trust instrument.Wimer & Co. v Downs, Inc. 77 Colo 377, 237 P 155

399

 


 

§ 27                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

and issue a new certificate on demand, and it is not negligent in so doing, in the absence of  fraud or collusion or notice of lack of title in the persons presenting the certificate.17  A court of equity has jurisdiction to compel the trustees to effectuate such a transfer in accordance with the provisions of the trust instrument, but the burden is on an alleged transferee to show that he is entitled to have the transfer perfected.18

It has been held that a brokerage firm regularly dealing in shares of a business trust may maintain an action to compel the trustees to make transfers in accordance with the trust instrument.19  And the fact that a purchase of shares was made by a corporation as agent for another person does not relieve the trustees of their duty to recognize and record the transfer, where the offer was made in good faith and met all the requirements of the declaration of trust.20  However, a court will not compel the trustees to of a trust to transfer shares obtained though a breach of faith and the use of confidential information secured through the former employment of the purchasers by the trust.1

 

§ 29. Bequest or inheritance.

Shares in a Massachusetts or business trust may be bequeathed by the shareholder,2  and upon the death of  a  shareholder intestate,  his  personal representative becomes vested with the right to the shares and the undivided profits.3

Under a statute providing for an accounting in the local probate court in the administration on the estate of a nonresident, with respect to “his estate found here,” ancillary executors  of  a  deceased  shareholder have been held to be accountable for shares  in  a  Massachusetts  trust in  the state in which the shares were kept,  the trustees resided,  the home office of  the business  was located, and in  which certificates must be transferred  and  new  certificates issued, although the testator  was  domiciled  in  another state.  For this purpose, there is said to be no difference between such a certificate and a certificate of shares in a domestic corporation.4

 

IV. SHAREHOLDERS, MEMBERS, OR

CESTUIS QUE TRUSTENT

A. General

§ 30. Generally.

In jurisdictions where the business trust is regarded primarily as a trust and there is no governing statute, shareholders occupy a relation to the business_

 

17.  United States Fidelity & G. Co. v Ramey (Tex Civ App) 261 SW 503, holding also that when a certificate is presented for cancellation for the purpose of having a new certificate issued, and the certificate bears the signature of the owner thereof in blank, by way of assignment, the only duty the trust owes to the owner is to verify his signature and to ascertain its genuineness.

 

18.  Rice v. Rockefeller, 134 NY 174, 31 NE 907.

 

19.  Wimer & Co. v Downs, Inc. 77 Colo 377, 237 P 155.

 

20.  Fairfield Holding Corp. v Souther, 258 Mass 540, 155 NE 639.

1.  Wimer & Co. v Downs, Inc. 77 Colo 377, 237 P 155, holding also that the court will not grant any relief tending to aid such purchasers in a business based upon their breach of an undertaking not to engage in a business competing with that of the trust.

 

2.  See Douglas v Safe Deposit & T. Co. 159 Md 81, 150 A 37.

 

3.  See Taber v Breck, 192 Mass 355, 78 NE 472; Bryan v Seiffert, 185 Okla 496, 94 P2d 526 (right of heirs to accounting).

 

Annotation: 156 ALR 97.

 

4.  Kennedy v Hodges, 215 Mass 112, 102 NE 432.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 31

 

trust similar to the relation of stockholders to a corporation.5  However, the relationship is somewhat different where the business trust is treated as a partnership, since the shareholders then may be said to have a direct interest in the affairs of the trust.6

Shareholders are charged with notice of the provisions of the trust instrument,7 and become bound by those provisions on the purchase of shares.8

 

§ 31. Eligibility.

The rule applicable to trusts generally that any person having capacity to take and hold legal title to property has capacity to be the beneficiary of a trust of such property9 would appear to apply to business trusts as well.  Accordingly, while an unincorporated voluntary association which is not a legal entity cannot hold title to shares in a business trust,10 there would appear to be no reason why one business trust, where regarded as a legal entity,11 may not become a shareholder in another such trust.12  And where business trusts are treated as true trusts rather than as partnerships, no inherent reason is aparent why a corporation may not hold shares of such a trust as well as shares of another corporation.  However, particular statutory or charter provisions may prevent a corporation from holding shares in a business trust.13  And the principles or statutory limitations which prohibit corporations from entering into a partnership have been held to preclude them from becoming shareholders in a business trust which is, in contemplation of the law, a partnership.14  Thus, it has been held that a corporation violated its charter and subjected itself to dissolution  becoming a party to a business trust agreement which had the effect of creating a partnership.15

5.  Mallory v Russell, 71 Iowa 63, 32 NW 102.

Annotation: 156 ALR 99.

 

6.  Stephenson v Kirkhan (Tex Civ App) 297 SW 265 (comparison for the purpose of determining the disqualification of a judge because of his relationship to a shareholder in such a trust).

 

7. George v Hall (Tex Civ App) 262 SW 174;  Hardee v Adams Oil Asso. (Tex Com App) 254 SW 602.

 

8.  Cox v Lucky Pat Oil & Gas Asso. (Tex Com App) 241 SW 105, rebg (Tex Civ App) 230 SW 858; George v Hall (Tex Civ App) 262 SW 174; Burnett v Smith (Tex Civ App) 240 SW 1007.

Apparently shareholder become chargeable with notice of the rules and bylaws of a business trust from the moment they assume that status.  See Burton v Ross (Tex Com App) 292 SW 207.

 

9.  See Trusts (1st ed § 137).

 

10.  Comstock v Dewy, 323 Mass 583, 83 NE2d 257, holding, however, that the effect of registering shares of a business trust in the name of a club which is a voluntary unincorporated association is to vest ownership in the members of the club jointly, and that the members can collectively transfer control of the trust shares to the club directors and empower them to appoint a proxy to vote

the shares, thus giving the club a voice int the administration of the trust.

 

11.  § 4, supra.

 

12.  See Greco v Hubbard, 252 Mass 37, 147 NE 272, sustaining the status and rights of an investment trust as a shareholder in a business trust in which all shares had been acquired by the former.

Annotation: 156 ALR 99.

 

13.  A statutory prohibition against a railroad corporation directly or indirectly holding stock in any other corporation has been held to prevent a railroad company from becoming a shareholder in a business trust organized to hold corporate stocks, because this would amount to an indirect  holding of corporate stock by the railroad company.  Atty. Gen. v New York, N. H. & H. R. Co. 198 Mass 413, 84 NE 737.  To the same effect is Williams v Johnson, 208 Mass 544, 95 NE 90.

 

15.  Merchants’ Nat. Bank v Wehrmann, 69 Ohio St 160, 68 NE 1004, revd on other grounds 202 US 295, 50 L ed 1036, 256 S Ct 613, holding that a national bank could not, by reason of the federal laws, become a shareholder in a business trust in the nature of a partnership whose members would be liable for its debts.

 

15.  People v. North River Sugar Ref. Co. 121 NY 582, 24 NE 834 (“Sugar Trust” case).  And see State ex rel. Watson v Standard Oil

(13 Am Jur 2d) —26                                                                                           401

 


 

§ 32                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

Trustees of a business trust are not disqualified from being shareholders thereof;16 in fact, provision for ownership of shares by the trustees is frequently incorporated in trust instruments.17  The only limitation in this regard seems to be that the sole trustee cannot be the sole shareholder, and perhaps that all of the trustees and all of the shareholders must not be identical persons.18

 

B. Rights and Powers

§ 32. Generally.

The provisions of the declaration of trust are binding upon the shareholders of a business trust, and determine their rights.19  Thus the right of shareholders to the earnings and profits of the trust depends upon the terms of the trust instrument,20  The extent and manner of exercise of the shareholders’ right to vote on affairs of a business trust may be, and frequently are, governed by the terms of the trust instrument.  In this connection, the propriety of making provision for voting by proxy has been recognized.1  In determining their rights, the courts apply, by analogy, the rules governing the rights of stockholders in corporations, so far as the rules of equity will permit.2

In a suit to marshal the assets of a business trust, the stockholders have the right to have the property of the trust applied to the payment of its debts, so that they would be individually liable on for the deficiency.3

The rights of shareholders as against the trustee have been treated herein in connection with the corresponding duties and liabilities of the trustees,4 and various shareholders’ actions are discussed in the division of this article on practice and procedure.5

 

§ 33. Proprietary interests.

The  proprietary  interests  of  shareholders  are  subject  to  the  terms of  the  trust  instrument.6   And  their  rights  in  the  property  of  the  trust depend  upon  the  title actually  acquired  by  the  trustees,  and  are subject to the defects in

Co. 49 Ohio St 137, 30 NE 279 (quo warranto proceedings by the state against the corporation participating in the trust arrangement of the “Standard Oil Trust”).

 

16.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493;  Henry G. Tausig Co. v Poindexter, 224 Mo App 580, 30 SW2d 635.

 

17.  See Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273 .

 

18.  § 43, infra.

 

19.  Todd v Ford, 92 Colo 392, 24 P2d 173;  Wirner & Co. v Downs, Inc.77 Colo 377, 237 P 155;  Hardee v Adams Oil Asso. (Tex Com App) 254 SW 602.

Annotation: 156 ALR 222.

 

Practice Aids,Trust instrument provisions as to rights of shareholders. 3 Am Jur Legal Forms 3:1, 3:79, 3:103 et seq.

 

20.  Smith v Moore, 129 Mass 222.

Annotation: 156 ALR 98.

 

Practice Aids, —Trust instrument provisions as to rights of shareholders to profits and divi-

dends.  3 Am Jur Legal Forms 3:1, 3:87, 3:96, 3:112.

 

 

1.  Comstock v Dewy, 323 Mass 583, 83 NE2d 257.

 

Practice Aids, —Trust instrument provisions as to meetings of, and voting by, shareholders. 3 Am Jur Legal Forms 3:1, 3:107, 3:109.

 

2.  Wineinger v Farmers’ & Stockmen’s Loan & Invest. Asso. (Tex Civ App) 278 SW932, affd (Tex Com App) 287 SW 1091.

 

3.  Howe v Keystone Pipe & Supply Co. 115 Tex 1611, 278 SW 177, deng rch of 115 Tex 158, 274 SW 563.

 

4.  §§ 61 et seq,., infra.

 

5.  §§ 104 et seq., infra.

 

6.  State Street Trust Co v hall, 311 Mass 299,41 NE2d 30, 156 ALR 13.

Practice Aids,—Trust instrument provisions negativing shareholders; ownership of trust property.  3 Am Jur Legal Forms 3:1, 3:103, 3:113.

402                                                                                                       (13 Am Jur 2d)

 


 

13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 34

 

the title of  the trustees,  even though  such defects do not appear  of  record and the shareholders  have  no  notice thereof.7  Where  (as is usually the case) the legal title  to  the trust  property is vested in the trustees,8 the shareholders have an equitable  interest,9  and only an equitable  interest,10  in  the  property.  However,  it  has  been said  that the members  of  a  business trust who, by the laws of the state, are  held liable for  the debts of   the trust,  are also entitled to the assets which have been acquired in behalf of the trust,  on  the analogy  of  the rights  of  persons undertaking to form a corporation who fail to perfect the same in conformity to the statute.11

Shareholders,  even after the termination of the period provided as the lifetime of the trust, do not have any  such interest in the real property of the trust as will enable them to maintain an action of trespass to try title.12 And, in the absence of  a  provision  in  the trust instruments granting them that power, they have no authority  to contract for the sale of trust lands.13  Instruments creating business trusts often contain provisions expressly denying shareholders the right to a partition,14 and even in the absence of such a provision,  it is held  that they have nosuch right prior to the termination or dissolution of the trust.15

 

C. Liability for Trust Debts and Obligations

 

§ 34. Generally.

According  to  the  generally  accepted  view —that is, the  “control test”16 — the  status  of  a  business  trust  for  the  purpose  of  determining  the  liability  of the  shareholders  depends  upon  who  has  the  power  of  control  over  the business  and  property  of  the  trust.    If  the  ultimate  power  of  control  is  vested in  the  trustees,  who also hold the legal title to the trust property,  the organization is treated as  a  true trust, rather than as a  partnership, and the shareholders are not liable  for  the  debts  or  contractual  obligations  incurred  by  the  trustees.17   As stated by  some  courts,  if  the  organization  is  actually  a  Massachusetts

 

7.  Bisbee v Mackay, 215 Mass 21, 102 NE 327.

 

8.  § 55, infra.

 

9.  Reconstruction Finance Corp. v Goldberg (CA7 Ill) 143 F2d 752, cert den 323 US 770, 89 L ed 616, 65 S Ct 117, erh den 323 US 817, 89 L ed 619, 65 S Ct 266;  Goodhue v State Street Trust Co. 267 Mass 28, 165 NE 701.

Annotation: 156 ALR 102.

 

10.  Kinney v Treasurer, 207 Mass 368, 93 NE 586.

 

12.  Kountze v Smith, 135 Tex 513, 144 SW 2d 261 (trust instrument expressly providing that the certificates of shares, and the rights and benefits evidenced thereby, should be personal property).

 

13.  See Spotswood v Morris, 12 Idaho 360, 85 P 1094/

 

14.  Practice Aids.—3 Am Jur Legal Forms 3:11.

15.  Aronson v Olsen, 318 Ill 26, 180 NE 565.

Annotation: 156 ALR 103.

 

16.  § 11, supra.

 

17.  Bank of America Nat. Trust & Sav. Asso. v Scully (CA10) 92 F2d 97 (law of California); Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; Commercial Casualty Ins. Co. v Pearce, 320 Ill App 221, 50 NE2d 434; Rossman v Marsh, 287 Mich 589, 283 NW 696, affd on reh 287 Mich 720, 286 NW 83; Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493; Re Winter, 133 NJ Eq 245, 31 A2d 769; Rhode Island Trust Co. v Copeland, 39 RI 193, 98 A 273

 

Annotation: 156 ALR 107.

 

In such cases, recovery cannot be had against the shareholders on the ground that they were the undisclosed principals of the trustees. Greco v Hubbard, 252 Mass 37, 147 NE 272.

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§ 34                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

trust,18 or a true trust, the shareholders are not liable for its debts.19  But if the shareholders have the power of effectual control over the trustees or over the affairs of the trust, the concern is regarded as a partnership, and the shareholders are consequently liable.20  Where the ultimate power of control over the property and business of the trust is vested in the shareholders, they are liable as partners for the debts of the trust even under a statute expressly authorizing the creation of a trust to carry on any lawful business designated in the trust instrument, since such an organization is not a trust, but a partnership.1

 

In a few jurisdictions the shareholders of a business trust are held liable for the debts of the trust, irrespective of the question of their control over the affairs of the trust.2   And shareholders have been held liable, as partners, for the debts of the trust, where the business was carried on under a name which would indicate that it was a corporation and the shareholders did not hold themselves out as operating under a trust agreement.3   Even in a jurisdiction where, by statute, shareholders are generally exempt from personal liability for the debts of the trust, persons who associate for the purpose of forming a business trust, but who fail to perfect the trust, are liable as partners for goods purchased on behalf of the association.4  And in a jurisdiction which regards business trusts as imperfect corporations, it has been held that the shareholders of such a trust are in the position of persons who begin but never complete the organization of a corporation, and, as such, are liable for the debts of the trust.5

 

The fact that credit was not extended to the trust on the financial responsibility of a particular shareholder, or even that at the time credit was extended tot he trust the creditor did not know that the particular shareholder had  any connection with the trust, does not prevent the creditor from holding such shareholder personally liable for the debt, where the trust is regarded as a partnership.6

 

18.  Re Conover, 295 Ill App 443 NE2d 980.

 

19.  Greco v Hubbard, 252 Mass 37, 147 NE 272.

 

20.  Bank of America Nat. Trust & Sav. Asso. v Scully (CA10) 92 F2d 97; Rand v Morse (CA8) 289 F 339 (law of Missouri);  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; First Nat. Bank v Chartier, 305 mass 316, 25 NE2d 733; Neville v Gifford, 242 Mass 124, 136 NE 160.

 

Annotation: 156 ALR 105, 102.

 

Where the trustees are the mere agents of the shareholders, the latter are liable as principals on the contracts of the former, Brown v Bedell, 263 NY 177, 188 NE 641, reh den 264 NY 453, 191 NE 510, motion den 264 NY 513, 191 NE 541; Byrnes v Chase Nat. Bank, 225 App Div 102, 232 NYS 224, affd 251 NY 551, 168 NE 423.

 

The fact that the shareholders or beneficiaries exercise their control through a managing agent, or the like, does not relieve them of liability as partners. Bernesen v Fish, 135 Cal App 588, 28 P2d 67.

1.  See Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561.

 

2.  Burk-Waggoner Oil Asso. v Hopkins, 269 US 110, 70 L ed 183, 46 S Ct 48 (applying law of Texas); Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158; Ing v Liberty Nat. Bank, 216 Ky 467, 287 SW 960 (in which the court said: “It is a well-settled rule in this state that these unincorporated syndicates are simply partnerships and that each member of the syndicate is liable personally for the debts of the syndicate”); Means v Limpia Royalties (Tex Civ App) 115 SW2d 468, error dismd.

 

Annotation: 156 ALR 105.

 

3.  Haves Motor Truck Wheel Co. v Wolff, 175 Wis 501, 185 NW 512.

 

4.  Hollis v O. A. Steiner Tire Co. 122 Okla 190, 247 P 66.

 

5.  Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158.

 

6.  Feldman v Scay (Tex Civ App) 291 SW 350.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 35

 

Former shareholders are not liable for debts contracted on behalf of the trust after they have ceased to be shareholders.7  And this rule has been applied, notwithstanding the fact that there was no transfer on the books of the trust as required by its rules, in the absence of a showing that the creditor, at the time the debt was incurred, knew of the membership of such shareholder and relied thereon in extending credit to the trust.8

One who inherited shares in a business trust, held by the court to constitute a partnership, prior to the time when a note was executed, and who asserted his ownership of the stock, was recognized as its owner by the trust, participated in the business, and are certified dividends on the shares up to a time only one month before the debt was incurred, was held liable as a shareholder for the debt.9  However, it has been indicated that a person inheriting shares in such a trust after the time when the trust incurred an indebtedness would not be personally liable for the debts, and that in such case the creditor’s remedy would be restricted to the enforcement of a lien against the shares so inherited.10  Where the control over the business and property of the trust is vested in the trustees, and not in the shareholders, the executor of a deceased shareholder may continue to hold the shares without rendering himself liable for any obligation or indebtedness of the trust, in jurisdiction adhering to the “control test.”11

 

§ 35. Liability for torts.

The beneficiary of an ordinary trust is not personally liable to third persons for torts committed by the trustee.12  But in determining the liability of the shareholders of a Massachusetts or business trust in  tort, the courts seem to apply the same tests and principles as in cases involving liability on contract. The “control test” has been applied in this connection, and it has been held that the shareholders are personally liable for the torts of the trust where they are vested with the ultimate and effectual control over the business and property of the trust.13  This liability, it is to be noted, depends upon power of control, and not upon the actual exercise of the power.14  A fortiori, shareholders in a business trust may become liable for the torts or fraud of the managing trustee, where they participate in or authorize them to be done.15

7.  Green v La Rue Oil Asso. (Tex Civ App) 272 SW 623.

 

A transfer of his shares prior to the time when a debt was incurred by the trust relieves a shareholder of any personal liability for the debt which the law would impose upon him as a shareholder.  Adams v Texhoma Oil & Ref. Co. (Tex Civ App) 262 SW 139.

 

8.  Adams v Texhoma Oil & Ref. Co., supra.

 

9.  Houston Finance Corp. v Stewart (Tex Civ App) 7 SW2d 644.

 

10.  See Houston Finance Corp. v Stewart, supra.

 

11.  Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273.

 

12.  See Trusts (1st ed § 492).

See Liquid Carbonic So. v Sullivan, 103

Okla 78, 229 P 561, for example of a statute expressly providing that beneficiaries of an express trust shall not be liable for any act, omission, or liability of the trustees.

 

13.   Marchulonis v Adams, 97  W Va 517, 125 SE 340.

Annotation: 156 ALR 113.

 

And see Roller v Madison, 172 Ky 693, 189 SW 814, in which the association was referred to as a joint stock company, and it is not clear whether or not it was operating under a trust arrangement.

 

14.  Marchulonis v Adams, 97  W Va 517, 125 SE 340.

 

15. Piff v Berresheim, 405 Ill 617, 92 NE 2d 143, wherein shareholders who authorized a trustee having full knowledge of the title to convey certain lands of the business trust, including two lots for which a purchaser had previously paid in full but which had never

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§ 36                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

§ 36.  Nature and degree of control sufficient to impose liability.

Under the “control” test, the character of an organization as a true trust or a partnership, for the purpose of determining the personal liability of shareholders, depends generally upon the powers vested in the shareholders by the trust instrument, rather than upon the powers actually exercised by them.16  The fact that the agreement on its face provides for managers, and not for trustees, is significant on, but not conclusive of, the question whether the instrument creates a true trust or a partnership or agency.17

The determination of the question whether the shareholders have such effectual control of the organization as will render them personally liable generally depends upon no single element of control, but upon a combination of factors.18  Circumstances held insufficient to impose partnership liability on shareholders include the mere power of the shareholders to hold meeting;19  occasional conferences, about the affairs of the trust, between the trustees and a shareholder who has no power of control;20  the appointment by the trustees of an advisory board of shareholders, where the trustees do not relinquish control over the affairs of the trust;1  and the right to fix or control the minimum sale price of lots vested by the declaration of trust in the shareholders.2

 

been conveyed to him, were held liable to the purchaser for his damages as participants in the fraud upon the purchaser.

 

16.  § 11, supra.

 

17.  Brown v Bedell, 263 NY 177, 188 NE 641, reh den 264 NY 453, 191 NE 510, motion den 264 NY 513, 191 NE 541.

Annotation: 156 ALR 114.

However, a provision of the trust agreement that the subscribers irrevocably nominate and constitute the managers their agents and attorneys to do and perform all things necessary to carry out the contract does not necessarily indicate a relationship of partners or principal and agent, so as to render the shareholders liable for the debts of the trust, where the instrument as a whole indicates an intention to create a business trust.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

18.  For example, an organization was held a partnership where the declaration of trust provided for annual meetings of the shareholders and authorized them to share with the trustees in the management of the trust business, to elect trustees annually to amend the trust instrument, to terminate the trust, and to restrict the power of the trustees with respect to the issuance of additional shares under certain circumstances.  Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561 (under statute expressly authorizing the creation of an express trust to carry on and conduct any lawful business designated in the trust instrument(.

The power of control was vested in the shareholders, so as  to render them liable for the torts of the trust, where the trust instrument provided for annual meetings of the shareholders for the election of trustees, and

for special meetings called for special purposes, authorized increase or reduction in the number of the shares with the consent of the shareholders, required the consent of the shareholders as a condition of the right of the trustee to mortgage or pledge the property of the trust, empowered the shareholders to terminate the trust before the expiration of the term provided in the trust instrument, and authorized them to amend or alter the trust instrument in any particular, except with regard to the exemption of the trustees, officers, and shareholders from personal liability. Marchulonis v Adams, 97 W Va 517, 125 SE 340.

 

19.  Levy v Nellis, 284 Ill 228, 1 NE2d 251;  Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273 .

 

However, shareholders who are vested with the power to hold meetings, to give binding instructions to the trustees in any manner not inconsistent with the trust instrument,and to amend the bylaws governing the trust, are individually liable for the debts of the trust.  Morehead v Greenville Exch. Nat. Bank (Tex Civ App) 243 SW 546.

 

20.  Greco v Hubbard, 252 Mass 37, 147 NE 272.

 

1.  Krey Packing Co. v Hitchings (MO App) 18 SW2d 123.

 

2.  Rossman v Marsh, 287 Mich 589, 283 NW 696, affd on reh 287 Mich 720, 286, NW 83.

 

But it is otherwise where the shareholders are also vested with the general supervision and management of the project and with the power to determine what property shall be sold and what improvements constructed.  Bank of America Nat. Trust & Sav. Asso. v Scully (CA10) 92 F2d 97

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 36

 

As a general rule, the reservation to the shareholders of a business trust of the power to elect trustees at stated intervals and to fill vacancies among the trustees resulting from death, resignation, or expiration of term of office, does not alone transform the organization into a partnership, under the “control” test, so as to render the shareholders personally liable for the debts of the trust.3  And the same has been held true of the power to elect trustees in combination with other powers reserved to the shareholders.4  The vesting of power in the shareholders to remove or replace trustees has been said not to convert a business trust into a partnership,5  even in combination with the powers to amend the trust instrument and to terminate the trust.6  However. it has been stated, obiter, that if the trustees are subject to removal by the shareholders and are dependent upon them for election, the ultimate control of the organization rests in the shareholders, so as to render them liable as partners.7  And the power in the shareholders to elect and remove trustees, combined with such other powers as that of amending or terminating the trust, has been held to give the shareholders such control as to characterize the trust as a partnership.8

The mere reservation to the shareholders of a business trust of the power to amend the trust instrument does not,  of itself,  convert  the organization to a partnership so as to render the shareholders liable for the debts9 or the torts of the trust.10    And the power to terminate  the  trust has been held not to give the shareholders such control over the affairs of the trust  as  will render them liable for  its debts,11  even  in combination  with the  power  to  remove trustees,12   or  with  other powers reserved  to  the shareholders.13    However,  the  power  to  amend the  trust  instrument or to terminate the trust, in addition to other powers

 

3.  Gutelius v Stanbon (DC) 39 F2d 621;  Levy v Nellis, 284 Ill App 228, 1 NE2d 251.

Annotation: 156 ALR 116.

 

4.  Levy v Nellis, supra.

 

5.  Downey Co. v Whistler, 284 Mass 461, 188 NE 243, involving liability of successor trustees as partners.

 

6.  Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273.

 

7.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871 (arguendo in limiting Old River Farms Co. v Roscoe Maegelin Co. 98 Cal App 331, 276 P 1017).

 

8.  First Nat. Bank v Chartier, 305 mass 316, 25 NE2d 733 (shareholders given the power to elect officers and directors at  at annual elections, to remove any officer and fill the vacancy thus created, to hold annual meetings, and with the approval of the board of directors,  to amend the trust instrument);  Neville v Gifford, 242 Mass 124, 136 NE 160 (shareholders vested with the power to hold meetings, increase or diminish the number of trustees, remove trustees, fill vacancies, modify the trust, or terminate the trust at any time);  Feldman v American Dist. Teleg. Co. (Tex Civ App) 257 SW 929 (power in the shareholders to amend the trust agreement and to elect the trustees).

Annotation: 156 ALR 117.

9.  Levy v Nellis, 284 Ill App 228, 1 NE2d 251 (wherein the court said: “while this power of the beneficiaries enables them to take over control and so points toward a partnership, it is not enough, standing alone,to balance the provisions of the declaration which indicate trust.”); Re Winter, 133 NJ Eq 245, 31 A2d 769.

 

10.  Marchulonis v Adams, 97 W Va 517, 125 SE 340.

 

11.  Cox v Hickman, 8 HL Cas 268, 11 Eng Reprint 431.

And see 23 Columbia L Rev 423, 437.

 

12.  Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273.

 

13.  Where the trust instrument otherwise vests the trustees with absolute management and control of the trust property and business, provisions thereof requiring the consent of two-thirds of the shareholders as a condition of the power of the trustees to mortgage trust property, to amend the trust agreement, and giving the shareholders the power to terminate the trust, by a two-thirds vote, were held not to confer upon them that degree of ultimate control which would convert the organization into a partnership rather than a trust or render the shareholders liable for the debts of the trust. Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

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§ 37                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

reserved to the shareholders, has been held to render them liable as partners for the debts of the trust.14

 

§ 37.  Provisions of trust instrument or contract negativing or limiting liability.

Stipulations affecting the personal liability of shareholders for debts or liabilities of business trusts are frequently found in the trust instruments.  It is sometimes expressly provided that the shareholders shall not be personally or individually liable for the the debts or liabilities incurred by the trustees or on contracts made by the latter on behalf of the trust, or that persons dealing with the trustees shall look for payment or satisfaction of their demands only to the property and assets of the trust, or that in every contract or obligation executed by the trustees they shall insert a stipulation exempting the shareholders from personal liability, and referring to the trust instrument.15  It is generally held that a provision of a trust instrument that persons dealing with the trustees shall look only to the trust fund and property, and that the shareholders shall not be personally liable, is not contrary to law or public policy.16

In a jurisdiction where the shareholders of a business trust are held personally liable for  the debts of the trust, irrespective of the question of power of control, a provision of the trust instrument purporting to exempt them form liability has been held ineffectual, at least in the absence of notice to the creditor of the provision.17  According to this view, the members of such a trust cannot confer immunity upon themselves by their own contract.18

In a jurisdiction following the doctrine that a business trust is, in legal contemplation, a partnership in the nature of a joint-stock company, notwithstanding that exclusive control is vested in the trustees, it has been held that a provision of the trust instrument purporting to exempt the shareholders from  liability for the debts incurred by the trustees on behalf of the trust is invalid and ineffectual, where there is no compliance with a statute relating to the formation of limited partnerships, with respect to a creditor who dealt with the trustees with knowledge of the terms of the trust instruments but without expressly agreeing to look only to the assets of the trust.19

14.  Whitman v Porter, 107 Mass 522 (where the trust instrument provided that property was to be conveyed in one of the subscribers in trust, that three officers and three trustees, to be chosen annually, were to have the entire management and control of the trust property and business, that the business was to continue so long s a majority of the subscribers determined, and that the trust property might be sold whenever a majority in number and value so decided); Hollister v McCamey, 115 Tex 49, 274 SW 562 (power in the shareholders to amend the declaration of trust and to authorize an increase in the capital stock).

 

Annotation: 156 ALR 119.

 

15.  Annotation: 156 ALR 119.

 

Practice Aids,—Trust instrument provisions as to character of organization, or negativing partnership relation. 3 Am Jur Legal Forms 3:1, 3:12, 3:111.

—Trust instrument provisions that shareholders shall not be personally liable for trust obligations. 3 Am Jur Legal Forms 3:1, 3:110, 3:111.

 

16.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485;  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493

Annotation: 156 ALR 120.

 

17.  Annotation: 156 ALR 122.

The liability of shareholder, notwithstanding provisions purporting to exempt them from personal liability, is predicated on the theory that such an organization is, in the contemplation of the law, a corporation, that in order to form a corporation, statutes relating thereto must be compliance with, and that the laws regulating corporations and protecting the public cannot be circumvented by a trust instrument purporting to exempt members from personal liability.  Weber Engine Co. v Alter, 120 Kan 557, 245 P 143, 46 ALR 158.

 

18.  Linn v Houston, 123 Kan 409, 255 P 1105.

 

19.  Thompson v Schmitt, 115 Tex 53, 274 SW 554, followed in Victor Ref. Co. v City Nat. Bank, 115 Tex 71, 274 SW 561.

Annotation: 156 ALR 123.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 38

 

§ 38. —Effect of notice or lack of notice.

Where shareholders would otherwise be personally liable for the debts of the trust, it has been held, in the cases in which the question of notice has been considered, that a provision of the trust instrument purporting to exempt them from such liability does not relieve them of liability to creditors having no notice of such a provision.20    On the other hand, it is generally1  held that persons dealing with the trustees or officers of a business trust with notice of a provision of the trust instrument  purporting  to exempt the shareholders from  personal  liability for any debt or liability incurred  by  the trustees,  or of any contract made by them on behalf of the trust, cannot recover against the shareholders personally.2    Thus,  where the trust instrument contained provisions limiting the liability of the shareholders, they have been held not liable to an attorney who performed services for a business trust with knowledge of the restrictive provisions,3    to a person who was one of the organizers of the  trust and  who  knew of  the provisions of  the trust  agreement purporting to exempt the shareholders form personal liability.5    Likewise,   one  who dealt with a business trust with actual notice of provisions of the trust instrument purporting to exempt the shareholders from personal liability for the debts of the trust has  been  held  to  be  estopped  to  maintain  an  action against  such  shareholders on  a  note  executed  by the trustees.6   However,   where all of the shareholders  were  trustees,  so that the trustees and the beneficiaries were the

20.  Hunter v Winter, 268 Ill App 487;  Ing v Liberty Nat. Bank, 216 Ky 467, 287 SW 960.

Annotation:  156 ALR 120.

 

Persons employed by the executive committee of a trust, acting within the apparent scope of its powers, as agents for the beneficiaries, are not precluded from recovering their commission from the beneficiaries by a limitation in the trust agreement upon the liability of the beneficiaries, where such persons had no notice of such limitation, Case v McConnell, 5 Cal App 2d 688, 44 P2d 414.

In a number of cases in which it has been stated generally that shareholders were not liable for the debts of the trust where the trust instrument contained provisions exempting them from liability, there was no reference to the question of notice of such provisions on the part of the creditor.  It appears in these cases, however, that the shareholders were not vested with any power of control over the trustees or the trust business.  See for instance, Betts v Hackathorn, 159 Ark 311, 252 SW 602, 31 ALR 847; Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871; Henry G. Taussig Co. v Poindexter, 224 Mo App 580, 30 SW2d 635; Byrnes v Chase Nat. Bank, 225 App Div 102, 232 NYS 224 affd 251 NY 551, 168 NE 423; Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273 .Annotation: 156 ALR 121.

 

1.  In Texas, it is held that mere notice on the part of a person dealing with a business trust of provisions of the trust instrument

purporting to exempt the shareholders from personal liability does not preclude him from recovering against shareholders, kin the absence of an agreement on his part to that effect. Thompson v Schmitt, 115 Tex 53, 274 SW 554, followed Victor Ref. Co. v City Nat. Bank, 115 Tex 71, 274 SW 561;  Sessums v Citizens’  Nat. Bank (Tex Civ App) 72 SW2d 403.  However, even in this jurisdiction the circumstances under which a creditor deals with the trustees,  with notice of such a provision of the trust instrument, may give rise to an implied agreement that the shareholders shall not be liable. See Dayle L. Smith Oil Co. v Continental Supply Co. (Tex Civ App) 268 SW 489.  Annotation: 156 ALR 126,127.

 

2.  Farmers & M. Nat. Bank v Anderson, 216 Iowa 988, 250 NW 244; McCarthy v Parker, 243 Mass 465, 138 NE 8; Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493; Roberts v Aberdeen-Southern Pines Syndicate 198 NC 381, 151 SE 865, 71 ALR 885.


Annotation:
156 ALR 124,125.

 

3. McCarthy v Parker, 243 Mass 465, 138 NE 8.

 

4.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

5.  Dunning v Gibbs, 213 Ky 81, 280 SW 483.

 

6.  Roberts v Aberdeen-Southern Pines Syndicate 198 NC 381, 151 SE 865

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§ 39                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

same persons, constructive notice imputed to a creditor of the trust instrument purporting to exempt the shareholders and the trustees form personal liability and to bind only the trust estate for the obligations of the trust was held to be unavailing to exempt the shareholders-trustees from personal liability, in the absence of a contract to that effect.7

 

§ 39. —Sufficiency of notice.

A mere reference to the declaration of trust or a recital that the contract is made by the trustees pursuant thereto  has been held to be sufficient to charge the contracting party with notice of a provision of the declaration purporting to exempt the shareholders from personal liability.8  The statement by an officer of the trust, at the time of entering into a contract on behalf of the trust, that the organization was not a corporation and that he “thought” it was a partnership, has been held to be sufficient to put the other contracting party upon inquiry as to the nature of the organization and the relationship of the members thereof.9  However, the fact that the president of the creditor bank with was one of the organizers of the trust has been held not to charge the bank with notice of limitations in the trust instrument upon the personal liability of the shareholders.10

The question whether persons dealing with a business trust are charged with notice of trust instrument stipulations relieving shareholders of personal liability by reason of recordation of the trust instrument is discussed elsewhere.11

 

§ 40.— Contractual limitations, recital, and reference.

Generally, and even in a jurisdiction holding ineffectual a mere provision of a trust instrument purporting to exempt shareholders from personal liability for the debts of the trust, it is competent for the trustees and person dealing with them to stipulate for the exemption of the shareholders from liability.  Where the creditor agrees that the shareholders shall not be personally liable, no recovery can be had against them.12  Such an agreement is valid and binding, and violates no public policy.13  And a statute describing the manner of the formation of limited partnerships does not invalidate such an agreement.14

 

7.  Enochs & Flowers, Ltd. v Roell, 170 Miss 44, 154 So 299.

 

8.  Where a note executed by trustees recited that the undertaking was by the trustee as such under a certain declaration of trust, and not otherwise, and the declaration of trust exempted the individual shareholders from liability on any contract or undertaking of the trustee, it has been held immaterial, as regards the liability of shareholders on the note, whether or not the plaintiff examined the declaration of trust or knew of its contents, since the provision in the note required him to do so or to take the hazard of not doing it.  Bank of Topeka v Eaton (CC) 100 F 8 affd (CA1) 107 F 1003, cert den 183 US 697, 46 L ed 395, 22 S Ct 933.

 

9.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

10.  Ing v Liberty Nat. Bank, 216 Ky 467, 287 SW 960.

 

11.  § 16, supra.

 

12.  Farmers’ State Bank & T. Co. v German

Home Refinery (Tex Com App) 3 SW2d 65;  Victor Ref. Co. v City Nat. Bank, 115 Tex 71, 274 SW 561.

 

Annotation: 156 ALR 127, 128.

 

13.  Shelton v Montoya Oil & Gas Co. (Tex Com App) 292 SW 165, wherein the shareholders in question were also trustees.

 

However, in a jurisdiction which treats business trusts as partnerships, a provision of a contract of employment, by which the employee of the trust instrument exempting the shareholders from liability and agreed that for all debts or damages he would look only to the property and assets of the trust, was held to be within the rule prohibiting contacts purporting to exempt a master’s liability to his servant for negligence, and hence against public policy and void.  Fisheries Co. v McCoy (Tex Civ App) 202 SW 343.

 

14.  Industrial Lumber Co. v Texas Pine Land Asso. 31 Tex Civ App 375, 72 SW 875, wherein the court said:   “The statute merely

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It is not necessary, to exempt the shareholders from liability, that the agreement to this effect be expressly stated.  The agreement and understanding to this effect may be “implied in fact” from the circumstances.15  And parol evidence is admissible to show an agreement or understanding between the contracting parties that shareholders shall not be personally liable on an obligation executed by the officers of the trust.16

In other jurisdictions, a mere reference in a contract to the trust instrument has been held sufficient to exempt shareholders from personal liability on the contract, where the trust instrument contained a provision to the effect that the shareholders should not be liable.17

 

D. Rights and Liabilities Inter Se

 

§ 41. Generally.

Where only the rights of shareholders and trustees among themselves are involved, the court will, as far as possible, give effect to the provisions of the trust instrument.18   As  between  the  parties  to  the  trust  instrument,  a  provision therein  exempting  the  shareholders  from  personal  liability  is  valid   and binding.19   Such  a  provisions  is  binding  upon  the  shareholders,  who  are  charged with knowledge thereof,20 and the same is true s between the shareholders and an officer1 or trustee2 of such a trust.  The trustees cannot, for their own benefit

confers a power.  It does not limit or destroy any common-law right.  We are aware of no rule either of law or public policy which forbids the making of such a contract.

 

15.  Farmers State Bank  & T. Co. v Gorman Home Refinery (Tex Com App) 3 SW2d 65; Shelton v Montoya Oil & Gas Co. (Tex Com App) 292 SW 165 (where creditor first sought assurances of personal liability on part of shareholders and trustees, and when refused, accepted a note of the truss secured by stock certificates containing stipulation against personal liability);  McVey v United Timber & Kaolin Asso. (Tex Civ App) 270 SW 572 (where creditor was attorney who had prepared the trust instrument and hence was familiar with  clauses stipulating against personal liability of trustees and shareholders);  Dayle L. Smith Oil Co. v Continental Supply Co. (Tex Civ App) 268 SW 489 (wherein creditor made sale in reliance on apparent financial status and prospects of the trust rather than in belief shareholders would be individually liable).

Annotation: 156 ALR 128.

 

16.  Shelton v Montoya Oil & Gas Co. (Tex Com App) 292 SW 165;  George v Hall (Tex Civ App) 262 SW 174.

 

17.  Bank of Topeka v Eaton (CC) 100 F 8 affd (CA1) 107 F 1003, cert den 183 US 697, 46 L ed 395, 22 S Ct 933.

Annotation: 156 ALR 129.

 

Shareholders are not liable on a note executed by the trustees, purporting to exempt them from liability and referring to a trust instrument containing a provision that the sharers should not be liable, where they have

no power of control.  Levy v Nellis, 284 Ill App 228, 1 NE2d 251.

 

18.  Hossack v Ottawa Development Asso. 244 Ill 274, 91 NE 439.

 

19.  Barnett v Cisco Bkg. Co. (Tex Civ App) 253 SW 339.

It is competent for the parties to the trust instrument to contract as to their liability inter se.  State ex rel. Great American Home Sav. Inst. v Lee, 288 Mo 679, 233 SW 20.

 

20.  Hardee v Adams Oil Asso. (Tex Com App) 254 SW 602.

Persons becoming shareholders in a business trust on the faith of a guaranty executed in the name of the trust by a shareholder have been held to e bound by the provision of the bylaws of the trust exempting shareholders from personal liability. Burton v Ross (Tex Com App) 292 SW 207.

However, one who excepted stock in the trust in part payment for merchandise sold by him to the trust is not precluded,as a shareholder, from holding other shareholders liable for the debt,  by provisions of the trust instrument purporting to exempt shareholders from personal liability, on the theory that at the time the debt was created the creditor was himself a shareholder in the trust  where, in fact, such creditor had no knowledge of the contents of the declaration of trust. was himself a shareholder in the trust, Feldman v Scay (Tex Civ App) 291 SW 350.

 

1.  Oden v Bone (Tex Civ App) 263 SW 640, holding that the manager of the trust could not recover against the shareholders on a note held by the manager for a loan made to the trust.

 

2. Since shareholders are bound by the pro-

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§ 42                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

or protection, assert the liability of shareholders, where such liability results from the failure of the trustees to perform their duty to insert in a contract made by them a provision exempting the shareholders from liability.3

It has been indicated that where the trust is treated as a partnership, the claim of one shareholder against the others, as partners, can be asserted only in an accounting preceding,4  and that until there  has been an accounting and settlement of the partnership affairs, a shareholder cannot recover against other shareholders on a contract between the former and the trust, especially where the trust instrument expressly exempts shareholders from personal liability.5

Where the organization is, in legal contemplation, a partnership, the several shareholders sustain to each other a fiduciary relationship, which is violated by the acts of one shareholder in making a secret profit form a transaction which is ostensibly between a third person and the trust.6   And in a case involving a trust of this character, it was held that three corporations, which owned the majority of the shares of the trust, could not, against the objection of the minority shareholders, authorize at a shareholders meeting held pursuant to the trust instrument the sale and conveyance of all the trust property to such majority shareholders.7  However, there is authority for the view that the shareholders of a business trust do not bear any contractual or fiduciary relationship among themselves.8  Also, it is competent for the trust instrument to provide against any fiduciary relationship as between shareholders.9

 

§ 42. Contributions..

Where  the  shareholders  of  a  business  trust  are  personally  liable  for  the debts of the  trust,  one of  them  who  has been  required  to  pay  such  a  debt  may enforce  contribution  from  the other  shareholders.10    The   estate of  a deceased shareholder  has  been  held  for  contribution on account  of  a  debt  incurred  and  paid  after  his  death.11    It  would  appear,  however,  that  the liability  of  shareholders  to contribute  is  only for  that  proportion  of  the  debt represented by  their  proportionate  interest  in  the  trust.12    And   where  contribution  is  sought  for  a judgment paid by a shareholder  in another state, it has been held

visions of the trust instrument, and are charged with notice thereof, there can be no recovery by them against the trustees individually, o a promissory note executed by them on behalf of the trust, where the trust instrument expressly exempts the trustees, as shareholder, from personal liability. George v Hall (Tex Civ App) 262 SW 174.

 

3.  Barnett v Cisco Bkg. Co. (Tex Civ App) 253 SW 339.

 

4.  Brodage v Greenwood (Tex Civ App) 261 SW 453.

 

5.  Hardee v Adams Oil Asso. (Tex Com App) 254 SW 602.

 

6.  Howe v Chmielinski, 237 Mass 532, 130 NE 56.

 

7.  Flint v Codman, 247 Mass 463, 142 NE 256.

 

8.  Krensky v De Swarte, 335 Ill App 435, 82 NE2d 168

9.  Krensky v De Swarte,supra, holding that in the absence of fraud, a certificate holder may deal with the trust, and is not required to account to other certificate holders for a profit made in the course of such dealing.

 

10.  Phillips v Blatchford, 137 Mass 510;  Whitman v Porter, 107 Mass 522.

 

Annotation: 156 ALR 135.

 

11.  Phillips v Blatchford, 137 Mass 510 (under a provision of the trust instrument that the decease of a member should not dissolve the trust nor entitle his representative to take an accounting or other action in court against the trust or the trustees, and that such representatives should simply succeed to the right of the deceased to the shares, subject to the declaration of trust).

 

12.  Carl v Shore (Tex Com App) 299 SW 860, corrected and reh den (Tex Com App) 4 SW2d 965

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that shareholders who were not parties to that action are not concluded thereby.13

The right to contribution may, of course, be affected by equities among the shareholders themselves.  If their liability resulted from the personal fault or neglect of the shareholder seeking contribution, the other shareholders cannot be compelled to contribute.  Thus, where the liability of a shareholder for a debt of the trust results from his failure to insert in a contract executed by him on  behalf of the trust a provision exempting the shareholders from personal liability, as required by the trust instrument, he is not entitled to contribution form the other shareholders.14

 

V. TRUSTEES, OFFICERS, AND AGENTS

 

A. In General

 

§ 43. Generally; eligibility.

Generally speaking, and in the absence of statutory restrictions, any person may be a trustee of an express trust who is capable of confidence, of holding real and personal property, and of executing the trust.15    Subject to the limitations placed upon its powers by its own charter or by statute, a corporation may hold property in trust and may act as trustee of a business trust.16

The ownership of shares in the business trust does not disqualify one from becoming a trustee.17   Indeed, some business trust instruments expressly provide that the trustees may own shares.18   However, this rule is subject to the general principle that a sole beneficiary cannot be the sole trustee; and it has been held that where all  of the shareholders in a business trust are trustees and all the trustees are shareholders, so that the two groups are composed of identical persons, there can be no valid trust.19  however, this defect or disability is cured by the subsequent acquisition of shares by persons other than trustees.20

 

§ 44. Status.1

In the typical Massachusetts  or  business  trust,  title  to  the property is held by trustees,  and the business and property of the concern are managed by them

13.  Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

14.  Mims v Stephens County-Ranger Oil Co. (Tex Civ App) 268 SW 1014.

 

15. See Trusts (1st ed §§ 115 et seq.).

 

16.  Hossack v Ottawa Development Asso. 244 Ill 274, 91 NE 439 (nonprofit corporation).

Annotation: 156 ALR 137.

 

In some instances banks have been named trustees.  See James Stewart & Co. v National Shawmut Bank (CA1) 69 F2d 694, cert den 294 US 722, 79 L ed 1254, 55 S Ct 549;  (Massachusetts);  Baker v Stern, 194 Wis 233, 216 NW 147, 58 ALR 462 (trust company).

 

17. Commercial Casualty Ins. Co. v Pearce, 320 Ill App 221, 50 NE2d 434; Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493; Henry G. Tausig Co. v Poindexter, 224 Mo App 580, 30 SW2d 635.

18.  See Rhode Island Hospital Trust Co. v Copeland, 39 RI 193, 98 A 273 .

Practice Aids,— 3 Am Jur Legal Forms 3:1, 3:73.

 

19.  Enochs & Flowers, Ltd. v Roell, 170 Miss 44, 154 So 299.

In such situation, the legal and equitable come together in the same persons which generally terminates a trust. See Trusts (1st ed §§ 88).

 

20.  Henry G. Tausig Co. v Poindexter, 224 Mo App 580, 30 SW2d 635.

 

Practice Aids,— Provision of trust instrument as to titles of trustees. 3 Am Jur Legal Forms 3:4.

 

—Trust instrument provision negativing partnership relation. 3 Am Jur Legal Forms 3:4, 3:12.

 

—Denial that defendant is trustee of business trust. 203 Am Jur Pl & Pr Forms 20:792.

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§ 45                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

for the benefit of the shareholders.2  In making contracts for the trust estate in conducting its business, and in holding and managing its property, the trustees act as principals and not as agents or representatives of the shareholders.3

The fact that the individuals having charge of the management of the business and property of the trust are designated “managers” does not prevent their being treated as trustees,4 nor does the mere use of the term “trustees” necessarily fix the legal status of the persons to whom it is applied as trustees, as distinguished from partner.5

 

§ 45. Designation or election; term of office.

The instruments creating business trusts usually name the original trustees, fix their term of office, and provide for the manner in which their successors shall be appointed or elected.  In some instances it is provided that the trustees shall hold office for life and that upon the death of a trustee the survivors shall succeed to his title and duties.  Often the surviving trustees or the shareholders are given the power to fill vacancies in the office of trustee.  And many trust instruments limit the term of the trustees and provide for periodic elections of trustees.6

Where the trustees and the shareholders are given concurrent power to appoint trustees to fill vacancies, the exercise of the power by either group deprives the other group of the power to make an appointment for that particular vacancy.7  In such case, the appointment is deemed to take place at the time when they designate a successor, and not at the time when the appointee qualifies by formal acceptance of the office.8

A court of equity has jurisdiction to entertain a suit to confirm the title of a duly elected or appointed trustee and to compel the cotrustees to recognize the legality of the plaintiff’s claim to that office.9

 

§ 46.  Compensation.

Instruments  creating  business  trusts  usually  make  provision  for  the compensation of the trustees,10  in which case the rights of the trustees with respect to

2.  §§ 1, 3, supra; §§ 55, infra.

 

3.  Loring v United States (DC Mass) 80 F Supp 781;  Palmer v Taylor, 168 Ark 127, 269 SW 996; Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485;  Dolben v Gleason, 292 Mass 511, 198 NE 762;Darling v Buddy, 318 Mo 784,1 SW2d 163, 58 ALR 493.

 

Annotation: 156 ALR 136.

 

“Contracts with regard to the rights and property affected by trusts are the contracts of the trustee.  He, in  person, is liable upon them.  He is not acting as representative or agent of another.  He is acting for himself, but with fiduciary obligations to others.”  Larson v Sylvester, 282 Mass 352, 185 NE 44.

Being himself a principal, the trustee has no principal.   Taylor v Davis, 110 US 330, 28 L ed 163, 4 S Ct 147.

Unlike a corporation director who, if he acts apart from the board,   may function as an officer or agent of the corporation, a trustee of a business trust acts in the single capacity of principal in performing the usual duties of a trustee.  Loring v United States (DC Mass) 80 F Supp 781.

4.  Byrnes v Chase Nat. Bank, 225 App Div 102, 232 NYS 224 affd 251 NY 551, 168 NE 423.

In some trusts, however, the trustee merely holds the legal title to the trust property, and managers, designated in the trust instrument, carry on the affairs of the trust.  Beilin v Krenn & Dato, 350 Ill 284, 183 NE 330.

 

5.  Continental Supply Co. v Adams (Tex Civ App) 272 SW 325.

 

6.  Annotation: 156 ALR 138.

Practice Aids,— Provision of trust instrument as to number, election, and term of office of trustees. 3 Am Jur Legal Forms 3:1.

 

7.  Lambach v Anderson, 228 Iowa 1173, 293 NW 505.

 

8.  Lambach v Anderson, supra.

 

9.  Lambach v Anderson, supra.

 

10.  Practice Aids,  3 Am Jur Legal Forms 3:1, 3:27-3:31.

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their own compensation are governed by the terms of the trust instrument.11  A provision in a trust instrument for the allowance of a certain percentage of the profits of the trust business as compensation to the trustee does not disqualify him from acting as trustee.12  And under a trust instrument authorizing the trustees to receive such compensation for their services as they deem reasonable it is not improper for them to pay themselves a reasonable commission on shares of the trust sold by them.13  However, a provision of the trust instrument entitling the trustees to compensation from the trust estate does not give them a lien in receivership proceedings for the value of their services superior to that of a mortgage on trust property executed by them.14

 

In the absence of a provision in the trust instrument fixing the compensation of the trustee of a business trust, he is entitled to reasonable compensation for his services,15 and it has been held that an agreement will be implied to pay him a reasonable compensation out of the trust funds for services rendered by him to the trust.16  What amounts to reasonable compensation depends, of course, upon all the circumstances,17  and the fact that trustees or managers are also beneficiaries does not effect their claim for services.18

The compensation of trustees of a business trust who are performing the usual duties of such trustees has been held not subject to social security contributions, because the trustees cannot be deemed employees.19

 

§ 47. Right to reimbursement or indemnity.

The  trust  instrument  may  specifically  provide  as  to  the  expenses  and reimbursement  of  the  trustees of  a business  trust.     And even in the absence of such  a  provision,   the general principle of trusts,   that  a  trustee is ordinarily

 

11.  Todd v Ford, 92 Colo 392, 24 P2d 173.

 

In Mitchell v Ormond, 282 Mass 107, 184 NE 471, a provision of the trust instrument fixing the salary of the trustee was held to have been abrogated by an amendment of the declaration trust increasing the number of trustees and radically changing their duties.

 

12.  Walker v Close, 98 Fla 1103, 125 So 521, reh den 98 Fla 1125, 126 So 289.  See Beltz v Griggs, 137 Kan 429, 20 P2d 510.

Annotation: 156 ALR 141.

 

A limitation of salaries to a certain percent of all moneys received by the trustees has been held to refer to gross income and not net income.  Dunbar v Redfield, 7 Cal 2d 515, 61 P2d 744.

 

13.Dunbar v Redfield, supra.

 

14.  Warburton v Perkins, 150 Md 304, 133 A 141.

 

15.  Mitchell v Ormond, 282 Mass 107, 184 NE 471. 

 

16.  Woodke v Procknow, 238 Wis 422, 300 NW 173.

A provision of the trust agreement requiring the beneficiaries to pay the costs, charges, and expenses  in  connection  with  the  management  of the  business  has  been  held  to  render  them  liable to  the  managers  of  the  busies  for  a  reasonable compensation  for  their  services,

although there was no specific provision for compensation to the managers.  Trust No. 5522 & Trust No. 5614,   Bellehurst Syndicate v Commissioner of Internal Revenue (CA9) 83 F2d 801 (California).

 

17.  Todd v Ford, 92 Colo 392, 24 P2d 173, holding that compensation received by a trustee was  not unreasonable under the circumstances.

 

Where, starting with nothing, the trustee of a business trust having issued capital of $300.000, in the course of 12 years paid out in dividends about $2,000,000 and accumulated physical assets worth about $500,000, an average compensation paid to the three trustees, respectively, of $1,200, $962, and $812 a month, was held to be reasonable.  Dunbar v Redfield, 7 Cal 2d 515, 61 P2d 744.

 

18.  Trust No. 5522 & Trust No. 5644, Bellehurst Syndicate v Commissioner of Internal Revenue (CA9) 83 F2d 801 (California).

 

19.  Loring v United States (DC Mass) 80 F Supp 781, pointing out that trustees of a business trust are principals, not agents, and, even when acting individually, cannot be regarded as the agents of the trustees as a unit since the requirement of unanimity negatives the right of the unit to control any one trustee.

 

20.  Practice Aids,—3 Am Jur Legal Forms 3:1, 3:32,3:33.

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§ 48                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

entitled to reimbursement from the trust estate for all necessary and reasonable expenditures made in the execution of the trust.1  is applicable to business or Massachusetts trusts.  Where a trustee of such a trust has acted in good faith for the benefit of the trust, he is entitled to indemnify himself for his engagements and liabilities out of the trust estate in his hands, and for this purpose he is he is entitled to a credit for expenditures on his account.2   So too, shareholders suing a trustee for an accounting for profits are chargeable with losses incurred by the trustee in good faith.3  In order, however, to be entitled to reimbursement for expenses incurred on behalf of the trust estate, the trustee must make a definite showing of the amount and of the constituent items of his claim.4

On the other hand, property of the trust estate cannot be used to reimburse trustees for losses or expenses incurred by them, unless they have exercised good faith and common prudence.5  And they are not entitled to contribution or indemnity from the shareholders for a liability incurred by the trustees in violation of the trust instrument.6  Thus, the right of a trustee to reimbursement or indemnity is lost where his personal liability resulted from his failure to insert, as required by the trust instrument, a provision exempting the shareholders and trustees from personal liability.7

 

§ 48.Resignation, removal, or replacement; death or disability.

Although it is said that a trustee who has once accepted and entered upon the execution of an ordinary trust cannot resign or renounce the trust without the consent of the cestui que trust or of the court, the instrument creating the trust may give him the right to resign.  Where the trust instrument gives trustees of a business trust the right to resign at will, they do not violate their duty by entering into a contract to sell their interest in the trust and to resign as trustees so that others may be elected trustees in succession.8

The instrument of trust sometimes contains provisions permitting the removal or replacement of a trustee by the shareholders or other trustees.9    A provision authorizing the removal of trustees by the shareholders is valid and effective,   regardless  of  whether  the organization  is  treated  as  a  trust or a partnership.10    And where the power of removal is conferred,  it seems that a court will not,   in  the absence  of  fraud,   review  the  action of the shareholders in removing  a  trustee at a meeting regularly called.11   Nor may indirect means be taken to circum-

1.  See Trusts (1st ed §§ 514).

 

2.  Taylor v Davis, 110 US 330, 28 L ed 163, 4 S Ct 147;  Austin v Parker, 317 Ill 348, 148 NE 19.

 

3.  Maher v Landreth (CA5) 22 F2d 752.

 

4.  Consolidated American Royalty Corp. v Taliaferro (CA10) 78 F2d 802 (Oklahoma).

 

5.  Austin v Parker, 317 Ill 348, 148 NE 19.

 

6.  McFadden v Leeka, 48 Ohio St 513, 28 NE 874, in which the organization was held to be a partnership.

 

7.  Downey Co.  v  Whistler,  284  Mass  461,  188  NE  243  (coupled  with  failure  to  secure  the   concurrence  of   his   co-trustee);   Mims  v  Stephens  County-Ranger  Oil

Co. (Tex Civ App) 268 SW 1014;  Barnett v Cisco Bkg. Co. (Tex Civ App) 253 SW 339, holding that trustees, as sureties on a note executed for a trust without stipulation against shareholders’ liability, cannot assert primary liability of shareholders.

Annotation: 156 ALR 142.

 

8.  Wright v Webb, 169 Ark 1145, 278 SW 355.

Annotation: 156 ALR 139.

 

9.  Practice Aids,—Trust instrument provisions as to removal and replacement of trustees.  3 Am Jur Legal Forms 3:1, 3:69,3:70.

 

10.  Douglas v Safe Deposit & T. Co. 159 Md 81, 150 A 37.

Annotation: 156 ALR 140.

 

11.  Inderwick v Snell, 2 Macn & G 216, 12 Eng Reprint 83

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 49

 

vent the provisions of the trust instrument governing the manner in which trustees may be removed.12

Where the trust agreement provides that the trustees shall hold office until it becomes vacant on account of death, inability to act, or resignation, the trustees have no power to remove  one of their number so long as he attends the meetings and does not resign.13  But a court of equity has power to remove the trustees of a business trust upon a proper showing of fraud or unfitness, and to appoint other trustees in their stead, even though the trust instrument does not reserve to the shareholders the power to remove trustees.14

It has been said, that the death of a trustee of a business trust ends his interests under the trust agreement.15  Upon the death of the trustee of a business trust, and the failure of the proper persons to appoint his successor, a court of equity may appoint a successor with the same powers and duties as the original trustees, and the trustee thus appointed by the court takes title to the trust property, subject tot he same conditions and equities to which it was subject in the hands of the original trustee.16

 

B. Powers and Functioning

1.  In General

 

§ 49. Generally.

The instrument creating a business trust is to be looked to in determining the powers and duties of the trustees.17  In addition to the statement of the objects and purposes of the trust and the character of its business (which of itself indicates in broad outline the activities and duties of the trustees), such instruments usually contain special provisions defining these powers and duties in various degrees of particularity.18

The powers of trustees of a business trust are limited to those conferred by the trust instrument19 and those necessarily implied therefrom,20 and in order

12.  Thus in Douglas v Safe Deposit & T. Co. 159 Md 81, 150 A 37, a pooling agreement was held to be invalid, insofar as it would permit the owners of a mere majority of the pooled shares, although constituting less than a majority of all the shares, to remove or replace a trustee, in violation of a provision of the trust instrument for such removal or replacement by the owner of a majority of the shares in the trust.

 

13.  Oklahoma Fullers Earth Co, v Evans, 179 Okla 124, 64 P2d 899.

 

14.  Phoenix Oil Co. v McLarren (Tex Civ App) 244 SW 830;  Burnett v Smith (Tex Civ App) 240 SW 1007. (arguendo).

 

15.  Stewart v Solomon, 316 Pa 236, 175 A 498.

 

17.  The trust instrument is the best evidence by which to prove the power of the trustees.  Morriss v Finkelstein (Mo App) 127 SW2d 46.

 

18.  see Rhode Island Hospital Trust Co.

v Copeland, 39 RI 193, 98 A 273;  Reeves v  Powell (Tex Civ App) 267 SW 328.

Annotation: 156 ALR 144.

 

Practice Aids,—Provisions of trust instrument as to powers and functions of trustees.  3 Am Jur Legal Forms 3:1, 3:44-3:79.

—Trust instrument provisions as to sufficiency  of trustees’ notices to shareholders.  3 Am Jur Legal Forms 3:106.

 

19.  Bomeisler v M. Jacobson & Sons Trust (CA1 mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61 (Massachusetts).

 

20.  Gutelius v Stanbon (DC) 39 F2d 621 (involving law of Florida; express authority to mortgage carries with it power to sign and deliver obligations of the trust, to secure which the mortgage is given);  Walker v Close, 98 Fla 1103, 125 So 521, reh den 98 Fla 1125, 126 So 289 (power to make contracts for sale of trust lands implied from purposes of trust);  Jesseph v Carroll, 126 Wash 661, 219 P 429 (delegation of formal execution of mortgage securing debt.

 

Practice Aids,—Trust instrument provisions as to implied powers.  3 Am Jur Legal Forms 3:1, 3:47.

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§ 50                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

to bind the trust estate the trustees must act within the scope of the powers thus conferred.1  A person dealing with the trustees of a business trust, knowing them to be such, is bound to ascertain the extent of their power,2 and, having knowledge of their actual authority, cannot rely upon any apparent powers.3

The fact that certain ventures undertaken by the trustees were not successful is no indication that the trustees exceeded their authority therein.14

 

§ 50.Manner of functioning by trustees; unanimous, joint, or individual action.

The  general  rule that  where there are  cotrustees of an ordinary trust,   they  all form but one collective trustees and  must execute the discretionary duties of the office in their joint capacity,5   applies  to  the  trustees  of  a  business  trust,   who constitute a board and must act as a unit,   in  the absence of a provision  to  the  contrary  in  the  trust  instrument.6    It  has  been  held that  the trustees  can act only  as  board  assembled  and  not  through  the  individuals  who  happen  to compose such board,7    unless the trust instrument provides otherwise.8    However,  the  trust  instrument  may  authorize  action  by  a  majority  or  by  a  specified number  of  the trustees.9    And  it  has  been  held  that  the  trustees  may  delegate to  one  of  their  number   certain  duties  vested  by  the  trust instrument  in  the trustees  generally;10   that  the  trustees  may  constitute  one  of  their  number  the president and general manager of the trust,   with power and authority to execute and hypothecate notes;11   and that authorization of a single trustee to enter into a contract,   under a trust instrument providing  that  the majority of three trus-_

1.  Sykes v Parker, 250 Ill App 299;  Westside Oil Co. v McDorman (Tex Civ App) 244 SW 167.

The manager of a business trust is charged with knowledge of the contents of the declaration of trust under which the business is operated. Oden v Bone (Tex Civ App) 263 SW 640.

 

2.  De Witt v Cabanne (CA3) 2 F2d 322;  Downey Co. v Whistler, 284 Mass 461, 188 NE 243;  Horowitz v State Street Trust Co. 283 Mass 53, 186 NE 74.

 

3.  Rand v Farquhar, 226 Mass 91, 115 NE 286.

 

4.  Dunbar v Redfield, 7 Cal 2d 515, 61 P2d 744.

 

5.  See Trusts (1st ed §§ 296).

 

6.  Williard v Campbell Oil Co. 77 Mont 30, 248 P 219.

The trustees are not merely agents who act independently one of another.  They constitute a board and they can act only as a unit in the disposition of any business of the trust which requires the exercise of judgment or discretion.  Gordon Campbell-Kevin Syndicate, 75 Mont 261, 242 P 540.

 

7.  Williard v Campbell Oil Co. 77 Mont 30, 248 P 219., wherein the attempted approval by an individual trustee in another state of a contract made by disqualified trustees was held not to give any validity to the contract.

8.  Under a trust instrument expressly providing that it shall not be necessary for the trustees to assemble formally for the purpose of conducting the affairs of the tusk or exercising their power, they may act and vote by telephone.  Lambach v Anderson, 228 Iowa 1173, 293 NW 505, appointment of trustee to fill vacancy.

 

Practice Aids,—Trust instrument provisions as to meetings of trustees and manner of functioning.  3 Am Jur Legal Forms 3:1, 3:34, 3:36, 3:40.

 

9.  See Horne Lumber Co. v Hopkins, 107 Kan 153, 190 P 601, 10 ALR 879.

Where the trust instrument provides for action by a majority of the three trustees, one trustee,acting alone and without authorization or ratification of the other trustees, cannot bind the trust estate by his contract.  Downey Co. v Whistler, 284 Mass 461, 188 NE 243;  Horowitz v State Street Trust Co. 283 Mass 53, 186 NE 74.

 

10.  Martin v Security Nat. Bank (Tex Civ App) 257 SW 645.

 

11.  Martin v Security Nat. Bank, supra, trust instrument empowered the trustees to deal with and use the trust properties and moneys, to manage and conduct the trust in any manner that they deemed fit, to execute and make all agreements and instruments, and to do anything else properly incident to the trust purpose.

Annotation: 156 ALR 145.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 51

 

tees should rule, may be established or shown indirectly and by the conduct of the parties.12

Under a trust instrument expressly authorizing action by one trustee in connection with certain matters, and providing for action by “the trustees” in other cases, the participation of all the trustees has been held necessary to bind the trust  estate on a contract not relating to a matter on which a single trustee is authorized to act.13  One dealing with a single trustee with knowledge that his authority is limited is bound at his peril to ascertain the extent of the trustee’s authority.14  And a provision of a trust instrument excusing persons dealing with the trustees from the necessity of inquiring into the authority of the latter has been held not to validate a contract made by a single trustee, without some explanation of the failure of the other trustees to join in the contract or an authorization or ratification thereof by them.15

Trust instrument provisions with regard to the officers and agents of the business trust, and the delegation of authority to them or to an executive committee of the trustees, are discussed in the following section.16

 

§ 51.Delegation of powers; appointment of officers and agents.17.

Where the trustees of a business trust are charged with the duty to manage and control the trust business, they cannot divest themselves of that duty.18  Thus, where absolute control and management of the trust property and business is vested in the trustees, it has been held that they cannot appoint a general manager to control the affairs of the trust to the exclusion of the trustees themselves.19  On similar principle, power vested in a designated officer of the trust to make contracts for the sale of trust lands does not authorize him to delegate to another the power to do so.20  Of necessity, however, the trustees may ordinarily delegate ministerial and nondiscretionary duties to others and may employ agents and servants from the performance of acts of this nature.1  Thus, after arranging the terms of a loan the trustees may delegate to an attorney in fact the formal execution of a mortgagee securing the debt.2  In this regard the powers of the  trustees may be broadened by provisions of the trust instrument.3  For example, the trust instrument may authorize the trustees to create a board of directors or an executive committee to exercise certain designated powers of the trustees in the management of the affairs of the trust.4

It has been said that trustees cannot,  without the consent of shareholders,

12.  De Witt v Cabanne (CA3) 2 F2d 322, holding that the question of such authorization of a single trustee is for the jury and not the court.

 

13.  Sykes v Parker, 250 Ill App 299.

 

14.  Rand v Farquhar, 226 Mass 91, 115 NE 286.

 

15.  Horowitz v State Street Trust Co. 283 Mass 53, 186 NE 74.

 

16.  § 51, infra.

 

17.  Practice Aids,—Provisions of trust instrument as to delegation of authority by trustees and as to officers and agents of trust.  3 Am Jur Legal Forms 3:1, 3:3, 3:57, 3:59, 3:60, 3:84, 3:97-3:102.

 

18.  Phoenix Oil Co. v McLarren (Tex Civ App) 244 SW 830.

19.  Phoenix Oil Co. v McLarren, supra, holding that trustees were entitled to mandatory injunction against one whom they had attempted to appoint general manager, requiring the latter to turn over to the trustees the books, money, and other personal property belonging to the trust.

 

20.  See Spotswood v Morris, 12 Idaho 360, 85 P 1094.

 

1.  Byrnes v Chase Nat. Bank, 225 App Div 102, 232 NYS 224 affd 251 NY 551, 168 NE 423.

 

2.  Jesseph v Carroll, 126 Wash 661, 219 P 429.

 

3.  Horgan v Morgan, 233 Mass 381, 124 NE 32.

 

4.  See Peterson v Hopson, 306 Mass 597, 29 NE2d 140, 132 ALR 1.

419

 


 

§ 52                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

appoint agents to represent the latter; however, the shareholders may subsequently ratify or approve an unauthorized appointment of such an agent so as to be bound by his acts.5

 

§ 52.Ratification or acquiescence by trustees.

The trustees may bind the trust by their ratification of an unauthorized act on behalf of the trust.6  Thus, a contract within the authority of the trustees to make may be adopted by the trustees or a majority of them, although it was not properly executed or was made without formal authority,7 and it has been held that the ratification may be by acquiescence and need not be by formal act at a meeting.8  Further, ratification by the other trustees of acts of a single trustee can supply the unanimity required by the trust instrument of the acts of the trustees,9  and such ratification may be inferred from knowledge of a course of dealing and failure to object to it.10

 

§ 53.Knowledge or dereliction of trustees as imputable to trust.

The knowledge and inaction of the very trustees whose wrongful acts constitute the basis of a suit by other trustees cannot be relied upon as laches barring such suit.11  Nor do knowledge acquired by shareholders prior to their election as trustees, and their inaction prior to that time, constitute such laches as would preclude them, after their election as trustees, from maintaining an action on behalf of the trust estate.12  And the trust has been held not to be charged with the knowledge of a trustee with respect to an unrecorded mortgage on property sold by him to the trust.13

The right of a trustee to recover as the representative of the shareholders and for their benefit has been held not to be affected by his misconduct or fraud in his individual or private capacity, although his conduct would preclude him from recovering for his own benefit.14

Practice Aids,—Provision authorizing appointment of executive committee.  3 Am Jur Legal Forms 3:72.

 

5.  Hines v United States (CA7) 90 F2d 957, cert den 302 US 756, 82 L ed 584, 58 S Ct 283.

 

6.  National Surety Co. v Anacostia Finance Corp, 58 App DC 207, 26 F2d 985.

 

Annotation: 156 ALR 147.

 

7.  Rand v Farquhar, 226 Mass 91, 115 NE 286.

 

8.  Westside Oil Co. v McDorman (Tex Civ App) 244 SW 167, although the trust instrument contemplated action by the trustees at regular meetings.

 

9.  Bomeisler v M. Jacobson & Sons Trust (CA1 mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61 (Massachusetts);  Cabanne v De Witt (CA3) 10 F2d 504 (New Jersey).

 

10.  Bomeisler v M. Jacobson & Sons Trust (CA1 mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61 (Massachusetts).

 

Although  the rust  instrument  limited  the

powers and duties of the secretary-treasurer and the bylaws required the contract to be executed in the name of the president, vice president, or trustees, the trust was held to be bound by an oil-drilling contract executed by the secretary-treasurer, where it was shown that he acted as the general manager of the trust and that the other trustees knew of that fact and acquiesced therein.  Banner Oil & Gas Co. v Gordon (Tex Civ App) 235 SW 945.

 

11.  Williard v Campbell Oil Co. 77 Mont 30, 248 P 219, wherein the court said:  “The doctrine of laches has no application when the ones upon whom the duty of prosecuting the action devolves were themselves the wrong-doers.”

Annotation: 156 ALR 147.

 

12.  Williard v Campbell Oil Co, supra.

 

13.  Lowman v Guie, 130 Wash 606, 228 P 845, holding based upon general principles of agency.

 

14.  Wichita Royalty Co. v City Nat. Bank, 127 Tex 158, 89 SW2d 394, Modg (Tex Civ App) 74 SW2d 661, reh den 127 Tex 184, 93 SW2d 143

420

 


 

13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 55

 

C. Particular Powers and Functions

 

§ 54. Making contracts and incurring debts. generally.

In the performance of their primary duty to hold and manage the property of the trust, the trustees of a business trust may incur debts and make or ratify contracts15  binding on themselves personally, and instruments creating such trusts sometimes authorize the trustees to bind the trust estate thereon.16

The authority to enter into a particular contract may depend upon a construction of the trust instrument.17  But a provision of the trust agreement prohibiting expenditure of over a certain sum without the approval of the trustees has been held not to be binding on third parties or creditors without notice thereof.18

 

§ 55. Acquisition, administration, and disposition of trust property.

Ownership of the property of the enterprise by the trustees is one of the principal features distinguishing business trusts from partnerships and other forms of organization.19  Indeed, it may well be a prerequisite to the formation of a true business trust.20  In any event, the trustees are generally vested with the legal title to the trust property,1 and in determining the nature and validity of the title to trust property, the trust agreement must be taken into consideration.2

A deed to a trust has been held not to be invalid because the grantee was designated by the name of the trust without naming the trustees, where the trustees were parties to the trust agreement and could thus be identified,3 although an early authority has questioned whether a business trust is such a legal entity as can take a grant of land co nomine.4

The trustees may acquire and hold title to property on behalf of the trust estate, even in a jurisdiction denying the right of the shareholders or trustees to relieve themselves of personal liability for the debts of the trust.5  And the retention by the cestuis que trustent of the power to remove a trustee, to fill vacancies among the trustees, and to direct or control the action of the trustees,

15.  As to ratification or acquiescence, see § 52, supra.

 

16.  California Nat. Bank v El Dorado Lime & Minerals Co. 207 Cal 676, 279 P 775.

 

17.See generally § 15, supra.

A trust instrument empowering the trustees to deal generally in hides has been held to authorize them to enter into future contracts involving hides.  Bomeisler v M. Jacobson & Sons Trust (CA1 mass) 118 F2d 261, cert den 314 US 630, 86 L ed 505, 62 S Ct 61 (Massachusetts).

 

Practice Aids,—Provisions of trust instrument as to making and execution of contracts and documents by trustees.  3 Am Jur Legal Forms 3:8, 3:41, 3:42, 3:75.

 

18.  Stitzinger v Truitt, 81 Cal App 502, 253 P 971

 

19.  See Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561.

 

20.  See  Brown  v  Bedell, 263 NY 177, 188 NE 641,  revg  238 App Div 812, 262 NYS

926, which affd 148 Misc 550, 265 NYS 262, reh den 264 NY 453, 191 NE 510, motion den 264 NY 513, 191 NE 541.

 

1.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485;  Reffon Realty Corp. v Adams Land & Bldg. Co. 128 Md 656, 98 A 199; Morriss v Finkelstein (Mo App) 127 SW2d 46.

Annotation: 156 ALR 150.

 

2.  Hart v Seymour, 147 Ill 598, 35 NE 246.

 

Practice Aids,—Provisions of trust instrument as to title and powers of trustees with regard to trust property.  3 Am Jur Legal Forms 3:1, 3:4, 3:39, 3:44-3:46.

 

3.  Hodgkiss v Northland Petroleum Consolidated, 104 Mont 320, 67 P2d 811.

 

4.  German Land Asso. v Scholler 10 Minn 331, Gil 260.

 

5.  Fitch v United Royalty Co. 143 Kan 486, 55 P2d 409; Beltz v Griggs, 137 Kan 429, 20 P2d 510.

421

 


 

§ 56                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

has been held not to invalidate the title of the trustees, at least where the cestuis que trustent have never exercised such power.6

It has been said that if a business trust has acquired property which the law of the state does not permit such an organization to hold, the matter is the concern of the properly constituted state official and cannot be availed of by one who has conveyed property to the trustees in exchange for shares of the trust.7

Trustees are affected with notice to their predecessors in office regarding defects in title.8

 

§ 56. —Leases and encumbrances.

In the case of an ordinary trust, the power to lease trust property may be implied as a necessary or proper incident to the express powers and duties conferred upon the trustee,9 and there would appear to be no reason why this principle should not be applicable to a business trust.  Instruments creating this type of trust frequently contain provisions expressly authorizing the trustees to lease property of the trust and to obtain property under lease.10  While ordinarily the term of a lease should not extend beyond the limits placed on the duration of the trust,11 it has been held that where the trustees are vested with full power to sell, convey, and lease the trust property, they may lease such property beyond the term limited for the duration of the trust.12

Instruments creating business trusts frequently contain provisions expressly authorizing the trustees to execute mortgages of trust property to secure debts of the trust estate.13  It has been said in a case involving a business trust that a trustee cannot create a lien on the trust estate in favor of a creditor, without express authority in the trust instrument.14  However, under principles applicable to trusts generally, the power to mortgage the trust estate may be implied, in the absence of an express provision to the contrary, where it is reasonable and necessary for the execution of the trust.15  But clearly a trustee has no power to mortgage real property of the trust estate to secure his personal indebtedness growing out of a transaction independent of the trust.16

6.  Hart v Seymour, 147 Ill 598, 35 NE 246.

 

7.  Fitch v United Royalty Co. 143 Kan 486, 55 P2d 409.

 

8.  Bisbee v Mackay, 215 Mass 21, 102 NE 327.

It is doubtful whether trustees would be charged with the knowledge of one of their number who sold property to the trust, of the existence of a mortgagee on the property, since the interests and dealings of such trustee are antagonistic to the interests of the trust.  See Lowman v Guie, 130 Wash 606, 228 P 845.

 

9. See Trusts (1st ed §§ 471).

 

10.  Annotation: 156 ALR 153.

 

While the creation of a trust and the conveyance  of land to trustees for the purpose of a farming and ranching business do not authorize them to execute oil or mining leases, the power to make such leases maybe included, as a separate power of attorney, in the trust instrument. Crabb v Commissioner of Internal revenue (CA5) 119 F2d

772, remanded on reh (CA5) 121 F2d 1015 (Texas).

 

Practice Aids,—Trust instrument authorizing lease of trust property.  3 Am Jur Legal Forms 3:1, 3:44.

 

11.  See Trusts (1st ed §§ 471).

 

12.  Powell v Hammon Consol. Gold Fields, 8 Alaska 153, lease of gold-mining claims for a term of 12 years held valid,although trust was limited to 5 years.

Practice Aids,—Trust instrument authorizing mortgage of trust property.  3 Am Jur Legal Forms 3:1, 3:44, 3:49.

 

14.  Austin v Parker, 317 Ill 348, 148 NE 19.

 

15.  See Trusts (1st ed §§ 478).

 

16. Fourth Nat. Bank v Memorial Park, 181 Okla 571, 75 P2d 887.

422

 


 

13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 58

 

§ 57. —Sales and conveyances.

Generally the trustees of business trusts are given the power to make contracts for the sale of trust lands,17 which need not be conferred in direct or express terms, but may be implied from the purposes of the trust.18  The trustees, in whom titles and  control are vested, can convey a good and marketable title to real property belonging to the trust estate.19  and apparently may sell such property at private sale rather than by public auction.20  However, subsequent purchasers are charged with notice of limitations contained in the trust instrument upon the power of the trustees with respect to the conveyance of trust property.1

Generally, where title to trust real property is vested in the trustees, other officers of the trust cannot sell or convey the property.2  But where contracts for the sale of land are made in the adopted name of the trust,  by the duly designated managers thereof, the contracts are not subject to the objections that the real vendors are the trustees, that they are undisclosed principals, and that hence the contracts are unenforceable.3

Trustees may be compelled to specifically perform a contract for the sale of an interest in trust real estate, by making a conveyance thereof.4

 

§ 58. Making and issuing evidences of indebtedness.

Trustees  of  business  trusts  may,  of  course,  execute  bills  and  notes  binding upon  themselves  personally,  and  are  sometimes  expressly  given  the  power  to execute  such  paper  binding  upon  the  trust  estate.5   Such  power  may  also  be implied  from  the  trust  instrument.  For instance,  a  declaration  of  trust empowering  the  trustees  to  mortgage  trust  property  necessarily carries with  it  the

17.  Westside Oil Co. v McDorman (Tex Civ App) 244 SW 167; And see Reffon Realty Corp. v Adams Land & Bldg. Co. 128 Md 656, 98 A 199.

Annotation: 156 ALR 152.

 

Practice Aids,—Trust instrument authorizing sale or disposition of trust property.  3 Am Jur Legal Forms 3:1, 3:44, 3:46, 3:50.

 

18.  Walker v Close, 98 Fla 1103, 125 So 521, reh den 98 Fla 1125, 126 So 289.

 

19.  Reffon Realty Corp. v Adams Land & Bldg. Co. 128 Md 656, 98 A 199.

 

20.  Asher v Teter, 314 Ill App 200,. 40 NE 2d 803.

 

1.  Page v Natural Gas & Fuel Co. (CS8) 35 F2d 462, holding also that a provision of a trust instrument vesting in the trustee the sole power of alienating and conveying the property of the trust “for value” does not authorize him to donate such property to others, to sacrifice it in a manner contrary to his fiduciary obligation to the beneficiaries of the trust, or to dispose of it otherwise than for their benefit.

 

2.  Ward v. Davis, 5 NY Super Ct (3 sandf) 502 (holding that directors, as distinguished from trustees, had no power to dedicate trust lands to the public);  Willis v Greiner (Tex Civ App) 26

SW 858 (holding that contract entered into by the president and secretary of the trust for the sale of land of the trust was not binding).

Annotation: 156 ALR 152.

 

However, in W. C. Tyrell v Lovell, (Tex Civ App) 27 SW 2d 142, mod on other grounds (Tex Com App) 30 SW2d 301, a sale of trust lands by the general manager of the trust, who was its alter ego and exercised compete authority and control over the trust, was held to be a sale by the trust itself.

 

3. Bellin v Krenn & Dato, 350 Ill 284, 183 NE 330.

 

4.  Westside Oil Co. v McDorman (Tex Civ App) 244 SW 167, holding that specific performance may be required of the trustees although the contract was originally made irregularly and not at any formal meeting of the trustees, where it was subsequently ratified by the trustees.

 

5. Daries v Hart, 244 Iowa 1312, 243 NW 527.

 

Annotation: 156 ALR 150.

 

Practice Aids,—Provisions of trust instrument as to issuance of bills and notes and as to contracts for payment of money.  3 Am Jur Legal Forms 3:1, 3:44, 3:52, 3:76.

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§ 59                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

power to sign and deliver obligations of the trust, to secure which the mortgage is given.6

The failure to comply with a statue requiring that the trust instrument be recorded has been held not to deprive the trustees of the power, conferred upon them by the terms of the trust, to execute promissory notes.7

 

§ 59. Compromise and settlement of claims.

Trust instruments often authorize the trustees to compromise claims or demand of or against the trust estate.  Under a business trust agreement empowering the trustees to compromise any claims, they may compromise and settle claims or actions against the trust based on torts of the trustees from which the trust estate derived a substantial benefit,and may use trust funds in settlement of such claims.8

 

§ 60. Assessments.

Instruments creating business trusts sometimes contain provisions authorizing assessments against shareholders.  A trustee may maintain an action against the members of the trust to recover assessments made by the trustee against the members, where the assessments are reasonable and necessary and were made in accordance with the trust agreement.9  But power vested in the trustees of a business trust to make certain assessments against shareholders and to require them to pay the assessments does not empower the trustees to forfeit stock of a shareholder not paying such an assessment, and such a forfeiture is void in the absence of some authority therefor in the trust instrument.10  In any event, in order to effect a valid forfeiture of share they must comply strictly with the provisions of the trust instrument with respect to notice to the shareholders.11

 

C. Duties and Liabilities

 

1. To the Trust and Shareholders

 

§ 60.  Generally; fiduciary relationship.

The  relationship  between  the  trustees  and  beneficiaries  of  a  business  trust  is comparable  to  the  one  existing  between  the  directors of a  corporation  and  the  corporation itself,  but  is  more  confidential  in  character.12     In  essence  it  is a   fiduciary relationship,  regardless  of  whether  the  organization is  classed  as  a  pure  trust  or  as a  partnership  with  respect  to  the  rights of outsiders,13  and

6.  Gutelius v Stanbon (DC) 39 F2d 621 (involving law of Florida).

 

7.  Gutelius v Stanbon , supra.

 

8.  Alphonzo E. Bell Corp. v Bell View Oil Syndicate, 46 Cal App 2d 684, 446 P2d 786, involving trust instrument authorizing the trustees to develop and operate oil wells, to exercise exclusive management and control of the trust estate, and to employ counsel to prosecute, defend, or settle actions and to compromise or refer to arbitration any claims in favor of or against the trust.

Annotation: 156 ALR 150.

 

9.  Hudson v Outram, 203 Ky 78, 261 SW 847.

Annotation: 156 ALR 131.

 

10.  Durkee v. Stringham, 8 Wis 1.

 

11.  Morris v Metalline Land Co. 164 Pa 326, 30 A 240, later app 166 Pa 351, 31 A 114.

 

12.  Gordon Campbell Petroleum Co. v Gordon Campbell-Kevin Syndicate, 75 Mont 261, 242 P 540.

 

13.  Haskell v Patterson, 165 Ark 65, 262 SW 1002; Culp v Robey (Tex Com App) 299 SW 846, revg (Tex Civ App) 294 SW 647, later app Brown v Robey (Tex Civ App) 27 SW2d 590.

Annotation: 156 ALR 124, 177.

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 61

 

the trustees owe a fundamental duty to act for the promotion of the interests of the shareholders.14  Acts of a trustee contrary to the best interests of the shareholders are not absolutely void, but voidable at the option of the beneficiaries.15

The  fiduciary   relationship  existing  between  the trustees and the beneficiaries  of  a  business  trust  imposes upon the trustees a duty to act for the beneficiaries.   Accordingly,   trustees  must  manage the assets of the trust for the benefit and advantage of  the shareholders, and not with an eye to their own personal advantage or profit.17  A trustee of a  business trust may not profit by any transactions in relation  to the trust estate  at the expense of the beneficiaries,18 nor is he entitled  to derive  any  profit out  of  the trust, except  as  lawful compensation.19  He  has  no right to dispose of,20 or  to  encumber,1 or use,2 trust property for his own  personal   benefit,  nor  may  he  speculate  on  the  possibilities of  property of the trust  at   the  expense  of   the  trust.3   The  trustee  of  a  business  trust  is impliedly prohibited  from  purchasing  on  his  individual  account  property necessary  for  the business  of  the  trust  or  for  carrying out the purposes for which is was organized.4  He  may  not act for strangers adversely to the interests of the trust.5

The principle by which a trustee is disabled from profiting personally at the expense  of  his  trust  does not apply To a transaction by which trustees of a business trust acquire for themselves the share of other shareholders,6   And  trustees  cannot  be compelled  to account for the proceeds realized  from  a sale

An officer of a business trust vested with the sole management and control of its affairs owes to the trust the utmost good faith,  Haines v Bankers’ Petroleum & Ref. Co. (Tex Civ App) 273 SW 940.

 

14.  Page v Natural Gas & Fuel Co. (CS8) 35 F2d 462.

 

Practice Aids,—Provisions of trust instrument as to general duties of trustees.  3 Am Jur Legal Forms 3:80.

 

15.  Siedletz v Griffith, 18 Cal 2d 227, 114 P2d 598.

 

Such an act, being voidable only, may be either affirmed or repudiated by the beneficiary, but a stranger to the relationship between the trustee and the beneficiaries and to the question of title as between them cannot assert the invalidity of the act of a trustee in acquiring property as agent for a third person, Siedletz v Griffith, supra.

 

16.  Beedle v Campbell (CA8) 100 F2d 798, cert den 307 US 631, 83 L ed 1514, 59 S Ct 835 (Missouri).

 

17.  Greer Invest. Co. v Booth (CA10) 62 F2d 321, affg (DC) 52 F2d 857, app dismd in part (CA10) 62 F2d 1072.

 

18.  Winn v Shugart (CA10) 112 F2d 617 (New Mexico).

 

19.  Beedle v Campbell (CA8) 100 F2d 798, cert den 307 US 631, 83 L ed 1514, 59 S Ct 835.

20.  Haskell v Patterson, 165 Ark 65, 262 SW 1002.

 

1.  Fourth Nat. Bank v Memorial Park, 181 Okla 571, 75 P2d 887 (mortgaging trust property to secure trustees personal debt).

 

2.  Wichita Royalty Co. v City Nat. Bank, 127 Tex 158, 89 SW2d 394, Modg (Tex Civ App) 74 SW2d 661, reh den 127 Tex 184, 93 SW2d 143, holding that a bank having actual or constructive notice that the trustee was commingling the funds of the trust with his own account at the bank, and was using the commingled fund for his personal purposes, was liable to the trust for the sums thus misused.

 

3.  Vestal v Moore, 167 Ark 192, 266 SW 948.

 

4.  Wofford v Twin City Brick & Tile Co. 184 Ark 162, 41 SW2d 1079.  To the same effect is Haskell v Patterson, 165 Ark 65, 262 SW 1002.

He cannot elect to make a good bargain for himself, when, by fidelity to his trust, he could make the same bargain for the benefit of the shareholders. Oil Fields Corp. v Dashko, 173 Ark 533, 294 SW 25, cert den 275 US 518, 72 L ed 419, 48 S Ct 85, reh den (US) 72 L ed 1016, 48 S Ct 206.

 

5.  Siedletz v Griffith, 18 Cal 2d 227, 114 P2d 598, stating that the trustee of a trust engaged in the business of mining has no right to locate a mining claim as agent of a third person and for the latter’s benefit.

 

6.  Donnelly v Consolidated Invest. Trust (CA1) 99 F2d 185.

425

 


 

§ 62                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

of their own interests in a business trust, legally sold by them in connection with their agreement to resign as trustees.7

 

§ 62. Care and skill required; liability for negligence or misconduct..

 

Generally, the measure of the care and diligence required of a trustee is such as would be exercised by man of ordinary prudence and skill in the management of his own estate; he is not an insurer.8  These principles apply to the measure of care and skill  required of the trustee of a business trust.9  While ignorance on the part of the trustees of a business trust of the scope of their duties or of the legal requirements connected with their office is no excuse for their failure to discharge their duties with reasonable skill, prudence, and judgment,10 when trustees act according to their best judgment and in good faith, they should be protected though they make some trifling mistake in doubtful matters.11

The trustees of a business trust are liable for losses resulting from their willful breach of trust or diversion of trust funds,12  and for funds of the trust used by them for purposes other than trust purposes,13 and may be liable to an accounting for their improper dealing with trust property.14  However, there is no such liability where the loss to the trust is not due To any fault or negligence on the part of the trustee.15   And it has been held that the  inaction of a trustee does not constitute a breach of his duty to the members or shareholders, where, by the trust instrument, he has no authority to act without the consent of the majority of the shareholders.16  But the failure of trustees to insert in contracts made by them a provision exempting shareholders from personal liability has been said to subject the trustees to liability for any loss sustained by the shareholders as a result thereof.17

An officer of a business trust, vested with the sole management and control of its affairs, is liable to the trust for loss or damage resulting to it from his negligence and fraud.18

Trustees  are  not  estopped  to  maintain  an  action  against  former  trustees, based  on  improper  dealings  by  the  latter  with  trust  property, where there was

7.  Wright v Webb, 169 Ark 1145, 278 SW 355.

 

8.  See Trusts (1st ed §§ 322, 414).

 

9.  Ashley v Winkley, 209 Mass 509, 95 NE 932.

 

10.  Ashley v Winkley, 209 Mass 509, 95 NE 932.

 

11.  Downey Co. v 282 Beacon Street Trust, 292 Mass 175, 197 NE 643.

 

Annotation: 156 ALR 155.

 

12.  Digney v Blanchard, 226 Mass 335, 115 NE 424, holding that a trustee has no authority to erect or repair houses upon land belonging to others, under a provision of the trust instrument authorizing the erection and repair of buildings “upon land belong to” the trust, and the use of trust funds for those purposes constitutes a wrongful diversion thereof.

A former trustee is liable to the present trustees of a business trust for wrongful diversion of trust funds.  Digney v Blanchard, supra.

13.  Wichita Royalty Co. v City Nat. Bank, 127 Tex 158, 89 SW2d 394, Modg (Tex Civ App) 74 SW2d 661, reh den 127 Tex 184, 93 SW2d 143.

 

14.  § 107, infra.

 

15.  Beedle v Campbell (CA8) 100 F2d 798, cert den 307 US 631, 83 L ed 1514, 59 S Ct 835 (Missouri).

 

16.  Hogg v Hogg (CC) 107 F 807, affd (CA2) 154 F 1003.

 

17.  Barnett v Cisco Bkg. Co. (Tex Civ App) 253 SW 339.

 

18.  Haines v Bankers’ Petroleum & Ref. Co. (Tex Civ App) 273 SW 940, holding also that such an officer cannot escape liability to the trust for the consequences of his negligence and fraud, even if he organization is treated as a partnership, on the ground that there must be an accounting among the members of the partnership, or on the ground that there must be an accounting among the members of the a partnership, or on the ground that the trust instrument exempted the shareholders from personal liability.

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nothing of any nature to show either knowledge of or assent to the acts of the defendants.19

 

§ 63.  Trustee dealing individually with trust or shareholders.

While transactions between the trustee of a business trust and the beneficiaries are not prohibited, and sometimes are expressly authorized by trust instruments,20 such transactions are subject to close scrutiny and courts of equity will set them aside on slight grounds.1  In his dealings with the beneficiaries, the trustee is held to the highest degree of candor and frankness.  He must not only be strictly truthful in all his representations, but must not remain silent concerning any matter of which he has knowledge that would throw light upon the trust estate.2

The manager of a business trust, in making  a loan to the trust, is charged with knowledge of the provisions of the trust instrument.3

A deed of trust executed in good faith by trustees to secure the payment of a loan for the benefit of the trust, negotiated by a part of the trustees on their individual responsibility, is not absolutely void.4

A trustee of a business trust, in the presentation and consideration of his individual claim against the trust estate, cannot vote as a trustee upon the approval of the claim, if his vote is necessary to secure favorable action.5

 

§ 64. —Sale of trustees’ property to trust.

Where  complete  disclosure  is  made to the shareholders, the trustees of a business  trust may  sell to  the trust, for  shares  therein,  property  acquired  by them  prior  to  the  organization  of  the  trust,  even  though  at  the  time the persons  who  later  became  trustees  had  agreed  on  the  organization  of  the  trust and upon the principal provisions of the trust agreement.6   However,  a  trustee is  liable  to  an  accounting  to  the  trust  for  profits  wrongfully  made  by  him  from  a transfer  of  property  to  the  trust,  through  misrepresentations  as

19.  Haskell v Patterson, 165 Ark 65, 262 SW 1002.

 

20.  See Cohen v United States Trust Securities Corp. 314 Mass 152, 40 NE2d 282.

 

1.  Winn v Shugart (CA10) 112 F2d 617 (New Mexico).

 

Annotation: 156 ALR 160.

The acts of trustees of a business trust in purchasing for full value, in the name of a corporation in which they controlled, notes of the trust secured by a mortgage on trust property, after having failed to procure a renewal thereof, were held to constitute a breach of their duty, and the property thus acquired by them was held to be impressed with a constructive trust in favor of the other beneficiaries, on payment by the latter of their portion of the price paid for the property.  Beedle v Campbell (CA8) 100 F2d 798, cert den 307 US 631, 83 L ed 1514, 59 S Ct 835 (Missouri).

 

2.  Winn v Shugart (CA10) 112 F2d 617.

 

3.  Oden v Bone (Tex Civ App) 263 SW 640.

4.  McCallen v Mogul Producing & Ref. Co. (Tex Civ App) 257 SW 918 (at least in the absence of a verified pleading setting up lack of authority in the trustees).

 

5.  Gordon Campbell Petroleum Co. v Gordon Campbell-Kevin Syndicate, 75 Mont 261, 242 P 540, holding that where the trust instrument required that two of the three trustees act in order to bind the trust, action taken by two trustees  in approving a claim submitted by one of the trustees on behalf of the corporation which was merely an alias under which such trustee conducted his private business,against the trust,was invalid, and did not afford the basis of any action on an account stated, based on the approval by such trustees.

To the same effect is Williard v Campbell Oil Co. 77 Mont 30, 248 P 219, involving a contract for the extension of an agreement between the trust and a corporation in which one of the trustees was interested.

 

6.  Dunbar v Redfield, 7 Cal 2d 515, 61 P2d 744.

Annotation: 156 ALR 161.

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to the cost of the property.7  And fraud on the part of the promoters and trustees of a business trust in grossly misrepresenting the value of a lease transferred to the trust in exchange for its stock and cash has been held to be a ground for a suit by shareholders to cancel the transfer of the lease, to rescind their contracts for the purchase of shares, and to recover the price paid for the shares.8

 

§ 65. Rights in property or benefits acquired by trustees.

 

Where a trustee of a business trust acquires a debt or claim against the trust estate, or acquires an outstanding title to trust property, the purchase inures to the benefit for the trust estate. 9  Similarly, any profit made by trustees out of the trust ordinarily inures to the benefit of the beneficiaries.10  Thus, trustees who accept a new lease in substitution for one owned by the trust estate are liable to an accounting to the shareholders for the proceeds realized and wrongfully retained.11

 

Where trustees of a business trust acquire in their own individual names or on their personal account property necessary or appropriate for the business or purposes of the trust, the property  will be treated as being held in trust for the benefit of the shareholders, upon their payment of the purchase price12. And the same principle has been applied to property acquired by the trustees for the benefit of a third person.13   However, the trust has been held to have no right to recover an oil lease which the trustee, in violation of his duty under the trust agreement, took in his own individual name, and transferred to another, as against a bona fide purchaser of the lease for value and without notice of the claim of the trust.14

7.  Vestal v Moore, 167 Ark 192, 266 SW 948.

 

8.  Web v Shea, 149 Ark 406, 232 SW 602.

 

In such a case, the trustee is not entitled to credit for the expense of an improvement erected on the leasehold estate, since, upon the cancellation of the transfer to the trust, the benefit of the improvement will insure to the trustee, to whom The lease reverts. Web v Shea, supra.

 

9.  Where some of the trustees of a business trust purchased in the name of a corporation controlled by them the mortgage notes of the trust, after the failure of the trustees to procure a renewal of the notes, the purchase by such trustees of the trust property upon foreclosure of the mortgage was held to be unpressed with a trust in favor of the other beneficiaries of the trust, and each of the beneficiaries was held to have a right to share in the benefits of the purchase on foreclosure upon payment of his share of the consideration.  Beedle v Campbell (CA8) 100 F2d 798, cert den 307 US 631, 83 L ed 1514, 59 S Ct 835 (Missouri).

 

However, the right of the shareholders to share in the benefits of such a  purchase  depends upon  their  payment  of  their  propor-

tionate share of the purchase price, and the right may be lost by their failure to assert the same in an appropriate proceeding. Beedle v Campbell, supra.

 

10.  Beedle v Campbell, supra.

 

11.  Skinner v Cromwell (CA10) 40 F2d 241, later app (CA10) 62 F2d 432, cert den 289 US 754, 77 L ed 1498, 53 S Ct 785 (Oklahoma).

 

12.  Wofford v Twin City Brick & Tile Co. 184 Ark 162, 41 SW2d 1079;  Haskell v Patterson, 165 Ark 65, 262 SW 1002, followed Oil Fields Corp. v Dashko, 173 Ark 533, 294 SW 25, cert den 275 US 518, 72 L ed 419, 48 S Ct 85, reh den (US) 72 L ed 1016, 48 S Ct 206.

 

Annotation: 156 ALR 159.

 

13.  Siedletz v Griffith, 18 Cal 2d 227, 114 P2d 598 (Arguendo).

 

14.  Oil Fields Corp. v Dashko, 173 Ark 533, 294 SW 25, cert den 275 US 518, 72 L ed 419, 48 S Ct 85, reh den (US) 72 L ed 1016, 48 S Ct 206, wherein it appeared that the trust instrument was recorded in one county, but not in the county where the leased property was situated.

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§ 66. General.

Since the primary function of a business trust is to carry on commercial activity rather than to foster and preserve an estate for the beneficiaries,15  the question of the liability of trustees to third persons occupies a position of more importance in cases involving business trusts than in cases of ordinary trusts.16

The liability of trustees of business trusts to third persons may be affected by statute,17 or by a contractual stipulation exempting the trustees from personal liability on contracts made by them on behalf of the trust.18  Also, it is possible for a creditor, by his own action, to forfeit the right to enforce the personal liability of a trustee of a business trust,19 and creditor may be estopped to assert the individual liability of trustees.20

 

§ 67. Debts and contracts.

The  well-settled  principle,  applicable  to  trusts  generally,  that  a  trustee  is personally  liable  on  obligations  incurred  by  him  as  trustee,1  applies  to business  trust.   In  the  absence  of  a  stipulation  or  agreement  to  the  contrary, the  trustees  of  a  business  trust  are  personally  liable  for  debts  incurred  and on  contracts  made  by  them  on  behalf  of  the  trust.2   The  fact  that  a  person contracts  as  a  trustee  of  a  business  trust  does  not  relive  him  from  personal liability,  nor restrict his liability to the amount of the trust estate, unless he stipu-

15. § 8, supra.

 

16.  Annotation: 156 ALR 162.

 

17.  See Liquid Carbonic Co v Sullivan, 103 Okla 78, 229 P 561, the statute providing that liability to third persons for any acts, omissions, or obligation of the trustees of an express trust shall extend to the whole of the trust estate, but that “no personal liability shall attach to the trustee . .  for any such act, omission or liability.”

 

18. § 69, infra.

 

19.  Wm. Lindeke Land Co. v Kalman, 190 Minn 601, 252 NW 650, 93 ALR 1393, holding that where a landlord, with knowledge that a trustee had resigned, entered into a valid agreement with the other trustees for a reduction of rent without consulting the trustee who had resigned, the lessor had surrendered the lease as to such trustee, and could not recover against him for rents due thereunder.

 

20.  Continental Supply Co. v Robertson, 166 Ark 52, 265 SW 659 (unreasonable delay, by creditor asserting claim,after trustees made a final settlement of the affairs of the trust and disposed of all its assets).

 

1.  See Trusts (1st ed §§ 347).

 

2.  Betts  v  Hackathorn, 159  Ark  311,  252 SW  602,  31  ALR  847  (goods  sold  and delivered  to  the  trust);  Goldwater  v  Oltman, 210  Cal  408,  292  P  624,  71  ALR  871  (in the  absence of  an express or implied agreement with  the  creditor  to  the  contrary);  Slatt

v Thomas, 95 Colo 382, 36 P2d 459 (unless they are specifically exempted from liability in the contract); Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; McClaren v Dawes Electric Sign & Mfg. Co. 86 Ind App 196, 156 NE 584;  Linn v Houston, 123 Kan 409, 255 P 1105; Tebaldi Supply Co.v Macmillan, 292 Mass 384, 198 NE 651; Dolben v Gleason, 292 Mass 511, 198 NE 762;  Byrnes v Chase Nat. Bank, 225 App Div 102, 232 NYS 224 affd 251 NY 551, 168 NE 423;  J. P. Webster & Sons v Utopia Confectionery (Tex Civ App) 254 SW 123.

Annotation: 156 ALR 162.

 

“When a trustee contracts as such, unless he is bound no one is bound, for he has no principal.  The trust estate cannot promise; the contract is therefore the personal undertaking of the trustee.  As a trustee holds the estate, although only with the power and for the purpose of managing it, he is personally bound by the contracts he makes as trustee, even when designating himself as such.  the mere use by the promisor of the name of trustee or any other name of office or employment will not discharge him.” Taylor v Davis, 110 US 330, 28 L ed 163, 4 S Ct 147.

 

In Re Winter, 133 NJ Eq 245, 31 A2d 769, affd 136 NJ Eq 142, 40 A2d 648, the court thus laid down the rule: “A trustee is personally liable on the contracts which he makes as trustee, unless, from the terms of the contract itself, or from the surrounding circumstances it appears to have been the intention of the contracting parties to exempt the trustee from personal liability.”

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lates to that effect.3  Nor does the enactment of a statute providing that a business trust may be sued in an action at law for debts or liabilities incurred by the trustees have the effect of relieving the trustees of their personal liability.4  However, a trustee contracting for the benefit of the trust may avoid individual liability by stipulating that he is not to be personally responsible and that the other party is to look solely to the trust estate.5

Tristees are clearly liable on a contract made by them in their individual capacity,6 or on a contract purportedly made on behalf of the trust, but which was unauthorized.7

 

§ 68. Torts.8

The trustees of a business trust are personally liable for torts committed in conducting the business of the trust.9  The trustees, as such, are liable for personal injuries or death resulting from the negligence of the employees of the trust,10 regardless of whether the injured person is a stranger to the trust11 or an employee.12  However, while trustees may be liable for the torts of the trust as shareholders and partners where they own shares in the trust, it has been held that if the organization is a partnership, and not a true trust, because of the power of control vested in the shareholders, the trustees would be managing agents only, and not partners, and hence would not be liable for the torts of the trust unless they owned shares therein.13

 

§ 69. Agreement with creditors as to immunity or liability of trustees; indication of representative capacity.

The trustees of a business trust may,  by contractual stipulation,  exempt themselves from personal liability on contracts  made  by them on behalf of the trust.14     Such an agreement against personal liability on  a  contract  is

3.  James Stewart & Co. v National Shawmut Bank (CA1) 75 F2d 148 (Massachusetts).

The trustees are personally liable for the debts of the trust, even though the creditor knew of the trust organization and charged the goods for which the debt arose, to the trust in its assumed name.  Connally v Lyons, 82 Tex 664, 18 SW 799.

 

4.  Dolben v Gleason, 292 Mass 511, 198 NE 762;  Tebaldi Supply Co.v Macmillan, 292 Mass 384, 198 NE 651.

 

5.  § 69, infra.

 

6.  Andrews v Horton, 8 Cal App 2d 40, 47 P2d 496 (trustees held individually liable for a fee which they undertook to pay an attorney upon the settlement of an action against them individually).

 

7.  Weissbrodt v H. W. Elmore & Co. 262 Ill App 1.

 

8.  As to the tort liability of the trust estate, see §§ 74 et seq., infra.

 

9.  Sleeper v Park, 232 Mass 292, 122 NE 315;  Fisheries Co. v McCoy (Tex Civ App) 202 SW 343;  Marchulonis v Adams, 97 W Va 517, 125 SE 340 (where the organizations a true trust, as distinguished from a partnership).

Annotation: 156 ALR 164, 165.

 

10.  See Prinz v Lucas, 210 Pa 164, 165.

 

11.  Trustees were held to be liable in damages for personal injuries sustained by a person who was examining a house belonging to the trust with a view of renting it, where the negligence of the trustees caused the injury.Sleeper v Park, 232 Mass 292, 122 NE 315.

The liability of trustees for the negligence of a janitor employed by the trustees in a building owned and operated by the trust, resulting in personal injuries to the plaintiff, was recognized in Falardeau v Boston Art Students’ Asso. 182 Mass 405, 65 NE 797 (arguendo).

 

12.  Fisheries Co. v McCoy (Tex Civ App) 202 SW 343.

 

13.  Marchulonis v Adams, 97 W Va 517, 125 SE 340.

 

14.  Dolben v Gleason, 292 Mass 511, 198 NE 762;  Shelton v Montoya Oil & Gas Co. (Tex Com App) 292 SW 165, affg (Tex Civ App) 272 SW 222 (in which the trustees were also shareholders).  And see Ballentine v Eaton, 297 Mass 389, 8 NE2d 808.

 

Annotation: 156 ALR 165.

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valid, and is not illegal or contrary to public policy,15 and creditors who stipulate against the personal liability of trustees or agree to look solely to the trust estate cannot recover against the trustees in their individual capacity.16  The protection of such an express stipulation will not be denied to the trustees because they failed to execute properly a contract within their authority.17

An agreement against personal liability on the part of the trustees may be inferred where the trust instrument contains a provision exempting the trustees  from liability,18 and intention of the contracting parties to exempt the trustees from personal liability may be established by the surrounding circumstance or by extrinsic evidence, in connection with the contract itself.19  However, the mere fact that, by statute, a person contracting with trustees of a business trust could maintain an action against the trust does not create a presumption that such person accepted the trust rather than the trustee as the party liable.20  Notwithstanding a provision of the trust instrument exempting trustees from personal liability for the debts of the trust, they may assume liability for such debts by agreement with the creditor.1  and it appears that a trustee whose liability is restricted to the trust property may become liable in tort to one who enters into a contract with him on the faith of such property, for the failure to use reasonable care and diligence in safeguarding the property.

15.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485;  Pennsylvania Co. v Wallace, 346 Pa 532, 31 A2d 71, 156 ALR 1; Shelton v Montoya Oil & Gas Co. (Tex Com App) 292 SW 165.

 

16. Taylor v Davis, 110 US 330, 28 L ed 163, 4 S Ct 147; Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871;   Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485; Carr v Leahy, 217 Mass 438, 105 NE 445; Wm. Lindeke Land Co. v Kalman, 190 Minn 601, 252 NW 650, 93 ALR 1393; Pennsylvania Co. v Wallace, 346 Pa 532, 31 A2d 71, 156 ALR 1.

Annotation:  156 ALR 166.

 

A trustee is not liable on a contract made in the name of the trust estate and counting a provision expressly exempting trustees from personal liability and referring to a trust instrument which contains a similar exemption.  Carpenter v Elmer. Sly Co. 109 Cal App 539, 293 P 162.

Where the trust instrument provided that persons dealing with trustees should look only to the property of the trust for their payment and the contract named the trustees as such, “but not individually,” as parties to the contract, and provided that the contractor should look only to the funds and property of the trust for payment, and not to the trustees or stockholders personally, such trustees were held not to be personally liable on the contract.  Rand v Farquhar, 226 Mass 91, 115 NE 286.

 

17.  Rand v Farquhar, supra (contract signed by two rather than tree trustees).

The fact that trustees failed to insert in a promissory note a stipulation exempting the trustees and shareholders of the trust from personal liability, pursuant to the requirement

of the trust agreement  that they insert in every written contract a stipulation to that effect, does not place them in the position of having executed the note without authority so as to render them personally liable on the note, notwithstanding the indication therein of their representative capacity.  Charles Nelson Co. v Morton, 106 Cal App 144, 288 P 845.

 

18.  Pennsylvania Co. v Wallace, 346 Pa 532, 31 A2d 71, 156 ALR 1 (trustee held not liable for deficiency after foreclosure of mortgage on trust property where mortgagee had notice that it was dealing with a Massachusetts trust, and required the trust instrument containing a provision negativing personal liability of the trustees to be recorded as a part of the loan transaction, and the trial court found that the loan was not made on the basis of personal liability of the trustees).

 

19.  Hamilton v Young, 116 Kan 128, 225 P 1045, 35 ALR 496; Wm. Lindeke Land Co. v Kalman, 190 Minn 601, 252 NW 650, 93 ALR 1393; Re Winter, 133 NJ Eq 245, 31 A2d 769, affd 136 NJ Eq 142, 40 A2d 648.

 

Annotation:  156 ALR 168.

 

20.  Larson v Sylvester, 282 Mass 352, 185 NE 44.

 

1.  American Min. & Smelting Co. v Converse, 175 Mass 449, 56 NE 594.

 

2.  James Stewart & Co. v National Shawmut Bank (CA1) 69 F2d 694, cert den 294 US 722, 79 L ed 1254, 55 S Ct 549, holding that a trustee owes to one contracting with the trust a legal duty to exercise due care in properly managing the trust property so as to prevent loss thereof, even though the contract limited the trustee’s liability to trust property only, and the trust instrument

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§ 70                                          BUSINESS TRUSTS                           13 Am Jur 2d

 

Language of the contract indicating that the trustees intend to be bound as trustees, and not individually, is sometimes sufficient to relive the trustees of personal liability.3  In this connection, exemption of the trustee from personal liability has been accomplished by language indicating his representative capacity coupled with an express disclaimer of personal liability,4 or with constructive notice on the part of the other contracting party of provisions of the trust instrument exempting the trustee from personal liability.5  However, in  the case  of an ordinary contract, as distinguished from negotiable instruments, a signature as “trustee”, or a description of  a party to the contract as “trustee,” does not constitute an agreement that the trustee is to be exempted from personal liability or that the contracting party is to look to the trust estate alone for payment, and does not relieve the trustees of liability.6

The liability of fiduciaries, including trustees of business trusts, on bills and notes under the provisions of the Negotiable Instruments law and Uniform Commercial Code as affected by the form of signature or manner in which the authority is executed, and as affected by the lack of authority where that is the case,7 is treated in an earlier article.8

 

§ 70. Trust instrument provisions as to liability of trustee.

A  provision  of  a  trust  instrument  exempting  the  trustees  from  personal liability is  valid  and  not  contrary  to  public  policy.9   However,  such  a  provision  is  not  effective  as  against  a  person  contracting  with  or  extending  credit  to  the  trustees without notice of the provision of the trust instrument.10_

imposed no obligation on the trustee to any but the shareholders.

 

3.  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485 (provision of a contract by trustees of a business trust that it was executed “not individually but as trustees to bind the trust estate”); Levy v Nellis, 284 Ill App 228, 1 NE2d 251 (insertion of the words, “as trustees.” of the trust, a reference to the trust instrument, and the addition of the words, “and not individually”).

Annotation: 156 ALR 169.

Where the trustee clearly indicates in the contract that he executed the same in representative capacity, on behalf of the trust, his liability thereon is not affected by the use of the word “I” in the body of the instrument.  Dunning v Gibbs, 213 Ky 81, 280 SW 483.

 

4.  Shoe & Leather Nat. Bank v Dix, 123 Mass 148.

Extrinsic evidence has been held to be admissible to show the intention of the contracting parties as to the exemption of trustees from personal liability on a contract executed on behalf of the trust, in the trust name, by themselves, with the word “trustees” opposite their names. Re Winter, 133 NJ Eq 245, 31 A2d 769, affd 136 NJ Eq 142, 40 A2d 648.

 

5.  See James Stewart & Co. v National Shawmut Bank (CA1) 75 F2d 148.

 

6.  Taylor v Davis, 110 US 330, 28 L ed

163m 4 S Ct 147;  Austin v Parker, 317 Ill 348, 148 NE 19; Tebaldi Supply Co.v Macmillan, 292 Mass 384, 198 NE 651 (arguendo);  Dolben v Gleason, 292 Mass 511, 198 NE 762.

 

Annotation: 156 ALR 169.

 

The mere fact that a person contracting with the trustee of a business thus knew that the latter was acting as trustee has been held not to give rise to a contract that the contracting party is to look to the trust estate for payment, or that the trustee is not to be personally liable. Larson v Sylvester, 282 Mass 352, 185 NE 44.

 

7.  For general discussion of the authority of trustees of a business trust to make and issue negotiable instruments, see § 58, supra.

 

8.  See  11 Am Jur 2d, Bills and Notes §§ 552 et seq.

 

9.  Carpenter v Elmer R, Sly Co. 109 Cal App 539, 293 P 162;  Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

 

Practice Aids,—Trust instrument provisions as to personal liability or nonliability of trustees..  3 Am Jur Legal Forms 3:1,3:81, 3:84.

 

10.  Dickinson  v Butt  (Ark) 278 SW 19;   Betts  v  Hackathorn,  159 Ark  621, 252 SW 602,  31  ALR  847:   Review  Printing  Stationery  Co.  v  McCoy,  276  Ill  App 580; Linn

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13 Am Jur 2d                                      BUSINESS TRUSTS                                 § 71

 

It has been said that the trustees cannot, in a contract between themselves, such as a declaration of trust, shield themselves from the liability which the law imposes on them for the debts of the trust.11

A provision of the trust instrument making it the duty of the trustees to insert in every written contract a stipulation that neither the trustees nor the cestuis que trust shall be personally liable on the contract, and that persons contracting with the trustees shall look only to the property of the trust for payment, does not relieve the trustees from personal liability on contracts made by them for the benefit of the trust, where the contracts contain no stipulation against such personal liability, and the contracting party had no notice of the provision.12  Such provision has been held to have the effect of merely conferring on the trustees the power or privilege of  releasing themselves from personal liability or of limiting their liability,and consequently they are not exempted from liability unless they insert a stipulation to that effect in the contract in question.13

 

§ 71.  —Effect and sufficiency of notice.

The personal liability of the trustees of a business trust may be limited by provisions to that effect in the declaration of trust, if known and agreed to by all the parties affected.14  And it has been held that persons who deal with such trustees, with notice of a provision of the trust instrument purporting to exempt the trustees from personal liability on account of the debts and contracts of the trust, cannot recover against the trustees individually on such debts or contracts.15

A  person contracting with  a  trustee  of  a  business trust may  be  charged with notice  of  provisions  of  the  declaration  of  trust limiting  or  negativing  personal or  individual  liability  on  the part  of  the  trustee,  although  such  person  has never  actually  seen  the  trust  instrument  and  does  not  have  actual_

v Houston, 123 Kan 409, 255 P 1105;  Walker v Hatfield (Mo App) 17 SW2d 357.

 Annotation: 156 ALR 172.

 

11. Dickinson v Butt (Ark) 278 SW 19.

 

12.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871;  Review Printing Stationery Co. v McCoy, 291 Ill App 524, 10 NE2d 506;  McClaren v Dawes Electric Sign & Mfg. Co. 86 Ind App 196, 156 NE 584;  Dolben v Gleason, 292 Mass 511, 198 NE 762.

Annotation: 156 ALR 173.

 

13.  Review Printing & Stationary Co. v McCoy, 276 Ill App 580.

 

14.  Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871.

Annotation: 156 ALR 174.

 

15.  James Stewart & Co. v National Shawmut Bank (CA1) 75 F2d 148 (Massachusetts).;  State v Thomas, 209 NC 722, 184 SE 529.

Trustees are not individually liable on a contract with one who not only knew of a provision in the trust instrument purporting to exempt the trustees from personal liability, but was one of the organizers of the trust_

and signed the instrument containing this provision.  Dunning v Gibbs, 213 Ky 81, 280 SW 483.

 

Trustees are not individually or personally liable on contracts executed by them on behalf of the trust estate, where, during the negotiation of the contract, the trust instrument, containing a provision that the trustee should not be liable, was exhibited to the representative of the contracting party, and he was informed that the organization was a business trust.  Commercial Casualty Ins. Co. v Pearce, 320 Ill App 221, 50 NE2d 434.

 

A person selling goods to a business trust with full knowledge of the character of the concern and with notice of the provisions of the declaration of trust to the effect that persons contracting with the trustees should look only tot the trust funds or property, and that the trustees and shareholders should not be personally liable therefor, cannot recover therefor against the trustees personally. H. Kramer & Co. v Cummings, 225 Ill App 26.

 

One accepting a check executed by a trustee, with notice of a provision exempting the trustee from personal liability, will be held to have impliedly stipulated that he would look to the trust estate, and not to the trustee, for payment.  O’Connell v Horwich, 284 Ill App 554, 1 NE 2d 231.

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