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once to determine whether the trus- and creditors, and for that reason tees and shareholders in the Hope are individually liable. Oil Trust are individually liable for We next proceed to a determinathe account sued upon.
We will tion of the liability of the shareholdfirst determine the liability of the ers.
The declaration not only extrustees.
empts the shareholders from indiA general rule in the law of trusts vidual liability in specific terms, but is that a trustee is a principal and shears them of all control and man
not an agent for the agement of the business. ParaTrust-trustee as cestui que trust. It graph 9 of the indenture makes the principal.
follows from this trustees absolute masters of the rule that the trustee, and not the property and business. The only cestui que trust, is personally re- right accorded to the holders of cersponsible for an indebtedness grow- tificates of stock is to share in prof
ing out of transac- its or dividends. They are in the --personal liabil. tions in relation to
attitude of one lending money to a ity of trustee.
the trust estate. partnership for a share of the profThe creditor's guaranty is the per- its in lieu of interest. A reading of sonal liability of the trustee. We see the trust instrument in its entirety no reason why the trustees here
has convinced us that the sharehold should be exempt from this general ers are not associated with each rule. Their declaration exempting other and the trusthem from personal liability cannot tees for the pur- liability of Texemption dec. prevent
prevent individual pose of conducting
from at- a business in person or through
taching, as the law agents for a profit. There is nothfixes the liability of trustees. Ac- ing in the instrument showing an cording to the declaration, they are intention on the part of the shareself-appointed trustees, with abso- holders to enter into a copartnerlute authority over the trust busi- ship or an intention on the part of ness and property. The rule an- the trustees to co-operate with the nounced above is supported by the
shareholders in the conduct of the decided weight of authority, as will business. The test, after all, in debe seen by reference to the list of termining whether a business is a cases cited on page 46 of Sears on partnership, is to Trust Estates. It was said by the ascertain whether PartnershipSupreme Court of the United States the parties intended in the case of Taylor v. Davis (Tay- one. Buford v. Lewis, 87 Ark. 417, lor v. Mayo) 110 U. S. 330, 28 L. ed.
112 S. W. 963; Wilson v. Todhun163, 4 Sup. Ct. Rep. 147: “When
ter, 137 Ark. 80, 207 S. W. 221; Mea trustee contracts as such, unless
haffy v. Wilson, 138 Ark. 281, 211 he is bound no one is bound, for he
S. W. 148. Under the terms of the
instrument the shareholders are ceshas no principal. The trust estate cannot promise; the contract is
tuis que trust, and the instrument, therefore the personal undertaking
in so far as they are concerned, creof the trustee.
ates a pure trust. Common-law If a trustee
trusts are generally recognized and contracting for the benefit of a trust
have been upheld by the weight of wants to protect himself from indi- authority. Williams v. Milton, 215 vidual liability on the contract, he
Mass. 1, 102 N. E. 355 ; Simson v. must stipulate that he is not to be
Klipstein, 88 N. J. Eq. 229, 102 Atl. responsible, but that the oth
242; Rhode Island Hospital Trust er party is to look solely to the trust Co. v. Copeland, 39 R. I. 193, 98 Atl. estate.”
273; Home Lumber Co. v. Hopkins, The trustees under the terms of 107 Kan. 153, 10 A.L.R. 879, 190 the indenture interposed themselves Pac. 601; Wells-Stone Mercantile as a shield between the stockholders Co. v. Grover, 7 N. D. 460, 41 L.R.A.
(159 Ark. 621, 252 8. W. 602.) 252, 75 N. W. 911; Mayo v. Moritz, pany and a pure business trust. In 151 Mass. 481, 24 N. E. 1083; Fos- a joint-stock com
Joint-stock comter v. Boston, 215 Mass. 31, 102 N. pany the managers pany-manager E. 359. Appellee insists that this are agents for the court is committed to the doctrine shareholders. Not so in a business that immunity from individual lia- trust. The managers are princibility to shareholders in a business pals, and the shareholders are cesorganization can be accomplished in tuis que trust. In the Baker-Mc. Arkansas through the medium only Grew Co. Case the indenture providof limited partnerships and corpo- ed for shareholders to meet and rations. In support of this conten- elect trustees. In this way they tion two Arkansas cases are cited in were in a position to control and which the court held the members manage the business and property. of the organization liable as part. We have not overlooked the case of ners. Doyle-Kidd Dry Goods Co. v. Greene County v. Smith, 148 Ark. Kennedy, 154 Ark. 573, 243 S. W. 33, 228 S. W. 738. In that case the 66; Baker-McGrew Co. v. Union question of the liability of shareSeed & Fertilizer Co. 125 Ark. 146, holders to creditors or third persons 188 S. W. 571. The declaration of was not involved; the only question trust in each of these cases was involved being one of taxation. quite different from the declaration The instrument in the instant in the instant case.
case created a pure trust, in so far The question as to whether a as appellants P. M. Simms and T. partnership or strict trust is created M. Kinser are concerned, and they
by an indenture are immune from individual liabilconstruction of must depend on the indenture.
ity. language and provi- The judgment is affirmed as to the sions of the instrument involved in trustees, and reversed, and the each case. In the Doyle-Kidd Dry cause remanded, as to Kinser and Goods Co. Case this court ruled that Simms, with directions to overrule the instrument created a joint-stock the demurrer to their answer and to company. There is a marked dif- proceed in accordance with this ference between a joint-stock com- opinion.
I. Scope, 851.
a. In general, 852.
[No later decisions herein.)
trust may be formed, 856.
1. In general, 856.
2. Under Bankruptcy Act, 859. (No later decisions herein.)
3. For purposes of taxation,
859. IV. Rights of trust creditors, 862. V. Power of officers or shareholders to
sell trust lands, 865. V. [a] [New] Power of trustees to main
tain suit in own name, 865. V. [b] [New) Power of beneficiaries to
maintain suit, 865. V. (c) (New] Right to bring suit in firm
name, 866. V. [d] (New] Defense of suits against
business trusts, 866. VI. Liability of trustees for negligence,
7 A.L.R. 612, and 10 A.L.R. 887, to This annotation is supplemental to which reference should be made for annotations on the same subject in the earlier cases.
- U. S. ,
The scope outlined in 7 A.L.R. 612, Dunbar v. Broomfield (1924) Mass. is followed herein.
142 N. E. 148. For cases in which it has been New York. Bartley v. Andrews determined whether or not “Massa- (1923) 202 N. Y. Supp. 227. chusetts trusts" are within the scope Texas.- Bingham v. Graham (1920) of “Blue Sky Laws,” see annotation Tex. Civ. App. —, 220 S. W. 105; in 24 A.L.R. 529, 530, and Superior Davis v. Hudgins (1920) Tex. Civ. Oil & Ref. Syndicate v. Handley App. 225 S. W. 73; Wells v. Mackay (1921) 99 Or. 146, 195 Pac. 159, and Teleg.-Cable Co. (1921) -- Tex. Civ. State ex rel. Range v. Hinkle (1923) App. —, 239 S. W. 1001; Moss v. ReWash. 219 Pac, 41.
public Supply Co. (1922) -- Tex. Civ.
App. 11. Validity.
240 S. W. 326; Cox v. Lucky
Pat. Oil & Gas Asso. (1922) Tex. a. In general.
241 S. W. 105, modifying on other (Supplementing annotations in 7
grounds (1921) Tex. Civ. App. A.L.R. 613, and 10 A.L.R. 887.)
230 S. W. 858 (holding that persons In the following recent cases, the
buying shares in a mining corporation courts, either expressly or impliedly, association organized as a business have recognized the validity-funda- trust are bound by the articles of mentally, at least-of business trusts association, especially provisions of the character under consideration:
specifically authorizing the trustees United States. Hecht v. Malley to conduct the business and affairs of (1924)
68 L. ed. U. S. the firm, which include power to sell Adv. p. 510, 44 Sup. Ct. Rep.
the trust properties). And see Banreversing on other grounds (1922) ner Oil & Gas Co. v. Gordon (1921) 281 Fed. 363, which reversed on other
Tex. Civ. App. 235 S. W. 945. grounds (1921) 276 Fed. 830; Sim- But compare McCamey v. Hollister Oil son v. Klipstein (1920) 262 Fed. 823; Co. (1922) Tex. Civ. App. 241 Weeks v. Sibley (1920) 269 Fed. 155; S. W. 689, as quoted infra, II. c. Rand v. Morse (1923) 289 Fed. 339. And it has been held that a busi
Arkansas. Greene County ness trust is not rendered illegal beSmith (1921) 148 Ark. 33, 228 S. W. cause of the fact that it was formed 738; BETTS v. HACKATHORN (reported for the express purpose of reducing herewith) ante, 847.
or avoiding taxation. Thus, in Weeks California. McMillan v. Green- v. Sibley (1920) 269 Fed. 155, where amyer (1920) 50 Cal. App. 601, 195 a joint-stock association was changed Pac. 734, on subsequent appeal in
into a business trust for the purpose (1921) 53 Cal. App. 13, 199 Pac. 841. of avoiding or lessening future tax
Indiana, Ridge v. State (1923) liability, in holding that such purpose - Ind. -, 137 N. E. 758 (holding that did not affect the validity of the trust,
common-law trust association is the change apparently being percapable of taking and holding title to manent and otherwise in good faith, property).
the court said: “Bearing in mind the Kansas.-Harris v. United States rule of construction ... to the efMexico Oil Co. (1922) 110 Kan, 532, fect that the provisions of the tax204 Pac. 754.
ing statutes are not to be extended Massachusetts. Sleeper v. Park by implication beyond the clear im(1919) 232 Mass. 292, 122 N. E. 315; port of the language used, and that Horgan v. Morgan (1919) 233 Mass. they are to be construed most strongly 381, 124 N. E. 32; Adams v. Swig against the government and in favor (1920) 234 Mass. 584, 125 N. E. 857; of the taxpayer, it is the opinion of Howe v. Chmielinski (1921) 237 Mass. this court that the right to change 532, 130 N. E. 56; Neville v. Gifford the status of an organization, or to (1922) 242 Mass. 124, 136 N. E. 160; dissolve an organization in any legal McCarthy v. Parker (1923) 243 Mass. manner, is not made ineffectual be465, 138 N. E. 8; Hull v. Newhall cause the motive impelling the change (1923) 244 Mass. 207, 138 N. E. 249; is to reduce or avoid taxation in the
future. The right so to do is an in the trustees, and other business incidental right, inseparably
trusts where the beneficiaries retain nected with an individual's right to control over the trustees and the trust own and control his property. It is property, and distinguished Bakerpractically identical with the sale by McGrew Co. v. Union Seed & Fertilizer a citizen of tax-burdened securities Co. (1916) 125 Ark. 146, 188 S. W. 571, and the investment of the proceeds wherein it was held without discusthereof in tax-exempt ones, for the sion that an unincorporated busipurpose of reducing or avoiding taxa- ness association organized “under a tion. It is not unnatural that any scheme known as the 'Massachusetts thoughtful business man take such trust,'” was no more than a partnersteps. It is altogether different from ship, and certainly not a corporation tax dodging, the hiding of taxable or joint-stock company, upon the property, or the doing of some un- ground that in the Baker-McGrew lawful or illegal thing in order to Co. Case the indenture provided for avoid taxation."
the election of trustees which, it was In Washington it has been held said, gave the shareholders the conthat, by virtue of mandatory provi- trol and management of the business sions of the state Constitution, so
and property. called common-law trusts are pro- However, where the declaration hibited from doing business in the vests absolute control in the trustees state, so that they can have no legal so as to render them personally and status in its courts. State ex rel. individually liable for obligations Range v. Hinkle (1923) Wash. incurred on behalf of the trust, and 219 Pac. 41. Compare Jesseph V. gives the cestui que trust the right Carroll (1923) Wash. 219 Pac. to share in the profits only, it has 429, wherein the validity of a chattel been held that the declaration may mortgage executed by the trustee of exempt the beneficiaries from persona common-law business trust as se- al liability, and that, where it does curity for a loan was upheld, so that so provide, they cannot be held liathe trust could not successfully at- ble, either as partners or as printack the validity of a foreclosure cipals, for debts of the enterprise. sale.
BETTS v. HACKATHORN (reported here
with). And in Rhode Island Hospital b. Capital stock or shares; effect of transferability.
Trust Co. v. Copeland (1916) 39 R. I.
193, 98 Atl. 273, where the declaraNo later decisions herein. For ear
tion of a business trust limited lialier cases, see annotation in 7 A.L.R.
bility to the trust property, and the 616.
organization was such as to render c. Provisions limiting liability. it a true trust as distinguished from (Supplementing annotation in 7 a partnership, it was held that the A.L.R. 617, and 10 A.L.R. 887.)
holders of the stock were not under In the reported case (BETTS v.
personal and individual liability for HACKATHORN, ante, 847), where the
any of the obligations or indebtedness trust vested absolute control in the
of the trust association beyond the trustees, and relieved the cestui que amount represented by the shares betrust from liability, it was held that a longing thereto. declaration exempting the trustees But in Texas, in holding that the from personal liability for obligations individual members of an unincorof the trust did not relieve them from porated association organized as the liability which the law fixes business trust cannot, by so organizupon trustees, so that the trustees ing, relieve themselves of joint and were personally liable on such obliga- several liability on firm obligations, tions. In reaching this conclusion the the court, in Wells v. Mackay Teleg.court pointed out the distinction be- Cable Co. (1921) — Tex. Civ. App. tween so-called pure trusts, arising 239 S. W. 1001, said: “In late years from the vesting of absolute control much fine writing has been used in
describing the beauties of the com- troversy, nevertheless
the sharemon-law trust. The development of holders are liable for the debt sued the doctrine and the extension of the for under the rules of law applicable scope of its operation have increased to the relation of principal and agent. with our ever-increasing business de- A partnership or joint-stock company velopment and expansion, and its could have been organized for the purusefulness may not be questioned, pose of transacting the same busibut it cannot be substituted for statu- ness that was transacted under the tory methods of limiting the liability declaration of trust. Manifestly, it of persons associating themselves would be unjust to visit upon the together for the purpose of conduct- plaintiff the loss of labor and material ing a business for profit. The pub- furnished by him as a creditor for the lic, in its dealings with such busi- benefit of the shareholders in that ness organizations, has a right to the association, when the debt was conprotection afforded them by our stat- tracted for their benefit by persons utes, regulating the formation of called trustees and clothed with excorporations. This protection would press authority from
from the sharebe greatly lessened if it should be held holders to incur it; and the injustice that, by declaring and recording a of such a result is the basic principle declaration of trust, persons can as
of individual obligation imposed by sociate themselves together for busi- law upon each member of a partnerness purposes, giving their organiza- ship joint-stock company to tion all the powers of a corporation answer for all the debts of the firm and limiting their individual liability, or company.
To allow the accomwithout complying with the statutes plishment of such
injustice which require proof of the funds or through a resort to the rules of equity assets of such an association before by the substitution of a trust agreea charter will be granted it to con- ment for a partnership or joint-stock duct its business." To the same ef- agreement would be to violate the fect is Nini v. Cravens & C. Co. most vital, fundamental principle of (1922) Tex. Civ. App. - 253 the whole doctrine of equity jurisS. W. 582. And in McCamey v. prudence. The right to create an Hollister Oil Co. (1922) Tex. Civ.
express trust is subordinate to those App. —, 241 S. W. 689, where the so- fundamental principles, and, if an called declaration of trust was held attempt be made to create an express to create not a trust, but a joint- trust which is obnoxious to those stock company with the individual principles, the same must fail, and members liable as partners, it was the relation of partnership, jointalso held that the individual mem- stock company, or principal and agent, bers were personally liable on firm necessarily arises under the rules of obligations, although the declaration the common law. . . . And this of trust expressly provided against vice in the declaration of trust in such liability, the contracts creating controversy is a further reason why such obligations not having provided it should be held to create a partnerfor personal exemption of share- ship or a joint-stock company renderholders from liability, and the Texas ing the shareholders liable as partstatutes seemingly precluding mem- ners, if it is otherwise susceptible of bers of joint-stock associations, etc., that construction, and that, too, in avoiding personal liability by provi- the absence of the statutes relating sion therefor in the articles of organi- to unincorporated joint-stock comzation. And in the McCamey Case the panies. Equity is more just than the writer of the majority opinion went law. 1 Pom. Eq. Jur. $ 67. In order so far as to say:
"If for any pos- to reach the ends of justice, it often sible reason it can be said that relieves against the hardships of the neither a partnership nor a joint- rigorous rules of law; but it can never stock company was created by the be used as an instrumentality to work articles of the association in con- an injustice. In this connection atten