once to determine whether the trustees and shareholders in the Hope Oil Trust are individually liable for the account sued upon. We will first determine the liability of the trustees.

principal.

A general rule in the law of trusts is that a trustee is a principal and not an agent for the Trust-trustee a cestui que trust. It follows from this rule that the trustee, and not the cestui que trust, is personally responsible for an indebtedness grow

-exemption declarations effect.

ing out of transac

-personal liabil- tions in relation to ity of trustee. the trust estate. The creditor's guaranty is the personal liability of the trustee. We see no reason why the trustees here should be exempt from this general rule. Their declaration exempting them from personal liability cannot prevent individual liability from attaching, as the law fixes the liability of trustees. According to the declaration, they are self-appointed trustees, with absolute authority over the trust business and property. The rule announced above is supported by the decided weight of authority, as will be seen by reference to the list of cases cited on page 46 of Sears on Trust Estates. It was said by the Supreme Court of the United States in the case of Taylor v. Davis (Taylor v. Mayo) 110 U. S. 330, 28 L. ed. 163, 4 Sup. Ct. Rep. 147: "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. . . If a trustee contracting for the benefit of a trust wants to protect himself from individual liability on the contract, he must stipulate that he is not to be

. responsible, but that the other party is to look solely to the trust estate."

The trustees under the terms of the indenture interposed themselves as a shield between the stockholders

and creditors, and for that reason are individually liable.

ers.

We next proceed to a determination of the liability of the shareholdThe declaration not only exempts the shareholders from individual liability in specific terms, but shears them of all control and management of the business. Paragraph 9 of the indenture makes the trustees absolute masters of the property and business. The only right accorded to the holders of certificates of stock is to share in profits or dividends. They are in the attitude of one lending money to a partnership for a share of the profits in lieu of interest. A reading of the trust instrument in its entirety has convinced us that the shareholders are not associated with each other and the trustees for the pur- hareholders. pose of conducting a business in person or through agents for a profit. There is nothing in the instrument showing an intention on the part of the shareholders to enter into a copartnership or an intention on the part of the trustees to co-operate with the shareholders in the conduct of the business. The test, after all, in determining whether a business is a partnership, is to ascertain whether Partnershipthe parties intended

-liability of

test of.

one. Buford v. Lewis, 87 Ark. 417, 112 S. W. 963; Wilson v. Todhunter, 137 Ark. 80, 207 S. W. 221; Mehaffy v. Wilson, 138 Ark. 281, 211 S. W. 148. Under the terms of the instrument the shareholders are cestuis que trust, and the instrument, in so far as they are concerned, creates a pure trust. Common-law trusts are generally recognized and have been upheld by the weight of authority. Williams v. Milton, 215 Mass. 1, 102 N. E. 355; Simson v. Klipstein, 88 N. J. Eq. 229, 102 Atl. 242; Rhode Island Hospital Trust Co. v. Copeland, 39 R. I. 193, 98 Atl. 273; Home Lumber Co. v. Hopkins, 107 Kan. 153, 10 A.L.R. 879, 190 Pac. 601; Wells-Stone Mercantile Co. v. Grover, 7 N. D. 460, 41 L.R.A.

252, 75 N. W. 911; Mayo v. Moritz, 151 Mass. 481, 24 N. E. 1083; Foster v. Boston, 215 Mass. 31, 102 N. E. 359. Appellee insists that this court is committed to the doctrine that immunity from individual liability to shareholders in a business organization can be accomplished in Arkansas through the medium only of limited partnerships and corporations. In support of this contention two Arkansas cases are cited in which the court held the members of the organization liable as partners. Doyle-Kidd Dry Goods Co. v. Kennedy, 154 Ark. 573, 243 S. W. 66; Baker-McGrew Co. v. Union Seed & Fertilizer Co. 125 Ark. 146, 188 S. W. 571. The declaration of trust in each of these cases was quite different from the declaration in the instant case.

as agent.

pany and a pure business trust. In a joint-stock com- Joint-stock company the managers pany-manager are agents for the shareholders. Not so in a business trust. The managers are principals, and the shareholders are cestuis que trust. In the Baker-McGrew Co. Case the indenture provided for shareholders to meet and elect trustees. In this way they were in a position to control and manage the business and property. We have not overlooked the case of Greene County v. Smith, 148 Ark. 33, 228 S. W. 738. In that case the question of the liability of shareholders to creditors or third persons was not involved; the only question involved being one of taxation.

The instrument in the instant case created a pure trust, in so far as appellants P. M. Simms and T. M. Kinser are concerned, and they are immune from individual liability.

The judgment is affirmed as to the trustees, and reversed, and the cause remanded, as to Kinser and Simms, with directions to overrule the demurrer to their answer and to proceed in accordance with this opinion.

b. Capital stock or shares; effect of transferability, 853.

[No later decisions herein.]

c. Provisions limiting liability, 853. d. As affected by rule against perpetuities, 855.

[No later decisions herein.] III. Purpose and legal nature:

a. Purposes for which business
trust may be formed, 856.

b. Legal nature of organization:
1. In general, 856.

2. Under Bankruptcy Act, 859. [No later decisions herein.]

I. Scope.

This annotation is supplemental to annotations on the same subject in

III. b-continued.

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 maintain 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, 866.

7 A.L.R. 612, and 10 A.L.R. 887, to which reference should be made for the earlier cases.

In the following recent cases, the courts, either expressly or impliedly, have recognized the validity-fundamentally, at least-of business trusts of the character under consideration: United States. Hecht v. Malley (1924) - U. S., 68 L. ed., U. S. Adv. p. 510, 44 Sup. Ct. Rep. reversing on other grounds (1922) 281 Fed. 363, which reversed on other grounds (1921) 276 Fed. 830; Simson v. Klipstein (1920) 262 Fed. 823; Weeks v. Sibley (1920) 269 Fed. 155; Rand v. Morse (1923) 289 Fed. 339. Arkansas. Greene County v. Smith (1921) 148 Ark. 33, 228 S. W. 738; BETTS v. HACKATHORN (reported herewith) ante, 847.

Kansas.-Harris v. United States Mexico Oil Co. (1922) 110 Kan. 532, 204 Pac. 754.

Massachusetts. Sleeper v. Park (1919) 232 Mass. 292, 122 N. E. 315; Horgan v. Morgan (1919) 233 Mass. 381, 124 N. E. 32; Adams v. Swig (1920) 234 Mass. 584, 125 N. E. 857; Howe v. Chmielinski (1921) 237 Mass. 532, 130 N. E. 56; Neville v. Gifford (1922) 242 Mass. 124, 136 N. E. 160; McCarthy v. Parker (1923) 243 Mass. 465, 138 N. E. 8; Hull v. Newhall (1923) 244 Mass. 207, 138 N. E. 249;

Dunbar v. Broomfield (1924) -, 142 N. E. 148.

New York.

Bartley v. Andrews (1923) 202 N. Y. Supp. 227. Texas.-Bingham v. Graham (1920) Tex. Civ. App. - 220 S. W. 105; Davis v. Hudgins (1920) Tex. Civ. App., 225 S. W. 73; Wells v. Mackay Teleg.-Cable Co. (1921) Tex. Civ. App. 239 S. W. 1001; Moss v. Republic Supply Co. (1922) - Tex. Civ. App., 240 S. W. 326; Cox v. Lucky Pat. Oil & Gas Asso. (1922) — Tex. - 241 S. W. 105, modifying on other grounds (1921) Tex. Civ. App. -, 230 S. W. 858 (holding that persons buying shares in a mining corporation association organized as a business trust are bound by the articles of association, especially provisions specifically authorizing the trustees to conduct the business and affairs of the firm, which include power to sell the trust properties). And see Banner Oil & Gas Co. v. Gordon (1921) Tex. Civ. App. 235 S. W. 945.

But compare McCamey v. Hollister Oil Co. (1922) Tex. Civ. App. —, 241 S. W. 689, as quoted infra, II. c.

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. Thus, in Weeks v. Sibley (1920) 269 Fed. 155, where a joint-stock association was changed into a business trust for the purpose of avoiding or lessening future tax liability, in holding that such purpose did not affect the validity of the trust, the change apparently being permanent and otherwise in good faith, the court said: "Bearing in mind the rule of construction . . . to the effect that the provisions of the taxing statutes are not to be extended by implication beyond the clear import of the language used, and that they are to be construed most strongly against the government and in favor of the taxpayer, it is the opinion of this court that the right to change the status of an organization, or to dissolve an organization in any legal manner, is not made ineffectual because the motive impelling the change is to reduce or avoid taxation in the

tuture. The right so to do is an incidental right, inseparably connected with an individual's right to own and control his property. It is practically identical with the sale by a citizen of tax-burdened securities and the investment of the proceeds thereof in tax-exempt ones, for the purpose of reducing or avoiding taxation. It is not unnatural that any thoughtful business man take such steps. It is altogether different from tax dodging, the hiding of taxable property, or the doing of some unlawful or illegal thing in order to avoid taxation."

In Washington it has been held that, by virtue of mandatory provisions of the state Constitution, socalled common-law trusts are prohibited from doing business in the state, so that they can have no legal status in its courts. State ex rel. Range v. Hinkle (1923) Wash. 219 Pac. 41. Compare Jesseph v. Carroll (1923) Wash., 219 Pac. 429, wherein the validity of a chattel mortgage executed by the trustee of a common-law business trust as security for a loan was upheld, so that the trust could not successfully attack the validity of a foreclosure sale.

b. Capital stock or shares; effect of transferability.

No later decisions herein. For earlier cases, see annotation in 7 A.L.R. 616.

c. Provisions limiting liability. (Supplementing annotation in 7 A.L.R. 617, and 10 A.L.R. 887.)

In the reported case (BETTS V. HACKATHORN, ante, 847), where the trust vested absolute control in the trustees, and relieved the cestui que trust from liability, it was held that a declaration exempting the trustees from personal liability for obligations. of the trust did not relieve them from the liability which the law fixes upon trustees, so that the trustees were personally liable on such obligations. In reaching this conclusion the court pointed out the distinction between so-called pure trusts, arising from the vesting of absolute control

in the trustees, and other business trusts where the beneficiaries retain control over the trustees and the trust property, and distinguished BakerMcGrew Co. v. Union Seed & Fertilizer Co. (1916) 125 Ark. 146, 188 S. W. 571, wherein it was held without discussion that an unincorporated business association organized "under a scheme known as the 'Massachusetts trust,'" was no more than a partnership, and certainly not a corporation or joint-stock company, upon the ground that in the Baker-McGrew Co. Case the indenture provided for the election of trustees which, it was said, gave the shareholders the control and management of the business and property.

However, where the declaration vests absolute control in the trustees so as to render them personally and individually liable for obligations incurred on behalf of the trust, and gives the cestui que trust the right to share in the profits only, it has been held that the declaration may exempt the beneficiaries from personal liability, and that, where it does so provide, they cannot be held liable, either as partners or as principals, for debts of the enterprise. BETTS V. HACKATHORN (reported herewith). And in Rhode Island Hospital Trust Co. v. Copeland (1916) 39 R. I. 193, 98 Atl. 273, where the declaration of a business trust limited liability to the trust property, and the organization was such as to render it a true trust as distinguished from a partnership, it was held that the holders of the stock were not under personal and individual liability for any of the obligations or indebtedness of the trust association beyond the amount represented by the shares belonging thereto.

But in Texas, in holding that the individual members of an unincorporated association organized as a business trust cannot, by so organizing, relieve themselves of joint and several liability on firm obligations, the court, in Wells v. Mackay Teleg.Cable Co. (1921) Tex. Civ. App. —, 239 S. W. 1001, said: "In late years much fine writing has been used in

describing the beauties of the common-law trust. The development of the doctrine and the extension of the scope of its operation have increased with our ever-increasing business development and expansion, and its usefulness may not be questioned, but it cannot be substituted for statutory methods of limiting the liability of persons associating themselves together for the purpose of conducting a business for profit. The public, in its dealings with such business organizations, has a right to the protection afforded them by our statutes, regulating the formation of corporations. This protection would be greatly lessened if it should be held that, by declaring and recording a declaration of trust, persons can associate themselves together for business purposes, giving their organization all the powers of a corporation and limiting their individual liability, without complying with the statutes. which require proof of the funds or assets of such an association before a charter will be granted it to conduct its business." To the same effect is Nini v. Cravens & C. Co. (1922) Tex. Civ. App. - 253 S. W. 582. And in McCamey v. Hollister Oil Co. (1922) Tex. Civ. App., 241 S. W. 689, where the socalled declaration of trust was held to create not a trust, but a jointstock company with the individual members liable as partners, it was also held that the individual members were personally liable on firm obligations, although the declaration of trust expressly provided against such liability, the contracts creating such obligations not having provided for personal exemption of shareholders from liability, and the Texas. statutes seemingly precluding members of joint-stock associations, etc., avoiding personal liability by provision therefor in the articles of organization. And in the McCamey Case the writer of the majority opinion went so far as to say: "If for any possible reason it can be said that neither a partnership nor a jointstock company was created by the articles of the association in con

troversy, nevertheless the shareholders are liable for the debt sued for under the rules of law applicable to the relation of principal and agent. A partnership or joint-stock company could have been organized for the purpose of transacting the same business that was transacted under the declaration of trust. Manifestly, it would be unjust to visit upon the plaintiff the loss of labor and material furnished by him as a creditor for the benefit of the shareholders in that association, when the debt was contracted for their benefit by persons called trustees and clothed with express authority from the shareholders to incur it; and the injustice of such a result is the basic principle of individual obligation imposed by law upon each member of a partnership or joint-stock company to answer for all the debts of the firm or company. To allow the accomplishment of such an injustice through a resort to the rules of equity by the substitution of a trust agreement for a partnership or joint-stock agreement would be to violate the most vital, fundamental principle of the whole doctrine of equity jurisprudence. The right to create an express trust is subordinate to those fundamental principles, and, if an attempt be made to create an express trust which is obnoxious to those principles, the same must fail, and the relation of partnership, jointstock company, or principal and agent, necessarily arises under the rules of the common law. And this

vice in the declaration of trust in controversy is a further reason why it should be held to create a partnership or a joint-stock company rendering the shareholders liable as partners, if it is otherwise susceptible of that construction, and that, too, in the absence of the statutes relating to unincorporated joint-stock companies. Equity is more just than the law. 1 Pom. Eq. Jur. § 67. In order to reach the ends of justice, it often relieves against the hardships of the rigorous rules of law; but it can never be used as an instrumentality to work an injustice. In this connection atten