THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES TRUST ESTATES AS BUSINESS COMPANIES BY JOHN H. SEARS f<* COUNSELORS PUBLISHING COMPANY ST. LOUIS, MISSOURI COPYRIGHT 1912 BY JOHN H. SEARS ALL RIGHTS RESERVED ENTERED AT STATIONERS' HALL LONDON, ENGLAND T Se. To my Mother this book is affectionately dedicated PREFACE This work owes its appearance to the wide inter- est manifested in a booklet by the undersigned entitled " Effective Substitutes for Incorporation". This per- suaded me that bona-fide business had become greatly discontented with corporations as supposed exclusive agencies for the employment of the aggregated capital of numerous investors. One of the most conservative states of our Union upon investigation was ascertained to be applying another idea to the problem, and satis- faction therewith was growing with experience. I thought that, if this idea had passed beyond the experi- mental stage in Massachusetts and was there being developed into larger usefulness, very probably it could be applied elsewhere. My investigation showed, as cases hereinafter prove, that the principal features had been used in other states and our mother country even before their employment in Massachusetts. The book endeavors to plant itself upon those principles of jurisprudence, which have governed Courts of Equity in their enlightened conscience. Therefore there will be found herein no innovation in doctrine, but a mere adaptation of old principles to modern needs. The author considers that, if he may be thought to have presented those principles clearly and marshalled them in logical order, his efforts will achieve their greatest success. Upon this view the work is submitted to the kindly, but discriminating, judgment of the profession. Gratefully I acknowledge many helpful sugges- tions by my brethren in various parts of our country. Particularly do I acknowledge my indebtedness to Judge Needham C. Collier of the St. Louis bar for his assistance throughout the entire preparation of the work. St. Louis, September, 1912. JOHN H. SEARS. TABLE OF CONTENTS. CHAPTER I. EXPLANATORY. (References arc to sections.) The Purpose of this Book 1 Not Advocated as a Method of Escaping Legitimate Responsibilities 2 Difficulties of Corporations as to Changing Statutes . . 2a Distinction as to Trust Estates in Business 2b Personal Responsibility in Corporate and Trust Man- agement 2c Plan of Treatment 3 CHAPTER II. VARIOUS METHODS OF ESTABLISHING A TRUST ESTATE IN BUSINESS. Trust Estate Embarked in Business Created by Wills . . 4 Trust Estate Created by a Single Settlor with Himself and Others as Cestuis Que Trust 5 Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries 6 Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries (Continued) 7 Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries (Continued) 8 Several Persons Originating Trust Estate for Their Proportionate Benefit 9 Trust Estate In Pursuance to Articles of Association for Unincorporated Company 10 Smith v. Anderson Continued Ruling on Appeal. . . 11 Trust Estate In Pursuance to Articles of Association for Unincorporated Company Continued Ameri- can Cases 12 Summary 13 viii TABLE OF CONTENTS. CHAPTER III. THE NATURE OF A TRUST ESTATE. Status of Trust Estate Exemplified by Decisions.... 14 Rule Where Settlor Creates Trust for His Own Benefit 15 Rule Where Settlor Creates Trust for His Own Benefit (Continued) 16 Dry or Passive Trust Distinguished From Active Trust 17 Summary 18 CHAPTER IV. JOINT- SETTLORS CREATING TRUST FOR THEIR ENTIRE BENEFIT. Single Settlor Creating Trust for Benefit of Himself and Another 19 Several Settlors Creating a Dry Trust for Their Own Benefit 20 Several Settlors Creating a Dry Trust for Their Own Benefit (Continued) 21 Settlors Creating Active Trust for Their Exclusive Benefit 22 Settlors Creating Active Trust for Their Exclusive Benefit (Continued) 23 Settlors Creating Active Trust for Their Exclusive Benefit (Continued) 24 Summary 25 CHAPTER V. LIABILITY OF TRUSTEE OF AN ACTIVE TRUST. Independent Status of a Trustee 26 Independent Status of a Trustee (Continued) 27 Rule of Trustees' Personal Liability Stringent 28 Stipulation Effective Against Personal Liability 29 Stipulation Effective Against Personal Liability (Con- tinued) 30 Stipulation Effective Against Personal Liability (Con- tinued) 31 TABLE OF CONTENTS. ix Discussion of Above Ruling 32 Liability of Trustee for Negligence in Management of a Trust Estate 33 Liability of Trustee for Negligence in Management of a Trust Estate (Continued) 34 Liability of Trustee for Negligence in Management of a Trust Estate (Continued) 35 Liability of Trustee for Negligence in Management of a Trust Estate (Continued) 36 Summary 37 CHAPTER VI. TRUSTEE'S RIGHT OF INDEMNITY. Preliminary Observations 38 Trustee's Right of Indemnity 39 Trustee's Right of Indemnity (Continued) 40 Trustee's Right of Indemnity, Where the Indebtedness is in Tort 41 Liability of Trust Estate Through Indemnity, as Shown by American Cases 42 Liability of Trust Estate Through Indemnity, as Shown by American Cases (Continued) 43 Liability of Trust Estate Through Indemnity, as Shown by Other American Cases 44 Summary 45 CHAPTER VII. LIABILITY OF TRUST ESTATE. DIRECTIONS CREATING PRIMARY LIABILITY. Liability of Trust Estate Where Creating Instrument so Provides 46 Liability of Trust Estate Where Creating Instrument so Provides (Continued) 47 Embarking Trust in Trade as Pledging it for Debt ... 48 Special Contract Relieving Trustee From Personal Lia- bility 49 Summary 50 x TABLE OF CONTENTS. CHAPTER VIII. CESTUIS QUE TRUST OF A TRADING TRUST. ENGLISH DECISIONS. Unincorporated Associations 51 English Decisions as to Associations With Transferable Shares 52 English Decisions as to Associations With Transferable Shares (Continued) 53 Summary of Above Cases 54 Transferable Shares in a Trading Trust.' 55 Scope of Opinions in Smith v. Anderson on Appeal .... 56 Smith v. Anderson (Continued) 57 Smith v. Anderson ( Continued) 58 Summary of the Lords Justices' Opinions 59 Construing These Opinions Through Reference to Former Decisions 60 Summary 61 CHAPTER IX. CESTUIS QUE TRUST IN A TRADING TRUST CONTINUED. AMERICAN DECISIONS. Shareholders as Cestuis Que Trust 62 Other Contributors as Cestuis Que Trust 63 Creditors as Cestuis Que Trust 64 Devisees as Cestuis Que Trust 65 Summary 66 CHAPTER X. NONLIABILITY OF CESTUIS QUE TRUST OF A TRADING TRUST. Preliminary 67 Liability of Trustee to Creditors 68 Liability of Trust Estate 69 Nonliability of Devisees, Cestuis Que Trust of a Trad- ing Trust 70 TABLE OF CONTENTS. xi Making Creditors Cestuis Que Trust by Deed of As- signment 71 Review of the English Case Above Alluded to 72 Contributors Other Than Shareholders 73 Nonliability of Cestui for the Contracts of Trustee. . 74 Nonliability of Cestui on Contracts of Trustee (Con- tinued) 75 Nonliability of Cestui Que Trust on Contracts of Trustee (Continued) 76 Nonliability of Cestui Que Trust on Contracts of Trustee (Continued) 77 CHAPTER XI NONLIABILITY OF CESTUIS QUE TRUST OF A TRADING TRUST CONTINUED. Shareholders in a Trading Trust 78 Shareholders in a Trading Trust (Continued) 79 Liability in General Aspect of Shareholders in Un- incorporated Associations 80 Summary 81 CHAPTER XII. RELATION OF SHAREHOLDER TO TRUSTEE. Preliminary 82 Are Shareholders Partners Inter Sese? 83 The Massachusetts View 84 Rights of Cestuis Que Trust Against a Trustee 85 Cestuis Que Trust Represented by Certificates of Shares 86 Theory of Trustee's Responsibility to the Association . . 87 Summary 88 CHAPTER XIII. PERPETUITIES AND RESTRAINTS UPON ALIENATION. Trusts by Settlors for Their Sole Benefit 89 The Nature of Perpetuities 90 xii TABLE OF CONTENTS. Suspension of the Right of Alienation 91 Suspension of Power of Alienation Must be Absolute. 92 No Suspension Where Settlors Are Sole Cestuis 92b Power of Sale With Directions to Reinvest 93 Directions for Accumulation 94 Lawful Period of Suspension of Alienation 95 Provisions for Continuance Beyond Stated Trust Term 96 Rule Where Restraint is Upon Partition 97 Summary . ., 98 CHAPTER XIV. ACTIONS BY AND AGAINST THE TRUSTEES. Trustee of an Active Trust a Principal and not an Agent 99 Necessary Parties Defendant in Actions Against Trustees 100 Trustee Sued Alone Where Instrument Gives Trustee Full Control 101 Trustees as Plaintiffs 102 Trustees Suing in Foreign Jurisdiction 103 Constitutional Right of a Foreign Trustee to Sue in Another State 104 Trustee of Express Trust Distinguished From Statu- tory Trustee 105 Action Where Trustee Merely Binds Trust Estate 106 Actions by Cestuis Que Trust 107 Conclusion , 108 CHAPTER XV. TAXATION. Preliminary 109 Excise Taxes Exemption of Trusts From Federal Corporation Tax 110 Trust Taxable to Trustee or Beneficiary and Not to Both Ill Taxing Resident Beneficiaries of Foreign Trusts 112 Massachusetts Legislation 113 Summary 114 TABLE OF CONTEXTS. xm CHAPTER XVI. TRUSTEES AS MANAGERS. Preliminary 115 Unity of Action by Trustees 116 Provisions for Action by Less Than Full Number. . . . 117 Appointment and Tenure of Trustees 118 Occasion for Appointment of Trustees 119 Fixing Terms for Trustees and Election of Successors 120 Joint and Several Responsibility of Trustees Con- fidence Reposed 121 Acts and Defaults of Co-Trustee 122 Trustee Seeking Direction of Courts 123 Special Importance of Advisory Power as to Trading Trusts 124 Question Must be Substantial and Involve Actual Doubt 125 Effect on Trust Estate of Making Application for Direction 126 Limitation of Corporate Capacity to its Domicile 127 Trust Estate Distinguished from Corporation 128 Constitutional Protection Trust Estates May do Busi- ness in Foreign States and Countries on a Basis of Common Right 129 Distribution of Earnings of a Trust Estate in Business. 130 Trustees' Compensation 131 Trust Instrument Fixing Amount of Compensation. . . . 131a CHAPTER XVII. PROTECTION OF CESTUIS' INTERESTS. Preliminary 132 Status of Stockholders 133 Examination of Books and Papers by Stockholder. . . . 134 Status of Certificate Holders 135 Relation Between Stockholders of a Corporation and its Managers 136 Cases in Which Directors Were Held Liable to Stock- holders 137 Summary 138 xiv TABLE OF CONTENTS. Trustees Selling or Purchasing From or Dealing With the Trust Estate Interposition of Third Parties or "Dummies" 139 Trustee as One of Cestuis 140 Information From Trustees 141 Reports Required by Trust Instrument: Restraints on Right to Information Questioning Motive of In- quiry 142 Using Shares as Collateral Security 143 Meetings of Certificate Holders Receipts, Acquitances and Waivers 144 CHAPTER XVIII. INVIOLABILITY OF TRUST FUND. Preliminary 145 Pursuit by Creditor of Trust Fund 146 Corporate Assets as a Trust Fund 147 Assignments and Preferences by Corporations 148 Trust Estates not Subject to Bankruptcy 149 Unpaid Subscriptions to a Share in a Trust Estate .... 150 Subscription to Corporate Stock Distinguished 151 Conclusion 152 CHAPTER XIX. STIPULATIONS IN INSTRUMENTS ESTABLISHING TRUST ESTATES IN BUSINESS. PRACTICAL EXPERIENCE GENERAL DIREC- TIONS PURPOSES NAME INSURANCE TEMPORARY IN- VESTMENTS. Practical Experience With Trust Estates as Business Companies 153 Summary of Situation as Shown by Experience 154 General Directions in Trust Agreements 155 Unnecessary Detail in Trust Instruments 156 Purposes of Trust Estates in Business 157 Adoption of Name for a Business Trust 158 Stipulations in Trust Instrument as to Trustees' Con- tracts . 159 TABLE OF CONTENTS. XV Insurance Making Trustee Secure Against Personal Loss 1GO Directions as to Acts by Subordinate Agents 161 Temporary Investments by Trustees 162 CHAPTER XX. STIPULATIONS IN INSTRUMENTS ESTABLISHING TRUST ESTATES IN BUSINESS CONTINUED. CAPITAL SHARES PUBLICITY INCUMBRANCES TERMINATION OF TRUST RECORDING. Corporate Capitalization 163 Capitalization of Trusts in Business 164 The Capital of a Trust Estate in Business 165 Interests or Shares in a Trust Estate 166 Preferred Shares in a Trust Estate 167 Publicity of Affairs of a Trust Estate Reports Ac- countings Mortgages by Trustees Amending Trust Agreements Voluntary Termination of Trust Estate Recording Actual and Constructive Notice xvi TABLE OF CONTENTS. APPENDIX OF EXHIBITS. (References are to pages.) Explanation of Exhibits 277-278 Form of Declaration of Trust Establishing a Real Estate Company 279-285 Form of Declaration of Trust Establishing a Holding Company 286-300 Form of Declaration of Trust Establishing a Manufac- turing Company 301-320 Agreement Covering Reorganization from Incorporation to Trusteeship 321-325 Form of Trust Taking over Corporation 326-338 Certificate Without Par Value 339 Plan of the Merchants' Bank by Alexander Hamilton . . 340-347 Form of Indenture Securing the Payment of Notes or Debenture Bonds of a Business Trust 348-368 Form of Minutes of Cestuis' Meeting 369-370 TABLE OF CASES. (The references arc to sections.) A. Ackenman v. Emott 162 Adams v. Nelson 5 Aiello v. Montecalfo 158 Albright v. Albright 117 American Mining & Smelt- ing Co. v. Converse 49 Anthony v. Caswell 111 Ashley v. Winkley 87 Attorney General v. Cuming 117 Augusta v. Kimball ill Aven v. Beckom 28 B. Bacon v. Board of Com- missioners 112 Bailey v. Bailey 95 Bailie v. Carojina Inter- state B. & L. Ass'n. 169 Baldwin Fertilizer Co. v. Thompson 70 Ballou v. Farnum 34 Baltimore v. Stirling 112 Baltimore Appeal Tax Court v. Gill 112 Bank v. McLeod 105 Bank of Augusta v. Earle 127 Bank of Topeka v. Eaton 12, 31, 47, 49, 68, 75, 99, 146, 169, 172 Barbour v. Cummings 141 Barney v. Chittenden 117 Barney v. Saunders 131 Bascom v. Weed 117 Beardsley v. Hotchkiss 92& Bernheimer v. Converse 104 Berry v. Stigall 131 Bingham v. Stewart 28 Biscoe v. State 131o Blackstone National Bank v. Lane 28 Bloom v. National Sav. & Loan Co. 136 Bloom v. Wolf 28 Board of Commissioners v. LaFayette M. & B. R. Co. 136 Board of Commissioners v. Reynolds 136, 137 Bone v. Hays 141 Boon v. Hall 169 Borough of Carlisle v. Marshall 112 Bowker v. Pierce 131fl Bradner Smith & Co. v. Williams 78 Bragaw v. Sup. Lodge K. & L. H. 170 Bramblet v. Commonwealth Land & Lumber Co. 133 Brandon r. Robinson 14 Briggs v. Spaulding 135 Broadway Nat'l. Bank v. Adams 14, 61, 73, 85 Brown v. Spohr 115 Bullard v. Attorney Gen- eral 125 Burwell v. Cawood 115 Burwell v. Mandeville's Excr. 4, 42, 44, 65, 146 Bushong v. Taylor 101 Butterfield v. Beardsley 62 Byrne v. Jones 136, 139 C California Nat'l. Bank v. Kenedy 143 Carlisle v. People's Bank 158 Carpenter v. Danforth 136 Carritt v. Real and Per- sonal Advance Co. 89 Chase v. Ladd 123 Cheatham v. Rowland 101 Christian v. Worsham 169 Citizens' Building Ass'n. v. Coriell 131, 135 Clagett r. Kilbourne 23, 62, 79 Clark v. Carter 123 Clarkson v. Robinson 131o Clopton v. Gholson 44 Coal Company v. Blatch- ford 99 Colburn v. Grant 122 Coleman v. Connolly 116 Comes v. Clark 28 Commonwealth v. People's Five Cent Sav. Bank 111 Connally v. Lyons 48, 99, 101, 157 Converse v. Hamilton 104 XV1I1 TABLE OF CASES. (The references are to sections.) Cottingham v. Equitable B. & L. Ass'n. 169 Cox v. Hickman 7, GO, 71, 72 Crawford v. Gross 62, 73 Crocker v. Rogers 85 Cromey v. Bull 126 Crooke v. County of Kings 95 Cross v. Jackson 12 Crowell v. Jackson 136 Cummings v. People 133 Cunningham v. Pell 107 Curry v. Dorr 36 Curtis v. Smith 103 Cutbush v. Cutbush 42 D. Dartnell, In re. 135 Deaderick v. Cantrell 121 Dias v. Brunnell's Execu- tor 85 Diggs v. Fidelity & Deposit Co. 123, 126 Dillard v. Dillard's Execu- tors 117 Dodge v, Tulleys 99 Donaldson v. Allen 116 Downing v. Marshall 95 Duckworth v. Ocean Steam- ship Co. 117 Dyer v. Riley 122 E. Edmunds, Ex parte 40 Edwards v. Warren Lino- line & Gasoline Works 77 Eliot v. Freeman 83, 110 England v. New York Pub. Co. 158 Erie Railroad v. Pennsyl- vania 111 Eufaula Nat'l. Bank v. Ma- nassas 115 F. Falardeau v. Boston Art Students' Ass'n. 36 Farmers' etc. Bank v. Was- son 136 Farmers' Loan & T. Co. v. Chicago & A. Ry. Co. 99, 129 Farmers' Nat'l. Bank v. . Moran 17 Farnum v. Patch 62 Farrington v. Tennessee 111 Fidelity Ins. T. & S. D. Co. v. Nelson 105 First Nat'l. Bank v. Con- verse 143 Fiske v. Eldridge 28 Flint v. Stone Tracy Co. 110 Fogg -v. Blair 147 Fogg v. Virgin 28 Fonda v. Gibbs 169 Forcheimer v. Stewart 70 Forest of Dean Coal Min- ing Co., In re. 135 Forster v. Fuller Foster v. Friede 115 Frothingham v. Barney 62 G. Gardiner v. Gardiner 130 Garland, Ex parte 40, 42, 44, 48, 69, 146 Garrard v. Hardey 53 German Land Ass'n. v. Scholler 10 Gillett v. Bowen 136 Gleason v. McKay 21 Glenn v. Allison 49 Glenn v. Soule 104 Glenn v. Williams 104 Goodsite v. Lane 112 Grady v. Ibach & ^Co. 102 Great Western Mining & Mnfg. Co. v. Harris Green v. Brooks 141 Green v. Putney 126 Green v. Spicer 14 Grundy v. Drye 118 Guthrie v. Harkness 134 H. Hancox r. Wall 135 Hankey v. Hammond 4 Hardy r. Yarmouth 112 Harrison v. Belden . 85 Harrison v. Owsley 123 Hart v: Darter 123 Hart v. Seymour 12, 24, 62, 92, 120, 157 Hawley v. James 117 Hayes v. Crutcher 28 Hayes et al. v. Mathews 28 Heard v. March 117, 140 Heath v. Erie Ry. Co. 107 Henderson v. Henderson 92 Hewitt v. Green 125 Hewitt v. Phelps 43, 70, 157 TABLE OF CASKS. xix (The references are to sections.) Hills v. Bannister & Fuller 28 Hill v. Peoples 117 Hoadley v. County Com- missioners 21 Hoagland v. Cooper 123 Holdship t 1 . Patterson 14 Hollins v. Brierfield Coal Co. 147 Holmes v. McDonald 107, 135 Holmes v. Walter Q2b Hope v. Brewer 92 H'osch Lumber Co. v. Weeks 116 Howarth z: Angle 104 Howarth v. Lombard 104 Howe v. Morse 20, 62, 32, 171 Hunt v. Perry 112 Hussey z r . Arnold 1, 12, 30, 47, 49, 62, 68, 77, 99, 120 Husted v. Stone 85 Hutchinson v. Ayres 107 Hyde v. Woods 14 I. Iowa & Cal. Land Com- pany v. Hoag 105 J- Jacobs r. McClintock US Jarrett v. Johnson 131a Johns f. Herbert 99 Johns v. Johns 115 Johnson, In re. 39, 43, 70 Johnson v. Gaines Johnson v. Johnson 85 Johnson z>. Leman 49, 78 Jones v. Davis 79 Jones v. Jones 117 Jones v. Walker 42, 44, 65, 70, 146 K. Kerrison r. Stewart 101 King v. Dodd 52 King v. Stowell 106 King r. Townshend 12, 21 King r. Webb 52 Kirkman r. Booth 115 Knapp v. Railroad Co. 99 Kufferman v. McGehee 145 L. Ladd i'. Pigott 131a Lampert r. Haydel 16 Land Credit Co. r. Fermoy 135 Lange v. Royal Highlanders 170 Latrobe v. Mayor 111 Leavitt v. Wolcott 95 Lebeck v. Fort Wayne Bank 101 Lee v. Horton 102 Levy v. Hart 95 Long v. Long 17 Loud v. Winchester 141, 157 Louisville Trust Co. v. Warren 131a Low v. Bouverie , 135, 143 M. Magraw v. Pennock 169 Mallory v. Russell 9, 63, 73, 153 March v. Romare 118 Martin v. Niagara Falls Paper Mnfg. Co. 133 Mason v. Pomeroy 42, 46, 65, 99, 146 Matthews v. Stephenson 46, 157 May v. May 85, 118 Mayo v. Moritz 5, 19, 22, 76, 84, 157 McAllister v. American Hospital Ass'n. 151 McDougald's A d m r. v. Carey 105 McGraw r. Bayard 101 Mcllvaine v. Smith 16 Merchants' Nat'l. Bank v. Wehrmann 62,79, 143 Mersman v. Mersmaii 123 Mexican & So. American Company, Re. 53 Michoud r. Girod 139, 144 Mitchell & Co. r. Whit- lock 29, 33, 49 Moeller v. Poland 141 Monarque v. Monarque 123 Moore r. Universal Ele- vator Co. 133 Morrison r. Manchester 111 Morrow r. Morrow 102 Muscogee Lumber Co. v. Hyer 131 Myers r. Seaberger 112 N. National Bank v. Case 143 Near v. Donnelly 62 New v. Nicoll 49 New York Life Ins. & T. Co. v. Livingston 92fc XX TABLE OF CASES. ( The references are to sections.) Nichols v. Eaton 14 Norton v. Phelps 44, 69, 70, 99 Noyes v. Blakeman 49 O. O'Cain v. O'Cain 124 Oelrichs v. Spain 102 Oliver's Estate 62, 78 Oliver v. Oliver 136, 137 O'Neile v. Ternes 136 O'Neill v. Sup. Council A. L. H. 170 Orr v. Yates 118, 168 Owen v. Delamere 42 Oxley v. Lane 95 P. Pacific Bank v. Windram 15, 73 Packard v. Nye 28 Parmenter v., Barstow 34 Payne v. Bowdrie 171 Pease v. Pease 158 Penn v. Folger 162 Pennington v. Metropolitan Museum of Art 115, 125 People v. North River Sugar Refining Co. 2 People ex rel. Darrow v. Coleman 111, 112 People ex rel. Power v. Rose 158 People ex rel. Winchester v. Coleman 1, 66 Peper -v. Fordyce 99 Perin v. Carey 90 Perrin v. Lepper 135. 141 Philadelphia Trust S. D. & I. Co. v. Philadelphia & R. C. & I. Co. 117 Phillips v. Blatchford 21, 62, 66, 76 Pjtkin v. Pitkin 4, 42, 44, 146 Pittsburg Library Ass'n. v. Mercantile Library Hall Co. 133 Pittsburg Wagon Works' Estate 12, 21, 62, 78 Pope v. Elliott 14 Potter v. Couch 95 Poullain v. Poullain 135 Prinz v. Lucas 46, 78 Purdy v. Lynch 122 P. C. & St. L. Ry Co. v. Schmidt 4 R. Ratcliffe v. Sangston 117 Raybould, In re. 35, 41, 157 Raybould v. Turner 4 Rice v. Barrett 95 Rice v. Lane 145 Rice v. Rockefeller 142 Richardson, Ex parte 42, 44, 146 Rjchardson v. Van Auken 141 Rife r. Geyer 14 Roberts v. Corning 92 Roberts v. Hale 169 Robinson v. Dover 111 Roby v. Smith 99, 129 Rochford r. Hackman 14 Rogers v. Rogers 140, 169 Roger Williams Nat'l. Bank v. Groton Mfg. Co. 28, 49, 68, 78 S. Sanders v. Houston Guano Co. 101 Seaver v. Fitzgerald 90 Shaw v. Paine 119 Shipman v. Rollins 95 Shipp v. Williams 99 Shirk v. LaFayette 99, 129 Shoe & Leather Nat'l. Bank v. Dix 30, 49, 68, 99 Shropshire U. R. & C. Co. v. The Queen 89 Simmons v. Oliver 162 Simpson v. Cook 95 Skinner, Re. 135 Smith v, Anderson 10, 22, 55, 74, 83, 120, 153, 157 Smith v. Ayer 4, 42, 44, 65, 146 Smith v. Hurd 136 Snowdon v. Dales 14 Southworth v. Morgan 151, 168 Spenglar v. Kuhn 116 Spotswood v. Morris 12, 86 State v. Central Savings Bank 111 State v. Matthews 112 State ex rel. v. Standard Oil Co. 2 Sternfels v. Watson 169 Stevenson, In re. 169 Stewart v. Harris 137 Stewart v. Smith 137 Stinson v. Boston 112 TABLE OF CASES. XXI (The references are to sections.) Stone v. Kellogg 134 Stroh v. City of Detroit 112 Strong v. Repide 136 Suarez v. Pumpelly 116 Sutton v. Aiken 17 T. Tabernacle Baptist Church v. Fifth Ave. Baptist Church 171 Taft v. Brewster 28 Taft v. Ward 77 Tappan v. Bailey 77 Taylor t r . Davis 26, 39, 68, 75, 99, 149 Taylor z: Dickinson 117 Thatcher v. Dinsmore 28 Thibert v. Sup. Lodge K. H. 170 Thompson v. Andrews 42, 44 Thorn v. De Breteuil 94, 126, 157 Tillott, Lee v. Wilson, In re. 141 Toronto General Trust Co. v. Chicago, B. & Q. R. Co. 103 Townsend v. Wilson 169 Triseoni v. Winship 136 Turnbull v. Pomeroy 13lo Tyrrell v. Washburn 77 U. Ubhoff v. Brandenburg 117 United States v. Standard Oil Co. of New Jersey 2 United States Trust Com- pany v. Chauncey 92d V. Van Allen v. Assessors 111 Vanderpool v. Loew 90 Van Sandan v. Moore 53 Van Vetchen v. Terry 101 Von Au v. Wagenheimer 136 W. Wakeman v. Dalley 135 Walburn v. Ingilby 53 Walker v. Sharpe 141 Walker v. Wait 86 Walsh v. Goulden 136 Ward v. Davis 12, 78 Ward v. Maryland 129 Warner v. Beers 80 Warner v. Rice 15 Wells-Stone Mercantile Co. v. Grover 8, 43, 60, 64. 71, 73 Western R. Co. v. Xolan 102 Weston v. Barker 85 White v. White 14 Williams v, Boston 84, 86, 113, 153 Williams v. Johnson 84, 86 Williams v. Montgomery 92k William Cameron & Co. v. First Nat'l. Bank 86 Willis v. Braucher 162 Willis v. Greiner 12, 86 Wilder v. Hast 131 Wilson v. Stewart 116 Winslow v. Minn. & P. R. R. Co. 101 Winsor v. Mills 92 Winthrop v. Attorney Gen- eral 116 Wioddrop v. Weed 48, 146, 148, 149, 169 Wood v. Dummer 147 Wright v. Caney River Ry. Co. 33, 46, 64, 75, 157 Wren v. Hoffman 28 Wynne v. Humberston 141 Y. Young v. Snow 89, 91 Z. Zehnbar v. Spillman 101 Zonne v. Minneapolis Syn- dicate 83, 110 CHAPTER I. EXPLANATORY. 1. The purpose of this book. This work is to consider to what extent arrangements may be made, whereby persons, natural or artificial, may transfer legal title in, and control and management of property to another or others for purposes of trade, at the same time not creating the relationship of prin- cipal and agent, though the profits or income are to belong to the transferors. In other words, there is attempted in this book to discuss the attitude, that a trustee under a declaration of trust for the carrying on of a business may sustain to his contracts and acts in the management of such business, the liability generally and specially of the trust estate itself and the liability vel non, out- side of their interest in the trust estate, of the creators or settlors of the trust for whose benefit it is established. Inci- dentally there will be noticed the principles, or such of them as seem germane or illustrative, in trusts for the continuing of businesses previously carried on by testators and where settlors may otherwise have established trusts embarked in trade, where the equitable interests are in third persons. It is, of course, to be conceded, as a general proposition, that, if one is the pro- prietor of a business, his personal liability is behind its acts and contracts, and if two or more are the proprietors there is a joint and several liability, no matter what may be their arrange- ments with each other. Such business is ordinarily carried on by an agent, if not personally conducted, and the acts of the agent are those of the principal, when within the scope or appar- 1 1.] EXPLANATORY. [CHAP. I. ent scope of the agency. Also, it is too well settled to need discussion, that, at law, this personal liability cannot be avoided, where the ultimate owners of a business establish it and provide for its being conducted, unless the title thereto be vested in a corporation, with no statute specifically affixing liability over to the ownership of paid-up stock. It is thought to be well-settled, that a corporation is such a distinct legal entity apart from its shareholders, that it is neces- sary for any law authorizing its creation to declare expressly, that its shareholders are liable personally for its acts and con- tracts, or they will not be so held. This principle was clearly and adequately expressed by Judge Finch of the New York Court of Appeals, 1 as follows : "It is the essential and inherent char- acteristic of a corporation that it alone is liable for its debts, because it alone contracts them, except as that natural and necessary consequence is modified by some explicit command of the statute, which either imposes an express liability upon the corporators in the nature of a penalty, or affirmatively re- tains and preserves what would have been the common-law li- ability of the members from the destruction involved in the corporate creation. In other words, the individual liability of the members, as it would have existed at common-law, is lost by their creation into a corporation, and exists thereafter only by force of the statute * * * so far preventing by the interven- tion of an express command, the total destruction of individual liabilities, which would flow from the inherent effect of the corporate creation." All of this is to the effect, that, though in shareholders exists the right to create directors and limit their term of service and elect others, in their stead, in the way and manner and at the times prescribed, yet those directors are not the agents of those who appoint them, but of a distinct person, when acting within the scope of their agency. iPeople ex rel. Winchester v. Coleman (1892), 133 N. Y. 279 1. c. 284, 31 N. E. 96. 2 CHAP. l] PURPOSES OF THIS BOOK. [ 1. Thus far, and especially in connection with the further fact, that this artificial person is endowed, if not with immortality, at least with a certainty of continued existence in the full vigor of its primal creation, it might be thought, if there is no such "explicit command of the statute," as has been mentioned, it would be an academic discussion to pursue such a course as this volume purposes. Nevertheless, as the corporation is the creature of statute, those who employ it as an agency accept the burdens along with the benefits that are expected. It has only such rights as its creator confers and these may be hedged about in their exercise by such regulations as that creator sees fit to impose. It is sufficient to say, without elaboration, that these rights differ in many respects from those which belong to natural persons, and especially in their being less absolute and more relative. The growing complexity arising out of conditions, both in- trastate and interstate, in the United States has produced and seems likely to continue to produce, a vast amount of legislation particularly regarding corporations. The privilege of corporate organization apparently has come to be considered, either so valuable as to stand the impact of all kinds of regulation, or so defenceless against statutory purpose as to make indulgence in their regulation the sport of legislatures. Therefore, it may not be the cause of wonder, that business and enterprise, de- manding such aggregation of means, as is afforded by the owner- ship of shares of stock in corporations, is seeking other agencies than corporations for their uses. If, as is said by the Supreme Judicial Court of Massachusetts 2 associates interested in a business enterprise may obtain "most of the advantages belonging to corporations, without the author- ity of any legislative act, and with freedom from the restrictions and regulations imposed by law upon corporations," and, if this is true, there at least is presented a choice between association for such a purpose and corporations. 2Hussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. 3 2.] EXPLANATORY. [CHAP. I. This volume, it is hoped, may supply useful suggestion, based upon decided cases, for an intelligent solution of the problem in the choice of a corporate entity, or of a method arising out of a purely contractual relation, for the conduct of business by the use of aggregated capital not belonging to a partnership. 2. Not Advocated as a Method of Escaping Legitimate Responsibilities. The fact that advantages seem to be offered over other methods of business organization should not be taken, however, as evidence that the plan set forth in this book is not consistent with the public interest in matters of business control and regulation. Indeed, it is thought, that the trust relation thus established is the ideal toward which much corpor- ate legislation has striven and will continue to strive, in vain. That combinations in business in a trust form are readily made amenable to what appears to be the public interest is aptly attested by the experience in the United States with the so- called "trusts" in restraint of trade. These at one time consisted of arrangements whereby the title to stock in various prior com- peting corporations were vested in trustees, who controlled the action of the various companies, not through any direct authority, however, to operate the business, but by their votes at corporate meetings. 3 Transferable trustee certificates were issued to the various former stockholders of the corporations. These "trusts" were declared illegal, in the first of the cases just cited, because the controlled corporations were made parties to the agreement, and the act as to them was held to be ultra vires, in that corpor- ations had no right to combine, except in the mode prescribed by statute. In the other case, the corporations were not made parties to the trust instrument, but the court looked beyond the terms of the instrument and the fiction of corporate entity and followed the holding in the New York case, on the ground that the separate entity of corporations would be disregarded in aa instance of this kind, and the act was nevertheless a corporate act and an ultra vires one, and that "the agreement of organi- SPeople v. North River Sugar Refining Co. (1890), 121 N. Y. 582; State ex rel. v. Standard Oil Co. (1892), 49 Ohio St. 137. 4 CHAP. I.] CHANGING STATUTES. [ 2a. zation was in and of itself in restraint of trade and amounted to the creation of an unlawful monopoly." 4 Combines then found a more secure harbor of refuge in the "holding" corpor- ations. 4 They have abandoned the trust form, and the legisla- tion by the Federal and State governments against combination in restraint of trade, commonly called "anti-trust laws," no longer has any particular significance in an exact use of the word. These "anti-trust" laws have been referred to as a recognition by inference, from their terms, of the legality of business trusts, wherein "restraint of trade" is not attempted. 5 However, we are not concerned in this work with the subject of restraint of trade, and only make the above reference in this introduction, as illustrative of the fact that the trust form has not been found to be particularly suited to the evasion of anti- monopoly legislation, and to bring the reader's attention to the fact that such legislation in no way interferes with the embark- ing of trust estates in legitimate businesses, the only kind of business with which this book is concerned. The word "trust" as is perceived, has taken on, in com- mon parlance, an ambiguous meaning, its more modern application having something of sinister import. This book treats the word in its older and better sense and endeavors to show the principles it stands for are not only applicable to pres- ent business needs, but will conduce to placing business on a higher plane. 2a. Difficulties of Corporations as to Changing Statutes. As business expands into new states and countries it finds that the fundamental principles of trade are alike everywhere, with the principal exception, however, that, if such business is clothed in the corporate form, it finds that it is placed under diverse and discordant views as to what its rights and liabilities are. The corporate status is created and regulated by statutes. 4 U. S. v. Standard Oil Co. of New Jersey (1911), 221 U. S. 1, 1. c. 41. ^Francis Lynde Stetson on "The Government and the Corpor- ations" in the Atlantic Monthly for July, 1912. 5 2b.] EXPLANATORY. [CHAP. I. These statutes differ in different localities and at different times in given localities, owing to the experiments of legislators in attempting to bring about various reforms. It is practically impossible for a corporation doing business over a wide territory to have that assurance of its rights which a sound and stable business demands. It must keep constantly on the alert to guard itself against the enactment of new legislation, and must keep counsel constantly at work to ascertain what the meaning of new laws is. It often happens that, as soon as a particular question has been decided by the courts, the law construed has been repealed and a new one put in its place, of which construc- tion must be had at the cost of litigation and uncertainty before its effect will be known. The resistance of corporations to statutory regulations gives rise to a popular belief that corpor- ations are not law abiding bodies, although the corporation may be resting its resistance upon just grounds. The corpor- ation must, in opposing what appears to be destructive legisla- tion, pay the price of an unpopularity which reacts in further legislation or in unfavorable verdicts by juries. In the true sense of the words, therefore, it cannot be said that corporations stand before the law with the same rights as individuals. The indefinite and variable notions entertained according to times and places, and the temperaments of courts, in their appli- cation to corporations, have a detrimental effect upon not only the activities of business itself, but upon the confidence of those who supply the means for new business, namely, the investors. 2b. Distinction as to Trust Estates in Business. It is thought that trust estates embarked in business will not be subject to such uncertainty. They bring to their legal sup- port, a long line of authority based upon broad principles applicable thereto and irrespective of statutory experiment. The moral advantages to all concerned, will, in our opinion, excuse them in the future from a great many statutory restrictions placed upon corporations. Only such parts of the subject as seemed of particular interest to the question in hand have been treated in this book. Accessory problems are fully discussed 6 CHAP. I.] PERSONAL RESPONSIBILITY. [ 2c. in treatises on Equity Jurisprudence and its branches in a man- ner highly satisfactory to the legal profession. It is hoped this work will stimulate return to a wider use of those books and the adaptation of their principles to modern conditions ; that they will be glad of a surcease from the literalism of ill-drawn statutes, unending annotation of cases and ceaseless inpour of text-books which are mere instances in statutory construction, like a tessellated floor on a foundation of sand. 2c. Personal Responsibility in Corporate and Trust Manage- ment. The impersonal character of a corporation as a merely le- gal entity has rendered easy the shifting of all kinds of respons- ibility. It has encouraged the erection of a being which pur- chases from a promoter at an inflated price, under pretense of its being an independent purchasing power. It has merged companies independent of each other and natural rivals, so as to control their activities through what is known as a holding company, while all are held out to the world and their several stockholders as acting independently. So much, indeed, has this practice prevailed, that directors are mere figure heads so far as the policy of each corporation is concerned, as they are governed by others who may not even possess the qualifications required by statute to become a director. This method neces- sarily derrogates from all theory of trust and confidence sup- posed to be reposed and makes of charters themselves hollow shams reflecting a sort of immorality upon corporate business. Out of this situation has grown a tendency in legislation to deal with directors and other officers of corporations in a strictly personal way, both civilly and criminally. The trust estate sys- tem hereinafter expounded should relieve business of much of the odium that corporate abuse has created, for at least, it may be thought that the personality of a trustee in equity can hardly be lost in the estate he manages as that of a director has been, in the corporation he represents. As old as the trustee idea is that tendency has not yet appeared with it. But of these and other considerations, it seems best, that the 7 3.] EXPLANATORY. [CHAP. I. reader should be informed, as they are unfolded in treatment, preliminary questions being first disposed of. 3. Plan of Treatment. To secure a comprehensive grasp of the precise nature of the plan of business organization here under consideration, the reader is advised to examine one or more of the "Agreements and Declarations of Trust," set forth in the back of this book under the title of "Exhibits," before taking up the text proper beginning with Chapter II. The arrangement and order of Chapters is designed to supply answers somewhat in the following sequence of inquiry: (1) Is the general plan a legal one? (2) Are the equivalents of corporate advantages, namely (a) exemption of shareholder liability, (b) transferable shares, (c) continued existence, and (d) limited number of necessary parties to litigation, le- gally and practicably attained? (3) Does the arrangement stand on as good or better basis as regards taxation? (4) May trust assets in business be managed as well and practicably as those of corporations? If the reader resolves these questions affirmatively, then he will be prepared to consider, whether there are advantages, either general or special, or as suited to particular enter- prises, possessed by trustee management over that by a corpor- ation. Generally speaking, the following advantages may be thought to exist: (1) The doing of business upon the common law right of contract with freedom from all statutory ex- actions that may be imposed upon corporations both foreign and domestic, as merely artificial persons. (2) The right of trustees to apply to Courts for di- rection in the execution of their powers, and thus their acts be given legal certainty in advance of their com- mission. 8 CHAP. I.] PLAN OF TREATMENT. [ 3. (3) The protection of cestuis que trust, in their deal- ings with trustees, their right to accountings and full information, without the right, however, of securing information for improper purposes. (4) The protection of creditors in "following" the "trust fund," and their right against trustees individu- ally in cases of fraud. (5) The freedom with which the terms of a trust instrument may be framed for the conduct of a par- ticular business and according to the lawful preference of its equitable owners. (6) Latitude in amendment of provisions of man- agement, as experience may show is desirable. (7) The winding up of a business expeditiously and without resort to proceedings at law, with their conse- quent burden of delay and expense, under express provisions of the trust instrument, upon any termina- ation of the trust. Incidental to a part of the foregoing, the practical experience in Massachusetts with these trusts is recited and suggestions afforded for -the drawing up of agreements establishing such trusts, together with other instruments incident to their manage- ment and operation, the work closing with exhibits of trust instruments used by trust estates in actual operation. As the strict relation of trustee and cestui que trust must never be forgotten nor derogated from, it has been sought to stress the necessity of there being a complete devolution of the legal title in the trustee and his absolute right, so far as third persons are concerned, to control the trust estate for all purposes within the scope of the trust instrument and bind it by his acts and contracts, the principles of equity governing his respons- ibility to his cestuis que trust. CHAPTER II. VARIOUS METHODS OF ESTABLISHING A TRUST ESTATE IN BUSINESS. 4. Trust Estate Embarked In Business Created By Wills. It has often occurred, both in England and in the United States, that a testator has wished to provide for the continuance of a partnership business after his death. Thus in Ex Parte Rich- ardson, 1 where a partnership of which testator was a member was carried on after his death, the question before the court for decision was whether or not, upon the partnership be- coming insolvent, his general estate was liable to its creditors. It was said by Sir John Leach, V. C, that: "A trustee under a will, carrying on a trade, pledges the trust property given to him for that purpose and also his own property; but what is the trust property given to him for that purpose must depend on the terms of the will." In this case, other money of the estate was used in the business and this was allowed to be proved as a debt against the partnership in bankruptcy, and this allowance was sustained. Similar instances of the creation of such trusts are found in other English cases. 2 Of Ameri- can cases there appears a decision by the Federal Supreme Court, 3 in which the opinion was by Mr. Justice Story. This opinion recites that the will, after giving sundry legacies, pro- vided by a codicil for the testator's interest in a partnership continuing until the expiration of the term limited by the part- nership articles, with the surviving partner to conduct the 1(1818), 3 Maddock's Ch. 79. 2Hankey v. Hammond, 1 Cooke's Bankruptcy Law 67; Ex parte Garland (1803), 10 Vesey 110; Raybould v. Turner (1899), 82 L. T. (N. S.) 46. 3Burwell v. Mandeville's Executor (1844), 43 U. S. (2 How.) 560. 10 CHAP. II.] TRUSTS UNDER DEEDS. [ 5. business and the profits and losses to be distributed as the ar- ticles declare. This partner was not the executor. The part- nership becoming insolvent, it was sought to make the general estate of testator liable for its debts. The language of the Justice in denying this claim is interesting as showing, at least as to a trust embarked in trade by testamentary provisions, how strict is the rule as to the trust fund or property being com- pletely segregated from the rest of the estate. He said: "Noth- ing but the most clear and unambiguous language, demonstrat- ing in the most positive manner, that the testator intends to make his general assets liable for all debts contracted in the continued trade after his death, and not merely limit it to the funds embarked in that trade, would justify a court in arriv- ing at such a conclusion from the manifest inconvenience there- of, and the utter impossibility of paying off legacies or dis- tributing the residue, without in effect saying that the pay- ments may all be recalled, if the trade should become unsuccess- ful or ruinous." And yet it could well be argued, that, as the partnership was to be continued, as by the articles thereof pro- vided, with the same division of profits and losses as before, it was intended each partner should stand as before, that is to say, jointly and severally liable for its debts. Instead, how- ever, this interest was decreed to stand as a completely segre- gated interest from the remaining estate, with the surviving partner the trustee thereof. This ruling was later approved by the same court. 4 5. Trust Estate Created By A Single Settlor With Him- self And Others As Cestuis Que Trust. In an Ohio case the owner of a business set it apart as a trust estate by means of a declaration of trust, he to share in the income and profits to arise out of the continued conduct of the business, with the trust to continue or not after his death upon the happening or not *Smith v. Ayer (1879), 101 U. S. 320. See also Pitkin v. Pit- kin (1829), 7 Conn. 307, 18 Am. Dec. Ill; P. C. & St. L. Ry. Co. v. Schmidt (1894), 8 Ohio, C. C. 355. 11 6.] TRUSTS FOR CREDITORS. [CHAP. II. of a certain contingency. 5 Its existence as a trust estate was recognized. But there was a question as to personal liability for its debts, because of its management as a business after the time, when, by the provisions of the declaration of trust, the trust was to cease. For this wrongful act, induced by the con- sent of the former cestuis que trust, they were held personally liable for its debts. In a Massachusetts case there is found an instance of a single settlor conveying to certain trustees an invention with full and exclusive rights of application for patents in this and foreign countries. The trustees were to hold, manage and control said patents and dispose of the same or any interest therein. The settlor's interest was represented by scrip for one half and money for the carrying on of the busi- ness was raised by payments by scripholders as to the re- maining half interest. The question was as to the liability of the scrip owners as partners and it was held that they were riot liable for the debts created by the trustees, thus plainly recognizing the validity of this trust arrangement. 6 6. Trust Estate Created By Debtor With Himself And Creditors As Beneficiaries. Instances are frequent where by ar- rangement between a debtor and his creditors a business in embarrassment may be continued by deed of trust vesting the legal title in a trustee, with the creditors primary beneficiaries, and the trust to cease upon their indebtedness being satisfied. One of the most notable English cases of this character is In re Stanton Iron Company, 7 wherein a partnership conveyed to trustees its business to be conducted under a new name for the benefit of creditors joining in the deed of trust, the overplus to be reconveyed to the partners. Sir John Romilly, M. R., said : "The question is really whether the deed constituted a part- nership thereto, so as to bring it within the provisions of the Winding up Acts. I have two things to consider the relation in which the parties to the deed stand to each other, and their relation to third parties. There can be no doubt that persons 5Adams v. Nelson (1893), 1 Ohio Dec. 216. Mayo v. Moritz (1890), 151 Mass. 481, 24 N. E. 1083. 7(1855), 21 Beav. 164. 12 CHAP. II.] TRUSTS FOR CREDITORS. [ 7. may be partners towards the world, and yet not be partners as between themselves. But on the other hand, persons who are partners between themselves are necessarily partners as respects the public." Then construing the provisions of the deed he concluded it neither made the creditors partners between each other nor did it hold them out to the world as partners. He then observed: "I see no ground for supposing that they could under any circumstances be held personally liable to the creditors in respect to the management of the business." The arrange- ment, therefore, was deemed one to which legislation respecting partnerships had no application. 7. Trust Estate Created by Debtor With Himself And Creditors as Beneficiaries Continued. The case of Cox v. Hickman, 8 decided five years after the Stanton Iron Company case, was a deed of trust by traders with like provisions. This case was an appeal from a decision by Justice Blackburn 9 who took the view that the creditors stipulated for such control over the business as made them partners as to debts created by its conduct, Justice Crampton concurring on the ground that the trustees were really managers or agents and not trustees, though so denominated. This view was overruled upon great con- sideration by eleven out of nineteen judges, the Law Lords all being with the majority. It was held that by the deed there was committed, along with the conveyance of the legal title, such management and control in the trustees as made the creditors not proprietors but merely cestuis que trust thereunder, with no personal responsibility for the debts created by the trustees. 8. Trust Estate Created by Debtor With Himself and Creditors as Beneficiaries Continued. This ruling was much relied on in a like case decided by the Supreme Court of North Dakota, 10 the court holding that by the terms of the deed of trust the entire management and control of the business con- 8(1860), 9 C. B. (N. S.) 47. 9S. C. (1860), 8 H. L. C. 268. 10(1898), Wells-Stone Mercantile Co. v. Grover, 7 N. D. 460; 75 N. W. 914. 13 9.] TRUSTS FOR SETTLORS. [CHAP. II. veyed was devolved upon the trustee. This case was an action seeking to hold the creditors, who joined in the deed of trust executed by their debtor, liable, jointly and severally, as part- ners, and asking also for a personal judgment against the debtor, upon indebtedness created by the trustee subsequent to the deed. It was held that neither the creditors nor their debtor was liable beyond the trust fund. The court said: "If the trust is valid and that point does not seem to be contro- verted then the trustee became personally liable on every con- tract made- by him in the discharge of the trust. * * * * He is not in the position of a mere agent." This, however, was not re- garded as the conclusive test, but it was thought that this and the fact of absolute control over the trust property passing to the trustee created an estate, as to which all antecedent relations became immaterial. This and other cases hereinbefore cited will be again referred to in questions considered later on. 9. Several Persons Originating Trust Estate For Their Proportionate Benefit. This may be accomplished through ar- ticles of association in a joint stock company with transferable shares or by simply contributing money or property to this end without the issuance of such shares. These methods will be shown, in inverse order, by reference to adjudicated cases. Thus in Mallory v. Russell 11 there was a trust deed agreement executed by two persons associated for the purpose of buying and selling land. The legal title of all land to be purchased was to vest in a trustee, who was to have sole management and control of the business thus created. The parties to the agree- ment were to contribute money and acquire a beneficial interest in proportion to the amounts respectively contributed. The court said: "The contract itself rebuts the idea that persons who paid their money in aid of the enterprise became seised of any interest in the land." Therefore, it was held that the widow of one of them had no dower right in any of the land of which the trustee held the legal title. Cases like this one are rare, however, because quite generally enterprises of this character have behind them a large number of people and it 11(1887), 71 Iowa 63, 32 N. W. 102, 60 Am. Rep. 776. 14 CHAP. II.] TRUSTS FOR SETTLORS. [ 10. is more convenient, as well as making their several interests more marketable to follow the plan used by corporations of issuing to contributors certificates or shares. 10. Trust Estate In Pursuance to Articles of Association for Unincorporated Company. Vesting title in a trustee or trustees for the carrying on of a business whose profits are to be divided among shareholders in a joint stock company, whether in a state or country where there are statutory provi- sions regarding such a company or not, appears in many cases decided by courts of last resort. Never, however, does it ap- pear to have been held, except in an isolated case, 12 that a trust deed was void where the title was in trust for an unincor- porated association "and for the several use and benefit of the several members thereof according to their respective interests, as the same thereafter may be determined by division or other- wise." It was said: "The association had no legal existence and the trust deed gives no intimation as to who were the per- sons associated under that name". This case, however, seems to confirm, by its very exception, claim for the legality of estab- lishing a trust as to any number of persons in their own in- terest, if the proper indicia for identification of beneficiaries ap- pear. Merely as illustrative we give, in this chapter, a limited number of the many cases, hereinafter to be referred to, of active business trusts operated in the interest of shareholders in unincorporated associjations. In England a very notable case 13 appears. In stating its effect it should be said that the contention revolved around the question whether or not an as- sociation, whose members being more than twenty persons, were, as shareholders, cestuis que trust in a business, estab- lished by means of a deed of settlement, came under the English Companies Act of 1862 requiring it to be registered upon pain of being an illegal partnership. The Master of Rolls, in the lower court, said: "It does appear to me that this is as plain a company or association formed for the transaction of business for the purpose of gain as could be put fairly into words, if l2German Land Assn. v. Scholler (1865), 10 Minn. 331. iSSmith v. Anderson (1880). 15 Ch. D. 247. 15 11.] TRUSTS FOR SETTLORS. [CHAP. II. you change names and nothing more. If you call the certificate holders 'shareholders' and call the trustees 'directors' and call the association a 'company', changing those three names, you have about as simple a description of an ordinary company under the Act as, I think, you can well have." Thereupon he condemned the arrangement as a "mere device and a very transparent one to endeavor to escape from the plain meaning of the enactment." 11. Smith v. Anderson Continued, Ruling On Appeal. Three Lords Justice reversed this holding upon the ground, that there was no carrying on, nor intent to carry on, any busi- ness by the associates. The only business that was to be car- ried on was by the trustees, one of the Lords saying: "Here it seems clear that according to the true construction of the deed, they (the trustees) were not directors or agents, but trustees. If that be so, the certificate holders, even if they were associated at all, were not associated for carrying on the busi- ness. It was not their business. They could not have been made liable for any contract made by the trustees." Other English cases will be cited and discussed hereinafter. 12. Trust Estate In Pursuance to Articles of Association for Unincorporated Company Continued. American Cases. In Massachusetts this method in the creation of a trust estate for the conduct and control of a business has been frequently resorted to. In one of these cases 14 the equitable character of an estate vested in a trustee for the purpose of carrying on a business, which had become insolvent, was distinctly declared to the ex- tent, that it could not, under Massachuestts practice, be pro- ceeded against in an action at law. In another case, 15 C. J. Put- nam speaks of "sundry members of what is commonly known as 'a voluntary joint-stock association' organized in Massachu- setts under a so-called 'trust deed'." It was held that, under the pleadings, its fund only was liable upon a promissory note l^Hussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. iSBank of Topeka v. Eaton (1901), 100 Fed. 8, affirmed in 107 Fed. 1003 47 C. C. A. 140. 16 CHAP. II.] SUMMARY. [ 13. upon the face of which there was a restriction of personal lia- bility on the part of the trustee. These and other Massachusetts cases will be hereinafter cited and discussed. In North Da- kota, 16 in New York, 17 in Illinois, 18 in Texas, 19 and in Penn- sylvania, 20 decisions treat of trust deeds vesting property in trustees to carry on business for the benefit of certificate holders in unincorporated associations. 13. Summary. Thus it appears that it is by no means novel or unusual that trust estates should be created either for em- barking in a new business or continuing an old one, and the legal and equitable status of such estates ought to be well defined, as also the relations they and their trustees and their cestuis que trust bear to each other and to third persons with respect to- their acts and contracts arising in the course of the existence of such estates. 16Spotswood v. Morris (1906), 12 Idaho 360, 85 Pac. 1094, 6 L. R. A. (N. S.) 665. !7Ward v. Davis (1850), 3 Sandf. 502; King v. Townshend (1894), 141 N. Y. 358, 36 N. E. 513; Cross v. Jackson (1843), 5 Hill 478. ISHart v. Seymour (1893), 147 111. 598, 35 N. E. 246. 19Willis v. Greiner (1894), Tex. Civ. App. 26 S. W. 858. sopittsburg Wagon Works' Estate (1903), 204 Pa. St. 432, 54 Atl. 316. 17 CHAPTER III. THE NATURE OF A TRUST ESTATE. 14. Status of Trust Estate Exemplified by Decisions. It is unimportant in this treatise to go into refinements marking evolution of the trust doctrine in England, which happily for this country there ended in putting it upon a stable founda- tion prior to our separation from the mother country. It suf- fices for our purpose to indicate by a few adjudicated cases the firm distinction between a trust and a legal estate. In a well considered case in Massachusetts 1 there was a question as to a devise to executors of a fund in trust to invest as they deemed prudent and pay the net income semi-annually to a cestui que trust during his natural life, with such income "free from interference or control of his creditors", with "the use of said income * * not to be anticipated by assignment". The opinion cited English authority which held that the income could not be made inalienable. 2 It was said in the Adams case, as representing the English view that: "By the creation of a trust like the one before us, the trust property passes to the trustee with all its incidents and attributes unimpaired. He takes the whole legal title to the property, with the power of alienation; the cestui que trust takes the whole legal title to the accrued income at the moment it is paid over to him. Neither the principal nor income is at any time inalienable." But the Massachusetts court said that many American courts have re- jected the English view, and hold instead that "the founder of a trust may secure the benefit of it to the object of his bounty, iBroadway National Bank v. Adams (1882), 133 Mass. 170, 43 Am. Rep. 504. 2Brandon v. Robinson, 18 Ves. 429; Green v. Spicer, 1 Russ & Myl. 395; Rochford v. Hackman, 9 Hare 475; Snowdon v. Dales, 6 Sim. 524. 18 CHAP. III.] TRUST FOR SETTLOR^ BENEFIT. [ 15. by providing that the income shall not be alienable by anticipa- tion, nor be subject to be taken for his debts," citing cases in the note. 3 15. Rule Where Settlor Creates Trust For His Own Bene- fit. In a case decided by the Massachusetts court on the same day of the decision in Broadway National Bank v. Adams, supra, the question was whether a married woman, possessed in her own right of personal property, which she conveyed to trustees to pay the net income to her semi-annually during her life "upon her sole and separate order or receipt, the same not to be by way of anticipation", with remainder to her children, could pledge her income in advance of its accruing. 4 The con- troversy revolved around the validity of the clause in quotation marks, recognized by the court as the equivalent of that found in the Adams case. The court said: "The general policy of our law is, that creditors shall have the right to resort to all the property of the debtor except so far as the statutes exempt it from liability for debts. But this policy does not subject to the debts of the debtor the property of another, and is not de- feated when the founder of a trust is a person other than the debtor. In such case, the founder, having the entire jus dis- ponendi in disposing of his own property, may, if he sees fit, give to his beneficiary a qualified and limited, instead of an abso- lute, interest in the income. * * * But when a man settles his property upon a trust in his own favor, with a clause restrain- ing his power of alienating the income, he undertakes to put his own property out of the reach of creditors, while he retains the beneficial use of it. * * * It is true that a man, who is not indebted, may by a voluntary conveyance made in good faith transfer his property so as to put it out of the reach of his creditors. When a man transfers a trust fund, of which the SHoldship v. Patterson, 7 Watts 547; Shankland's Appeal, 47 Pa. 113; Rife v. Geyer, 59 Pa. 393; White v. White, 30 Vt. 338; Pope v. Elliott 8 B. Mon. 56; Nichols v. Eaton, 91 U. S. 716; Hyde v. Woods, 94 U. S. 523. ^Pacific Bank v. Windram (1882), 133 Mass. 175. 19 16.] NATURE OF TRUST ESTATE. [CHAP. III. income is to be paid to him during his life, and the principal at his death to be paid or transferred to others, the principal may be beyond the reach of his creditors; but we are of the opinion that his right to the income which he retains himself may be alienated by him, is liable for his debts and may be reached in Equity." In a Maryland case, 5 there is the same reasoning and dis- tinction found in the two Massachusetts cases above referred to, with the incident of the income being declared for the main- tenance and support of the "immediate family" of the grantor. It was said: "There is no such separate, independent and de- fined interest in the family, as to enable its members, whoever they may be, to enforce the trust in their favor," which ruling aids in realizing the vigor existing in a competent method for the creation of a trust where beneficiary and interest are well defined. 16. Rule Where Settlor Creates Trust For His Otvn Bene- fit Continued. In Missouri cases by comparison one with the other and the later expressly approving the former cases, it is shown that restrictions may be placed by the founder of a trust in favor of another upon alienation of income, while if he creates a trust in favor of himself, the restriction is nugatory. 6 In the older of these cases an alleged interest in the title to certain realty of the beneficiary in the income for life of a trust estate was levied on and sold under execution against him. It was conceded that the deed creating the trust was by the nominal purchaser from this beneficiary and that he was in effect the founder of the trust. It was provided therein, that the income was to be paid to him quarterly for life, and should he attempt to anticipate its accrual in any way, this should operate, to that extent, in making it a fund to be kept by the SWarner v. Rice (1886), 66 Md. 436. SMcIlvaine v. Smith (1867) 42 Mo. 45, 97 Am. Dec. 295; Lam- pert v. Haydel (1888), 96 Mo. 439, 9 S. W. 780, 2 L. R. A. 113, 9 Am. St. Rep. 358. 20 CHAP. III.] DRY AND ACTIVE TRUSTS. [ IT. trustee for the benefit of the remaindermen. A petition in equity was brought by the purchaser at execution sale to have the trustee pay to the plaintiff the income during the life of the beneficiary. In this case it was declared that a judgment creditor of the beneficiary could, by bill in equity, have the rents and profits, notwithstanding the restrictions upon alienation created by a donor himself a beneficiary, applied in satisfaction of his debt. But when it was attempted to sell the interest as a life estate, upon execution sale, nothing passed. Speaking of the purchaser at such sale the court asked: "What interest did he take ? By the terms of the deed, during his life the trustee is to control and manage the property, to make loans and receive the rents and profits, to pay all the taxes, charges, insurance and other expenses and to pay over to (founder) at the end of each quarter, during his life, 'the net product of said prop- erty', under the restrictions mentioned, with remainder over and a power of appointment as therein expressed. This gave him a vested life estate in the net product of which the trustee could not deprive him by the exercise of any discretion." By this case it is seen, that, though the donor had reserved to himself the exact equivalent of a life estate, yet it was not an interest in the land at all, but merely a vested interest in its income, only to be reached by a proceeding in equity. 17. Dry or Passive Trust Distinguished From Active Trust. The cases which we have referred to all relate to trusts in which their nature is prescribed by the creating instrument and along with the vesting of the legal title in the trustee is given possession of the property, which the trust embraces. In other words, the trust fund or estate is under his control ac- cording to prescribed limitations. A simple or dry trust has been said to exist "When property is vested in one person in trust for another, and the nature of the trust, not being pre- scribed by the donor, is left to the construction of law". 7 In some jurisdictions these trusts are not recognized, but such TPerry on Trusts, 6th Ed. sec. 520. 21 18.] DRY AND ACTIVE TRUSTS. [CHAP. III. an estate vests directly in the beneficiaries. 8 But whether so or not, the trustee holds neither possession nor control of the property, and the cestui que trust controls the use and has the right to direct the trustee to execute whatsoever conveyance to another he sees fit. 9 Nevertheless, it required a statute to prevent even a dry trust from having a very positive effect on property under statutes of distribution. Thus it is said by the author last cited that: "According to the law previously to the Statute 3 and 4 Will. IV Ch. 105, no dower attached upon a mere equitable estate of inheritance." 10 Now, however, the trustee, where there is a simple or dry trust, has merely a three-fold ministerial duty: (1) To permit the cestui que trust to occupy and receive the income and profits of the estate; (2) To execute such conveyances or make such disposition of the estate as the cestui que trust may direct and (3) To protect and defend the title or allow his name to be used for such purpose. 11 Nevertheless, it is seen that even a simple or dry trust has some, though a minor, influence in dis- tinguishing an equitable estate from that where the real owner possesses the legal title both in form and in fact. 18. Summary. The authorities above cited, which are merely illustrative and capable of multiplication indefinitely, show, that even a dry but especially an active trust is a distinct lawful entity, as much so as a legal estate, and where the instru- ment of creation empowers the trustee to manage and control it, that he is free from any sort of restraint upon the part of cestuis que trust, when acting within the limits of his authority. We have seen also that the rule is the same as to this freedom, whether the founder of the trust creates the estate solely for the benefit of another or for his own benefit for life with remainder 8 Ala. Code 1907, sec. 3408; Sutton v. Aiken (1879), 62 Ga. 733; Long v. Long (1883), 62 Md. 33; Farmers' Nat'l. Bank v. Moran (1883), 30 Minn. 165. 9Hill on Trustees, pp. 316, 317. I0(ibid page 316.) UPerry on Trusts (6th Ed.) Sec. 520; Hill on Trustees, p. 317. 22 CHAP. III.] SUMMARY. [ 18. over after his death. Whether a founder may create a trust estate with provision merely for income for his benefit without providing for the ultimate disposal of the principal, that is to say, so as to make his interest to consist solely in income, is to be considered hereinafter. At all events, however, so far we have ascertained that a founder may create a trust for his own benefit, so that his right to exercise control thereof shall cease. In other words, he can found an estate, out of which he reserves the income to himself for a fixed time, and make the principal inalienable by himself, and not subject to his debts and contracts subsequently created. Elaborate treatises on trusts and trust estates all presuppose, if they may not specially consider, this result, as otherwise they would be merely academic. This result, however, is all of which there is need for the subject in hand. To attempt any- thing more would be merely to compile definitions more or less accurate. 23 CHAPTER IV. JOINT SETTLORS CREATING TRUST FOR THEIR ENTIRE BENEFIT. 19. Single Settlor Creating Trust for Benefit of Himself and Another. We have seen that a single founder may create a trust and reserve to himself an interest less than the fee of the property conveyed. Perhaps there has never been a bona fide attempt by a single settlor to do anything more than this. The nearest approach to the contrary is found in a case already referred to, 1 where a founder conveyed to trustees his property for the benefit of scrip-holders who were to pay into the trust fund the amounts for which they were to receive scrip, the settlor to be also entitled to scrip in one-half of the whole capital, and, yet, it was not the same, because thereby he became a con- tributor to the trust just as they. If a settlor, however, were to declare that his property should be held in trust with the income to be payable to him during life and made no provision as to what should become of the principal at his death, it may well be doubted whether that principal would not be alienable by him and subject to his debts as a present interest. However that may be, it is of no special importance here. 20. Several Settlors Creating a Dry Trust for Their Own Benefit. Just as it has been held that a single settlor might create a trust in his own property for himself and others con- tributing a fund for its better employment in business, a fortiori, perhaps, may it be said that two or more, one in consideration of his being joined by the other or others, may create a trust fund or property, the income out of which shall be for the several benefit of the founders of the fund. Thus in another Massa- chusetts case 2 a trust was formed for the convenience of an IMayo v. Moritz (1890), 151 Mass. 481, 24 N. E. 1083. 2Howe v. Morse (1899), 174 Mass. 491, 55 N. E. 213. 24 CHAP. IV.] JOINT SETTLORS. [ 21. unincorporated association in renting and selling land. The ex- istence of the trust was evidenced by a declaration of trust that certain land was held by the declarants as trustees for said association. In this declaration the trustees appear as such of a dry or simple trust because the entire management of the estate was committed to the directors of the unincorporated association. It further appears that the association had a capital stock divided into shares and that the income was to be dis- tributed as it accrued ratably among the shareholders. The court held that there was a valid trust and that the equitable interests represented in shares were constantly vendible. Thus it appears that, even in and by means of a dry trust, several settlors may provide a trust fund for their exclusive benefit without more, for the trust declarants were not themselves the founders of the trust, but the shareholders were. To save the trust against the objection that it was void under the rule against perpetuities, the vendibility of these shares and their being sub- ject to debts of the shareholders were relied upon. These facts and the further fact that the association could at any time direct the trustees to sell the land showed there was no withdrawing of property from commerce. We shall hereinafter see that provision against both objections may be made by limiting the duration of a trust. ' 21. Several Settlors Creating a Dry Trust For Their Own Benefit Continued, In an earlier Massachusetts case 3 the dec- laration of trust provided that the Executive Committee of an unincorporated joint stock association should have general management of property vested in trustees with the members to be the equitable owners. The interest of each member was to be represented by transferable shares, and their status as cestuis* que trust was fully recognized. If a share represents the entire interest of a ccstui que trust, then a declaration of trust so pro- viding is a means of founders or settlors creating a trust for their own exclusive benefit, and that the trust being passive may make these founders or settlors liable as partners for its acts SHoadley v. County Comrs. (1870), 105 Mass. 519. 25 21.] JOINT SETTLORS. [CHAP. IV. and contracts is another question. In a later case 4 than the one last above cited the court thus expressed itself as to interests being wholly included in transferable shares: "The peculiar feature that the interest of each member may be transferred without the special assent of the other members is created by agreement of the partners under their natural rights at common law." This language was used where the firm property was the equitable interests of its members in property the legal title to which was vested in trustees under a declaration of trust. It may be said, however, that there ought to be no sensible distinc- tion in making an entire interest in a legal estate represented by a transferable certificate and doing the same as to an equitable interest. Another passive trust, passive at least in the sense that the management of the trust estate was to be in a board of managers even though the trustee may have been given some special powers is found in another Massachusetts case. 5 In the opin- ion by Judge Holmes after saying it was provided that: "The decease of a member of the association shall not work a dissolu- tion of it (association), nor shall it entitle his legal representa- tives to an account or to take any action in the courts or otherwise against the association or the trustees for such ; but they shall simply succeed to the right of the deceased to the certificate and the share it represents subject to this declaration of trust," held there was a partnership liability under such pro- vision against the estate of a deceased shareholder, because he was the owner of a transferable share saying: "When, as here, a company is made as nearly a corporation as possible, and it is obviously intended that the death of a shareholder shall not affect either the company or the rights incident to the share, we think that the liabilities go with the rights." It thus appears that this provision which specifically limited all beneficial inter- ests to ownership of shares was held to be a valid provision, though the shares were in a fund, the legal title to which was in a trustee. The personal liability held to exist in this case de- ^Gleason v. McKay (1883), 134 Mass. 419. SPhillips v. Blatchford (1884), 137 Mass. 510. 26 CHAP. IV.] JOINT SETTLORS. [ 22. pended, as we think will be hereafter shown, on the fact of management being reserved in the association. In a New York case 6 the court did not deem it necessary to inquire whether trustees were those of a dry or a special trust, but it was ruled, that, in a conveyance from A to B, C and D described as trustees of a certain named land association, it would be presumed they held the legal title for a partnership of individuals dealing in real estate, in which the grantees had or may have had a beneficial interest. A Pennsylvania case 7 shows a dry or passive trust, the trustees of which held the legal title to real estate in trust for an association, the articles of which provided that the interest of each member should be determined by the number of shares he held, and that the only way he could dispose thereof was by transfer on the books of the asso- ciation. It was ruled that the interest of each member was per- sonal property, and no levy on the real estate held by the trustees could affect the individual interest of a member. This certainly means the entire interest of each cestui que trust was in the shares owned by him. 22. Settlors Creating Active Trust For Their Exclusive Benefit. In a case where there was a declaration of trust by an inventor in favor of himself and other scrip holders in an unin- corporated association, as cestui que trust, his and their inter- ests therein to be represented by scrip or certificates of stock, 8 the complete control and management of the property was to follow the vesting of the legal title in the trustees. Gleason v. McKay and Phillips v. Blatchford, supra, were distinguished, the court, composed of practically the same members as in those cases, saying: "This deed does not have the effect to make the scrip holders partners. It does not contemplate the carrying on of a partnership business upon the joint account of the grantor and the scrip holders, and in this respect the case is unlike" those 6King v. Townshend (1894), 141 N. Y. 358, 36 N. E. 513. TPittsburg Wagon Works' Estate (1903), 204 Pa. 432, 54 Atl. 316. SMayo v. Moritz (1890), 151 Mass. 481, 24 N. E. 1083. 27 23.] JOINT SETTLORS. [CHAP. IV. cases. But it can hardly be said the grantor was the sole founder of the trust, because the fund was contributed to by him and the scrip holders and yet it was said "the invention is held in trust and is trust property". The evident distinction is that the trust was an active one under the entire control of the trustees, while the partnerships in the other cases actually oper- ated the trust property as a business, while the trustees were merely holders of title. But in the three cases the interests were represented by transferable shares. The same idea of vesting absolute control in trustees divesting the business of its partnership character, though its cestuis que trust constitute an association we have seen to have been ex- pressed in a noted English case. 9 In this case the members were held to be mere investors carrying on no business that would bring them under the English Winding Up Acts relating to partnerships. It is true that the only question involved in these cases was as to personal liability of certificate or scrip holders, but it was necessary to adjudge validity of the trust to hold the cestui que trust released from liability. 23. Settlors Creating Active Trust For Their Exclusive Benefit Continued. In a case decided by the Federal Supreme Court 10 it is recited, that a joint stock company, an unincor- porated association was formed in 1836 by several persons for the purpose of dealing in the purchase and sale of lands. By the articles of association the lands purchased were to be con- veyed to trustees to hold as joint tenants in trust for the mem- bers of the association. Its capital was divided into forty-eight shares and was held in unequal parts according to sums severally contributed by the members. The trustees were vested with entire control during the continuance of the trust, which was to cease when enough money was realized from sales by the trustees to satisfy all the purchase money, improvements, inter- est, taxes and assessments, and a division of the lands, if any 9Smith v. Anderson, 15 Ch. D. 247. Ante. 10-11. lOClagett v. Kilbourne (1861), 66 U. S. (1 Black) 346, 17 L. Ed. 213. 28 CHAP. IV.] JOINT SETTLORS. [ 24. remaining, was to be among the shareholders. A judgment creditor of one of the shareholders owning one-sixth of the total shares levied on certain lots, the legal title to which was in the trustees, and they were sold to him at the sheriff's sale. He then brought ejectment against the purchaser of these lots from the trustees. The court said: "The proceeding assumes that the share of the judgment debtor in the association is an interest in lands; and though the legal title be in the trustees, is liable to be seized on the execution and sold and the pur- chaser put in possession. The settled law is otherwise. * * * * In this case the legal title is in the trustees who are bound to account to the stockholders, the cestuis que trust, according to their respective shares after all the debts of the association have been paid." It seems as clear here, as is possible to make the matter, that a trust designed by founders for their exclusive interest as shareholders of an association was recognized as a valid trust, under the active management of a trustee. The court said: "It is quite clear the plaintiff has mistaken his rem- edy, as he obtained no title, legal or equitable, to the particular lots in question." 24. Settlors Creating Active Trust For Their Exclusive Benefit Continued. In an Illinois case 11 several persons en- tered into a written agreement to engage in the business of buy- ing, improving and selling business property and by the agree- ment they appointed three of their number trustees to take legal title to land purchased and to subdivide and sell same, exercis- ing general control of the affairs of the association. There was to be capital stock divided into shares. The agreement reserved the right to give directions to the trustees at a general meeting of shareholders by a majority vote, or to remove a trusteee by a two-thirds vote. The question at bar was whether a deed for a purchase by the trustees at sheriff's sale running to (A B and C) "trustees of the Norwood Land and Building As- sociation'' and "to their heirs and assigns forever" was to be taken as conveying an absolute title to A B and C individually, or if they took the land in trust and if in trust was the convey- liHart v. Seymour (1893), 147 111. 598, 35 N. E. 246. 29 25.] SUMMARY. [CHAP. iv. ance void. The court holding first that the word "trustees etc. was not descriptio personarum merely, unless there was incapacity in the beneficiary to take, thought that there was no incapacity, and the members of a co-partnership acquired interests "to be determined by the trust agreement and by that alone." The court said also: "There can be no doubt that the trust thus created was an active one, and one which involved the exercise of powers and the performance of duties which rendered it necessary that the trustees should hold the legal title, in order to secure the performance of such duties and the execution of such powers," which fact, as distinguishing a conveyance to a trustee of an active trust from a trustee of a dry trust, operates, as held in some states, to make "the trusts or uses remain mere equitable estates." 25. Summary. This character of cases both as to dry and active trusts might be extended at greatly more length, but, after all, these cases would be merely illustrative of the applica- tion of well-known principles. It is deemed, therefore, suf- ficiently shown, that there is no more novelty in claiming that two or more founders or settlors may create a trust fund of property, the entire interest in which may be vested in them- selves severally, than that the capital stock of a corporation may be vested in its shareholders, and the title to the capital or prin- cipal may be in the trustees they appoint just as it is in a cor- poration. With these questions settled, as it appears to the author they are settled, the various relations parties to a trust agreement for an active business trust bear to the trust, to each other and to third persons for its acts and contracts, may now be considered. 30 CHAPTER V. . LIABILITY OF TRUSTEE OF AN ACTIVE TRUST. 26. Independent Status of a Trustee. As to how a trustee stands to a trust estate, to creditors and to beneficiaries or cestitis que trust, has not been found anywhere more tersely and yet more comprehensively expressed than by Justice Woods of the Federal Supreme Court. 1 The learned Justice said: "A trustee is not an agent. An agent represents and acts for his principal who may be either a natural or artificial person. A trustee may be defined, generally, as a person in whom some estate, interest or power in or affecting property is vested for the benefit of another. When an agent contracts for his prin- cipal, the principal contracts and is bound, but the agent is not. 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 promissor of the name of trustee or any other name of office or employment will not discharge him. Of course, when a trustee acts in good faith for the benefit of the trust, he is entitled to indemnify himself for his engagements out of the estate in his hands, and for this purpose a credit for his expenditures will be allowed in his accounts by the court having jurisdiction thereof. If a trustee contracting for the benefit of a trust wants to protect himself from indivi- dual liability on the contract, he must stipulate that he is not to be personally responsible, but that the other party is to look solely to the trust estate." ITaylor v. Davis (1884), 110 U. S. 330, 334, 28 L. Ed. 163. 31 28.] LIABILITY OF TRUSTEE. [CHAP. V. 27. Independent Status of a Trustee Continued. In the case from which the foregoing excerpt is taken it appears that there was an action at law upon a written promise by trustees under a deed of settlement to pay certain demands of a former trustee against the trust estate out of moneys coming into the hands of the trustees, as such. This coming into their hands of such moneys was shown and the judgment of the lower court against the trustees, personally, was affirmed. The prin- ciple of personal liability is thus expressed by a standard work: 2 "In the present state of the law, no trustee could be advised, under any circumstances, to undertake the responsibility of carrying on any trade for others. For by so doing he adopts the same risks and liabilities as persons who trade on their own account, while he can participate in none of the profits; and, as a matter of ordinary prudence, a trust for such a purpose should be unhesi- tatingly declined." This consideration no doubt has been the main reason why corporate organization has been preferred to trusts for carrying on trade. But in the evolution of business methods, especially, we may say, in the growth of indemnity insurance and express stipulation against liability, in a personal way, the conclusion, that was drawn fifty years ago from the existence of the principle stated, may be greatly qualified now. 28. Rule of Trustees' Personal Liability Stringent. As seen in the closing sentence of the excerpt from Taylor v. Davis, supra, the trustee must stipulate not to be personally liable or he will be so held. This is with equal emphasis announced in many other cases, some of which we proceed to set forth. Thus in a case from Rhode Island, 3 the trustees indorsed a promissory note. They were sued at law as individuals. They pleaded it was their duty under the will of the founder of the trust to indorse negotiable paper of certain corporations of which the maker of the note in suit was one, and the suit, so far as the indorsers were concerned, should be brought in equity, it being also averred that plaintiff, holder of the note, knew at the time 2Hill on Trustees (4th Am. Ed. 1867) 534. 3Roger Williams Nat'l. Bank v. Groton Manfg. Co. (1889), 16 R. I. 504, 17 Atl. 170. 32 CHAP. V.] STIPULATIONS AGAINST LIABILITY. [ 29. of its issue of the provisions of said will. The Supreme Court upheld the ruling of the lower court, sustaining a demurrer to said plea and rendering judgment against the trustees, per- sonally, citing a great number of cases. 4 The opinion says : "Although it has sometimes been stated as a reason why the trustee is held personally liable upon his contracts as trustee, is because he has no power to bind the trust estate, he being likened to an agent who has exceeded his authority, we think the true reason why he is held personally liable on such con- tracts is that he has no principal, or, rather, he is the principal himself. The contract is therefore necessarily his and his alone. But, however this may be, we do not think that the fact that the defendant trustees were empowered by the will, and it was made their duty to indorse the notes in suit, is sufficient to relieve them from personal liability upon their in- dorsements, they not having stipulated that they were not to be so liable." It was urged by counsel for the trustees that to hold them personally liable "is to punish them for the faithful performance, within the limits of their powers, of the trust imposed on them, well known to the plaintiff." The court as to this, said : "The situation of the trustees, if the trust estate be insufficient to indemnify them fully for the debts which they have contracted, is indeed hard, but it is one in which they have volun- tarily placed themselves, and, though we may sympathize with them, we cannot on that account relax the rules of law in their behalf." 29. Stipulation Effective Against Personal Liability. The foregoing cases may be thought necessarily to indicate that 4 Fogg v. Virgin, 19 Me. 352; Blackstone National Bank v. Lane, 19 Me. 352, 13 Atl. 683; Comes v. Clark, 12 Cal. 168; Taft v. Brewster, 9 Johns. 334; Hills v. Bannister & Butler, 8 Cow. 31; New v. Nicoll, 73 N. Y. 127; Thacher v. Dinsmore, 5 Mass. 299; Forster v. Fuller, 6 Mass. 58; Fiske v. Eldridge, 12 Gray 474; Pack- ard v. Nye, 2 Mete. 47; Bloom v. Wolf, 50 Iowa 286; Hayes v. Crutcher, 54 Ind. 260; Hayes et al. v. Matthews, 63 Ind. 412; Bing- ham v. Stewart, 13 Min. 106; Wren v. Hoffman, 41 Miss. 616; Aven v. Beckom, 11 Ga. 1; Johnson v. Gaines, 8 Ala. 791. 33 30.] STIPULATIONS AGAINST LIABILITY. [CHAP. V. there is no method of a trustee avoiding personal liability where he makes a contract in behalf of a trust estate, unless he stipu- lates with the other party to a contract that only the trust estate shall be liable. They do not decide, except argumentat- ively, however, that he may be saved from personal liability by expressly stipulating therefor. There are a number of cases, however, where this question was directly involved. Thus in a case from North Carolina, 5 a trustee was sued personally for goods ordered, as trustee, and so charged to him on plaintiff's books. Defendant testified that before purchasing he had an agreement with plaintiff for the trust estate to be solely liable, and this was denied by plaintiff as a witness. The court in- structed that the burden was on plaintiff to show that the sale was to defendant individually, and there was a verdict for defendant. The case was reversed, the court saying: "In this (instruction) we think there was error. The answer of de- fendant was in the nature of a plea of confession and avoidance. Having admitted that he obtained the goods, he assumed the burden, and nothing else appearing, the plaintiff would be entitled to judgment. A trustee purchasing goods, or incurring any other liability on account of his trust, is personally liable for the payment thereof unless his liability is limited by an agreement, expressed or implied, with the creditor. The liability of the trust estate is not now before us, the only question being the individual liability of the defendant. It is admitted the defendant might have limited his liability by such an agreement with the plaintiff as he alleges, but having alleged such an agreement he must prove it." The case therefore was remanded, defendant to prove the agreement alleged, if he could. 30. Stipulation Effective Against Personal Liability Con- tinued. In a Massachusetts case, 6 defendants were sued at law on a promissory note, which in the body thereof stated that "we as trustees, but not individually, promise" etc., and then signed their names with the word "Trustees" added. The court SMitchell & Co. v. Whitlock (1897), 121 N. C. 166, 28 S. E. 292. Shoe & Leather Nat'l. Bank v. Dix (1877), 123 Mass. 148. 34 CHAP. V.] STIPULATIONS AGAINST LIABILITY. [ 31. said : "If a party in a contract into which he voluntarily enters, and not in the execution of any official trust or duty, makes it an express stipulation that he is acting for somebody else and in no event to be personally liable, he certainly cannot be ren- dered so by law." The words of the note were held an express stipulation to this effect. It was urged "that if these defend- ants are not liable on the contract as a note, then nobody is liable." The court replied: "Even if such were the fact, it would not be in the power of the court, as we have already seen, to alter the contract for the purpose of giving it validity. In deciding whether the defendants have or have not bound them- selves, we need not decide whether they have or have not bound their principals." This case was approved in a later de- cision by the same court. 7 31. Stipulation Effective Against Personal Liability Con- tinued. It would seem a work of supererogation to extend the citation of authority any further on this subject, especially as cases referred to hereafter necessarily go upon the necessary presumption, that a stipulation of this kind is valid, but the observation of a distinguished Federal Circuit Judge, in a case in which his opinion was pointedly approved by the Circuit Court of Appeals, 8 is so apt that it ought not to be omitted. In this case a promissory note was sued upon. It read : "Sixty days after date the trustee of the Topeka Land & Development Company, as such trustee under declaration of trust, dated May 23, 1887, and not otherwise, promise to pay" etc., and signed by the trustee with the words "as trustee as aforesaid" following his signature. Judge Putnam said: "The only question is whether or not this implied stipulation of the plaintiff, limiting its remedy to the general assets of the association and the prop- erty especially pledged to it, is contrary to the rules of law. Of course, a stipulation in an instrument which fundamentally vio- lates its essential nature must sometimes be rejected by the THussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. SBank of Topeka v. Eaton (1900), 100 Fed. 8; affd. 107 Fed. 1003, 47 C. C. A. 140. 35 32.] STIPULATIONS AGAINST LIABILITY. [CHAP. V, courts. For instance, if any individual or partnership should stipulate in this or its pecuniary obligations that he or it should not be personally liable thereon, without at the same time mort- gaging or pledging property or giving some other specific lien for security, it might be difficult for the law to regard the stipu- lation, because in that event, as there would be no lien which the law could enforce, the holder of the obligation would be left without remedy, unless he could proceed by judgment against the obligor; and the result, if sustained, would be an obligation, which in law is no obligation. The present case, however, assimilates itself to the large class of cases, where certain property being pledged in some form for the security of a debt, the parties have been at liberty to stipulate that the owner of the debt should look only to the property thus pledged. In the present case, not only did the Bank of Topeka have specific assets given to it for its security, but the entire property of the association was held in trust, and therefore subject to adminis- tration by the Chancery Courts, which could apply it equitably and proportionally to the discharge of obligations of the trustee, as contemplated by the express direction of the Articles of Asso- ciation that the debtors of the trust should look for payment solely to its property." 32. Discussion of Above Ruling. This excerpt embraces some matters to be hereinafter considered, for example, respons- ibility of the trust estate for the acts and contracts of the trustee, but the reason of the rule for the validity of a stipulation for exemption of a trustee from personal liability is so well ex- pressed, where the question of that validity was directly in- volved, that it ought to appear. By that reason it is shown that the power of a Court of Equity over a trust estate places it where it stands like property specifically pledged. It may be placed out of reach of creditors, possibly, by sale or disposal by the trustee, but not by the mere creation of indebtedness, where vigilant creditors would secure advantages over others, but if misfeasance or nonfeasance were wasting assets, a Court of Equity might interpose. In a word a trust estate is always actually or potentially in the custody of a Court of Equity, 36 CHAP. V.] LIABILITY OF TRUSTEE FOR TORTS. [ 34. and for this reason its trustee may stipulate for exemption from personal liability in its management. The rule is not an unrea- sonable one as to indebtedness rightfully created under the provisions of an instrument creating a trust, and, if the indebt- edness is not of that character, the creditor may be in fault in permitting it to be incurred under color of authority. 33. Liability of Trustee For Negligence in Management of a Trust Estate. That trustees are liable in their personal capacity for acts of negligence seems not seriously disputed. Generally the question is whether or not the estate he represents is also liable. Thus in a North Carolina case 9 an action at law was brought where a railway company leased to a trustee and operated by him was sued as also was the trustee, in his of- ficial capacity. It was chiefly urged that the latter could not be sued in his official capacity and the trust estate held respons- ible for his negligence. The court in this case held the trust estate liable as an exception to the general rule, that only the trustee would be liable saying in reference to Taylor v. Davis, supra, and Mitchell v. Whitlock 10 that: "In neither of these cases was it held that the trust estate could not also be held responsible to the creditor. * * * * And in the present case, no doubt, the defendant Morrow (Trustee) could have been sued and held liable as an individual, because the intestate was one of his employees." This case will be again referred to when the question of liability of the trust estate is considered. 34. Liability of Trustee For Negligence in Management of a Trust Estate Continued. In a Rhode Island case, 11 non- liability of the trust estate was held in a cause of action arising out of negligence by the servants of the trustee, the court reasoning as follows: "The declaration shows that the legal title to the premises in front of which the accident happened Wright v. Caney River Ry. Co. (1909), 151 N. C. 529, 66 S. E. 588, 19 Am. & Eng. Anno. Cas. 384. 10(1897) 121 N. C. 166, 28 S. E. 292. llParmenter v. Barstow (1900), 22 R. I. 245, 47 Atl. 365, 63 L. R. A. 227. 37 35.] LIABILITY OF TRUSTEE FOR TORTS. [CHAP. V. was in the defendants at the time of the happening thereof, and that they were in the possession and control thereof. And, while it appears from the declaration that the beneficial interest in the estate belongs to others, yet, as the absolute legal title thereto is vested in the defendants, the law devolves upon them, in their personal capacity, all of the ordinary duties and liabilities which are incident to the ownership of real estate. They are not the agents of the beneficiaries, for a trustee is not an agent, in the strict sense of the term, and hence the relation of master and servant does not exist, so that the liabil- ities which trustees incur by their misconduct or negligence are personal liabilities." In a Massachusetts case 12 the trustees were sued for negligence in the running of a railroad. These trustees were such under a mortgage for the benefit of bond- holders and upon default entered into possession and continued its operation under a verbal agreement. It was held that, as the trustees were in control with no superior power above them, they therefore were principals. It is to be said of this case, that the trustee idea is not dominant, but the fact that those, who were trustees, were put in control as individuals. 35. Liability of Trustee For Negligence in Management of a Trust Estate Continued. In an English case, 13 the only question was whether or not a judgment creditor of the trustee sued in tort for negligence arising out of his acts as a trustee could have his judgment satisfied out of the trust estate. The case ruled that, if the trustee having paid such a judgment was entitled to indemnity, then the creditor should not be made to "go through the double process of suing the trustee, recovering the damages from him and leaving the trustee to recoup him- self out of the trust estate." This case shows that the liability of the trustee may be more extensive than the liability of the trust estate, whether to the trustee for indemnity or to the party to whom he has become individually liable. Recovery by either from the trust estate is based on the trustee's right l2Ballou v. Farnum (1864), 9 Allen 47. I31n re Raybould (1900), 1 Ch. 199, 82 L. T. N. S. 46. 38 CHAP. V.] SUMMARY. [ 37. to indemnity and that depends on whether the trustee "has acted with due diligence and reasonably." 14 36. Liability of Trustee For Negligence in Management of a Trust Estate Continued. In anothier Massachusetts case, 15 there was an action brought against a corporation for negligence of the janitor of a building leased to it. Several months after the lease an assignment was executed to certain trustees "giving them full power and authority to hold, manage and control the property for the remainder of the term under certain trusts, for the benefit of assignor and others." Accord- ing to the terms of this instrument, neither the defendant nor anybody else had any right to interfere with the management and control of the trustees so long as they properly executed their trust, and the trustees were not accountable for their con- duct of the business, except for the proper performance of their duties under the instrument. The court said: "It is plain the janitor was their servant and not the servant of the defendant. If there was any liability of a master for his con- duct as a servant Mr. B. and Mr. H. (Trustees) were liable and not the defendant." 37. Summary. These illustrative cases, announcing well settled principles, enable us to take up the next subject in the development of our purpose, viz: The right of the trustee to in- demnity out of the trust estate. I4lbid. iSFalardeau v. Boston Art Students' Assoc, (1903), 182 Mass. 405, 65 N. E. 797. See also Curry v. Dorr (1912), 210 Mass. 430, 97 N. E. 87. 39 CHAPTER VI. TRUSTEE'S RIGHT OF INDEMNITY. 38. Preliminary Observations. Necessarily as this woik progresses in the manner adopted for the clearer establishment of the propositions in its text, that is to say, by copious excerpts from decided cases, many things are quoted which forecast what is to be repeated further along. This, it is thought, should not be regarded as redundancy, because in every excerpt there is obviated the objection that the proposition stated is not sup- ported by the context in which the principle is found. In this way the authorities relied on may be distinguished or found to be adequate or not. 39. Trustees' Right of Indemnity. Recurring to the lan- guage of Justice Woods, 1 we see that he announces, generally, that: "When a trustee contracts, unless he is bound, no one is bound, for he has no principal," and "the trust estate cannot promise." Nevertheless, the learned Justice further says in ef- fect that the trustee may lawfully stipulate for freedom from personal liability, and that "the other party is to look solely to the trust estate." Also in this case, which showed a surrender by one trustee to the others, upon their promise, held to be per- sonal, to pay him what the trust estate was indebted to him, the retiring trustee "had the right (which he waived) to keep pos- session of the trust estate until he was paid." Therefore, here is indicated the trustee's right of indemnity. Therefore, also, a trustee is not held to a mere expenditure of income from a trust estate, with no power to contract indebtedness in advance of the accrual and collection of that income, unless, at least, the creating instrument specifically forbids him to anticipate income. In English cases, that, to which Justice Woods thus ITaylor v. Davis (1884), 110 U. S. 330, 334, 28 L. Ed. 163. 40 CHAP, vi.] TRUSTEE'S INDEMNITY. [ 39. merely alludes, is discovered to be the only basis of a trust estate's liability to third persons. Thus in a case decided in 1880 by Jessel M. R., 2 where an executor was directed to employ a specific portion of the estate of his testator in carrying on his trade, summonses were sued out by several creditors for goods supplied to the executor in carrying on this trade, to establish their claims against the trust estate. These summonses were dismissed, with leave to the creditors to present intervening petitions. The Master of Rolls said : "I understand the doctrine to be, that where a trustee is authorized by a testator, or by a settlor for it makes no difference to carry on a business with certain funds which he gives to the trustee for that purpose, the creditor who trusts the executor has a right to say 'I had the personal liability of the man I trusted and I also have the right to be put in his place against the assets; that is, I have a right to the benefit of indemnity or lien which he has against the assets devoted to the purposes of the trade/ The first right is his general right by contract, because he trusted the trustee or executor; he has a personal right to sue him and to get judgment and make him a bankrupt. The second right is a mere corollary to those numerous cases in Equity in which persons are allowed to follow trust assets. The trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the li- abilities; therefore the court says to him: 'You shall not set up a trustee who may be a man of straw and make him a bank- rupt to avoid the responsibility of the assets for carrying on the trade. The court puts the creditor, so to speak, as I under- stand it, in the place of the trustee. But, if the trustee has wronged the estate, that is, if he has taken money out of the assets more than sufficient to pay the debts, and instead of applying them to the payment of the debts, has put them into his own pocket, then it appears to me there is no such equity, because the cestuis que trust are not taking the benefit. The trustee having pocketed the money, the title of the creditor, so to speak, to be put in the place of the trustee, is a title to get 2In re Johnson, 15 Ch. D. 548. 41 40.] TRUSTEE'S INDEMNITY. [CHAP. vi. nothing, because nothing is due to the trustee." Whether the right of a creditor is so intensely derivative as this indicates greatly may be doubted, because, though it be held that the right against the trust estate is through the right of indemnity, never- theless confidence has been reposed by the testator or settlor, and not entirely by the creditor who extends credit, upon the presumption of the trustee's fidelity, the testator or settlor in- viting reliance thereon. Furthermore, it might appear that at the time the trustee contracted the debt for the benefit of the trust estate he had an equity and, if he afterwards converts its money, the relation back of his wrongful act ought rather to fall upon the trust estate than upon the creditor, as the trust estate and not the creditor continues to rely upon the trustee. 40. Trustees' Right of Indemnity Continued. In one of the cases, decided by Lord Eldon, 3 to which Jessel, M. R., refers, it is said, in distinguishing between creditors prior and those subsequent to testator's death : "As to creditors subsequent to the death of the testator, in the first place they may determine whether they will be creditors. Next, it is admitted, they have the whole fund that is embarked in the trade and in addition they have the personal responsibility of the individual with whom they deal, the only security in ordinary transactions of debtor and creditor. They have something very like a lien upon the estate embarked in the trade. They have not a lien upon any- thing else ; nor have creditors in other cases a lien upon anything else ; nor have creditors in other cases a lien upon the effects of the person with whom they deal; though, through the equity, as to the application of the joint and separate estates to the joint and separate debts respectively, they work out that lien." This language about joint and separate estates and joint and separate debts was occasioned by a contest between the creditors respec- tively before .and after testator's death. As to the latter, how- ever, it is clearly indicated that they have a debt against the trustee and "something very like a lien" against the trust estate. Of course, no lien could exist against the trust estate, except there be a debt against the trustee. In a later case decided by 3Ex parte Garland (1804), 10 Vesey 110. 42 CHAP, vi.] TRUSTEE'S INDEMNITY. [ 41. Lord Justice Turner, Lord Justice Knight Bruce concurring, 4 Ex parte Garland, supra, and other cases therein cited were ap- proved, the opinion saying: "They proceed upon the principle that the executor or trustee directed to carry on the business having the right to resort for his indemnity to the assets directed to be employed in carrying it on, the creditors of the trade are entitled to the benefit of that right, and thus become creditors of the fund to which the executor or trustee has a right to resort." Jessel, M. R., was merely contending, that, if the trustee had no right of indemnity because of his wrongful acts, the creditors would be cut out, though there might remain a fund employed in the trade, and that these cases did not foreclose that contention. However, Ex parte Garland says the creditors have "something very like a lien" on the assets embarked in the trade, which seems to mean a lien on the whole of such assets, resting on a valid indebtedness against the trustee. In other words, the indebtedness is that of the trustee; its security some- thing in the nature of a lien on the entire trust estate. 41. Trustee's Right of Indemnity, Where the Indebtedness is in Tort. In a much more recent English case, 5 where peti- tioner had obtained a personal judgment against a trustee for negligence, Byrne, J. said : "It has been argued that there is no authority to justify me in holding that, where damages have been recovered against a trustee in respect of a tort, the person so recovering can avail himself of the trustee's right of indem- nity, and so go directly against the trust estate ; but the author- ity of Bennett v. Wyndham, 4 De Gex, F. & J. 259, goes to show that, if a trustee in the course of the ordinary management of his testator's estate, either by himself or his agent, does some act whereby some third person is injured, and that third person recovers damages against the trustee in an action for tort, the trustee, if he has acted with due diligence and reasonably, is entitled to be indemnified out of his testator's estate. When once a trustee is entitled to be thus indemnified out of his trust estate, I cannot myself see why the person who has recovered *Ex parte Edmunds (1862), 4 De Gex. F. & J. 488. Bin re Raybould (1900), 1 Ch. 199, 82 L. T. N. S. 46. 43 42.] LIABILITY OF TRUST ESTATE [CHAP. VI. judgment against the trustee should not have the benefit of this indemnity and go directly against the trust estate or assets, as the case may be, just as an ordinary creditor of a business carried on by a trustee or executor has been allowed to do." Further along, the Judge finding that he was "not prepared" to say the injury was "occasioned" by reckless or improper working of the colliery (the trust estate), the petitioner was held entitled "to be indemnified" out of the trust assets. This case is better understood than the statement by Jessel, M. R., supra, in regard to the trustee pocketing assets. The holding is something like discussion in regard to ultra vires acts com- mitted by a corporation, though apparently the right to recover is more confined than by that doctrine. At all events, however, these cases abundantly show, as said by Justice Woods, supra, that unless the trustee is bound no one is bound, and it is only through his being bound, that a trust estate may be resorted to. American cases may or not be less strictly predicated on the indemnity idea, and of this we shall presently see. 42. Liability of Trust Estate Through Indemnity, as Shown by American Cases. In the English cases above referred to there is discussed the principle of liability, without reference to any express provisions in instruments creating a trust estate for embarkation in trade expressly declaring the liability of the trusts for the acts and contracts of trustees, and this course we shall pursue. Afterwards these instruments appearing both in English and American decision will be considered. In one of the Massachusetts cases, 6 a suit in Equity was brought against trustees under a will to reach and have a trust estate applied in payment of their debts. By the will testator devised his mills and manufacturing business to three trustees with that business to be continued until a younger son should attain his majority, when the trust estate was to be conveyed to his two sons. The trustees were empowered to provide for outstanding and current liabilities, and incur such liabilities on account of the trust estate as a wise and prudent management might require. Provision was made for their compensation, and that they should not be SMason v. Pomeroy (1890), 151 Mass. 164, 24 N. E. 202. 44 CHAP. VI.] THROUGH INDEMNITY. [ 42. liable for any loss to the trust estate not involving bad faith on their part and at the termination of the trust and before its transfer or conveyance they were to be indemnified against any then existing personal liability incurred in the proper execution of the trust. The elder of testator's sons was one of the trustees and, disagreements arising in the management of the business, the trustees other than the son retired. There were two classes of creditors, or at least the retiring trustees claimed, that those becoming creditors before they retired should be preferred to subsequent creditors, even contending that the latter had no claim .against the trust estate at all. In other words, the claim was advanced that, as the single trustee managing the estate after the retirement of the other two had no right of indemnity, be- cause of his wrongful acts, these later creditors had no right of recovery out of the assets of the trust. The court states the general principle as follows : "Where trustees, who are authorized to carry on a business contract debts, they are not only liable personally for the payment of them, but the creditors may also resort to the trust fund, subject, however, to the rules of equity, as applicable to the facts and circumstances which may exist in any particular case." 7 Inasmuch as this question was raised on demurrer and it could not be said that creditors should be thus classified, unless the evidence should show the remaining trustee had no equity, a demurrer to the bill should have been overruled. However, as testimony was taken by a master, it was said there was no finding that the remaining trustee was guilty of any fault involv- ing bad faith on his part. The court was careful, however, to say that it does not decide : "Whether, as a general rule of Equity, the rights of the plaintiffs would be qualified thereby in case ^Cases cited: Ex psrte Garland, 10 Ves. 110; Ex parte Richard- son, 3 Madd. 79; Owen v. Delamere, L. R. 15 Eq. 134; Cutbush v. Cutbush, 1 Beav. 184; Thompson v. Andrews, 1 Myl. & K. 116; Bur- well v. Mandeville, 2 How. 560; Smith v. Ayer, 101 U. S. 320, 330; Jones v. Walker, 103 U. S. 444; Pitkin v. Pitkin, 7 Conn. 307; Lewin on Trusts (7th Ed.) 217. 45 43.] LIABILITY OF TRUST ESTATE [CHAP. VI. it should be found that he (the remaining trustee) was himself subject to such equity." 43. Liability of Trust Estate Through Indemnity, as Shoivn by American Cases Continued. In a North Dakota case, 8 the question whether the trustee's right to indemnity was the in- dispensable basis of a claim by a creditor against a trust estate was not directly involved. The court, in arguing, said, how- ever: "The trustee may claim reimbursement from the funds in his hands for any proper expenditure made by him in the exe- cution of the trust; and this equity is the foundation of the right of the creditor, under peculiar circumstances, to proceed directly against the property itself." To this are cited several cases, English and American, and among the latter, Mason v. Pomeroy, supra, in which case, as we have seen, this principle was not decided, but the court appeared to doubt its correctness, if thereby was meant that this equity is the sole foundation of the creditor's right. By another one of the cases cited, 9 this principle does appear to receive considerable, if not absolute, support. Thus the facts show, that a husband and wife con- veyed her separate property to a trustee upon trust for her use during life and a remainder in fee for the use of her children living at the time of her death. The trustee was to permit the husband "as agent for said trustee, and as agent and trustee for said (wife) and as agent and trustee for her children after her death, to superintend, possess, manage and control said property for the benefit of all concerned." The concluding clause in the deed is: "My intention is that said (husband) shall be regarded for the purposes of this deed, not merely as an agent, but also a co-trustee," with the other trustee to be in no manner responsible for his acts and conduct. Both husband and wife having died, plaintiffs sued in equity for a balance claimed by them to be due by the surviving trustee, contending that this was a charge in equity upon the trust estate. The court said that the trustee other than the husband was "a trustee SWells-Stone Mercantile Co. v. Grover (1898), 7 N. D. 460, 75 N. W. 914. 9Hewitt v. Phelps (1881), 105 U. S. 393. 46 (.IIAP. VI.] THROUGH INDEMNITY. [ 43. merely of the title without any active duties in regard to the estate," and, therefore, there was ''no equitable charge against the estate through the supposed liability" of him. It was also said it is "quite plain that he was never personally answerable for 'the obligations created by" the husband, "and his alleged assumption of the account may be rejected as incompetent to create any such liability on his part." It was said also his ad- mission could create no charge against the estate. The only way, if any, for the creditors to reach the estate was through their claim against the husband as co-trustee. Upon this the court said : "Does his insolvency create an equity to reach the estate, for the benefit of which the advances are admitted to have been made?" This being an appeal from a Circuit Court sitting in Mississippi, the court first expresses its concurrence of view with Mississippi cases hereinbelow referred to. Then it says, in speaking of the right of the creditor, by way of ex- ception, to resort to the trust estate : "The ground and reason of this rule are, that the trustee has an equity of his own, for re- imbursement for all the necessary expenses to which he has been put in the administration of his trust, which he can en- force by means of the legal title to the trust estate vested in him; and that his creditor, in case of his insolvency or absence from the jurisdiction, may resort to the equity of the trustee, upon a principle of equitable substitution or attachment for his own security." Then the court, premising that this principle might not apply at all to indebtedness created by the husband, because the legal title was not vested in him, yet says that even, if it might be extended to this case, it ought to appear, but does not, what was the condition of the account at the husband's death. "For aught that appears, he may have had in his hands means enough belonging to the estate to satisfy all demands against it." Therefore it was held that the estate could not be reached. This case is very strong support for what was said by Jessel, M. R., 10 about a creditor's equity being defeated by a trustee pocketing funds of the trust instead of paying its debts. The suggestion above as to distinguishing to ascertain whether at the time credit was extended the trustee had an re Johnson (1880), 15 Ch. D. 548. 47 44.] LIABILITY OF TRUST ESTATE [CHAP. VI. equity or if he deprived himself of it afterwards, is not referred to. If, however, the creditor once acquired a right against the trust estate, subsequent acts by the trustee ought not to defeat it. 44. Liability of Trust Estate Through Indemnity as Shown by Other American Cases. One of the Mississippi cases 11 expressly approved in Hewitt v. Phelps, supra, shows a suit in reference to the same trust estate, but it was made liable, the reason therefor being found in the following language from the opinion: "Generally the trustee alone must be looked to. He stands between the creditor and the estate. He represents the estate and deals for it. He is entitled to be reimbursed out of the trust estate for all disbursements rightfully made by him on account of it, and creditors must get payment from him; but when they cannot do that, and it is right for the trust estate to pay the demand, and it owes the trustee, or would owe him, if he had paid or should pay the demand, the rule founded in policy, which denies the creditor access to the trust estate, yields to the higher considerations of justice and equity; and in order that justice may be done, the creditor may be substituted, as to the trust estate, to the exact position, which the trustee would occupy, if he had paid or should pay the demand, and seek to obtain reimbursement out of the estate. Applying these prin- ciples to the facts of this case, it will be found that they bring it within the exception stated." The other Mississippi case referred to 12 was a suit to reach an estate through a contract for legal services rendered upon employment by an administra- tor. Norton v. Phelps, supra, declared that it stated a well- settled principle. There it was declared that: "If the creditor can show that the consideration of his demand inured to the benefit of the estate and is unpaid; that the administrator is non-resident or insolvent; has never received credit for it in his settlements, and that the estate is indebted to him, in such case the creditor may, by bill in chancery, have himself subro- gated to the rights of the administrator against the estate, and UNorton v. Phelps (1881), 54 Miss. 467. 12Qopton v. Gholson (1876), 53 Miss. 466. 48 CHAP. VI.] THROUGH INDEMNITY. [ 45. to that extent have satisfaction of his demand out of its assets." Here it is suggested, that there reasonably might be a distinc- tion between an administrator, purely an officer by statute, being indebted to an estate and the right of subrogation being value- less, and the trustee of a trust embarked in trade, and subroga- tion or right of indemnity being equally confined, a cestui que trust might be so affected with notice of a trustee's misconduct as to be estopped against claiming the trust estate should not be liable, whether he has any valuable right to indemnity or not. In other words, if his misconduct has by anticipation cut him out of indemnity, cestui que trust ought in equity to be considered under duty to have him removed, or the presumption exist, that creditors do have what Lord Eldon says is "some- thing very like a lien upon the estate." 13 Also, if at the time of the extension of credit the trustee had a right to indemnity, to which the creditor might be subrogated, his subsequent mis- conduct should not defeat subrogation. It is certain that by the continuance of a decedent's interest in a partnership, a will creating a trust in the business, a trust estate may be made liable for all the present and future debts of the partnership. 14 In the cases just cited the controversy was whether the general estate of the testator or only that part embarked in business was liable for such debts. The holding was that the latter was the case. But in such a case the misconduct of the surviving partner acting as trustee could scarcely be interposed, even though he was indebted to the business. In other words, the only difference resulting from death of one of the partners was that the joint and several liability of partners was destroyed, the live partner still remaining personally liable. In other re- spects the partnership would remain as it formerly was. 45. Summary. These cases very strongly enforce the idea parte Garland (1804), 10 Vesey, 110. Hfiurwell v. Mandeville (1844), 43 U. S. (2 How.) 560; Smith v. Ayer (1879), 101 U. S. 320; Jones v. Walker (1880), 103 U. S. 444; Ex parte Richardson (1818), 3 Madd. 79; Thompson v. Andrews (1832), 1 Myl. & K. 116; Pitkin v. Pitkin (1829), 7 Conn. 307. 49 45.] SUMMARY. [CHAP. vi. that a trust estate is not known to the creditor at all, or, if known, it is only looked to by way of security. The trustee is the debtor and unless his act or contract entitles him to reim- bursement upon any claim therefor made against him, that se- curity vanishes, though the trustee's individual liability may continue. 50 CHAPTER VII. LIABILITY OF TRUST ESTATE. Directions Creating Primary Liability. 46. Liability of Trust Estate Where Creating Instrument so Provides. The deduction made in the preceding chapter, as to a continuance of a testator's interest in a partnership being carried on at the time of his death and its liability for all its debts, presents occasion for easy transition to considering the status of a trust estate, where the instrument of creation pre- scribes its liability for the acts and contracts of its trustee. In an early Pennsylvania case, 15 there was a deed of settlement and it declared that: "The property and funds hereby granted shall be subject to all legal charges and expenses in carrying on the business, and all debts heretofore contracted by Thomas in carrying on the business shall be paid out of the property hereby conveyed." The court said: "The authority given the trustee is very ample; so general and comprehensive, that when applied to, and explained by the usual mode of doing business of the kind entrusted to him in this community, it must be con- sidered as sufficient power to contract debts. * * * * Now when it is considered that a great portion of the goods and effects was what was commonly called a store which required to be renewed from time to time, we cannot doubt but it was the intention of the grantor to give the power of contracting debts upon the credit of the fund or property. It would be monstrous to hold that the trustee, altogether without prop- erty, as appears from the deed of trust, should be allowed to carry on business on the strength of the trust property, and then to permit him or anyone else to allege that the trust property was not liable, because he was not expressly author- iSMatthews v. Stephenson (1847), 6 Pa. St. (Barr) 496. 51 46.] DIRECTIONS CREATING PRIMARY [CHAP. VII. ized to contract debts, in so many words." This was an action at law against the guardian of the children cestuis que trust and the question was, whether there could be a recovery to be levied out of the trust estate. The lower court's holding that there could not be, was reversed. In Mason v. Pomeroy, 16 considered in the next preceding chapter, the will provided specifically for the incurring of liabilities on account of the trust estate and that the trustees should not be liable for any loss to the trust estate. These provisions and the fact that they related to a trust embarked in trade most probably accounts for the caution expressed by the Massachusetts Court in refus- ing to say whether a creditor's right to go upon the trust estate depended upon the trustee's right to indemnity. As the court found, as a fact, that the trustee was not in default, it was un- necessary to decide this point. In a recent Pennsylvania case, 17 an action based on negligence was brought against A and B "trustees, trading as John Lucas & Company". The evidence showed a deed of trust and the court said that: "Under its provisions the trustees were empowered to deal with the prop- erty as if they were the absolute owners thereof. It is also provided that no responsibility whatever shall result to them by reason of misconduct of agents or employees, also for neg- ligence there shall be no liability or responsibility upon the part of the trustees. It was clearly intended that the risk of any loss in this respect should be assumed and borne by the trust estate." Nothing further is said in the opinion and it appears that the trustees were not claimed against in their in- dividual capacity at all. The principle of liability of the trust estate is very positively stated, but why or how the plaintiff could proceed directly against it in an action at law is not shown, nor is any authority cited. In a North Carolina case, 18 a trustee was sued in his official capacity in an action for damages, and the trust estate held liable. The court explained that this procedure could be adopted in a court having full 16(1890), 151 Mass. 164, 24 N. E. 202. 17p r jnz v. Lucas (1905), 210 Pa. 620, 60 Atl. 309. !8\Vright v. Caney River Ry. Co. and Morrow Trustee (1909), 151 N. C. 529, 66 S. E. 588, 19 Am. & Eng. Anno. Cas. 384. 52 CHAP. VII.] LIABILITY OF TRUST ESTATE. [ 47. jurisdiction of legal and equitable issues and where a part of the trust fund is in the control and custody of the court and available in satisfaction of the claim. It matters little whether that is a valid reason or not for the point at present involved. The trust estate was held liable, specially because the manage- ment of the trust estate was under the supervision and control of the beneficiaries. In the Pennsylvania case last above cited the trustees were held rightly proceeded against in their of- ficial capacity because the trust estate was under their absolute control and "it was clearly intended that the risk of any loss" was to be "borne by the trust estate." But it was said in the Wright case: "It is true, as a general rule, that a trust fund cannot be subjected to legal liability by reason of the torts of the trustee or his agents and employees, but this doctrine ordi- narily exists in the case of passive trusts, or when active, in those instances where the power and duties of the trustee are so defined and restricted by the law or the provisions of the instrument under which he acts, that the principle of imputed responsibility .similar to that which lobtains in the fcase of principal and agent cannot prevail." There is more or less of unsatisfactory statement in this quotation, but it at least an- nounces clearly, that in an active trust there is liability for the acts of the trustee unless restrictions by law or the creating instrument this is not so. This rule takes no account of a creditor's remedy through a trustee's right to indemnity, but through imputability, as in the relation of principal and agent, that is to say imputability so far as the trust estate is con- cerned. But imputability so far as cestui que trust is con- cerned is another question. 47. Liability of Trust Estate Where Creating Instrument so Provides Continued. In a Massachusetts case, 19 an agree- ment provided for non-liability of shareholders in an unincor- porated association to third parties for the acts and contracts of trustees, that all contracts by them should specifically provide against any personal liability on their part and that only the property of the trust estate should be answerable. lHussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. 53 47.] DIRECTIONS CREATING PRIMARY [CHAP. VII. The agreement did not specifically say that only the property of the trust estate was to be answerable, but it was said by the opinion, that the trustees could provide against such li- ability "in accordance with the direction of the agreement." This case and the one it cites will be referred to hereafter in reference to the general right of a trustee to limit his personal liability, and the effect of such a limitation as giving the right to proceed directly against the trust 'estate. In a Federal Court case 20 by Putnam, C. J., affirmed by Circuit Court of Appeals, an agreement creating a trust, the shareholders in a joint-stock association being the cestuis que trust, did provide that any money borrowed by the trustees for taxes and the necessary expenses of the trust "shall be and remain, until paid, a lien upon all funds and moneys belonging to this trust or thereafter in the hands of the trustees, in preference to any claim of any shareholders as such upon such funds and moneys." It also provided against shareholders being bound personally; for the trustees in all contracts making reference to the declara- tion and that all persons and firms or corporations contracting with the trustees shall "look only to the funds and property of the trust for payment." This case was a suit upon a note given by the surviving trustee saying that "the trustee of the Topeka Land and Development Company, as such trustee under declara- tion of trust dated May 23rd, 1887, and not otherwise, promise to pay" etc. The court said: "It was the duty of the plaintiff to ascertain for itself what powers the trustees had in the premises. * * * Whether or not the plaintiff examined the articles of association, or knew their contents, is of no conse- quence, because this express provision (in the note) required it to do so, or take the hazard of not doing it." The court then goes on to inquire whether a provision limiting the creditor's remedy to the general assets of the trust is contrary to the rules of law and holds it is not, because "the entire property of the association was held in trust," a court of chancery being bound to "apply it equitably and proportionally to the discharge of obligations incurred by the trustee." In other words a 20Bank of Topeka v. Eaton (1900), 100 Fed. 8; s. c. 107 Fed. 1003, 47 C. C. A. 140. 54 CHAP. VII.] LIABILITY OF TRUST ESTATE. [ 48. trust estate, unlike a legal estate, is subject to no dissipation at the expense of general creditors by way of preferences to particular creditors, and, if the only interest of a cestui que trust therein is represented by a share of stock, no homestead or exemption laws may interfere with equitable distribution among creditors. 48. Embarking Trust in Trade as Pledging it for Debt. There are cases which seem to proceed on the theory that em- barking a trust in trade amounts to a specific statement that it is primarily liable for the contracts and acts of its trustee. Thus in a Pennsylvania case, 21 the facts show that testator devised all his property to his brother in trust to possess, hold and manage it as a business for the benefit of certain cestuis que trust. The trust estate, as well as the trustee, became insolvent. The character and nature of the different kinds of business car- ried on by testator required large credits. The court said : "These credits were obtained by the trustee in conducting the same, and the creditors upon the faith of the trust estate gave them. * * * While the wife and the others are named in the will as cestuis que trust, there came into existence, by reason of the power of the trustee, the estate embarked in trade, the credit given the trust estate in the business, a class of per- sons whom equity, in case of insolvency, will protect by the preservation of the trust property from destruction or dissipa- tion. This equity has its foundation in the estate which is embarked in trade and to which credit has been given. Trust property which has been embarked in business is primarily liable to creditors for debt, and will be applied as far as it will go to the liabilities. (Hill on Trustees, 4th Ed. * 443.)" Further along, as to this estate, the court said: "As it is in- solvent, and the trustee, as the master finds, is also insolvent, he became a trustee for creditors. As such he was bound to protect all their rights and preserve the trust estate for dis- tribution among them according to their respective rights, and he had no right to give a preference to any of them." There- 21Woddrop v. Weed (1893), 154 Pa. St. 307, 26 Atl. 375, 35 Am. St. Rep. 832. 55 48.] EMBARKING TRUST IN TRADE [CHAP. VII. fore, the court in this case held that the creditor's claim for an account with the trust property to be divided ratably among all the creditors was sustainable, and certain promissory notes, with warrants of attorney to confess judgment, acquired no priority. This decision elevates the general credit of a trust estate over that of a corporation or individual, with its or his right to prefer one creditor over another. Here, too, we dis- cover that the trustee's own misconduct or the existence or non-existence in him of a right to indemnity, was not suggested, but where the estate is embarked in trade it "is primarily liable to creditors," and creditors become preferred cestuis que trust. The opinion also quotes from Lord Eldon that the creditors "have something very like a lien upon the estate embarked in trade." 22 In a Texas case, 23 the contention of non-liability of a trustee, in his personal capacity, appears to have been based mainly upon the fact, that the trust was embarked in trade. The court said: "Although the plaintiffs knew that the defendant was conduct- ing the mercantile business of which he had control and manage- ment as trustee for the benefit of the persons mentioned in the conveyance and charged the goods when sold to (the trust estate) the defendant was nevertheless personally liable to the plaintiffs for the price of the goods." The court also adopted the text from Hill on Trustees, *533, that so far as this per- sonal liability is concerned: "It is immaterial that the trade is carried on by him in consequence of express direction in the trust instrument; although the trust property will doubtless be primarily liable to the creditors and, will be first applied so far as it will go in discharge of the liabilities." This theory of primary liability seems, however, not to operate in the way of postponing right of recovery against the trustee in the first instance, because, possibly, as he has control of the trust estate he should be able to take from its funds to discharge his per- 22x parte Garland (1804), 10 Vesey, 110. 23Connally v. Lyons (1891), 82 Tex. 664, 18 S. W. 799, 21 Am. St. Rep. 935. 56 CHAP. VII.] AS PLEDGING IT FOR DEBT. [ 49. sonal obligation incurred for the benefit of the trust and this is all that a court could do for him. 49. Special Contract Relieving Trustee From Personal Liability. The right of a trustee to relieve himself from per- sonal liability in his contracts as such has been ruled to be an independent right. In other words, if he stipulates clearly and unambiguously for his release from personal liability when acting in a representative capacity, it has been ruled, that his stipulation is valid, whether or not the trust estate is bound by the contract. Thus in a Massachusetts case, 24 an action at law was brought against the makers individually upon a note, on the face of which it was stated that "we as trustees but not individually promise", etc. The note was signed by the makers with the words "Trustees" following thereafter. It did not appear from the note for whom or for what they were trustees and it was contended that the word "trustees" was "a mere description of the general relation or office which the per- sons signing the paper hold to another person or to a cor- poration." This contention was held not sustained, because, said the court, this "would require us to strike out the words 'but not individually', although in so doing" we should not only alter the contract, but should impose upon them a liability which apparently they took special pains to avoid." Then as showing the absolute right of the trustees to stipulate, the court further said: "It is contended that if these defendants are not liable upon the contract as a note, then nobody is liable. Even if such were the fact, it would not be in the power of the court to alter the contract for the purpose of giving it validity." The court also announced the general principle that: "If a party in a contract into which he voluntarily enters, and not in the execution of any official trust or duty, makes it an ex- press stipulation that he is acting for somebody else, and is in no event to be personally liable, he certainly cannot be ren- dered so at law." This case was later approved by the same 24Shoe & Leather Nat'l. Bank v. Dix (1877), 123 Mass. 148. See also Glenn v. Allison (1882), 58 Md. 527. 57 49.] LIABILITY OF TRUST ESTATE [CHAP. VII. court 25 in a case where the agreement creating the trust di- rected that trustees should in all contracts stipulate that they were not to be personally liable. In another case, 26 the reason for the validity of such a stipulation is based upon the fact that thereby the creditor could apply directly to a Court of Equity "as contemplated by the express direction of the articles of association that the debtors of the trust should look for pay- ment solely to its property." This last case, perhaps, may be said still to leave the question open as to whether such way would be open in the absence of such contemplation in an in- strument creating the trust. On this subject the next follow- ing case from New York 27 is pertinent. In this case there was no trust embarked in trade, but real estate had been con- veyed to the trustee upon trust to receive the rents and pay over the net income to the life tenant with remainder over. The trustee having no funds in hand and repairs being needed, they were made upon the credit of the estate. The court said : "The general rule undoubtedly is, that a trustee cannot charge the trust estate by his executory contracts unless authorized to do so by the terms of the instrument creating the trust. Upon such contracts he is personally liable and the remedy is against him personally. But there are exceptions to this general rule. When a trustee is authorized to make an expenditure, and he has no trust funds and the expenditure is necessary for the pro- tection, reparation or safety, of the trust estate, and he is not willing to make himself personally liable, he may, by express agreement, make the expenditure a charge upon the trust estate. In such a case he could himself advance the money to make the expenditure, and he would have a lien upon the trust estate, and he can by express contract transfer this lien to any other party, who may upon the faith of the trust estate, make the ex- penditure." This ruling was based on an older case, 28 which held that for the necessary protection of the trust estate "there is no rule of law or equity which would prevent the trustee as- 25Hussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. 26fiank of Topeka v. Eaton (1900), 100 Fed. 8. 27New v. Nicoll (1878), 73 N. Y. 127, 29 Am. Rep. 111. 28Noyes v. Blakeman (1852), 6 N. Y. 567. 58 CHAP. VII.] THROUGH STIPULATION. [ 49. signing his own lien." "Shall", the court said, "the trustee stand by quietly and see the objects of the trust utterly frustrated? Rather than suffer it, the law will infuse into the trust deed a provision to enable the trustee to exercise the necessary power, if possible, to prevent it." In other words, even as to trusts not embarked in trade, or where the creating instrument does not specifically state, the trust estate may not be directly liable for debts created in its management, yet they may be made so by the law "infusing" into that instrument the necessary power for them to become thus liable. These two cases, it is perceived, plainly recognize that a trust estate can be charged by the trustee when "by the terms of the instrument creating the trust" this is pro- vided, and they rule that, even when it does not so provide, if an expenditure is necessary for the preservation of the trust estate, a trustee, unable or unwilling to become personally liable or to advance the necessary funds, may transfer his lien to an- other. Generally, too, it may be said that in the absence of a reservation against personal liability, the trustee becomes per- sonally liable, even if the trust deed provides he shall be free from personal liability. Thus as said by Holmes, J., in speak- ing as to a particular case: 29 "It was also true, of course, that the fact that the trust deed provided that the defendants (trus- tees) should be free from personal liability, i. e., under the deed, did not limit their authority to contract personally with the plaintiff, if they saw fit." In an Illinois case, 30 it was sought to proceed directly against a trust estate, where a former trustee had engaged the services of plaintiff, a broker, to ob- tain a loan. Before negotiations could be concluded the trustee died and his successor obtained the loan from another. It was held that the trustee was personally liable and this liability sur- vived his death. However, the broker's compensation, it was said, could have been made by the trustee a specific lien on the trust fund had the contract between the broker and the trustee so specified, as the services were beneficial to the estate. 29American Mining & Smelting Co. v. Converse (1900), 175 Mass. 449, 56 N. E. 594. 30J hnson v. Leman (1890), 131 111. 609, 23 N. E. 435, 7 L. R. A. 656, 19 Am. St. Rep. 63. 59 50.] SUMMARY. [CHAP. vn. In a Rhode Island case, 31 trustees sought to escape personal liability on a note endorsed by them as trustees. They claimed that the trust being one embarked in business and the note be- ing indorsed by direction of the will and this being known to the holder, this constituted a mere pledging of the trust estate. The court, however, held that a trustee is held personally liable upon his contracts as trustee because he has no principal, or, rather, he is the principal himself. "Therefore it was not thought that the fact that the defendant trustees were em- powered by the will, and it was made their duty to indorse the notes in suit, is sufficient to relieve them from liability upon their indorsements, they not having stipulated that they were not to be so liable."^ 50. Summary. The array of authority and excerpts there- from shown in this and the next preceding chapter abundantly sustain the proposition that a trust estate may be made liable, where a debt has been incurred for its benefit. However, it also appears that the trustee is liable in the first instance, where he does not otherwise stipulate. Liability, however, would seem always to depend upon the debt being one contracted by the trustee by virtue of his powers as such, or upon an act reason- ably in the administration of the estate confided to his manage- ment. 31Roger Williams et al. Bk. v. Groton Mnfg. Co. (1889), 16 R. I. 504, 17 Atl. 170. 32See also Mitchell & Co. v. Whitlock (1897), 121 N. C. 166, 28 S. E. 292. 60 CHAPTER VIII. CESTUIS QUE TRUST OF A TRADING TRUST. English Decisions. 51. Unincorporated Associations. The fact, that various business enterprises have been attempted to be carried on by joint-stock and other unincorporated associations leads to an in- quiry into the relations of members inter sese and to the con- tracts and acts of the business carried on by such associations. In England these associations came into disfavor to such an extent that what is known as "The Bubble Act" was enacted in the early part of the Eighteenth Century for their suppres- sion. It was, however, the form, which the agreements or ar- ticles for these associations took, more than the fact of their tormation, which called down upon them the law's denounce- ment. Afterwards, legislation in regard to partnerships, called "Companies Acts" prescribed certain regulations where mem- bers in a partnership exceeded a designated number. The form, to which allusion is above made, was the providing for mem- bership in and by the ownership of transferable shares. It was by the issuance of such shares, that wild schemes were ex- ploited, along with representation, that there was no personal liability attaching to their ownership. Furthermore, actions either at law or in equity were difficult to bring or be brought, by reason of an infinite number of necessary parties thereto. 52. English Decisions as to Associations With Transferable Shares. The purport and bearing of the "Bubble Act" was treated nearly a hundred years after its passage, and, in con- sidering whether or not an association with transferable shares was condemned, Lord Ellenborough, C. J., said: 1 "Independent of the general tendency of schemes of the nature of the project iKing v. Dodd (1808), 9 East 516. 61 52. J UNINCORPORATED ASSOCIATIONS. [CHAP. VIII. now before us to occasion prejudice to the public, there is be- sides in this prospectus a prominent feature of mischief; for it therein appears to be held out that no person is to be account- able beyond the amount of the share for which he shall sub- scribe, the conditions of which are to be included in a deed of trust to be enrolled. But this is a mischievous delusion cal- culated to ensnare the unwary public. As to the subscribers themselves, indeed, they may stipulate with each other for this contracted responsibility; but as to the rest of the world it is clear, that each partner is liable to the whole amount of the debts contracted by the partnership." It is seen, that the opinion was not that the issuance of transferable shares was il- legal or objectionable, but the representation that there was no relation of partnership, with liability attaching thereto, which gave to the project a fraudulent aspect. Three years later the Lord Chief Justice considered more fully the effect of the "Bubble Act" upon associations with transferable shares. 2 There was a prosecution under indictment against one Webb and others for the formation of such an association. The Lord Chief Justice in rendering judgment for defendants, said among other things: "The enacting part in Section 19 relates to all such unlawful undertakings and attempts so tending to the com- mon grievance, etc., and the making or taking of any subscrip- tions for that purpose, etc. It is only, therefore, where the sub- scription is with reference to undertakings, etc., which the act prohibits, that it is illegal. The act does not apply indiscrimi- nately to all subscriptions. The purpose for which this capital was raised, viz : The buying of corn, etc., not manifestly tend- ing to the common grievance, and being in this case expressly found to have been beneficial, the only remaining question is this, whether, as the shares in this institution are, to the extent which has been pointed out, transferable, the defendants have offended against this act in respect of having raised such a description of transferable stock. It may admit of doubt, whether the mere raising transferable stock is in any case, per se, an offense against the act, unless it has relation to some undertaking or project which has a tendency to the common grievance, prejudice or 2King v. Webb (1811), 14 East 506. 62 CHAP. VIII.] ENGLISH DECISIONS. [ 53. inconvenience of his Majesty's subjects or of great numbers of them." Then his Lordship holds that at least shares of limited transferability such as were provided for by this company did not come under the act. 53. English Decisions as to Associations With Transferable Shares Continued. Lord Eldon thought, or appeared to think, that joint-stock associations were illegal at common law, because they could not "effectually demand what they had a right to demand or be effectually sued for that for which they were liable," all of this because of the partners being so numerous courts practically could not attend to all the necessary parties in a suit. 3 But Lord Brougham in 1832 expressly denied this proposition, 4 saying: "To hold such a company illegal would be to say that every stock company not incorporated by charter or act of parliament is unlawful, and, indeed, indictable as a nui- sance, and to decide this for the first time, no authority of a decided case being produced for such a doctrine. The clause intimating that each subscriber is only to be liable to the extent of his share is not enough to make the association illegal; such a regulation is wholly nugatory, indeed, and can serve no pur- pose whatever, unless to give notice. * * * * For the pur- pose of restricting the liability of the shareholders, it would plainly be of no avail ; and whoever became a subscriber upon the faith of the restricting clause, or of the limited responsibility, which that holds out, would have himself to blame and be the victim of his ignorance of the known law of the land." This case was followed in 1843 by a decision by Tindal, Lord Chief Justice, 5 in which he said : "The raising and transferring of stock in a company cannot be held, in itself, an offense at com- mon law ; such species of property was altogether unknown to the law in ancient times; nor indeed was it in usage and prac- tice until a short period antecedent to the passing of the Statute ("Bubble Act"), as is evident from the preamble to the 18th section which recites that it is notorious that these projects and 3Van Sandan v. Moore (1826), 1 Russ. Ch. 441. 4Walburn v. Ingilby (1832), 1 Mylne & K. 61, 76. 5 Garrard v. Hardey, 5 Manning & Granger, 251. 63 54.] SUMMARY OF ENGLISH CASES. [CHAP. VIII. undertakings, which it is the object of the clause to put down, had been contrived and practiced within the Kingdom since the 24th of June, 1718, evidently showing that the act was look- ing to some grievance of late introduction. And as that clause has been repealed, we find no authority for holding that an allegation that the parties raised and transferred stock is simply and per se, without any statement of the mode by which it in- jures and defrauds the public, an indictable offense at common law." In 1859 Romilly,*M. R., said: 6 "I have listened in vain for any case, or indeed for the statement of any principle, whereby at common law and independent of any statute, a partnership between persons who agree among themselves that their shares shall be legally assignable, is absolutely void or illegal. I find no case which determines it, and no principle on which it can rest, nor am I able to conjecture why such an association should be void at common law. It does not appear to me to offend against society, or to injure any class of individuals, and, there- fore, unless bound by distinct authority, I should not be the first judge to hold that such an association was void at common law." 54. Summary of Above Cases. These cases indicate merely a prejudice against transferable shares of stock in an unincor- porated association, as a kind of aftermath of the calamity that succeeded their employment in such schemes as "The Bubble Act" was enacted to suppress. Investment in these shares was the avenue of approach to thousands willing to gamble upon the delusive promises of wealth in extravagant prospectuses scat- tered broadcast over England. But the extent only to which English decision went in regard to the issuance of such shares seems to be, that they could be regarded as a means to a fraudu- lent end, but in a beneficial, lawful enterprise they could be law- fully provided for. It is also to be observed, that the liability of shareholders as partners was only considered as to under- takings carried on by an unincorporated joint-stock association 6R e Mexican & So. Am. Co., 27 Beav. 474, 4 De G. & J. 320. 64 CHAP. VIII.] TRUSTS WITH TRANSFERABLE SHARES. [ 55. as such. There was not yet evolved the idea of such an associa- tion forming the nucleus for investment in shares in an enter- prise, the title in and control over the property of which was to be in trustees. This development appears in English cases next herein to be considered. 55. Transferable Shares in a Trading Trust. To show how pointedly different in England was the old idea in an associa- tion, a mere partnership, with interests therein measured by transferable shares, carrying on a business through a board of directors, and a similar association causing title to property embarked in trade to be vested in trustees, who were to man- age and control it according to their own discretion, a some- what extended consideration should be given to a notable case decided in 1880. 7 The English Companies Act of 1862 pro- vided that any association consisting of more than twenty per- sons, formed for the purpose of carrying on business, that had for its object the acquisition of gain by the association, or by the individual members thereof, should, to be legal, be registered as a company under said Act. A shareholder in a Submarine Cables' Trust sued to have it wound up as being illegal for want of such registration. Sir George Jessel, M. R., rendered judgment specifically declaring that it was an association of more than twenty persons formed for such a purpose "without being registered as a company under said act," and he "ordered that the affairs of the association should be wound up." This judgment was reversed on appeal, with directions that the ac- tion be dismissed, Lords Justices James, Brett and Colton of the Court of Appeals all concurring in separate opinions. The association or trust was constituted by a deed between six per- sons, called in the opinions trustees of the one part, and a seventh person, called in said opinions the covenantee, "for and on be- half of all the holders for the time being, of the certificates here- inafter mentioned," of the other part. This deed recited that various persons had subscribed in or for the purchase by said trustees of the stock, shares and debentures of certain submarine telegraph companies as set forth in an attached schedule, all TSmith v. Anderson, 15 Ch. Div. 247-285. 65 55.] TRUSTS WITH TRANSFERABLE SHARES. [CHAP. VIII. of which had been transferred to said trustees on the books of said companies, and it was designed to issue to said subscribers certificates of shares according to their subscriptions respectively. The trustees covenanted to hold said stock, shares and deben- tures, called scheduled securities, in trust, and from the income pay expenses of the trust, not to exceed a certain sum, to pay interest at six per cent upon the face value of the certificates and for redemption of so many of said certificates as the sur- plus income would permit. Between periods of distribution of this income, the trustees could make investments in Exchequer Bills or the income deposited in bank at interest. These trustees were also given power to sell any of the scheduled securities upon a minimum premium above what they were purchased for and the proceeds of sale should be treated as surplus income, unless they unanimously resolve and their resolution be con- firmed at a meeting of the stockholders that other securities of the same character be purchased and held subject to the same trust as the scheduled securities. Then follow provisions for annual meetings for stockholders, which meetings may receive reports, appoint auditors and elect new trustees to fill vacancies. It was said in a prospectus inviting investment in shares of the trust, that : "A person desirous of holding Submarine Cable shares can thus by a minimum of trouble and expense diminish the risk of investing in any one particular undertaking by spread- ing his investment over a number of undertakings." The holders of these certificates far exceeded twenty in number. Sir George Jessel, M. R., went into an elaborate consideration of various clauses and summed up his conclusion as follows: "It does ap- pear to me that this is as plain a company or association for the transaction of business for the purpose of gain as could be put fairly into words, if you change names and nothing more. If you call the certificate holders 'shareholders' and call the trustees 'directors' and call the association a 'company', changing those three names, you have about as simple a description of an ordinary company under the Act as I think you can well have. I am satisfied, as far as I am concerned, that this is not only within the words of the Act, but is the very thing which the Act intended to prohibit for various reasons, and that this 66 CHAP. VIII.] SMITH V. ANDERSON. [ 56. is a mere device, and a very transparent one, to endeavor to escape from the plain meaning of the enactment." Evidently, this case must have been argued on the theory that this arrange- ment was a mere holding trust, but Sir George Jessel's analysis of its provisions was that it was active, with trustees to em- ploy their time in carrying on its affairs and therefor to be com- pensated. The opinions of the Lords Justices will now be looked to as to whether they regarded the trustees or the cestuis que trust as carrying on the business. 56. Scope of Opinions in Smith v. Anderson on Appeal. The point was squarely made on appeal that there was a mere "trust for investment" and not a carrying on of business. The powers given the trustees were called merely incidental to the main object. On colloquy with counsel, Brett, Lord Justice asked : "What is the 'business' here ?" And counsel replied : "The Act of original investment, the putting out the money which the certificate holders contribute and the management of the investments." And the Lord Justice said : "But do the cer- tificate holders carry on that business?" Counsel then replied: "Yes, the trustees invest as servants of the association." Fur- ther along James L. J. asked: "Can the certificate holders be held liable on contracts? Could anybody but the trustees be made liable for rent, if the trustees did not pay it ?" Counsel re- plied: the company under his agreement and by the nature of the busi- ness done. The object in buying was not to mine or operate in any other manner, but to sell again so as to make gain by the purchase and sale of land, and the articles provided for the divi- sion of the profits made by such purchase and sale among the stockholders. The interest of each member was therefore an interest in the profits made. He had no title to the land bought by the trustees for the Company, as a tenant in common or otherwise and could neither convey nor encumber it. His in- terest in it was personal estate and the extent of that interest was shown by his certificates of stock." If each certificate holder is the owner of personal property, he, of course, has the exclusive right to call the trustees to account with reference to- 16Estate of Oliver (1890), 136 Pa. 43, 20 Atl. 527, 9 L. R. A. 421, 20 Am. St. Rep. 894. 116 CHAP. XII.] CESTUIS AS CERTIFICATE HOLDERS. [ 86. his interest, or to join with other certificate holders in seeking an accounting not affecting remaining certificate holders. Even though for some purposes, as for example taxation as pointed out, 17 or in the spirit of the rule against a corporation going into a partnership, 18 a voluntary association formed mere- ly as an incident in the creation of a business trust may be deemed a partnership, yet, if it is not designated itself to carry on any business and no one holds himself out or is authorized to hold himself out as capable of contracting for the association, is there a partnership? Even in voluntary joint stock associa- tions carrying on a business it is not every member that can bind the others as partners. It is only in "an ordinary part- nership, unless special provision is made in that behalf, each partner may act authentically in the business of the company and bind the company thereby." 19 Thus it has been stated by a text writer in speaking of un- incorporated joint stock associations: "If the concern is com- posed of numerous members, and is governed by managers there is no implied power in the other members to act." 20 In a Texas case it was attempted to hold the members of a joint stock as- sociation as partners for money advanced by a bank upon the order of the association's manager without authority of its di- rectors, and they were held not liable, 21 the court saying that it was expressly provided by the articles of which the bank had notice that: "The board of directors alone shall have power to contract debts against the concern." In 17 Am. & Eng. Encyc. of Law, p. G38, it is said : "Although a joint stock company is a partnership, it is a partnership of a different description, and attended with different incidents and liabilities, from a partnership constituted between a few in- ITWilliams v. Boston, supra. ISWilliams v. Johnson, supra. lOWalker v. Wait (1878), 50 Vt. 668. 20 i Bates on Partnership C. Ill Sec. 72. 2lWilliam Cameron & Co. v. First Nat'l. Bank (1893), 4 Tex. Civ. App. 309, 23 S. W. 334. 117 87.] TRUSTEE'S RESPONSIBILITY TO ASSOCIATION. [CHAP. xn. dividuals who carry on business jointly, with equal powers and without transferable shares. All who have dealings with a joint stock company know that the authority to manage the business is conferred upon the directors, and that a shareholder, as sucn has no power to contract for the company. For this purpose it is wholly immaterial whether the company is incorporated or unincorporated." If, however, it has no business to be managed, but its mem- bers are represented as cestuis que trust, and no power has been conferred on any officer or director to manage any busi- ness for it, then by the instrument establishing the trust and the trustees' acceptance thereof and action thereunder is not an immediate, and not an indirect, relation established between the shareholders and the trustees? The moment it appears that there is direct responsibility by the trustees to the shareholders of course, the general principles of equity in favor of cestuis que trust become operative. In a very elaborate opinion by the Supreme Court of Idaho 22 the nature of voluntary unincorporated joint stock associations is treated, and therein it was held that, though certain officers of such an association entered into an agreement with another, it did not bind the shareholders, as partners, because power therefor had neither been given nor ratified, in a word, the authority of such officers was construed in the same way as that of officers of a corporation. Similarly it was ruled in a Texas case. 23 87. Theory of Trustee's Responsibility to the Association. The record in Clagett v. Kilbourne, 24 frequently hereinbefore re- ferred to, is very incomplete, as published, but the court there regarded the debts created through the acts of the trustees as acts of a joint stock association, whose articles gave them au- thority to perform certain acts. It does not appear whether 22Spotswood v. Morris (1906), 12 Idaho 360, 85 Pac. 1094, 6 L. R. A. (N. S.) 665. 23Willis v. Greiner (1894) (Tex. Ct. App.), 26 S. W. 865. 24(1861), 66 U. S. (Black), 346. 118 CHAP, xii.] TRUSTEE'S RESPONSIBILITY TO ASSOCIATION. [ 87. these trustees were vested or not with full discretion, or if they were under the control of the association. It seems, how- ever, they performed some acts, presumably by direction or con- sent of the stockholder, for which express power by the articles was not granted. At all events an association was called a partnership and responsible for all indebtedness arising out of the platting, improving, buying and selling of lands for which the association was organized. A judgment creditor of a stock- holder levied an execution upon an undivided interest corres- ponding to his debtor's interest in the property, upon particu- lar lots. It was held that this could not be done, as the debtor of a partner could only levy on his interest in the partnership, and what that was could only be ascertained after settlement of partnership liabilities. Still viewing the association as a partnership and the trustees as its agents the court said : "In this case the legal title is in the trustees, who are bound to account to the stockholders, the cestuis que trust, according to their respective shares after all debts of the association have been discharged. The equity of the judgment creditor is the interest in the land, after a sufficient portion of it has been disposed of for this purpose." This case is not like a case of trustees managing property producing income for distribution among cestuis que trust, but managing property in which a surplus was to be distributed after cost of purchase and expense in handling should be refunded. This surplus was to be profit and not income from use, and in that aspect the partnership idea cut no figure, the equity of the stockholders being the same whether the property was handled by the association or the trustees. Nevertheless the gen- eral principle is stated, that where the association does carry on business through its officers or agents it is a partnership, and even if there is liability by a trustee directly to share- holders, it is only after the association's debts are paid. But, if the association does not, as shown by Smith v. Anderson, supra, carry on any business, then it contracts no debts and there is nothing to come between a trustee's accounting "to the stock- 119 88.] SUMMARY. [CHAP. xn. holders, the cestuis que trust", and there is no authority by any officer or director given by articles of an association to con- tract any indebtedness, the partnership debts, which this decision speaks of, cannot exist. This theory of direct responsibility of the trustees to shareholders is shown in a recent decision by the Supreme Judicial Court of Massachusetts, 25 where some, but not all, of the shareholders joined in a suit against trustees of a trust estate capitalized at an amount divided into shares. There was a decree in favor of the shareholders, with recovery to be ratably distributed, and, as showing particularly how each interest was considered separately, the trustees were held not liable to account to a shareholder for losses caused by their mis- conduct participated in by such shareholder, but to all the others according to their respective interests. It is to be noted here also that this trust was formed in a way very similar to those considered in Williams v. Boston and Williams v. John- son, supra, and this later case aids the construction hereinabove urged as to these cases. 88. Summary. It would seem, therefore, reasonably estab- lished, that, at least, if the instrument creating a trust for busi- ness purposes, in which trust interests are represented by trans- ferable shares, intends that there shall be direct accountability of its trustees to the holders of the shares, such relation will be fully recognized as that of trustee and cestuis que trust. That being true, it would follow, that the usual equitable remedies, and those at common law when applicable, could be employed when a shareholder's interest separately considered needed the ; r aid. As to any limitations attaching to a shareholder being one of a great number of cestuis que trust, it is thought he would stand no differently than, if he was one of a great num- ber of other cestuis que trust whose interests are not thus de- fined. 25Ashley v. Winkley (1911), 209 Mass. 509, 95 N. E. 932. 120 CHAPTER XIII. PERPETUITIES AND RESTRAINTS UPON ALIENATION. 89. Trusts by Settlors for their Sole Benefit. A perpetuity is obnoxious to American jurisprudence, primarily because it creates an absolute suspension of the power of alienation. The creation of a trust naturally suggests, though it does not neces- sarily involve, the idea of such suspension. The suggestion, however, does not create a disfavor against trusts, for they are favorites of equity. At most, it inclines the mind to scrutiny to see whether under the cloak of a trust any undue restraint upon alienation is attempted, the law of every state permitting some restraint. But trusts, as holding high place in jurispru- dence, are truly portrayed by an eminent legal author as follows :* "The system of trusts is now so thoroughly recognized that, according to the laws of property in England and in other coun- tries where the English common law is in force, it is one of the rights of ownership that this division of the complete title should, if desired, take place. If the absolute owner of the property wishes for any reason to have the equitable title only vested in him and the legal title outstanding in another, he has a per- fect right to hold and enjoy his property in that way. Nor is it necessary that the cestui que trust should be under any disabil- ity in order that he may enjoy this privilege. A person sui juris, and who is absolute owner of property, may avail himself of the system of trusts, and may keep the legal title outstanding in another as long as he sees fit so to do." Mr. Bispham, in saying this, also had in mind the ordinary constitution of a trust for the benefit of others than the creators, as, of course, is universally the case of a testamentary trust and, generally, of other trusts. But basing the right to create at all on ownership, he deduces the principle that "division of IBispham's Principles of Equity (6th Ed.) Sec. 49. 121 89.] RULE AGAINST PERPETUITIES. [CHAP. XIII. the complete title" may be as well for one s own enjoyment of the equitable interest as for that of another. This proposition was discussed by Lord Cairns as follows: "The arguments on behalf of the respondent appeared to me to go almost to this, that whenever you have an equitable owner who is the absolute owner, that is to say, entitled to the whole equitable interest, such a person ought not to have a trustee at all holding indicia of legal ownership; or, if he chooses, for his own purpose, to have such a trustee, he must be in danger of suffering for every act of improper conduct by that trustee; and that, therefore, if the person entitled absolutely to the equitable interest in a share in a railway company, chooses for his own purpose to have that share standing in the name of a trustee for him, he will be bound not merely by a valid legal transfer of that share by the trustee, but by any equitable dealing or contract which the trustee may choose to enter into. That is a very serious proposition. It goes not merely to shares, but it goes to land and to every other species of property; and it goes to say that, whereas there is a large, well-known, recognized and admitted system of trusts in this country, that system of trusts is to be cut down and moulded and reduced to this, that it is to be a system applicable only to infants, married women or persons with limited interests, and that wherever the limited interest has ceased, and the equitable interest has become entire and com- plete without any limit, there the equitable owner is under some measure of obligation with regard to his duty of watching his trustee, an obligation which does not lie upon a limited owner. I find no authority for such a proposition, and I feel satisfied that your Lordships will not be disposed to introduce, for the first time, that as a rule of law." 2 The other Lords agreed. This case was followed later, 3 Chitty, J., saying that it was "the case of an ordinary trustee holding property of the kind in question for a cestui que trust." That a testator may create a trust and vest both the income and remainder in the same persons and they, though their inter- 2Shropshire U. R. & C. Co. v. The Queen (1875), L. R. 7 H. L., 1. c. 507. SCarritt v. Real and Personal Advance Co. (1889), 42 Ch. D. 263. 122 CHAP. XIII.] RULE AGAINST PERPETUITIES. [ 90. ests may be reached by creditors, may not by their joint act terminate the trust in contravention of the express provisions of the will, has been held. 4 The court said: "While the will vests the fund in the testator's four children, it does not give them an absolute estate and then impose restrictions and con- ditions repugnant to the estate, but gives an ownership qualified by the directions that the property is to remain for a time in the hands and control of the executors as trustees. Whether the testator made these provisions for one purpose or another is immaterial, since he had the right to order as he did." This case shows a "division of the complete title" exactly in the way that results from a settlor conveying the legal title to a trustee and reserving the entire equitable interest in himself, except that it will scarcely be said he could not revoke his own direc- tions that the property should remain in the hands of his trustee for a time less than that appointed, a consideration to be ad- verted to later on in this chapter. Indeed it will be inquired further along whether or not this very right of revocation does not wholly differentiate this kind of a trust from all of those which work a forbidden suspension of the right of alienation. 90. The Nature of Perpetuities. Consideration of the rule against perpetuities shows that it concerned itself about limitations which postponed the vesting of property to a re- mote time, thereby causing undue restraint upon alienation. Thus it has been said: "No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest." 5 And a definition approved by the United States Supreme Court 6 is as follows: "A perpetuity may be defined to be a future limitation, restraining the owner of the estate from alienating the fee of the property, discharged of such future use or estate, before the event is determined, or the period is arrived when such future use or estate is to arise." 7 Thereupon the court said: "It is then a limitation upon the jus 4 Young v. Snow (1897), 167 Mass. 287, 45 N. E. 686. BGray on Perpetuities (2nd Ed.), sec. 201. 6Perin v. Carey (1860), 65 U. S. (24 How.) 1. c. 494. ^Sander's Essay upon Uses and Trusts, 196. 123 91.] SUSPENSION OF ALIENATION. [CHAP. XIII. disponendi of property, upon the common law right of every man to dispose of his land to any other private man at his own discretion." These descriptions show that a perpetuity affects in no way a vested interest, because "ex vi termini it is not subject to a condition precedent," 8 and it does not matter that such an interest may not give a right to the possession, as for example a remainder or reversion, where no contingency may prevent a future right of possession." 9 Inasmuch as these business trusts reserve to cestuis que trust the entire equitable interest in property, immediately vesting by the terms of instruments creating them, and there are no limitations as to any future interest or estate to arise upon some condition precedent, it would seem impossible for such a trust to be declared void under any rule against perpetuities. There- fore, it will be inquired whether such a trust may be unlawful as suspending the right of alienation. Such suspension has been spoken of inaccurately as a perpetuity, but as no perpetuity is forbidden that does not operate as a suspension of the right of alienation during a prescribed period, it is sufficient to inquire wherein these trusts may contravene any rule of law against restraints upon alienation. This inquiry will relate to no ques- tion of a future estate, except incidentally, as none by these trusts is contemplated. 91. Suspension of the Right of Alienation. Restraint upon alienation is a part of, or inheres in, the rule against perpetuities, but it is not sufficient alone to raise application of the rule. Thus Mr. Gray says it is a "mistaken idea that a trust violates the Rule against Perpetuities because it is to last indefinitely." 10 Nevertheless, a trust, if it effects or may effect an absolute suspension of the right of alienation beyond a prescribed period, would seem to be contrary to American statutes, and, possibly, to the spirit of American decision, whether it could be deemed 8 Gray on Perpetuities, (2nd Ed.) Sec. 205. SVanderpool v. Loew (1889), 112 N. Y. 167; Seaver v. Fitz- gerald (1886), 141 Mass. 401. lOGray on Perpetuities (2nd Ed.), Sec. 412. 124 CHAP. XIII.] SUSPENSION OF ALIENATION. [ 92. opposed to the strict rule against perpetuities or not. At all events, it is from this aspect and out of an abundance of caution, that these trusts will be treated in this chapter, for it is certain, that, if a trust agreement does not work an undue restraint upon alienation, it cannot offend the rule against perpetuities. Employing the words of Mr. A. C. Freeman in a very elaborate note on perpetuities, 11 it will be inquired whether the "terms of a trust are such, that in the performance of the duties con- fided to them, the trustees may be required to hold the title, without the power of alienation on their part, beyond that permitted by the statute of the state forbidding any disposition of property which may restrain the power of alienation beyond the time designated therein," and additionally if the trustees are so required, for example, by a testamentary trust, if the statute would apply where settlors, making themselves owners of the entire equitable interest, may alter such requirement. That a testamentary trust can be made to continue for a definite period, beyond the time when all interests are vested, by the mere fiat of a testator and against the joint act of trustees and beneficiaries seeking to terminate it, has been held by the Supreme Judicial Court of Massachusetts. 12 But it scarcely is to be doubted, that the creator of a trust may, with the consent of all interested therein, change its terms. If he may, a requirement therein that trustees have no power of alienation, is not conclusive of an absolute suspension thereof. 92. Suspension of Power of Alienation Must be Absolute. A very interesting case of a trust organized "to last indef- initely," using the language of Mr. Gray, and which was held not to cause even a suspension of the power of alienation was decided by the Illinois Supreme Court. 13 This trust in land was organized for the sole benefit of its creators and assignees to whom they might convey their separate equitable interests, represented by shares in the capital stock of the trust. The court said: "The land was to be conveyed to the trustees to be 1149 Am. St. Rep. 129. 12Young v. Snow, supra. 13Hart v. Seymour (1893), 147 111. 598, 35 N. E. 246. 125 92.] SUSPENSION OF ALIENATION. [CHAP. XIII. subdivided and improved and then sold, and the time of sale ' was left wholly to their discretion. Indeed the whole scheme of the association was to purchase, sub-divide and improve suburban property for the purpose of placing it at once upon the market for sale. No trust term was created and a convey- ance of the land or any part of it at any time was no violation of the trust. Where there are persons in being at the creation of an estate, capable of conveying .an immediate and absolute estate in fee in possession, there is no suspension of the power of alienation, and no question as to perpetuities can arise." It was unnecessary for the court to say that even had the trustees been required to hold the title indefinitely, this could have been changed by all parties in interest and who were themselves creators of the trust, because the trustees were granted by the trust, a power which prevented there being any suspension of the power of alienation. In a Massachusetts case 14 there was a trust without a trust term and with no power in the trustees except as directed by the directors of an unincorporated asso- ciation to sell. The court said: "Such a trust for the conven- ience of an unincorporated association in renting and selling land, under which the land is held for no other purpose, and where the income is not accumulated but is distributed as it accrues and where the land is to be sold free of trusts at the will of the association, and where the whole equitable interest in the trust is at every moment vested absolutely in those who at that moment are shareholders, and never can become vested in any other persons save by act of the absolute owners or by operation of law upon their property, and not by force of any limitation contained in the deed of trust, the equitable interests so vested being also constantly vendible by their several owners with- out let or hindrance, as well as subject to their debts and passing like other property upon death by virtue not of the deed of trust, but of the general laws governing the disposition of property of decedents, withdraws no property from commerce, and is not within the reason or terms of what is called the rule against perpetuities." 14Howe v. Morse (1899), 174 Mass. 491, 55 N. E. 213. 126 CHAP. XIII.] SUSPENSION OF ALIENATION. [ 92. It is to be said that Massachusetts has no statute modifying this rule, but even if it had and it merely condemned suspension of the power of alienation, without reference to any future limi- tation as to vesting, this trust would not have been condemned, because it was said that it "withdraws no property from com- merce." While the point is not material with respect to suspension statutes, yet the claim of perpetuity made in the case because of transferability of shares is convenient to be noticed, so far as what this court said on the point. It said : "The provisions by which the trust fund may be at some time held for the benefit of persons not shareholders at its inception, and who may become such, at a period more remote than that allowed by the rule, are not future limitations made by the trust deed in the sense in which the word 'limitation' is used in speaking of the operation of the rule. If there shall ever be a shareholder other than those in whom the whole equitable estate was abso- lutely vested at the inception of the trust, that shareholder will not take his interest by virtue of a limitation in the trust deed, but because of his succession by virtue of the general principles of law to the property of the original shareholder. * * * The entire ownership is never for a moment uncertain nor unvested, and at every moment each owner can freely dispose of his property, and at each moment it can be transferred to his creditor by the ordinary process of the law, and at each moment the trust can be terminated at the will of the owners of the equitable interest." It seems too plain for argument that the possessors of "the entire ownership" could terminate such a trust at any moment, whether there were a trust term stated or not, and this language is significant in view of what the court said in Young v. Snow, supra, where there was a testa- mentary trust. The author of that trust had commissioned no one to shorten the term he had prescribed. The point was also made, that as no direction could be given for a sale by the trustees except by a three-fourths vote of the shareholders this made a possible title continue in the trustees beyond a term allowed by law, as had been held in a prior case by this court. 15 ISWinsor v. Mills (1892), 157 Mass. 362, 32 N. E. 352. 127 92.] SUSPENSION OF ALIENATION. [CHAP. XIII. But the court distinguished the two cases as follows : "The provision in the present trust, that the shareholders are not to have any interest or title in the trust property itself and no right to call for partition, and that the share shall be personal property, is not a restraint upon alienation, since the alienation of the legal and equitable ownerships are provided for. It does not appear, and cannot be assumed, that the persons who organized the association and became its shareholders had title to the land held by the trustees. Their whole interest comes through the shares which are vendible without restraint. In Winsor v. Mills, Philbrick, who held the title, owned two undivided thirds of the land and held the remaining undivided third in trust for Mills, under an explicit agreement that no sale or conveyance of the land, or of any part thereof, or any interest therein, should be made by Philbrick, his heirs or assigns, except upon the written consent of Mills, his heirs or assigns ; and there was also a provision by which a part of the land might be pur- chased by Mills or his heirs or assigns at a specified price, at any time before the land should be otherwise sold or disposed of. These were restraints upon alienation, and were held void because they might continue too long. The purpose of the trust was to prevent alienation of the land and to keep it out of commerce. Neither of the owners could convey his own share in the property and the land was intentionally tied up." It was claimed in the Winsor case that the rule against per- petuities only applied where it was impossible for the owners of the estate to convey it, but the court said this was not ac- curate in reference to many cases which come within the rule, and it would not apply it to a case where land is to be held in fee simple, but to be "inalienable so long as a certain other estate remains the property of the owner and his descendants." In other words, this would be to recognize the existence of a condition precedent to the right to convey a fee simple title, a condition intentionally withholding such a title from commerce. In New York where unlawful suspension may accrue by rea- son of a trust-term, with no power of alienation while the trust existed, if the term exceeded or might exceed the prescribed 128 CHAP. XIII.] SUSPENSION OF ALIENATION. [ 92. period, the court said: 16 "The mere creation of a trust does not, ipso facto, suspend the power of alienation. It is only sus- pended by such a trust, where a trust-term is created, either expressly or by implication, during the existence of which a sale by the trustee would be in contravention of the trust. Where the trustee is empowered to sell the land, without re- striction as to time, the power of alienation is not suspended, although the alienation in fact may be postponed by the non- action of the trustee, or in consequence of a discretion reposed in him by the creator of the trust. The statute of perpetuities (N. B. the court calls this a statute of perpetuities, though it is not strictly such, but only a statute against restraints upon alienation) is pointed only to the suspension of the power of alienation, and not at all to the time of its actual exercise, and when a trust for sale and distribution is made, without restric- tion as to time, and the trustees are empowered to receive the rents and profits, pending the sale for the benefit of beneficiaries, the fact that the interest of the beneficiaries is inalienable by stat- ute, during the existence of the trust, does not suspend the power of alienation, for the reason that the trustees are persons in being who can at any time convey an absolute fee in posses- sion." The observation the court makes about interest of bene- ficiaries being inalienable can, of course, have no application to interests in trusts this book is considering, as we have shown that a settlor cannot thus provide for himself against his creditors and by the trusts themselves shares are transferable. But the strength of the court's ruling is emphasized by such a remark. In a later New York case 17 expressly approving Roberts v. Corning, supra, a residuary estate was held not subject to the perpetuities statute upon the following reasoning: "The pay- ment of the bequest of the residuary estate to the trustees in Scotland was to be made by the executors as soon and when the same was converted into money. The fact that such con- version might require a period of time not measured by lives ISRoberts v. Corning (1882), 89 N. Y. 225. "Hope v. Brewer (1892), 136 N. Y. 126, 32 N. E. 558, 18 L. R. A. 458. 129 92b.] SUSPENSION OF ALIENATION. [CHAP. XIII. does not create an unlawful perpetuity. * * * It was within the legal power of the executors to convert the whole estate into money the day after their appointment and qualification, and to pay over the residuary fund to the foreign trustees, and this fact would seem to constitute a sufficient answer to the con- tention that the absolute ownership was suspended, by any reason of any power or duty conferred upon the executors." Where there was a provision in a will that the executor should not be compelled to make partition, division and apportionment, until after five years from the probate of the will where, as in New York, suspension is measured by lives, this was held not objectionable, because "the power of sale was not suspended. He could sell and convey an absolute fee in possession at any time after the testator's death." 18 92b. No Suspension Where Settlors Are Sole Cestuis. As showing that it is only where a trust is created in favor of another or others than where the trustor or settlor is the sole beneficiary, that the instrument must alone be looked to, to ascertain whether there is an absolute suspension of the power of alienation, a decision by New York Supreme Court seems very pertinent. 19 In that case it was claimed that a deed of trust reserving the income to the trustor for life with a power of appointment by will to say where it should then go, there was a violation of the rule against perpetuities It was said : "It may be gravely doubted whether that deed of trust imposed a single fetter upon the hand of the testator to write such a will as he saw fit. He was not executing a power of appoint- ment given to him by another. His was not an act which de- rived its force from any delegated authority. * * * It is difficult to imagine who could object to that testator's conveying abso- lutely the property referred to in the trust instrument during life * * * notwithstanding the trust deed. After that deed of trust was delivered the vital ownership of the income and the ISHenderson v. Henderson (1889), 113 N. Y. 1, 20 N. E. 814. 19United States Trust Co. v. Chauncey (1900), 66 N. Y. Supp. 563, 32 Misc. Rep. 358. 130 CHAP. XIII.] SUSPENSION OF ALIENATION. [ 92b. property itself remained in the trustor." This as to a single settlor or trustor seems to show there can be no absolute sus- pension of the power of alienation where "the vital ownership of the income and the property itself remains in the trustor," and every word would seem applicable to several trustors who may act in unison. In a decision by the New York Court of Appeals 20 it was said, where a like reservation was made in a deed of trust: "He reserved therein the beneficial interest during his life and a power of appointment by will. This was little less than owner- ship." But another New York case 21 gives yet stronger expression to the principle indicated by the New York Court of Appeals in the Livingston case, supra. Thus a trustor transferred all of his property to a trustee to manage and pay trustor the in- come for life and at death transfer it to such persons as he should by will appoint. It was claimed that the will and the deed taken together violated the rule against perpetuities, though standing alone neither would. If the deed was irrev- ocable it was conceded that the two must be taken together. The court said: 22 "It is not true that the trust was irrevocable. It is only in cases where other parties besides the person creating the trust have an interest therein that the trust becomes irrev- ocable. We see nothing that would have prevented the de- ceased from revoking the trust if he had desired to do so. No one had any interest to prevent his doing so." Therefore it was held that there was no term whatever created by the trust deed, which could be taken into account upon the question of there being or not any suspension of the power of alienation under the New York perpetuities statute, as it is familiarly called, notwithstanding that on the face of the trust deed there was a trust term specified. 20N. Y. L. Ins. & T. Co. v. Livingston (1892), 133 N. Y. 125, 30 N. E. 724. 21Re. Ogsbury (1896), 39 N. Y. Suppl. 978, 7 App. Div. 71. 22ltalics are by the author. 131 92b.] SUSPENSION OF ALIENATION. [CHAP. XIII. The cases from New York last above cited refer to a single settlor or trustor and it is asserted that in principle they apply to more than one trustor. Happily this point has been directly passed upon by New York Court of Appeals. 23 There the court said: "If there is a present right to dispose of the entire inter- est, even if its exercise depends upon the consent of many per- sons, there is no unlawful suspension of the power of alienation." Infancy of beneficiaries has been held to have no effect on the question of there being or not an unlawful suspension of alienation. 24 The court said in the case just cited: "I have treated this just as if all the children were adults at the death of their mother, as the statute is aimed only at the suspension of the power of alienation by the terms of the instrument, and not such as necessarily arises from the disability of infancy, or from other causes outside of the instrument." But if an instru- ment is revocable by adults, as shown In re. Ogsbury, supra, so as not to be capable, whatever its terms, of creating an unlawful suspension of the power of alienation, it also should be thus regarded as to infants, or the law will treat the shield of personal privilege in their favor as a sword against them. In Wisconsin it was said as to a testamentary trust, which was of indefinite duration, that the power of alienation was not unduly suspended both because the trustee could sell at any time, and, thd will containing no prohibition, express or implied,, against terminating it, there were parties in being who could by uniting cause its termination, when they became sui juris, 2 * thus very plainly declaring that any necessary postponement arising out of infancy is not to be considered, when there would otherwise be in existence those capable of conveying a fee in possession, so far as the question of undue restraint of trade is concerned. 23Williams v. Montgomery (1896), 148 N. Y. 519, 1. c. 526, 43- N. E. 57. 24Beardsley v. Hotchkiss (1884), 96 N. Y. 201, 214. 25Holmes v. Walten (1903), 118 Wis. 409, 95 N. W. 380, 62 L_ R. A. 986. 132 CHAP. XIII.] ACCUMULATIONS. [ 94. 93. Power of Sale With Directions to Reinvest. It is be- lieved to be well established that, though a trust instrument may authorize a sale by trustees, yet, if the proceeds of sale are to be reinvested upon the same uses and trusts, the theory of undue restraint of trade will be applied. It is clear that this would not take a devise or legacy out of the rule against perpetuities, though it may be conceivable that such a provision in a trust might be thought not to offend a rule against suspension of alienation. It could be urged, in the latter case, that the prop- erty of the trust was not thereby withdrawn from commerce, and investment and reinvestment, over and over again, keeps it in commerce. Especially might this contention seem forceful as to a business trust for divers reasons, chief among which is that the very purpose of the trust is not to withdraw property from, but to embark it in, commerce. Additionally there is the fact, as shown by decisions, supra, that the trust itself is at all times revocable and parties are at every moment of its existence, capable of conveying absolute title to any purchaser. It is unnecessary to discuss the cases on the question of reinvestment, as none is of a trust for the trustor's sole benefit, and it should be frankly conceded, that, if this kind of a trust may create an absolute suspension of alienation, despite the principles in the cases we have cited, the mere suggestion above made must be considered upon its merits or the lack thereof, there being no authority found on the precise point. 94. Directions for Accumulation. It is difficult to under- stand how a trust inter vivos devoting property to a gainful pursuit could come under the description of a trust for accumu- lation, even though it provided for its profits being added to capital in conformance with requirements of the business or in the discretion of the trustees reserved as surplus, out of an abundance of caution. All such arrangements amount, at most, to an increase of capital to be employed in the same way that the original capital was at first employed. If the shareholders are the sole owners of equitable interests and virtually of the capital itself, by agreement they may increase or diminish it at their pleasure. It is trust property, but it is not corpus in the 133 94.] ACCUMULATIONS. [CHAP. XIII. same sense as in an ordinary testamentary trust. Cases regard- ing corpus and its accumulated rents and profits to be held for a definite period or upon the arising of some future event, are of trusts not for the exclusive benefit of settlors, but where the accumulation provisions are integral, irrevocable conditions or limitations upon the trust. This view as to accumulation of profits receives support from a decision by the New York Court of Appeals, 26 wherein it appears that testator had provided in his will as follows: "I direct that my executors hereinafter named, or such of those named as shall qualify as such, their survivors or successors, shall prosecute or carry on with my estate or property, my present business under the firm name of Garner & Co., for and during the lifetime of my wife, Mary Marcellite, and my daughter Florence, and the survivors of them, and all profits and gains arising from said business shall, after the sums set apart for the support of my wife and children, as hereinafter provided are deducted, be added to and form a part of the work- ing capital of my estate." The business was conducted as di- rected, and consisted in the manufacturing and selling of cotton goods on a very large scale. The case here under consideration came up as a result of an accounting in which the daughters claimed $3,748,314.84, as having been illegally added to working capital from the surplus profits and gains of the business. The New York statutes provide that directions for accumulation of income, in whatever form, from real, or personal property are only permissible when made for the benefit of minors and for the duration of their minority. The court in a unanimous opin- ion held that, although trustees in the management of a business may apply "earnings from the business to the perfecting of its earning capacity, or to its protection in various ways, and the action of the trustees in doing so, if seen to have been a reason- able exercise of discretion, would be sustained by the Courts," still an absolute direction to accumulate without reference to business needs offended the New York statute and rendered the direction to accumulate void. However, as the par- 26Thorn v. De Breteuil (1904), 179 N. Y. 64, 71 N. E. 470. 134 CHAP. XIII.] LAWFUL DURATION. [ 95. ties in interest had assented to various previous accountings wherein "the aggregate of the profits and gains had been added to the capital of the estate," they were estopped from after- wards setting up a claim to them as constituting illegally with- held income. 95. Laivful Period of Suspension of Alienation. It has been thought advisable to consider whether upon principle such a trust as this work is concerned with could be deemed, even when not specifying a trust-term, to work an unlawful suspension of the right of alienation. This assists to a clearer understanding of the nature of such a trust and to differentiate it from one in which cestuis que trust have, as said by Lord Cairns, supra, 26a "limited interests", and not where "the equitable interest has become entire and complete without any limit." Then, too, it is found, that abundance of caution, if nothing else, has suggested to trustors with entire and complete equit- able interests, without any limit, to fix a term for the dura- tion of a trust agreement. This is an easy requirement where lawful suspension is not measured by a life or lives in being, but it is not so easy where such is the measurement of dura- tion. Nevertheless, even that measurement admits of practi- cable employment, conceding, for the sake of argument, that a trust-term should be stated. In a Wisconsin case where there was a suspension of aliena- tion for the expressed period of twenty-one years, and there was a statute prohibiting suspension "for a longer period than during the continuance of two lives in being at the creation of the estate and twenty-one years thereafter," the court ruled the suspension was lawful. It said: "To say that twenty-one years can be a longer period than the continuance of two lives and twenty-one years is to assert that one of its parts can be greater than the whole, the falsity of which is axiomatic in law, as in mathematics." 27 The lawfulness of such a 26a 89, ante. 27In re. Will of Kopmeier (1902), 113 Wis. 233, 89 N. W. 1134. 135 95.] LAWFUL DURATION. [CHAP. XIII. suspension, where such period was similarly measured, is strik- ingly illustrated in a decision by the U. S. Supreme Court. 28 There a will required that the estate should be held in trust by the executors for twenty years before final division among four children and that the share devised to his daughter should then be conveyed to three trustees with the net income to be paid to her for life with the principal after her death to her chil- dren or appointees. 29 The court said: "To the suggestion that the will violated the rule against perpetuities, which pro- hibits the tying up of property beyond a life or lives in being and twenty-one years afterwards, it is a sufficient answer that after twenty years from the death of the testator, and after the death of the widow and daughter, (if not before) the title, legal and equitable, in the whole estate would be vested in persons capable of conveying it." Thus again it is seen that there is no suspension where there is a right to convey. This will contemplated the tacking of one trust estate upon an- other to run for longer than twenty years, the period being indefinite, but as there arose upon the expiration of twenty years the power of alienation, the tacking was merely contem- plated and not absolutely enjoined. As to states where statutory modification has measured law- ful suspension from alienation by a life or lives it is premised that the only cases which authority supplies are where trust instruments are irrevocable trust instruments imposing con- ditions upon other beneficiaries than the settlors or trustors themselves. But considering for the sake of argument and despite decision supra, that no trust is irrevocable except ''in cases where other parties besides the person creating the trust have an interest therein," it will be attempted to show how in an agreement for a trust to carry on business, in these states, a practicable trust-term may be provided for. At once settlors in such an attempt are confronted with the prohibition against creating any suspension for an absolute period without refer- ence to any lives. Thus where a "testator intended that his 28Fotter v. Couch (1890), 141 U. S. 296, 314, 11 S. Ct. Rep. 1005, 35 L. Ed. 721. 29Italics by author. 136 CHAP. XIII.] LAWFUL DURATION. [ 95. residuary estate should remain in the hands of his executors for the simple purpose of accumulation for the period of ten years after his death," the court said: "The trust is not made determinable with or within any two ascertained lives, nor is it limited by life, but during- the whole of that fixed term the estate is inalienable." 30 This was held to be a pro- hibited suspension, and the residuary clause void. Neither may suspension be measured by any greater number of lives in being at the creation of a trust than the statute directs. Thus where the measure was no longer than during two lives in being at the creation of the estate, a suspension to continue until the death of four designated persons was held to be unlawful, 31 and so where the principal of a bequest was to vest after the death of three designated persons. 32 In the last two cases it appears that the suspension was nec- essarily to continue beyond the statutory periods while in Rice v. Barrett, supra, it might, but not necessarily would, but a fixed period however brief equally offended the statute. The suspension must not be measured in any other way than pre- scribed. But a period of time may be provisionally stated. Thus where a trust was to continue until grantor's youngest child then living should attain twenty-one years of age, pro- vided this was in the life time of two designated persons, otherwise to cease at their death, it was ruled there could be no possibility of the trust continuing beyond the duration of two designated lives and it was therefore a lawful suspension. 33 And this period may also be expressed in years unless sooner terminated by the deaths of the designated persons. 34 Thus a will was sustained which provided for a trust for twenty-five 30Ri ce v. Barrett (1886), 102 N. Y. 161, 164; 6 N. E. 39. SILeavitt v. Wolcott (1884), 95 N. Y. 212, 218. 32Shipman v. Rollins (1885), 98 N. Y. 311. 33Levy v. Hart (1869), 54 Barb. (N. Y.) 248. 34Simpson v. Cook (1877), 24 Minn. 180; Phelps' Exr. v. Pond (1861), 23 N. Y. 69. 137 96.] RENEWAL OF TRUST TERM. [CHAP. XIII. years, except that if death occurred before that the estate should be distributed. 35 In New York, Michigan and Minnesota the period of suspen- sion is measured by two lives in being at the creation of an estate, the two latter states adopting the New York statute and presumably therefore with construction already placed thereon. Wisconsin, up to 1887, had the same statute, but in 1887 the words "and twenty-one years thereafter" were added. The only other states measuring the term of lawful suspen- sion by "lives in being at the creation of the estate" are Cali- fornia, Idaho, Indiana, North Dakota and South Dakota, whose statutes differ from the New York statute in putting no re- striction upon the number of lives. In all other states there is an absolute period of at least twenty-one years beyond a life or lives in being. It is also to be said that construction at one time was that designation by lives must be among those of the beneficiaries. 36 But this holding was expressly disapproved, in one case where duration was predicated on the life of the trustee, 37 and in another case, on the lives of two persons who were strangers to the trust. 38 96. Provisions for Continuance Beyond Stated Trust Term. As to providing for a continuance of the trust to a time be- yond the trust term provided for in the trust instrument, by a course prescribed by that instrument, it is to be considered, whether such provision could or might offend the rule against restraints upon alienation. Thus suppose, that the power to continue should be confided to the discretion of the trustees or be left to be decided by a certain proportion less than the whole of the cestuis. It would seem clear that, if the trustees or, for that matter, any person not a beneficiary were given this un- SCQxley v. Lane (1866), 35 N. Y. 340. 36Downing v. Marshall (1861), 23 N. Y. 366. 37Crooke v. County of Kings (1884), 97 N. Y. 421. 38Bailey v. Bailey (1884), 97 N. Y. 460. 138 CHAP. XIII.] SUMMARY. [ 98. restrained power, this would be an evasion of the rule against perpetuities. But as trustees should not control the cestuis in this regard, why should any number of cestuis less than the whole control those who do not assent to a continuance? But it may be said, that the rule against suspension of alienation does not apply, because there is no suspension of the absolute power of alienation for reasons shown supra, and this power remains as well after as before the trust is continued. This would seem to be a good answer, but whenever it is deemed advisable, out of caution, to state a term and to state that in accordance with statute prescribing a lawful period regarding suspension of alienation, the same caution would recommend that neither all nor any of the original cestuis nor their transferees should be committed to any attempt at evasion of such a statute. 97. Rule Where Restraint is Upon Partition. Another rea- son why this rule against restraints upon alienation does not apply to these trusts may lie in the fact that interests are repre- sented by transferable shares, the holders of which can call for no right of partition and "a prohibition against partition is not a restraint on alienation, as the undivided share is always assign- able." 39 Therefore if the trust does not offend against the rule against restraints upon alienation, such a provision for continu- ance from a new date whatever its terms would seem to be valid. But, if any doubt exists about this rule applying, it were safer not to provide for a continuance of the trust in the absence of consent by all shareholders, or without non-assenting ones hav- ing the option to surrender their shares upon a valuation to be made as may be prescribed. 98. Summary. From the cases hereinbefore cited and dis- cussed it appears reasonably certain that a trust with no limitations or conditions upon the vesting of a future estate can by no sort of construction be called a perpetuity; that where it does not suspend the absolute power of alienation during a forbidden period it comes under no statutory modification of 3Gray on Restraints on Alienation (1883), Sec. 30; Gray on Perpetuities (2nd Ed.) (1906), Sec. 509 /; Howe v. Morse (1899), 174 Mass. 491, 55 N. E. 213. 139 98.] SUMMARY. [CHAP. xm. the rule against perpetuities; that where no one other than the holders of transferable shares in a business trust have any in- terest therein the trust is revocable and at all times there are owners in possession who can convey and thus there is no absolute suspension of the power of alienation; that as to the rule in nearly all of the states an absolute period of suspension of at least twenty-one years is lawful, whatever may be thought in regard to these business trusts; that a provisional period of time may be fixed where the absolute duration is measured by lives. 140 CHAPTER XIV. ACTIONS BY AND AGAINST THE TRUSTEES. 99. Trustee of an Active Trust a Principal and not an Agent. For the proper presentation of the subject of this chap- ter the individuality of a trustee, and where there is more than one, the trustees, of a business trust may be dwelt upon. In doing this recurrence to citation of cases already referred to will arise along with citation of other cases. Thus in Taylor v. Davis, 1 Mr. Justice Woods says the trustee "is a principal and not an agent," and as "a trust cannot contract, if the trustee is not bound, then nobody is bound," recognizing, how- ever, that if he chooses he may exempt himself and subject the trust property to liability for his contracts. 2 The personality of a trustee, as distinguished from his repre- sentative character, was early recognized, as a principle, in our jurisprudence. Thus, Mr. Justice Field in Pennoyer v. Neff 3 relied upon Massie v. Watts 4 and other cases for the proposition that the state through its tribunals may compel per- sons domiciled within its limits to execute, in pursuance of their contracts respecting property elsewhere situated, proper instruments of transfer according to the lex rei sitae. Thus, in the case relied on the Chief Justice said: "Where the de- fendant is liable to plaintiff, either in consequence of contract, or as trustee, or as the holder of a legal title acquired by any 1(1883), 110 U. S. 330. See also Mason v. Pomeroy (1890), 151 Mass. 164, 24 N. E. 202, 7 L. R. A. 771; Connally v. Lyons (1891), 82 Tex. 664, 18 S. W. 799, 27 Am. St. Rep. 935. 2See also Shoe and Leather Bank v. Dix (1877) 123 Mass. 148; Bank of Topeka v. Eaton (1900), 100 Fed. 8; Hussey v. Arnold (1904) 185 Mass. 202, 70 N. E. 87. 3(1877) 95 U. S. 714. 4(1810) 10 U. S. (6 Cranch) 148. 141 99.] PARTIES. [CHAP. xiv. species of mala fides practiced on the plaintiff, the principles of equity gave a court jurisdiction wherever the person may be found," and: "Upon the authority of these (cited) cases, and of others which are to be found in the books, as well as upon general principles, this court is of opinion, that in a case of fraud, of trust or of contract, the jurisdiction of a Court of Chancery is sustainable wherever the person be found, al- though land not within the jurisdiction of that court may be affected by the decree." Again it has been held that a trustee is a person, in the same way that a natural person is distinguished from a cor- poration, under the Federal Constitution. 5 Thus, in the first of the cases cited in the note, Gresham, C. J., said : "It will be observed that (this (Indiana) Statute does not prohibit foreign corporations from doing business in this state. Ob- viously that was not the design of the legislature. It is a statute which denies to residents of other states the right to take and hold in trust, otherwise than by last will and testa- ment, real and personal property in Indiana. The right is as- serted to deny to persons, associations or corporations, with- in or without the state, power to convey to any person in trust not a resident of Indiana, real or personal property within the state. This is a plain discrimination against the residents of other states." Still further decision as to jurisdiction of federal courts in diversity of citizenship exemplify the personal, as opposed to the representative, capacity of trustees. Thus it was ruled that a federal court obtains jurisdiction through the trustee, though the beneficiary may be of the same state as the defend- ant, where the suit is brought. 6 This rule extends even to a SFarmers' Loan & T. Co. v. Chicago & A. Ry. Co. (1886), 27 Fed. 146, 149. See also Shirk v. La Fayette (1892), 52 Fed. 855; Roby v. Smith (1891), 131 Ind. 342, 30 N. E. 1093. SDodge v. Tulleys (1892), 144 U. S. 451, 456; 12 S. Ct. Rep. 728, 36 L. Ed. 501. See also Peper v. Fordyce (1886), 119 U. S. 469, 7 S. Ct. Rep. 287, 30 L. Ed. 435; Coal Co. v. Blatchford (1870), 73 U. S. (11 Wall.) 172, 20 L. Ed. 179. 142 CHAP. XIV.] PARTIES. [ 99. case where a beneficiary, with the requisite diversity, sues in- stead of a trustee, who is without such diversity, jurisdiction for this reason being denied. 7 It is also held that the rule of there being or not jurisdiction in all of the plaintiffs or in all of the defendants being qualified applies in the same way to trustees as to others. 8 It was also ruled that the trustee of an active trust made so by the act of the parties creating the trust is not a formal or nominal party. 9 The fact of personal capacity being of controlling influence was recognized by the Supreme Court of Mississippi where it announced the general rule expressed in Taylor v. Davis, supra, and then said : "But while this is the rule, there are excep- tions to it, and where expenditures have been made for the benefit of the trust estate, and it has not paid for them, direct- ly or indirectly, and the estate is either indebted to the trus- tee, or would have been, if the trustee had paid, or would be if he should pay the demand, and the trustee is insolvent or non-resident, so that the creditor cannot recover his demand from him, or will be compelled to follow him to a foreign jurisdiction, the trust estate may be reached directly by a proceeding in Chancery." 10 This is really, if not quite equiva- lent to, saying that an attachment might be sued out for non- residence, the only obstacle to such announcement being that it is necessary to proceed in equity to subject trust property to a debt created by a trustee. Where statute may provide that it may be reached by an action at law, it would seem certain that process by attachment, upon the ground of non-residence of trustee, would lie, at least, if he by himself or agent, were in control and management of trust property in the jurisdiction. District of Columbia Court of Appeals shows that a trustee is not a mere officer, like an executor or administrator to be ?Shipp v. Williams (1894), 62 Fed. 4, 10 C. C. A. 247. 8 Coal Co. v. Blatchford and Shipp v. Williams supra. 9Shipp v. Williams supra; Knapp v. Railroad Co. (1873), 87 U. S. (20 Wall.) 117, 22 L. Ed. 328. lONorton v. Phelps (1877), 54 Miss. 467, 471. 143 100.] PARTIES. [CHAP. xiv. called to account in the jurisdiction where he is appointed but he may be sued in whatsoever jurisdiction he may be found. 11 In this case the defendant was a resident of Fairfax County, Virginia, by the court of which he was appointed executor. The suit was to recover a legacy and was brought in the Su- preme Court of the District of Columbia, where personal serv- ice was obtained. The court said: "This is not a suit for the settlement of the estate. There is no controversy as regards the executor's account. There does not appear to be any ques- tion of the right of any creditor. Some sixteen years had elapsed since the probate of the will. From the statement of the terms of the will contained in the bill, it would appear that defendant Herbert stood in two relations to the testator: first as executor for all purposes of administration, and second as trustee for the benefit of legatees, after the estate shall be closed and until the death of Mary Johns. The lapse of time, the facts alleged in the bill, all go to show his assent to the trust created in him by the legacy. As a trustee of the legacy then, and not as executor of the estate, he is amenable to suits in the courts of any jurisdiction within which he may be found." 100. Necessary Parties Defendant in Actions Against Trustees. The characteristic and sufficiency of jurisdiction in personam, when trustees are sued, are further illustrated in cases, which hold that beneficiaries or cestuis que trust need not be joined as parties defendant, when actions are founded either upon contracts entered into, or for torts committed, by trustees. The obligation of trustees, as said in the English case of In re Frith (1902), 1 Ch. D. 342, is such that "the creditor is en- titled to sue all three or any two or any of them," there being three trustees of that trust, which was a boot manufacturing business. Selection of trustee defendants in this case was ma- terial as to the right of the creditor to avail himself of the trustee's right of indemnity, it appearing that one of said trus- tees was a defaulter. As trustees contract and the trust estate "Johns v. Herbert (1894), 2 App. D. C 485, 497. 144 CHAP. XIV.] PARTIES. [ 101. does not, the usual principles about joint and several obligors apply. If the trust estate is sought, statutes as to right of service by publication may be available. Where liability is limited to the trust fund it would appear to the writer that the only safe procedure would be to make all the trustees defendants, unless the trust instrument specifically waives this, in order that title would pass upon judicial sale. It has been held by some courts and stated by Dean Ames in his cases on Trusts, page 262, that in a foreclosure bill a trustee does not adequately represent assets, principally because the cestuis should have opportunity to tender the amount necessary to prevent foreclosure, but this seems merely an exception in the way of a choice by cestuis to preserve the estate by volun- tary contributions. 101. Trustee Sued Alone Where Instrument Gives Trus- tee Full Control. Chief Justice Waite expresses the rule as to the necessity or not of joining beneficiaries, as follows : "It cannot be doubted that under some circumstances a trustee may represent his beneficiaries in all things relating to their com- mon interest in the trust property. He may be invested with such powers and subjected to such obligations that those for whom he holds will be bound by what is done against him as well as what is done by him. The difficulty lies in ascertaining whether he occupies such a position, not in determining its effect if he does. If he has been made such a representative, it is well settled that his beneficiaries are not necessary par- ties to a suit by him against a stranger or to one by a stranger against him to defeat it in whole or in part." 12 One of the cases, which the Chief Justice cites as authority to this proposition, was where a creditor sought to reach trust property in the hands of trustees. After the action was com- menced one of the beneficiaries asked to be made a party de- fendant, alleging collusion of the trustees with the plaintiff and that the former did not intend to make defence, for which affi- 12Kerrison v. Stewart (1876), 93 U. S. 155, 160. 145 101.] PARTIES. [CHAP. xiv. davits were submitted. His application was denied. The court an- nounced that: "The principle seems well-settled that in an ac- tion by a creditor to reach trust property, in the hands of ad- ministrators or trustees, who have the control of and whose duty it is to protect the property, the cestuis que trust need not be made parties. The defence of the trustees is their defence, and their presence in court is not necessary to the protection of their interests." 13 In Florida the rule of beneficiaries not being necessary par- ties, where it is sought to reach the trust property in a direct proceeding, is stated by way of exception as follows: "The trust property cannot be reached except by a proceeding in Chancery to which the cestuis que trust must be made parties; unless in cases where the property has been bound by the trustees within the scope of their authority." 14 Similarly has the rule been stated in Illinois where it was said: "The gen- eral equity rule is that all persons interested in the subject mat- ter of a suit must be made parties in order that the decree may affect their rights, and this rule requires that in litigation had in respect to trust property, both the trustee and the cestuis que trust be made parties. There is an exception to this where the trust is an active one, imposing on the trustee the duty of receiving, controlling and working the trust fund for the bene- fit of the cestuis que trust." 15 An illustration of the completeness of this principle, not only as a rule of practice, but also as a rule of right, is furnished by a North Carolina case. 16 That case concerned the enforce- ment of a mechanics' lien against trust property. The trial court rendered personal judgment against the trustees, but re- fused to subject the property to the lien because the cestuis que 13Winslow v. Minn. & P. R. R. Co. (I860), 4 Minn. 313, 317; 77 Am. Dec 519. See also 4 Lawson's Rights, Remedies & Practice ! 2023. l^Zehnbar v. Spillman (1889), 25 Fla. 591, 598. ISMcGraw v. Bayard (1880), 96 111. 146, 152. ISCheatham v. Rowland (1885), 92 N. C. 340. 146 CHAP. XIV.] PARTIES. [ 102. trust had not been made parties. The Supreme Court held this error, because the trustees were "as legal owners in charge to manage and take care of the common property, not only in its preservation, but in its defence against unjust and un- reasonable demands, from whatever source they may come." The court also said that this was so entirely true that the statute of limitations operating against them would also operate against cestuis que trust though they be infants or married women. 17 Of course there is a conclusive reason for beneficiaries not being made parties, where merely a personal judgment is sought against a trustee. It may be observed, however, in passing, that this personal liability of the trustee is the specific reason given in a Texas case for beneficiaries not being necessary paities. 18 The other cases above referred to in this chapter seem to prove, that power may be so vested, along with the legal title, in trus- tees, that even when it is sought to reach the trust property the only necessary parties defendant are the trustees, this being thought to be true especially where "the cestuis que trustent are so numerous and so constantly changing by death, removal, etc. beyond the jurisdiction." 19 When we remember that the de- cisions cited and quoted from merely deduce their conclusions from the mere commission of management and control to trus- tees, a fortiori are such conclusions applicable, when the trust instrument provides in terms, that trustees conclusively may act so as to bind the trust property for all acts and contracts done and entered into in execution of powers vested in them. 102. Trustees as Plaintiffs. In principle it may be said that the cases already cited and quoted from in this chapter, 17For other cases of and regarding trustees of active trusts, see Bushong v. Taylor (1884), 82 Mo. 660, 670; Lebeck v. Fort Wayne Bank (1896), 115 Ala. 447, 453, 22 So. 75, 67 Am. St. Rep. 51; San- ders v. Houston Guano Co. (1899), 107 Ga. 49, 56, 32 S. E. 610. ISConnally v. Lyons (1891), 82 Tex. 664, 18 S. W. 799, 21 Am. St. Rep. 935. iSBushong v. Taylor, supra, citing Van Vetchen v. Terry, Johns, Ch. 197 and Story's Eq. PI. 148, 150, 207a. 147 103.] PARTIES. [CHAP. xiv. i and those referred to from the standpoint of personal liability, are applicable under this section, because the same general in- quiry is at stake, viz : whether there are sufficient parties before the court for it to determine, conclusively, the subject matter in controversy. In addition, however, it may be said that : 20 "The modern codes which provide that actions shall be brought by the real party in interest, universally authorize trustees of express trusts to sue in their own names without joining the beneficiaries, as an exception to the rule," and for this statement very numerous cases from many states are cited. It is use- less here to cite local statutes on this subject, but practitioners are referred respectively to their own codes. Such an exception may be thought to be expressed more out of abundance of cau- tion than otherwise, for a legal owner ought to be considered, in a matter of pleading, as the real owner, and especially so when that legal owner has the same control over property to which he has the legal title as has the absolute owner. It is stated, therefore, as a principle that "the trustee and not the beneficiary is the proper party to sue at law upon contracts made with the trustee." 21 103. Trustees Suing in Foreign Jurisdiction. The distinc- tion between an appointee of a court, in that the powers vested in him must be exercised within the jurisdiction of the court ap- pointing him, or at least within the state, and a trustee whose title is created by the owner of property has been thus stated: "Where the legal title of the trustee is created by the owner of the property, it would be respected, and the right of the trus- tee to enforce it be recognized everywhere. It would not be deemed material that the legal title was encumbered with a trust. The jus disponendi would be acknowledged and effect given to it, though, of course, any requirement of the local law 2022 Ency. PI. & Pr. 167. 21 22 Encl. Plead. & Prac. 179; Oelrichs v. Spain (1872), 82 U. S. (15 Wall) 211, 21 L. Ed. 43; Grady v. Ibach & Co. (1891), 94 Ala. 152, 10 So. 287; Morrow v. Morrow (1905), 113 Mo. App. 444, 87 S. W. 590; Western R. Co. v. Nolan (1872), 48 N. Y. 513; Lee v. Horton (1877), 104 N. Y. 538, 11 N. E. 51. 148 CHAP. XIV.] PARTIES. [ 103. as to formalities must be observed. Thus: if the title of the trustee is created by will, the will must be proved in the state where the suit is brought, according to the local law, to give effect to any title under it. So if the legal title be by deed, the deed must be proved according to the local law. In this regard the legal title of the trustee does not differ from any other legal title, and he can everywhere enforce that title by legal pro- ceedings, the same as any other owner." 22 A New York case enforces the same general view as Curtis v. Smith, supra, though differing with it on a question of prac- tice. 23 Thus, where it was held by the trial court, that a testa- mentary trustee under a foreign (Canadian) will had no legal capacity to sue in that state without the will were first admitted to probate in the state, the Court of Appeals overruling this view said: "The trustee could have maintained an action in the courts of this state to recover any of the trust property wrong- fully detained here, or for the wrongful conversion of such property, or for damages thereto. Such an action would not have been in a representative capacity, but in his own right as the legal owner of the property. It might have been necessary for him, upon the trial of such an action, to have the will proven and put it in 'evidence for the purpose of showing his title, but it would not have been necessary for him to have the will ad- mitted to probate in this state. ***** j t j s t h e general rule that he who is the legal owner of property may maintain an ac- tion wherever it may be for its recovery, or for damages for its conversion. ******* j n suc h ca ses all owners stand upon the same footing. But the rule is somewhat modified when one sues in a representative capacity. Foreign executors and administrators cannot sue here for reasons of public policy." Here there is again perceived the same distinction, 24 which sustained an action against a trustee, who was also an execu- 22(Jurtis v. Smith (1869), 6 Blatchf. 537, 6 Fed. Cas. 3505. 23Toronto General Trust Co. v. Chicago, B. & Q. R. Co. (1890) 123 N. Y. 37, 25 N. E. 198. 24 99 ante. 149 104.] RIGHT TO SUE IN FOREIGN STATE. [CHAP. XIV. tor, in a jurisdiction where he was found. The personal, and not the representative, capacity for jurisdictional purposes, was recognized in both cases. 104. Constitutional Right of a Foreign Trustee to Sue in Another State. The several cases which are referred to 25 on diversity of citizenship seem to involve the conclusion that the right of a trustee to sue in another state is annexed to citizen- ship especially, also, those cases condemning an Indiana Statute as a "plain discrimination against the residents of other states," for the reasons stated by Judge Gresham, supra. 25 But a very recent decision by the Federal Supreme Court brings into relief this question, 26 in a two-fold view. In this case a receiver appointed by a Minnesota Court, with authority to sue stockholders of an insolvent corporation upon their double liability was held by Wisconsin courts not en- titled there to sue, because such a liability was contrary to the public policy of Wisconsin. The primary question considered by the Federal Supreme Court was the effect of the faith and credit clause of the Constitution. In his reasoning to his con- clusion reversing the Wisconsin courts for not giving effect to this clause Justice Van Devanter said, among other things: "Under this (Minnesota) statute as interpreted by the Su- preme Court of the state, as also by this court, the receiver is not an ordinary chancery receiver or arm of the court appoint- ing him, but a quasi assignee and representative of the creditors and when the order levying the assessment is made he becomes invested with the creditors' right of action against the stock- holders, and with full authority to enforce the same in any court of competent jurisdiction in the state or elsewhere." 27 It might be enough merely to suggest that this receiver called by the court " a quasi assignee" could as appropriately have 25 99 ante. 26Converse v. Hamilton (1912), 224 U. S. 243, 32 Sup. Ct. Rep. 415. 27See also Bernheimer v. Converse (1907), 206 U. S. 516, 534. 150 CHAP. XIV.] RIGHT TO SUE IN FOREIGN STATE. [ 105. been called a trustee of the creditors, and this suggestion de- rives force from one of the cases 28 cited by Bernheimer v. Con- verse, supra, in which cited case it was said: "The statutory liability of stockholders is an asset of the insolvent bank, the title to which was in said receiver as a trust fund for the pur- pose of satisfying the claims of creditors." In another of those 29 cited cases, it was said of such a receiver that: "By in- terest of his official relation to the corporation and its creditors he is the owner of the legal title to their fund as a trustee for the creditors." The question of comity was considered in this case, but that has been eliminated by the Converse decision and none of any of the cases dispute the competency of the receiver as trustee to bring the proper action elsewhere. We suggest that no question of comity may be found which would attempt to deny the right of the legal owner of a right of action to sue, whatsoever it might say as to his cause of action, if constitution- ally his privileges and immunities as a citizen may be invaded at all. At all events the Federal Supreme Court reversed the Wis- consin courts, when, if it had power for any reason to sustain their ruling to deny admission to its tribunals, it might have sustained it. Instead it said this "quasi assignee" or trustee could compel the Wisconsin courts to entertain his suit. 30 105. Trustee of Express Trust Distinguished from Statu- tory Trustee. It is stated in Cyc. 31 that: "Strictly speaking, a trustee deriving his power from statute or judicial appointment cannot as of right, maintain an action in comity outside of the jurisdiction of his appointment, and the tendency of the courts in earlier times was to refuse to enter- tain such actions." How far this general statement is subject to qualification by reason of the force and effect of the faith 28Howarlh v. Angle (1900), 162 N. Y. 179. 186, 56 N. E. 489, 47 L. R. A. 725. 29Howarth v. Lombard (1900), 175 Mass. 570, 579, 56 N. E. 888, 49 L. R. A. 301. 30See also Glenn v. Soule (1884), 22 Fed. 417; Glenn v. Williams (1882), 60 Md. 93, 119. SI 39 Cyc. 449. 151 105.] RIGHT TO SUE IN FOREIGN STATE. [CHAP. XIV. and credit clause of the United States Constitution it would be merely academic here to inquire. It is only desired to fur- ther accentuate the fact that it is impliedly admitted in the above excerpt that a trustee of an express trust may "as of right" maintain an action in foreign courts. Thus in an early case 32 an action was brought by a trustee in which he recovered. While the case was pending on appeal the trustee died and the question arose in whose name should the appeal be revived. The law of Alabama was, that death required the substitution of a new trustee, while in Georgia where the trust was created the com- mon law was presumed to prevail and his personal representa- tive would succeed him. It was said that law was confined to Georgia and a trustee should be appointed in Alabama, in whose name the appeal could be revived. A California case held that as a matter of comity a statutory foreign trustee should be allowed to sue in its Courts, if the rights of domestic creditors were not interfered with, 33 a hold- ing which if not overcome by the ruling in Converse v. Hamil- ton, supra, yet goes no further than as above expressed. It compares such trustees to "foreign receivers and like officers." In a Washington case 34 we find the excerpt taken from Cyc. and the question was whether the plaintiff "as trustee" could maintain the action. It was held he could because of comity. It would appear from other cases, that it was doubtful whether plaintiff was a statutory trustee but he was so regarded. He is spoken of as an "officer" and he was appointed substitute trus- tee by the court. In Glenn v. Williams 35 a substituted trustee though the substitution be by decree of court, was regarded as standing like the original trustee, the decree operating like an appointment. It was upon this very distinction he was held 32McDougald's Admr. v. Carey (1862), 38 Ala. 320. 33 Iowa & Cal. Land Co. v. Hoag (1901), 132 Cal. 627, 64 Pac. 1073. 34Fidelity Ins. T. & S. D. Co. v. Nelson (1902), 30 Wash. 340, 70 Pac. 961. 35 Supra, 152 CHAP. XIV.] PARTIES. [ 106. to have the right to sue abroad. This, however, seems all ob- viated by the logic of the ruling in the Converse cases, the faith and credit clause putting a receiver who is "quasi assignee" in the position of a trustee appointed by the owner of property. A very elaborate discussion of this comity rule is found in an Ohio case 36 and at bottom it goes upon the theory that a statute and an order of court having no extraterritorial opera- tion, outside at least of the faith and credit clause, does not bind property elsewhere. If this is the true basis of appeal to comity, it is easily understood in what way a trustee under ap- pointment of an owner of property needs no more of comity for bringing a suit abroad than an ordinary holder of a promissory note. One status is based on jus disponendi, the other on con- tract and in final analysis the two are the same, while a statutory assignee or trustee may take in invitum? 1 and the law of his title be local. 106. Action Where Trustee Merely Binds Trust Estate. Under the broad language of .Chief Justice Waite we have quoted, 38 it cannot be seen, that there would be any difference of venue in personal jurisdiction, where a trustee stipulates for exemption from personal liability and where he does not. He may be sued alone without joining the cestuis que trust, in the one case as the other, because it is by virtue of his being in- vested with powers that he becomes, so to speak, their alter ego, their personal representative as a principal. It might be that a court in its discretion might direct that a cestui que trust be brought in, because his personal interests might be affected, but failure to make him such in the first in- stance would not be jurisdictional. Thus in a trust not em- barked in trade and subject to none of its vicissitudes, and the sole duty of the trustees was to set aside so much of testator's property as would produce a certain annual income and pay that over to the support and maintenance of testator's insane 36Bank v. McLeod (1882), 38 Ohio St. 174. 37Matter of Waite (1885), 99 N. Y. 433. *&Ante 101. 153 108.] CONCLUSION. [CHAP. xiv. daughter, in a suit to subject the trust fund to money bor- rowed by the trustees, it was held that upon the case being re- manded on a reversal, a guardian ad litem to represent her, would after the service upon her, be appointed, as her personal interests may be affected by the proceedings. 39 It is easily conceived, however, that this would be vastly different where a trust instrument expressly provides, that a trustee may exempt himself from personal liability and is given the power to bind directly the assets of a trust for his acts and contracts. 107. Actions by Cestuis Que Trust. In actions by cestuis que trust against trustees for breach of trust the personal, in- stead of the representative, character of the trustee again ap- pears. Thus it has been ruled, that if several trustees are im- plicated in a common breach of trust, for which a cestui que trust seeks relief in equity, he may sue all or any one or more of them, at his election. 40 Blatchford, D. J., said this was a well settled rule and was upon the theory of a tort being treated as several as well as joint. This was called an exception to the general rule that in a proceeding against trustees all must be made parties. 41 We have indicated hereinbefore the liability of trustees to cestuis que trust and under what circumstances they may be sued at law. 42 108. Conclusion. There are many cases, which might have been cited and discussed were this a more general treatise 39Ring v. Stowell (1912), (Mass.) 98 N. E. 91. *OHeath v. Erie Ry. Co. (1871), 8 Blatchf. 347, Fed. Cas. 6306; See Holmes v. McDonald (1907), 226 111. 169, 80 N. E. 714, where only some of the trustees were sued. 4 lCunningham v. Pell (1836), 5 Paige (N. Y.) 607. It has been said that all trustees should be joined so as to adjust liabilities of co-trustees and to avoid future litigation. Hutchinson v. Ayres (1886), 117 111. 558, 7 N. E. 476. 42 Ante 85. 154 CHAP. XIV.] CONCLUSION. [ 108. in regard to trusts. As, however, it is of a particular character of trusts, it has been endeavored to consider only such as may seem to bear some relationship or furnish some analogy to ques- tions that may concern these particular trusts. That the rem- edy at law should more generally apply to them than other trusts may be readily thought, because the personality of the trustee in these trusts stands out in greater relief, and his status as that of general owner is more strongly emphasized, and then the rule of convenience, arising out of the similitude of trust interests, represented by transferable certificates, to those in a corporation, implies it was never intended, that any others than trustees need be made parties in law or equity, unless at least the integrity of a trust itself is threatened. 155 CHAPTER XV. TAXATION. 109. Preliminary. It has been demonstrated, it is here as- sumed, that interests in a trust are subject to levy and sale, and assignable at the will of the owner, generally speaking, and especially so, when by the instrument creating the trust such interests are represented by transferable shares. It becomes, therefore, needful to inquire how a business carried on by means of a trust agreement stands, in comparison with other arrange- ments for the conduct of business, so far as the assessment of taxes are concerned. The federal corporation tax, resting upon the exercise of a privilege should be taken out of the review proposed to be made of the general subject of taxation, so far as needed in its particular bearing on trust estates and their beneficiaries. It needs to be noticed, however, by way of demonstrating that a business trust has at least one important consideration in its favor as compared with a corporation. 110. Excise Taxes. Exemption of Trusts From Federal Cor- poration Tax. This part of the subject of this chapter briefly may be covered by allusion to and quotation from the corporation tax decisions. Two cases were disposed of by one of these de- cisions. 1 One of these was of a so-called "real estate trust." By the instrument creating it trustees were vested with the title to certain lands and buildings in Boston, with absolute control and authority over same, with right to sell for cash or credit and to manage for the best interest of shareholders. Dividends were to be paid from income or net proceeds. The existence of the trust was to be twenty years after the termination of lives in being, and the property then held was to be sold and the pro- ceeds of sale divided among the then shareholders. These shareholders were to receive shares of the par value of $100., lEliot v. Freeman (1911), 220 U. S. 178. 156 CHAP. XV.] EXCISE TAXES. [ 110. according to the investment of each. Transferees of shares were to receive new certificates upon surrender of certificates of shares belonging to transferrors. No shareholder was to have any legal title to or interest in the trust property nor any right to call for partition. It was also provided that the trust might be terminated at any time by an instrument in writing signed by not less than three-fourths of the value of stock held by shareholders. The instrument also provided for meetings of shareholders. The trust owned one building leased to a single tenant and an office building with elevator service, janitor serv- ice, etc. The other was called a "Department Store Trust," formed for the purpose of purchasing and holding certain parcels of land, also in Boston, and erecting a building thereon for a depart- ment store. This had similar provisions to the other, with power given shareholders to hold annual meetings and by a majority to elect and depose trustees and to alter and amend the terms of the trust agreement. The opinion said: "The two cases now under consideration embrace trusts which do not derive any benefit from and are not organized under the statutory laws of Massachusetts. * * * * En- tertaining the view that it was the intention of Congress to em- brace within the corporation tax statute only such corporations and joint stock associations as are organized under some statute, or derive from that source some quality or benefit not existing at the common law, we are of opinion that the real estate trusts involved in the two cases are not within the terms of the act." As showing that the feature of these two trusts being "real estate" trusts had nothing to do with their being declared not subject to the corporation tax, another of these corporation tax decisions is greatly in point. 2 In that case it was held that a corporation whose sole purpose was to hold title to a single parcel of real estate subject to a long lease for the mere con- venience of its stockholders, for receiving and distributing the 2Zonne v. Minneapolis Syndicate (1911), 220 U. S. 187. 157 110.] EXCISE TAXES. [CHAP. XV. rentals from such lease, was not subject to the corporation tax, because this was not "doing business within the meaning of the law." The court, however, was careful to say: "The corpora- tion involved in the present case, as originally organized and owning and renting an office building was doing business within the meaning of the statute as we have construed it." Then it stated that: "It had wholly parted with control and manage- ment of the property; its sole authority was to hold the title subject to the lease for 130 years, to receive and distribute the rentals which might accrue under the terms of the lease or the proceeds of any sale of the land if it should be sold." Therefore, from the two decisions it is to be inferred, that though the two real estate trusts were doing business in such a way as would make a corporation or joint stock company or- ganized under a statute liable to the tax, yet solely and only because they were trusts doing this business, they were not thus liable. But this point need not be left to mere inference from judicial reasoning, because in the main decision of these cor- poration tax cases, 3 specific objection was made that certain corporations were "real estate companies, whose business is principally the holding and managing real estate." The court said: "We think it is clear that corporations organized for the purpose of doing business and actually engaged in such ac- tivities as leasing property, collecting rents, managing office buildings, making investments of profits, or leasing ore land and collecting royalties, managing wharves, dividing profits and in some cases investing the surplus, are engaged in business within the meaning of this statute." A word of caution is here indulged as to what was said in Eliot v. Freeman, supra. The court said Massachusetts has no statute authorizing the formation of a joint stock association, and, therefore, of course it was clear that the trusts considered could not derive, even if the trustors had wished so to do, any benefit from statute, but were forced to depend upon the com- mon law for whatever rights they enjoyed. A few states have 3Flint v. Stone Tracy Co. (1911), 220 U. S. 107. 158 CHAP. XV.] TAXATION. [ 111. such a statute, but, as has been shown, such a trust instrument does not need its aid when it merely provides for several in- terests in trust capital or property. That these interests are represented by transferable shares does not make their owners associates, as has been shown. Caution should be used, how- ever, not to form a business trust by means of a joint stock association statute, if avoidance of this corporation tax is to be completely assured. The question here of excise tax under the federal statute is greatly different from that of excise tax under the Massachusetts constitution. The Judges of the Supreme Judicial Court of Massachusetts held, by a bare majority, that an excise tax could be imposed upon a privilege which is the exercise of a natural right, this being said in an advisory opinion by the Justices re- ported in (1908) 196 Mass. 603. The whole question there was what was a taxable commodity under the Massachusetts consti- tution. And it was held that transferable shares represented by certificates were such commodities both when issued by cor- porations and by voluntary associations. Three of the Justices dissented from this view, holding that shares in a corporation could be taxed, but those of an association could not. 111. Trust Taxable to Trustee or Beneficiary and Not to Both. In a New Hampshire case 4 it was said: "When an owner has left his farm in trust for his widow and children, and the trustee, holding the legal title without any beneficial in- terest pays the farm tax and expenses out of the farm income, and pays the rest of the income to the widow and children, a second tax for the same amount is not assessed on the equitable title of the widow and children. For the purpose of taxation the legal title of the trustee and the equitable title of the widow and children are not more than the whole title, legal and equit- able, which the testator had in his lifetime." Then the opinion proceeds in a manner of reasoning peculiarly applicable to the question in hand, as follows: "And if the ^Morrison v. Manchester (1879), 58 N. H. 538, 563. 159 111.] TAXATION. [CHAP. XV. testator, dividing the equitable title and beneficial interest into four shares, gave two shares to his widow and one share to each of his two children, directed the trustee to issue to them cer- tificates as evidence of their respective rights in the trust prop- erty and made the certificates assignable and available as per- sonal property, like certificates of corporation stock, and if this disposition of his property were authorized by law, the united titles of the trustee and the widow and children would not be more than the title of the testator." The question of legal and equitable interests in such an estate was not involved, but the court was using premises of undoubted correctness for the conclusion, that there should not be taxation of deposits in a savings bank both upon it and its depositors. Whether the conclusion follows or not, the premises employed are incontro- vertible in law. As showing that a trust estate would be inequitably assessed, if taxed in the hands of the beneficiary when also taxed to the trustee, this same court said: "When a testator, having a son capable and a daughter incapable of managing property, leaves half of his estate to the son and the other half in trust for the daughter, the tax of the whole estate is not thereby increased one-half. The mere trust does not make the daughter's share of the public expense twice as much as her brother's; and the double taxation of her property would be the imposition of a penalty for a misfortune." 5 In Maryland the principle that there cannot be two taxes on a trust fund was recognized and distinguished, where a tax on savings bank deposits was sus- tained, as follows: "The tax imposed on the deposits in Savings Banks is not in our opinion a tax on the property held by such Banks in trust for the depositors. * * * It is nothing more nor less than a tax on the Bank itself, upon its franchises and assessed in consideration of the privileges conferred by the State. The average deposits during a specified time are but a measure of the extent to which such institutions have exercised their fran- chises, the basis of which the amount to be paid may be com- puted." 6 SRobinson v. Dover (1880), 59 N. H. 521, 528. 6State v. Central Savings Bank (1887), 67 Md. 290. 160 CHAP. XV.] TAXATION. [ 111. A savings bank case was considered in Massachusetts under a law that provided that depositors were exempt from direct taxation on the amount of their respective shares. It was claimed that taxing the bank on deposits was to nullify this ex- emption, but the Massachusetts court held, that the tax being levied only upon average deposits showed that it was an excise tax upon a privilege to operate a savings bank, that it was merely a corporate charge, 7 the court arguing away constantly from the position that there was a tax on a trustee, when the bene- ficial owner had been exempted. This holding is similar to that by the Federal Supreme Court by a majority of six to three, 8 and ever since adhered to, that the shares of the capital of National Banking Associations are subject to state taxation without any reference to the amount of such capital invested in non-taxable bonds of the United States. It was considered in this case that "the tax is the con- dition for the new rights and privileges conferred upon these associations." Therefore, if there is a common law right in division of title into legal title and equitable interest, there is no new right and privilege to which a condition of taxation may be annexed, as specifically held in Eliot v. Freeman, supra. This court also said that "shares (of stock) are a distinct independent interest in property held by the stockholders," 9 an affirmation that hardly may be made as to an equitable interest in a trust; an interest in these business trusts that has its source purely in contract which adds nothing to the intrinsic value of the property itself or puts any new burden on the taxing power. In an early Maryland case the question was, whether a tax should be assessed as to personal property at the residence of the trustee or where the cestuis que trust resided, there being no statute specifically providing as to this. 10 The court in ^Commonwealth v. People's Five Cent Savings Bank (1862), 5 Allen (Mass.) 428. 8Van Allen v. Assessors (1865), 70 U. S. (3 Wall.) 573. SFarrington v. Tennessee (1877), 95 U. S. 679, 695. lOLatrobe v. Mayor, etc. (1862), 19 Md. 13; Ames Cases on Trusts, 228. 161 111.] TAXATION. [CHAP. XV. reaching the conclusion that the tax was to be assessed at the residence of the trustee said, that when the trustee paid the taxes "the obligation of one entitled to the beneficial interest of property held by a trustee, to contribute to the public taxes, according to actual worth, is none the less satisfied, for in such a case the assessment of the tax to the holder of the legal estate, through him reaches and fastens upon the interest of the bene- ficial owner," a statement that is wide of the mark as to tax- ation of a corporation, because "shares are a distinct, inde- pendent interest or property held by the stockholder." A New York case in holding that a trustee not in possession, the beneficiary being a non-resident, was not to be assessed be- cause of his legal title, said: n "Generally a man is not spoken of as the owner of property, who merely holds it as a trustee and in a representative capacity. He has the legal title, and he is assessed for it when it is within the state, but this is by express provision of statute, and such provision is not men- tioned in the case of a trustee, whose trust property is outside of the state and not in his possession." Then referring to cus- tody in the state making the property assessable there, the court says: "The statute as it is may lead to injustice in the double taxation of personal property, once to its absolute owner and again in the hands of his agents in the shape of securities in their custody and control in other states." This, however, would not be double taxation in the case of corporate capital and shares therein being taxed. The usual, if not universal, method in taxation statutes is to group holders of property in irust in some such manner as the Rhode Island statute does, as follows: "All personal property held in trust by any executor, administrator or trustee, the in- come of which is to be paid to any other person, shall be assessed against the executor, administrator or trustee" etc. It would seem no more abhorrent to equity and justice and consti- tutional provisions against double taxation to tax property to an executor or administrator and again to legatees and heirs UPeople ex rel. Darrow v. Coleman (1890), 119 N. Y. 137, 140, 23 N. E. 488, 7 L. R. A. 407. 162 CHAP. XV.] TAXATION. [ than to trustee and cestui que trust, and statutes in this grouping seem thus to view the matter. It was claimed that the Rhode Island statute made it possible for a resident cestui que trust to escape taxation by appointing a non-resident trustee. This was admitted, but the court said: "It is fair to suppose that the State intends to allow to other states the same right which it claims for itself and does not contemplate a double taxation." 12 If this does not mean it would be double taxation to tax the trustee in one place and the cestui que trust, then it is difficult to find that it has any bearing upon the objection that was urged. In a Maine case 13 where non-resident trustees were appointed by a will, the residence of beneficiaries was held to give no right to tax property in the hands of the trustees, the statute being like that of Rhode Island, the court saying it "could not affect trustees and property thus situated," saying also: "We do not hold, however, that the assessors of Augusta cannot assess a tax directly against the annuitants resident in Augusta for their annuities or other interests arising out of the trust." It was also said the trustees "could not be made amenable to the taxing powers of this state, since neither they nor their property were within the state or subject to its jurisdiction." For this, reliance is placed upon federal authority, 14 where it is said: "No principle is better settled than that the power of a state, even its power of taxation, in respect to property, is limited to such as is within its jurisdiction." 112. Taxing Resident Beneficiaries of Foreign Trusts. Some of the cases above discussed show that resident benefici- aries were held non-taxable as to their interests in a trust, the property of which was in the hands of non-resident trustees, but that holding was according to the form of the statute, the last of these cited cases, however, seeming also to say that such taxation was not even within state power, except that an annuity could be taxed, which also would be true had the trustees been resident trustees. 12Anthony v. Caswell (1885), 15 R. I. 159. But see Hunt v. Perry (1896), 165 Mass. 287, 43 N. E. 103. iSAugusta v. Kimball (1898), 91 Me. 605, 40 Atl. 666. "Erie Railroad v. Pennsylvania (1894), 153 U. S. 628, 646. 163 112.] TAXATION. [CHAP. XV. In Michigan the constitution prohibits double taxation and it was claimed that, as this prohibited taxing a domestic cor- poration and the holders of its stock, so it prohibited taxing residents on stock in a non-resident corporation taxed upon its property outside of the state. The court by a majority of four to one held that the inhibition against double taxation only applies to such taxation within the state, and as stock has its situs at the domicile of its owner and is there taxed once, it stands on an equality with stock in a domestic corporation also taxed but once. 15 In a later case 16 this same court admitted there was a tech- nical reason for saying that taxes are not levied on the same property when levied on capital and upon corporate shares therein, but this was not true in the sense of a constitutional inhibition of double taxation, and, therefore, where all of a foreign corporation's property was located in Michigan and there assessed, shares of stock owned by its residents could not be assessed. A Pennsylvania case 17 illustrates very forcibly the theory that the taxable interest in a trustee is purely, solely and indistinguishably but a representation for taxing purposes of the property of cestuis que trust. Thus a trustee residing in a borough in Pennsylvania was held liable for a state, but not for a borough, tax, on the theory that "the inhabitancy of the owner is made the test of taxableness for borough purposes." The court said: "It would be a cruel and absurd law that should subject the trust-moneys of non-resident orphans to borough taxation, merely because their trustee resided in the borough. For state purposes it is right enough to tax them, because the safety and value of the funds depend on the existence of the government, which such taxes go to support, and possibly something of the same reason may apply in behalf of county taxation, but what protection or value does the borough of iSBacon v. Board of Comrs. (1901), 126 Mich. 22, 85 N. W. 307. iSStroh v. City of Detroit (1902), 131 Mich. 109, 90 N. W. 1029. "Borough of Carlisle v. Marshall (1860), 36 Pa. 397, 402. 164 CHAP. XV.] TAXATION. [ 112. Carlisle give to funds invested in Philadelphia? The inhabi- tants have an interest in the municipal government and are lawfully taxed to support it, but these taxes should be paid out of their own property, not out of property existing in Phila- delphia, and owned by inhabitants of New York." The theory of a tax being assessable against a trustee only because property to which he holds legal title is benefited by the laws of his domicile also finds illustration in a late de- cision by the Sixth Circuit Court of Appeals. 18 The trustee in that case was a resident of Ohio and the cestui que trust re- sided in Connecticut, where the trustee was appointed. The property consisted of stocks and bonds deposited with a bank and trust company in New York, which collected dividends and interest and remitted to the trustee, who in turn remitted to the cestui que trust, deducting for his services, $300.00 per year. The trustee was held not taxable under an Ohio statute which provided that "all property whether real or personal in this state * * * and all moneys, credits and investments in bonds, stocks and otherwise of persons residing in this state shall be subject to taxation." The decision relied on a leading federal case, 19 which said: "The power of taxation * * * is necessarily limited to subjects within the jurisdiction of the State. These subjects are persons, property and business," and upon an Ohio case 20 construing that statute as referring to tangible property, real or personal, in the State and "all intangible property of persons residing in this State, irrespective of where the subject of the property may be situated." But the federal court thought, that as to intangible property "the person taxed must be in the jurisdiction of the state, not only personally, but officially, in the capacity in which he is taxed and in that capacity must be enjoying the benefits of the laws of the jurisdiction." "In the case of a ISGoodsite v. Lane (1905), 139 Fed. 593, 72 C. C. A. 281. iSState Tax on Foreign-Held Bonds (1872), 82 U. S. (15 Wall), 300, 319. 20Myers v. Seaberger (1887), 45 Ohio St. 232, 235, 12 N. E. 796. 165 113.] TAXATION. [CHAP. xv. trustee, he must be exercising his office of trustee within the state, and be enjoying, as trustee, privileges of value to the estate, for which it is just the estate should pay." The court further said: "An examination of the cases will show, that where this tax has been sustained, either the trust estate or the beneficiary, or the trustee, as trustee, was receiving benefits from the State, for which it was only fair the trustee should pay." All of the trust property being intangible it was held non-tax- able to the trustee residing in Ohio. One need not agree with all of the reasoning in this case nor, under the facts, with its conclusion, but there seems much reason for holding that the state's jurisdiction over a person for taxing purposes may be broader than over one holding merely the legal title but not the beneficial interest. Therefore, while tangible property may be taxed because of location, intangible property should not be taxed to a trustee under the rule mobilia sequuntur personam. Such is the necessary principle to be fol- lowed, if double or triple or more greatly multiplied taxation is to be avoided, where there are more trustees than one, with each residing in a different jurisdiction. Authority is abundant that the trust property will be taxed upon some pro rata plan that will not subject the entire estate to more than a single tax. If separate tangible possession exists the tax will be proportional in amount, and if it cannot, each trustee will be taxed one-half or one-third or other fractional part according to their num- ber. 2 i 113. Massachusetts Legislation. Massachusetts statute, pursuing the theory that the beneficiary is the true owner and trust property ought to be taxed accordingly as he derives bene- fit, both from the state and its municipal divisions without re- gard to the particular residence of the holder of the legal title, 21Hardy v. Yarmouth (1863), 6 Allen (Mass.) 277; State v. Matthews (1859), 10 Ohio St. 431; Baltimore v. Stirling (1868), 29 Md. 48; Baltimore Appeal Tax Court v. Gill (1878), 50 Md. 377; Stin- son v. Boston (1878), 125 Mass. 348; People ex rel. Darrow v. Cole- man (1890), 119 N. Y. 137, 23 N. E. 488, 7 L. R. A. 407. 166 CHAP. XV.] TAXATION. [ 113. requires it to be taxed to the trustee in the city or town where the beneficiary resides, and, if he is a non-resident, then where the trustee resides, and, if there is more than one trustee resid- ing in different places, in equal portions. 22 Scarcely might legislation more specifically declare that the law regards the beneficiary as the true owner, owing both general and local taxes in that capacity, if a resident, and, if a non-resident, there is a presumption of benefit to him from general and local muni- cipal law, according to the residence of Ithe trustee. This statute was before the Supreme Judicial Court of Massachusetts upon the question whether certificate holders in a trust were taxable at their residences or at the place where the business was carried on. 23 The court said : "If the certificate holders in this trust are partners within the meaning of section 21 of chapter 490, Part 1 of Mass. Statutes, 1909, their property was all tax- able in the City of Boston, where their business was carried on," and "we do not think the provision exempting the certificate holders from personal liability for debts should be held to de- feat the application of this section to the trust as a partnership. * * * In the leading and substantive features that distinguish ordinary partnerships, this association is within the spirit and meaning of the law of partnership. The limitations upon the power and liability of individual members, and the attempt to avail themselves of many of the privileges of stockholders in corporations, relate more to details and to the machinery of management than to the substantive purposes of the enterprise. ' The "substantive purposes" were to carry on a business and a business ought, under the statute, to be taxed where it is carried on, and, if various persons establish it and it is carried on for their benefit, the court thought they were partners for taxing purposes. Had the court been at all disposed to dispute the validity of the exemption from liability there would have been a much briefer answer to the contention, but on the con- trary, it admits, or seems strongly to admit the validity of "limitations upon the power and liability of individual mem- 22Mass. St. 1909, c. 490, 23, cl. 5. 23\Villiams v. Boston (1911), 208 Mass. 497, 94 N. E. 808. 167 114.] TAXATION. [CHAP. XV. bers" and speaks of "the attempt to avail themselves" of other things. The case seems strong authority for the proposition, that, if the business of such a trust is taxable where it is located, it would be double taxation to tax those holding certificates of shares therein. Certainly this was so deemed in Massachusetts so far as other towns and cities were concerned. In other words, though the Massachusetts statute provides that a cestui que trust be taxed, through his trustee, in his town or city, yet a certificate holder in a trust need not be, because the trust is elsewhere taxed, the substantive purpose being to carry on a business for the benefit of investors. 114. Summary. It seems impossible to find any case main- taining or attempting to maintain the proposition, that the legal and equitable interest in the same property may both be taxed, at least where trustee and beneficiaries reside in the same state. On the contrary, all theory of this being lawful as to capital stock and shares of stock of a corporation is that they are distinct and independent properties, there being a legal interest in the former and a legal interest in the latter, that is to say, diverse legal interests in different things. In a trust there is a legal interest and its dependency, an equitable interest. If the latter is destroyed a beneficiary ceases to be, but the property resumes the status it had before the subsidiary interest began. Under the doctrine of limitation of power in the State to tax property only within its jurisdiction, as expressed in State Tax on Foreign-Held Bonds, supra, it is not perceived how a resident cestui que trust may be taxed as to his interest in a foreign trust, if no tangible property thereof is found at his domicile. His interest is not a chose in action. It is an interest merely represented by another who holds the legal title and lawful possession. If he could be taxed on tangible personal property elsewhere lawfully holden and taxable, then too he would be taxable on real estate in another state. As to intan- gibles the rule mobilia sequuntur personam should not override the legal title or make it have a double application. Therefore, it may be said that in the state, where both trustee and cestui 168 CHAP. XV.] SUMMARY. [ 114. que trust resides one tax is all that may be imposed ; and if they reside in different states the tax is imposed where the property is held.. If it is true, as stated in Morrison v. Manchester, supra, 24 that there is no difference in an equitable interest whether it is merely an aliquot part or represented by a transferable share therein, then it also would be true that a state may not discrim- inate by exempting the former and taxing the latter merely because of residence of the owner, even if it may tax it at all. Every state guarantees uniformity in taxation and equality in burden. This may not be absolute in practice, but it must be absolute in intention. Therefore, the holder of a transferable certificate cannot be taxed where the estate is elsewhere, unless the same rule is applied to every other trust interest whether it be testamentary or otherwise created. 24 in. 169 CHAPTER XVI. TRUSTEES AS MANAGERS. 115. Preliminary. It has been endeavored thus far to demonstrate that, so far as the general principles of equity are concerned, a business may be carried on by means of the vest- ing of its property in, and transferring its control to, trustees, who manage same under their duty to account to cestuis que trust, according to their several interests, the owners of these interests having alienable rights to an extent making the holders, in a sense, purely impersonal. Even where a court considered, that owners were associated in a company, whose property was vested in trustees, along with a complete surrender of its man- agement and control and the trustees distributed its profits to certificate holders, by original constitution and by purchase of shares, it was said of a shareholder that "his rights were re- duced (from that of an ordinary member of a company) so that the stockholder had only a right to participate in the elec- tion of trustees and receive his share of the money made," 1 and the trustees "are liable for their fidelity to the trust and for all profits made in business, in substantially the same man- ner that a board of directors is liable to stockholders in an in- corporated company." The particular differences in this liabil- ity, it has been attempted to show, are that in equity the trustee liability is more stringent, while operating "in substantially the same manner" as a board of directors, and that it is more per- sonal as to each trustee. Nevertheless for trustees to conduct a business, agreements and declarations of trust need to be framed so that settlors may, mutatis mutandis, and under their common law powers, create a trust estate to be managed in a practicable way to the attaining of the end desired. lEstate of Oliver (1890), 136 Pa. 43, 59, 20 Atl. 527, 9 L. R. A. 421, 20 Am. St. Rep. 894. 170 CHAP. XVI.] UNITY OF ACTION BY TRUSTEES. [ 116. The only magic in the creation of an express trust is the conveyance of a legal estate to one competent to take as a trustee for the benefit of one capable of being designated a beneficiary. 2 To the creation of such trust may be affixed di- rections for its management or disposal. Thus a will may au- thorize an executor as trustee to carry on a mercantile business, so that debts incurred therein may become chargeable against the trust estate and so endanger its existence, provided that the power so to do be unmistakably expressed. 3 And the directions prescribed for the management and control of the trust may not be interfered with by a court of equity, unless the preservation of the trust itself demands such interference. 4 It has been said that there is "extreme difficulty in applying even the doctrine of necessity to a case where the creator of the trust has plainly disclosed an intent to limit the benefit he intended, by an ad- herence to a course of conduct expressly mapped out, in the management of a trust." 5 From these cases it is to be seen that the trust character of property is in no respect derogated from by specific directions governing the trustee, holding the legal title, in its manage- ment, and that these directions sedulously will be observed by courts. 116. Unity of Action by Trustees. The maxim potestas delegate, non delegari potest applies to the office or power of a trustee. Thus in a declaration of trust in favor of shareholders in a tract of land which was to be sold by the trustee, either wholly or as to such portion as the persons holding a majority 2Foster v. Friede (1865), 37 Mo. 36; Brown v. Spohr (1904), 180 N. Y. 201, 73 N. E. 14; Estate of Smith (1891), 144 Pa. 428, 27 Am. St. Rep. 641. 3Eufaula National Bank v. Manassas (1899), 124 Ala. 379, 27 So. 258; Kirkman v. Booth (1848), 11 Beav. 273; Burwell v. Ca- wood (1844), 43 U. S. (2 Howard) 560. 4Johns v. Johns (1898), 172 111. 472, 50 N. E. 337. SPennington v. Metropolitan Museum of Art (1903), 65 N. J. Eq. 11, 23, 55 Atl. 468. 171 116.] TRUSTEES AS MANAGERS. [CHAP. XVI. of the shares should specify, at such time or times and at public or private sales and for cash or convertible securities, and upon such notice as they shall direct, Sandford, Vice-Chancellor, said: "The instrument contains no reservation or provision of a power of appointment or substitution by Graham, of any per- son or persons to do these acts in his stead. Upon such an instrument delivered to each shareholder, each appears to have paid the price or consideration for his share. Each shareholder thus acquired a right and interest in the covenants and powers contained in the declaration of trust. The powers were to be executed by Graham personally. The manner of their execution was important to the parties in interest. His skill and success in effecting a sale ; his economical conduct of the trust ; and his judgment and impartiality in making a partition, if that should become necessary, were elements of the contract which the parties entered into by this trust deed, and which the court upon the construction of the trust, must infer were a part of the inducement for the purchase of shares. It seems to me per- fectly clear, that such powers cannot be delegated, without an express provision in the deed creating the powers or the con- sent of all the parties." 6 This somewhat extended extract is given, because it is an admirable statement and shows application of a principle to a case where the discretionary powers of the trustee were closely circumscribed, and, though this was so, yet in whatever of dis- cretion there was vested in him, in this "each shareholder ac- quired a right and interest," just as in the covenants in the declaration of trust. The lack of power of substitution or delegation, and the re- fusal of a court of equity to permit same, by trustees chosen by a testator, though a proposed substitution might appear both to them and to the court as more practicable toward accomplish- ing the purpose aimed at, is well illustrated in a Massachusetts case. 7 This case shows that a donor gave to trustees a fund to Suarez v. Pumpelly (1845), 2 Sandf. Ch. (N. Y.) 336, 340. TWinthrop v. Attorney General (1880), 128 Mass. 253. 172 CHAP. XVI.] AGENTS OF TRUSTEES. [ 116. found and maintain a museum of archeology, with the fund to be divided as stated, with accumulation as to one part for a stated time. The trustees were authorized to appoint a treasurer and upon his resignation it was sought through the assistance of the court to turn the entire management of the trust fund over to Harvard University, in connection with which the mu- seum was to be founded and maintained. The court said: "It is a departure from the directions of the donor, which could be justified, if at all, only upon proof of the most pressing ex- igency. But the only reasons assigned by the plaintiffs are that their treasurer, who has acted without compensation, is about to resign, and that the agreement, if made, would be beneficial to the trusts, as it secures the services of efficient treasurers and custodians of the fund without charge, whose services they could not otherwise secure without great expense." The above two cases are but illustrative of the universally received doctrine, as a principle, but it is not considered to be derogated from by the appointment of agents for the perform- ance of merely ministerial duties incidental to a proper execu- tion of the trust, 8 especially when express authority to do this is given by the instrument creating the trust, 9 a subject to be considered hereinafter. It necessarily follows that, as no trustee can delegate to another any part of his discretionary power, where there are two or more trustees, they must act as a unit and not separately. 10 The reason for this rule is thus expressed in the Coleman case : "The power of sale conferred upon trustees and executrices must be presumed to have been conferred by reason of the trust and confidence reposed in them by the testator, and could be executed only by all those upon whom it was con- ferred acting jointly." It has been said that "this principle enters SSpenglar v. Kuhn (1904), 212 111. 186, 72 N. E. 214; Donaldson v. Allen (1904), 182 Mo. 626, 81 S. W. 1151; Perry on Trusts (6th Ed.) Sec. 409. SWilson v. Stewart (1858), 3 Phila. (Pa.) 51. lOColeman v. Connolly (1909), 242 111. 574, 90 N. E. 278, 134 Am. St. Rep. 347; Hosch Lumber Co. v. Weeks (1905), 123 Ga. 336, 51 S. E., 439. 173 117.] TRUSTEES AS MANAGERS. [CHAP. XVI. into all cases depending on the discretion and judgment of the trustees in contradistinction to acts of a mere ministerial nature. The former requires the concurrence of all the trustees; the latter may be performed by one." 11 The case here cited says each trustee has, in case of necessity, an inherent power to do what is necessary "to the continued existence of the trust, at least, in the absence of an express negative" in the instrument creating the trust. 117. Provisions for Action by Less Than Full Number. Frequent expression is made of an exception to the rule of unity arising out of the instrument creating the trust, but this is arguendo and where made it is done by way of illustrating the strength of the rule. Thus Chancellor Walworth said: 12 "A trustee who has only a delegated discretionary power can- not give a general authority to another to execute the same, un- less he is specially authorized so to do by the deed or will cre- ating such power." And it has been held that where the instru- ment empowers a majority to act, this exception to the general rule will not be enlarged by implication. 13 However, when there is action by a majority under a power in a deed or will plainly conferring it, such action has been upheld. 14 And so it may be thus conferred on one of two trustees. 15 though it is true that a majority may act where the deed "by a reasonable con- struction implies, if it does not expressly declare the power and authority of a majority of the appellees (trustees) to execute its provisions." 16 A deed or will also may classify trustees, assign- ing to some, certain duties, and to others, other duties, though that classification be not absolutely fixed by the instrument, but HVandever's Appeal (1845), 8 Watts & S. (Pa.) 405, 42 Am. Dec. 305. 12Hawley v. James (1835), 5 Paige 318, 487. l3Bascom v. Weed (1907), 105 N. Y. Supp. 459; 53 Misc. Rep. 496. 14Barney v. Chittenden (1849), 2 G. Greene (Iowa) 165; At- torney General v. Cuming (1843), 2 Y. & C. Ch. 139. ISTaylor v. Dickinson (1863), 15 Iowa 483. 16Ratcliffe v. Sangston (1862), 18 Md. 383, 389. 174 CHAP. XVI.] ACTION BY MAJORITY. [ 117. is dependent on its going into effect by "leave" of the trustees themselves. 17 It is to be remembered, however, that the mere fact that a majority of the trustees may govern, where an instrument so provides, does not mean, necessarily, that they may act without consulting the others. Thus where it was provided by a trust instrument, that the business of a com- pany was to be transacted by five trustees and a majority of them was to govern and that "if any trustee should be absent from the commonwealth, the others should have all the powers herein named," it was said by Shaw, C. J. : "Where the power is to deliberate and examine, and discretion and judgment are required there, although a majority may ultimately decide, yet all must deliberate and advise, or at least have full notice and opportunity to do so. The company, whose trustees they are, are entitled to the full benefit of the knowledge and discre- tion of them all." 18 Thus it seems clear, that instruments cre- ating trusts may provide for departure from the rule or principle of unity of action by trustees, but provisions should clearly define the limits of departure. This rule of unity perhaps more correctly should be called a rule of co-operation in the exercise of the powers of the of- fice of trustee; that is to say, it is a policy to secure the ap- proval of the several trustees for the presumed advantage of the trust and its beneficiaries, and not to enable an outsider to claim the invalidity of an act by a single trustee or any number less than the whole in his interest or defense, and he may claim its validity when the act is in an emergency or it is ratified. Thus it was said by the Supreme Court of District of Columbia that: "It is undoubtedly true, as the general law, that when the administration of a trust is vested in several trustees, they must all co-operate in the exercise of the powers of their office, and cannot act separately or independently of each other. This is held by all the authorities on the subject. But this rule is not without its exceptions and qualifications. ITDuckworth v. Ocean Steamship Co. (1896), 98 Ga. 193, 28 S. E. 736. ISHeard v. March (1853), 66 Mass. (12 Cush.) 580, 584. 175 117.] TRUSTEES AS MANAGERS. [CHAP. XVI. One trustee may in many things act as agent of all the trustees, especially in cases of emergency; and there may be ratification of the act of one trustee by his associates in the trust. In this case one trustee in express terms purported to act for the other as well as for himself. * * * This sale, being concurred in by both trustees, operated as a ratification by both of the previ- ously existing agreements between Williams and the appel- lant." 19 This power of ratification by trustees is not confined merely to acts of one, or a less number than all of the trustees, but extends also to acts of an agent appointed by one or more, but less than all, of the trustees. 20 Summarized, it may be said, that whatsoever fairly comes within the discretionary power vested in trustees may be accomplished according to the usual methods adopted in the conduct of business, with there being ever back of them the power of a court of equity to require that their powers "are all to be exercised only for the pur- pose of effectuating the trust; and, when it appears that such powers are perverted to the detriment of the cestui que trust, the court will promptly interpose its protective authority." 21 This discretion may resemble that of a judicial officer, that is to say, the doing of one of two things, doing of either of which is within the power of trustees as conferred by the instrument creating the trust, may be compelled, so far as making him choose one or the other, but not directing which. 22 It has been said that a court of chancery cannot "control the trustees in the exercise of a discretionary power reposed in them by the testator, nor compel them to exercise such discretion," 23 but this state- ment was made in a case where such control was given to the trus- l9Ubhoff v. Brandenburg (1905), 26 App. D. C. 3. See also Phila. Trust S. D. & I. Co. v. Phila. & R. C. & I. Co. (1891), 139 Pa. 534, 21 Atl. 70. 20H111 v. Peoples (1906), 80 Ark. 15, 95 S. W. 990. 21 Albright v. Albright (1884), 91 N. C. 220, 225; Jones T. Jones (1888), 124 111. 254, 15 N. E. 751. 22Matter of Stewart (1892), 131 N. Y. 279. 23Dillard v. Dillard's Ex'rs. (1895), Virginia, 21 S. E. 669. 176 CHAP. XVI.] TENURE OF TRUSTEES. [ 118. tees as made the estate in them "equivalent to a fee simple," and even in that case the court said: "It is perhaps true, that, if such discretion were exercised from fraudulent or improper mo- tives, a court of equity might interfere, but in such cases it must be so alleged and sustained by the proofs." The three next above cited cases, and especially the last one, enforce the theory of the validity of special powers conferred by trust set- tlors and the jurisdiction of a court of equity to enforce the relation of trust that is created. 118. Appointment and Tenure of Trustees. It is un- necessary to cite authority that an instrument sufficient to cre- ate a trust may appoint its trustees, and, were this desired, cases which follow conclusively so presume. These cases relate directly to the question of tenure and substitution of trustees. A very stoutly contested case, decided by the Court of Appeals of District of Columbia and affirmed by the United States Su- preme Court, 24 considered the grant of power in a will to one of two trustees and the beneficiaries, for sufficient cause and by unanimous resolution, to remove the other trustee from of- fice, the trust being an active one. The Court of Appeals said : "The power to remove their trustee was vested in the defend- ants to this cause. The power to determine when there was good and sufficient cause for such removal was necessarily in them also, subject to the restraining power of a court of equity against the abuse of it. They exercised their right to deter- mine that good and sufficient cause existed; they found that there was such cause; and they removed the trustee according- ly. Upon the face of their proceeding, it is beyond question that they acted within the scope of their authority." Then the court inquires whether or not their finding of such cause was "a pretense for the exercise of arbitrary and unreasonable author- ity," and concluding that there was "dissension, bitter and un- compromising," between the parties as to "active trusts in which the judgment and discretion of both trustees are neces- sary for their proper execution," the removal was not to be 24May v. May, 5 App. Cas. D. C. 552; same case (1897), 167 U. S. 310. 177 118.] REMOVAL OF TRUSTEES. [CHAP. XVI. deemed an arbitrary and unreasonable exercise of authority, the court saying it would not enter into any investigation of the causes of dissension. The United States Supreme Court speaking by Mr. Justice Gray discusses the clause for removal as follows: "If no such power had been given them (the beneficiaries) by the testator, any one of them could have applied to a court of equity, and have had the trustee removed, on proving good and sufficient cause therefor, satisfactory to the court. If the words 'for good and sufficient cause/ in the codicil, mean only such cause as would be deemed by a court of equity to be deemed good and sufficient, the only effect of conferring the express power of removal would be to restrict the power of removal by requir- ing their action to be unamimous. This cannot have been the testator's intention. The extent of the power con- ferred appears to us to have been well and accurately stated by the Court of Appeals." These two courts, therefore, sustain the right of a settlor to vest in beneficiaries the power of re- moval, but the Supreme Court said by way of caution, that it must not be understood as approving the selection of their at- torney as trustee, as his participation in a family controversy might make him unfit to be trustee, because the removed trustee was a beneficiary interested in the trust. It left this question to be dealt with by the court below. Though the codicil also gave the beneficiaries the power to appoint a successor, it is perceived that the court thought this power should be exer- cised with due regard to the rights of all beneficiaries and not in an arbitrary, unreasonable way. Thus it is perceived that in a trust a court of equity maintains its supervisory control over its administration, to the end of effectuating its purposes and maintaining in completest, integrity the rights of each and every of its beneficiaries and preventing any and all undue advant- age being obtained by one over another. These are the funda- mentals of a trust, of which a court of equity will not permit any violation. The power other than by court to appoint new trustees is 178 CHAP. XVI.] REMOVAL OF TRUSTEES. [ 118. said never to exist except in express trusts as created by deed or will, or as said in Perry on Trusts 25 and approved by a Kentucky Court: 20 "The power to appoint new trustees in place of the original ones can only be given by the author and creator of the trust; for, in cases where courts are called upon to appoint trustees, authority to appoint successors will not be given, but recourse must be had to the courts toties quoties." Therefore it is seen how necessary it is in such trusts as this work considers, that full and specific provisions should be em- braced in instruments creating them for the appointment of new trustees and their succeeding to the powers of the old ones. The Circuit Court of Appeals of the Fifth Circuit, 27 rendering a per curiam decision, from which one of the three sitting judges dissented, considered a clause in a deed of trust giving to a majority of the bondholders the right to remove a trustee. The Circuit Court had denied the exercise of such right, be- cause it was said this majority was removing the trustee, be- cause he was proceeding to do that which the minority had the legal right to demand should be done, and the per curiam opinion said: "We find nothing in the record to show that there was any abuse of the power so unequivocally and clearly grant- ed. * * * If the action of the majority of the bondholders is an abuse of the trust, or in any serious degree prejudicial to the interest of any bondholder, so that a court of equity should interfere against the exercise of the absolute right conferred upon the majority of bondholders, let the removed trustee or any bondholder in interest answer the bill to show cause." This opinion refers to May v. May, supra, as to the right of the removing parties to determine when cause for removal existed, and, therefore, when exercised it should operate immediately, unless a court of equity arrests its operation, because there is an abuse of the power. Presumptively, the exercise is lawful and divests the removed trustee of all power. 25(6th Edition) Section 287. 26Grundy v. Drye (1898), 104 Ky. 825, 839, 48 S. Wl 155. 27March v. Romare (1902), 116 Fed. 355, 53 C. C. A. 575. 179 119.] SUBSTITUTION OF TRUSTEES. [CHAP. XVI. As suggested in May v. May and Grundy v. Drye, supra, these provisions both obviate the necessity of applying to courts to fill vacancies and may add other reasons, such as mere pref- erence for a change of trustees. An Illinois case shows that it may be for the former purpose. 28 Thus is was said: "The point that the fact that the will authorizes the trustee, in the event of his sickness, old age or for any other good cause ap- pearing to him, to appoint his successor, renders the trust void, is clearly without force. His action in that regard, if arbitrarily or unwisely exercised, would be controlled by the court upon the application of the cestui que trust, even without this provi- sion. There can be no doubt that the court would have the power to appoint some suitable person to execute the trust, if for any reason Jefferson Orr became incapable of doing so." The claim of invalidity must have been on the ground that there was merely a fugitive sort of title in the trustee, but this was repudiated on the theory, that the intent to create a trust was the controlling idea and the designated trustee was ap- pointed to take the place of a court to see, that it did not fail for want of a trustee, but this power, wholly in the interest of others, must be thus exercised, or a court of equity will inter- fere. Substitution of trustees may be authorized either directly or upon a contingency, as for example where a deed of trust authorized a trustee, unwilling or unable to act in carrying out the trust, to appoint a substitute trustee, and should he refuse to appoint, then the lawful holder of the note secured by the deed of trust to appoint a substitute trustee. 29 119. Occasion for Appointment of Trustees. It has been seen that it is as competent for the creator of a trust to provide for the substitution of new trustees as it is within his power to create the trust, 30 but all illustrations in decided cases of 28Qrr v. Yates (1904), 209 111. 222, 240, 70 N. E. 731. 29Jacobs v. McClintock (1880), 53 Tex. 72. SOShaw v. Paine (1866), 12 Allen (Mass.) 293. 180 CHAP. XVI.] ELECTION OF TRUSTEES. [ 120. the timeliness or occasion for the exercise of the power of sub- stitution relate to contingencies, and not where terms of service prescribed or mere lapse of time may present occasion for the appointment of new trustees. Decisions where terms are not prescribed naturally speak of the necessity of conditions prec- edent to the appointment of new trustees, such as resignation, death, or conduct or circumstances subsequently arising. 120. Fixing Terms for Trustees and Election of Succes- sors. The absolute power of the creator of a trust, as is seen, to prescribe upon what contingencies beneficiaries may remove trustees and select their successors would seem clearly to em- brace his right to provide, that at stated intervals new trustees may be chosen. That such a provision is a reasonable one as to a trust, interests in which are represented by transferable shares, may not be doubted. It seems not only to make orderly the exercise of the power of removal, but to bring togethe* the owners of interests, who may make proper investigation of the conduct of trustees in the execution of their trust, and by re-electing or removing them, approve or disapprove what they have done, whether within or without their discretion. In other words, such a provision tends to keep trustees and bene- ficiaries in touch with each other, and gives the latter oppor- tunity for consultation with each other as to their common interests. This kind of trust calls for the exercise of a business policy and, therefore, its beneficiaries should have opportunity to select trustees, whose views accord best with those of the majority of beneficiaries. It is certain that the term theory of tenure and removal by election of successors, just as in cor- porations with respect to directors, has been adopted generally in trusts, whose interests are represented by transferable shares. Take for example, a great English case, 31 often referred to and abundantly quoted from in this work, where it was provided that cestuis que trust at an annual meeting duly called could elect new trustees. The court said: "Of course that should be done in some way which will enable those who are actually present to bind those who are absent, to enable the majority SlSmith v. Anderson (1880), 15 Ch. D. 247. 181 120.] ELECTION OF TRUSTEES. [CHAP. XVI. to bind the minority, as otherwise the assent of the cestuis que trust could never be effectually obtained, and, therefore, a form is adopted similar to the provisions in articles of association as to meetings of shareholders, but that is only mattei of form. They meet as cestuis que trust to give their assent, not as mem- bers of the partnership joining to carry on and control the business of the partnership." In a Massachusetts case, 32 in which the trust relation was squarely recognized, it was provided that any trustee could be removed and a successor appointed by three-fourths in value of the shareholders. In an Illinois case 33 where there was a valid trust in behalf of shareholders therein, it was held that the fact, that by the trust agreement two-thirds of the shareholders in interest could remove any trustee and fill any vacancies however caused, in no way militated against its character as a trust, as this reserva- tion of power was not the divesting at all of legal title in trustees nor unduly restrictive of their control. It is scarcely to be doubted that, were there found set forth in full in re- ported cases instruments creating trusts in which interests are represented by transferable shares, like provisions to those for the election of directors would appear, and they would have appeared had any point as to the validity of such a provision been raised. But there is found, as indicated above, cases where share- holders may remove under a power exactly similar to what is called in March v. Romare, supra, "the absolute right conferred on the majority of the bondholders" in that case, and why stated times may not be fixed, as say annual meetings of shareholders, for the exercise of such a right, it is difficult to conceive. If they may be so fixed, then trustees' terms may be fixed, with "the absolute right" to be exercised or not at the pleasure of share- 32Hussey v. Arnold (1904), 185 Mass. 202, 70 N. E. 87. 33Hart v. Seymour (1893), 147 111. 598, 35 N. E. 246. 182 CHAP. XVI.] JOINT AND SEVERAL RESPONSIBILITY. [ 121 holders. In this connection it is suggested that terms of trustees should be stated to continue until their successors are duly ap- pointed and inducted into office, and then the new trustee be clothed with the power and vested with the title that was in the former trustee, all power in him to cease and become null and void. 121. Joint and Several Responsibility of Trustees Con- fidence reposed. It is to be remembered that the creation of a trust is the reposing of confidence by its creator in a trustee, or, if more than one, in trustees severally. He alone has the power of appointment and no one of several trustees has the right to object to another's acceptance of the appointment. He may refuse to serve with another, but, if he accepts, it would not seem that he should vouch for his fidelity, and whether he has personal confidence or not in such other's fidelity may not be the test of liability for his defaults. Thus it was said in an opinion by the Tennessee Supreme Court: "Two trustees are appointed to execute a trust, the final operation of which is not to be completed for years ; they undertake to execute it, they are intended as checks on each other, have an equal control over the fund, are mutually bound to attend to the interest of the trust, and shall one of them be permitted to go to sleep and trust everything to the management of his co- trustee, and when in the course of ten or fifteen years, the fund having become wasted, and his co-trustee insolvent, he is called upon to make it good, shall he be heard to say he had implicit confidence in his companion, and permitted him to retain all the money and appropriate it as he pleased, and that he ought not therefore to be charged? Surely not; it is neither law nor reason." 34 It is to be noticed that the court does not say, at all, that the defendant was responsible for the mere default of his co-trustee, but for the blind confidence which permitted that default to become disastrous. The court also said : "If one trustee wrongfully permit the other to detain the trust fund a long time in his own hands without security, he will be deemed liable for any loss," an (admission that he 34Deaderick v. Cantrell (1837), 10 Yerg. 263, 31 Am. Dec. 57fl. 183 122.] LIABILITY OF CO-TRUSTEES. [CHAP. XVI. might detain it a reasonable time without his default in ap- propriating it being chargeable to his co-trustee. The conclusion is that each trustee is trusted by the settlor as to the proper exercise of his authority, whether that result in loss to the trust estate or not, but beyond that each trustee must be awake and active in behalf of the interests of the trust estate. 122. Acts and Defaults of Co-Trustee. The correctness of the conclusion just above stated is illustrated by many cases where it was sought to hold trustees liable for the default^ of co-trustees. Thus the Pennsylvania Supreme Court held a trustee liable for the default of his co-trustee, because it was held that he had "reason to believe that his co-trustee was not acting in good faith or might convert the trust funds to his own use" and "it was incumbent upon him to take necessary steps to prevent such misapplication of the funds." 35 The op- posite conclusion was reached by the New York Court of Appeals where the facts showed a conversion by a co-trustee, notwithstanding that the fund converted was turned over by two of three trustees to the one converting it. 36 Judge, after- wards Justice U. S. Supreme Court, Peckham said : "We have read many authorities on this branch of the law. They are numerous and the courts have said that, if the trustee un- necessarily do an act by which the funds are transferred from the joint possession of all to the sole possession of one, the trustee who does this unnecessary act must be held liable for the due application of the fund by his co-trustee. The ques- tion is what is meant by the word 'unnecessarily,' and it would seem to be that an act is unnecessary when done outside the usual course of business pertaining to the subject. In Bruen v. Gillet (115 N. Y. 10) the funds were turned over to one of the assignees without the slightest necessity and they con- tinued in the possession of the assignee with the knowledge of SSAdams' Estate (1908), 221 Pa. 77, 70 Atl. 436, 15 Am. & Eng. Anno. Cas. 518. 36Furdy v. Lynch (1895), 145 N. Y. 462, 40 N. E. 232. . 184 CHAP. XVI.] LIABILITY OF CO-TRUSTEES. [ 122. his colleague that they were being used in his private business. In Gasquoine v. Gasquoine (1894), 1 Ch. 470, an act which was done in the regular course of business in administering the property was held not to be unnecessary, and the trustee was held not liable for a resulting loss by the dishonesty of his co-trustee. Numerous authorities are cited in these two cases upon this subject." In the case at bar a very large sum came into the hands of three trustees which was to be paid out to depositors in a savings institution. The business of making these payments was left to one of them, checks being made in his favor from time to time. All of the trustees were men of high character. Out of over $260,000 the single trustee defaulted as to $33,000. The court said : "It was a usual, proper and ordinary way to make payments to these 700 odd creditors, under the circumstances above detailed, through the hands of one who was acting in the double capacity of trustee and receiver, and who in his latter character had all the data requisite to make the payments and to obtain accurate information as to the amount of the indebtedness in each case. And we do not think it was necessary for each trustee to attend and sign each check and make such payments instead of placing sums from time to time in the hands of the trustee-receiver and permitting him to make the payments." The great weight of authority lies within the boundaries of these two cases, i. e., Adams' Estate and Lynch v. Purdy supra, the gist of liability being negligence vel non contributing to loss from a co-trustee's default. Thus it has been said: "The principle of the cases is, that, if the estate be once properly invested, the securities may be lodged in the hands of one trus- tee and he be permitted to collect the interest and pay it over to the tenant for life, and the other trustee will not be liable for default in paying over the interest, until he has notice of some default or misconduct on the part of his co-trustee. This rule is based upon the circumstance, that it is practically impos- sible for both trustees to attend in person to the collection of the rents or interest." 37 This is but to say that confidence in the 37Dyer v. Riley (1893), 51 N. J. Eq. 124, 26 Atl. 327. 185 122.] LIABILITY OF CO-TROSTEES. [CHAP. XVI. integrity of each of several trustees is just as firmly reposed by a settlor as where there is a single trustee, and it is not negligence for each trustee to show the same confidence until his suspicions are, or should have been, aroused. This prin- ciple is well applied by the U. S. Supreme Court 38 in an opinion affirming and strongly commending the opinion by the Su- preme Court of District of Columbia in the same case.-" 9 The co-trustee, a man of excellent reputation for business integrity, was found, upon his death, to have squandered many estates in his custody. The surviving trustee recovered a small divi- dend by suit, and then he was sued by the ccstui quc trust for the remainder. The opinion, after saying that it was not con- tended as a matter of law that there was any liability for the mere malfeasance of a co-trustee, said : "What is contended is that an abandonment of discretionary power by a trustee to a co-trustee, where the trust is entitled to the united discretion of both, is such an act of supine negligence as to render the trus- tee who has abandoned his active participation in the manage- ment of the trust liable for the losses occasioned by the miscon- duct of the co-trustee." This principle, though sound, was held not applicable to the facts of the case, and the court then adopts the following language used by the Supreme Court of the District: "After a loss has occurred, as in this case, by the posi- tive fault of some one, it may be easy to say how it could have been prevented ; but in order to hold someone also fairly respons- ible, the point of view held by the party sought to be made liable at and before the loss occurred is the only safe point to assume. ****** From the light of the circumstances shown, I can- not convince myself that George F. J. Colburn was guilty of any such negligence as to render him liable." The following language in the opinion of the lower court, strongly approved as above stated, appears: "A co-trustee can- not be held responsible for loss or injury to the estate occurring through the fault of a co-trustee, if he himself has been blame- less." 38Colburn v. Grant (1900), 181 U. S. 601, 45 L. Ed. 1021. 39Colburn v. Grant (1900), 16 App. Cas. D. C. 107. 186 CHAP. XVI.] ADVICE OF COURTS. [ 123. 123. Trustee Seeking Direction of Courts. One of the advantages, that may be deemed to exist in respect to trust estates embarked in trade, is the general right of the trustee t6 apply to a court of equity for direction in the execution of his trust. This doctrine has been thus expressed : "There is no ques- tion that in cases of express trusts the trustee, if in doubt, may, for his protection, apply to a court of equity for a construction of the instrument creating the trusts, and for their execution under the court's direction and supervision. Cases of that class form an exception to the general rule that courts of equity will not declare future rights but will leave them to be determined when they come into possession." 40 This jurisdiction has often been sustained as to wills, but solely because they create trusts, 41 in which cases courts of equity will construe wills, and "give directions to the conduct of such trustees in the administration of the trust" under the will. It is suggested that a will con- taining a testamentary trust would possess an advantage over another not creating such a trust, in the event of there being ambiguous provisions. This is well exemplified in a Massa- chusetts case, 42 which ascertained merely the rights of devi- sees in a will creating a trust. As showing how important this advantage is are the remarks of Sharswood, J., 43 in a case where it was held that the Penn- sylvania Orphans Court had no such advisory power: "It would, perhaps, be a very convenient practice immediately up- on the death of a decedent to have all possible questions which might arise upon the construction of his will and in the settle- ment of his estate, settled by a decree of the orphans' court in limine, and by way of anticipation and, by an appeal to the Supreme Court from such a decree, have a final and con- 40Diggs v. Fidelity & Deposit Co. (1910), 112 Md. 50, 75 Atl. 517. 4 lHoagland v. Cooper (1903), 65 N. J. Eq. 407, 56 Atl. 705; Mersman v. Mersman, 136 Mo. 244, 37 S. W. 909. 42Chase v. Ladd, 155 Mass. 417, 29 N. E. 637. 4 3\Villard's Appeal, 65 Pa. 265; approved in Morton's Estate (1902), 201 Pa. 269, 272, 50 Atl. 933. 187 124.] TRUSTEES AS MANAGERS. [CHAP. XVI. elusive determination of the subject. It would certainly save counsel a great deal of responsibility in giving advice." As showing that courts of equity have no inherent power to construe a will but that this is merely an incident to its jurisdic- tion over trusts abundance of authority may be cited. 44 There- fore all of these cases are authority for jurisdiction in the direction of trustees in the execution of their powers. 124. Special Importance of Advisory Poiver as to Trading Trusts. The importance of such a power, the exercise of which is to be upon application of the trustee takes on a new phase in the case of a trust estate embarked in trade. We know that corporations, when the exigencies of affairs demand that there shall be created a bonded indebtedness, first consult eminent counsel as to its legality, and the matter is of such vital impor- tance that, if there is the least question in this regard, the bonds may either not be marketed or at a great disadvantage. If, however, a trust estate in business desires, under or without special provisions in a trust instrument, to do the same thing, all doubts upon the question judicially may be determined in advance and the court could provide for the security of in- vestors in such bonds. Were a court to refuse to entertain an application for direction in such a matter this itself would be approaching adjudication, that the authority was so clear and free from doubt that the trustee needed no directions in the premises. 45 The illustration of a bond issue is one that probably would first come to the mind of anyone, but it is conceivable, that in the case of a trust estate in business it often might be desirable for other proposed steps by trustees judicially to be approved by a court of equity before they are taken. 44 Monarque v. Monarque, 80 N. Y. 321; Harrison v. Owsley, 172 111. 629, 50 N. E. 227; Clark v. Carter, 200 Mo. 515, 98 S. W. 594; Hart v. Darter, 107 Va. 310, 58 S. E. 590, 15 L. R. A. (N. S.) 599. 45O'Cain v. O'Cain, 51 S. C. 348, 29 S. E. 68. 188 CHAP. XVI.] ADVICE OF COURTS. [ 125. 125. Question Must be Substantial and Involve Actual Doubt. It is to be said, that, while trustees have the right for their protection to invoke the direction of the court as to a proposed step or as to the alternative of one of two courses necessary to be taken, yet the court is not to be resorted to upon some fanciful or speculative doubt, or where it is doubt- ful whether proposed action may be for the benefit of the trust estate. This equity jurisdiction, so far as direction in execution is concerned, may not be thought to be of value, so far as the alternative spoken of is concerned, but its particular importance is in regard to administration of the trust estate as a going concern in business, though the right to have a court construe a trust instrument in case of doubt is not an unimpor- tant right. The rule deduced generally is that a court of equity will not entertain a bill for direction, unless there is a pressing necessity therefor. Thus an instruction was requested as to the duty of the trustees to give a bond payable! to the Probate Court as required by statute and perform such duties and render such accounts as is required of trustees required to give such bonds. The court thought : "That the instruction thus requested is not as to the duty of trustees who in the administration of a trust estate find themselves embarrassed by difficulties. The principal requisites for a bill for instructions have often been said to be the possession of a fiduciary fund, of which some direction is neces- sarily to be made presently; conflicting claims or the probability thereof; and the existence of no other means of determining rights or demands, so as to protect a trustee from the risks of future liability or controversy." 46 In this case it was thought the probate court could determine the question involved. It is to be noted that the court does not say that other embarrassment, than such is as is spoken of, may not receive the attention of a court of equity, but it is to be gathered, that there must be embarrassment of a substantial sort. 46Bullard v. Attorney General (1891), 153 Mass. 249, 26 N. E. 691. 189 126.] ADVICE OF COURTS. [CHAP. XVI. In New Jersey the right of trustees to ask instruction of the court is whether they "are at the present time confronted with the duty of pursuing a course of conduct about which they are in doubt, and concerning which they require instructions from the court." 47 That instruction may be given in other cases than regards the disposition of a fiduciary fund is well shown in a prior New Jersey case. 48 There the court said: "If trustees disclose a situation of their trust in which a slavish adherence to the terms of the trust will operate to wholly prevent the benefits intended by its creator and they seek instructions and directions as to their duty, I think that instructions and direc- tions for a course of conduct, which though differing from that prescribed by the terms of the trust, will actually carry out the intent of the creator, may well be grounded upon and sus- tained by the necessity of the case. The benefits intended for the beneficiaries are main subjects of consideration. The modes in which those benefits may be attained are incidental and necessity may require a change of mode to produce the intended effect." This case shows, that, even though the usual reason for applying is the trustee's protection, yet the advantage of the beneficiaries also gives ground therefor. Were the rule other- wise it would be something akin to misfortune; a court, sup- posed to be alert to protect cestuis que trust, should be equally as open for their protection as it is for that of the trustee. 126. Effect on Trust Estate of Making Application for Direction. There is authority that the making of such an application does not have the effect of thereafter placing the trustee in the position of a trustee of the court's appointment with powers limited in its decree, 49 and certainly this would not be the case where direction is merely asked as to an incidental thing under the general powers vested in the trustee. 47Hewitt v. Green (1910), 77 N. J. Eq. 345, 77 Atl. 25. 48pennington v. Metropolitan Museum of Art (1903), 65 N. J. Eq. 11, 55 Atl. 468. 49Qreen v. Putney (1848), 1 Md. Ch. 262; Cromey v. Bull (1883), 4 Ky. L. Rep. 787. 190 CHAP. XVI.] MIGRATION OF CORPORATIONS. [ 127. What might be the rule where this instruction practically covers the whole trust scheme it is unnecessary to inquire. The court would scarcely impose such a condition on its assistance being given, for it does not penalize the asking of assistance nor is a court of equity merely ambitious to enlarge its jurisdiction. This subject might be pursued at greater length but there seems little need therefor. The purpose here is merely to show that a trust is so protected by the chancellor, that there is "an exception to the general rule that courts of equity will not declare future rights," 50 but they will declare them and that declaration will be the law of the case in which a direction is given notwithstanding it may be erroneous, 51 because action thereunder is to be "regarded as accepted by the parties in interest." For this estoppel to have the necessary force stipula- tions in the constating instrument may provide, either that direction may be asked without notice to cestuis que trust or that it be called to the attention of a regular or stated meeting of the shareholders. 127. Limitation of Corporate Capacity to its Domicile. Corporations are largely limited in their right to act to the jurisdiction wherein they are organized. An extreme expres- sion of this .view is found in an oft-quoted dictum of Chief Justice Taney, which reads as follows: 52 "It is very true, that a corporation can have no legal existence outside of the boundaries of the sovereignty by which it is created. It exists only in contemplation of law, and by force of the law; and where that law ceases to operate, and has no longer obligation, a corporation can have no existence. It must dwell in the place of its creation and cannot migrate to another sovereignty." Migration, however, is effected by corporations in a limited degree and in accordance with limited legal authority. Directors may generally hold their meetings outside of the state, this being justified in law on the grounds that the directors are SODiggs v. Fidelity & Deposit Co., supra. SIThorn v. DeBreteuil (1904), 179 N. Y. 64, 83, 71 N. E. 470. 52Bank of Augusta v. Earle (1839), 38 U. S. (13 Peters) 519, 588. 191 127.] FOREIGN CORPORATIONS. [CHAP. XVI. mere agents of the corporation, and that no attempt is here made to effect any action on the part of the corporation in its artificial capacity. It is a general rule that stockholders' meet- ings must take place in the State wherein the corporation is created. 53 The rights of parties, particularly those of stockholders, are often injuriously affected by the fact that the internal affairs of a corporation are only subject to the laws wherein the cor- poration is created. Thus a suit may often have to be brought in some different State, although all the individuals concerned are in the home of the complainant. This hardship would not apply to trust estates where the management is carried on else- where than the place wherein the trust has been created. The jurisdiction of equity which applies in personam qualifies it to give relief where service is had upon the individual trustee against whom complaint is made. This subject has been treated in a prior chapter on "Actions by and against Trustees." Corporations in doing business in other States and countries rest purely upon comity and not upon right. In the leading case of Paul v. Virginia, 54 it was held that foreign corporations may be excludec 1 at the will of the State, or admitted under whatsoever conditions the State may impose. There are, however, some exceptions to this rule, which are noted in the case of Pembina Consolidated Silver Mining & Milling Company v. Pennsylvania : 55 "The only limitation upon this power of the State to exclude a foreign corporation within its limits, or having offices for that purpose, or to exact conditions for allow- ing the corporation to do business or have an office there, arises where the corporation is in the employ of the federal govern- ment, or where its business is strictly commerce, interstate or foreign. The control of such commerce, being in the federal government, is not to be restricted by State authority." The result of the authority of the several states and countries 53Cook on Corporations (6th Edition), 589. 54(1868), 8 Wall. 168. 55(1888), 125 U. S. 181, 190. 192 CHAP. XVI.] TRUSTEES DOING BUSINESS IN FOREIGN STATES. [ 128. to impose upon foreign corporations conditions precedent to their right to do business therein, is the multiplying of min- ute regulations in statutory law. This increase has been ac- centuated by some states and countries granting more liberal charters than are by the policy of other states and countries allowed, and this .merely for purposes of local fees in the granting of charters, or, at least, there is a well-settled suspi- cion to this effect. Such restrictive legislation, however, must be equal in its application and affect corporations from other states less liberal, and thus the penalty intended for the few must be borne by the many. Some of these restrictions have reached the point where it is almost impossible for many de- sirable businesses to meet the conditions local statutes impose. To overcome this difficulty, foreign corporations frequently smuggle their business into states by means of domestic cor- porations organized by "dummy" incorporators and officered by "dummy" directors. The usual conditions imposed upon a foreign corporation are that it file a certified copy of its charter in the foreign state, subject itself to a license tax, and appoint an agent for the service of process. Questions of service on foreign cor- porations crowd our courts with perplexing questions. Num- erous decisions upon statutory phraseology result, and cease to be of importance when statutes change. Regulations upon foreign corporations, in other aspects, have given rise to many intricate legal problems, with which our courts are constantly struggling. 128. Trust Estate Distinguished from Corporation. It is thought that the restrictions placed upon foreign corporations cannot be applied to trust estates engaged in business. The former are created by statute; the latter, by contract. The power of the corporation is measured by the law of its domicile, or the law where it acts if away from there. The trustee, and not the trust estate, acts as an individual and binds the trust estate, or not, everywhere. Therefore, in case a trust estate is. organized elsewhere than where its business is to be conducted, 193 129.] TRUSTEES DOING BUSINESS IN FOREIGN STATES. [CHAP. XVI. the trustee is merely an individual, with defined powers as to binding the estate, exercising the rights of an individual the same as any other individual in like circumstances. If there may be any choice of place for organization different from the place of business, it probably would be, either because of the law of that state as to the trust relation between trustee and cestuis que trust as there construed or because the power of the trustee as to binding the trust estate in such an instrument has received construction. But this could in no way affect the right of the trustee personally to act or contract and thereby be personally bound. 129. Constitutional Protection. Trust Estates May Do Business in Foreign States and Countries on a Basis of Com- mon Right. This question has been aptly considered for the purposes of this treatise in three cases involving the validity of legislation passed in Indiana in 1879, and which provided as follows : "It shall be unlawful for any person, association, or corpor- ation to nominate or appoint any person as trustee in any deed, mortgage, or other instrument in writing (except wills) for any purpose whatever, who shall not be, at the time, a bona fide resident of the State of Indiana; and it shall be unlawful for any person who is not a bona fide resident of the state, to act as such trustee. And if any person, after his appointment as such trustee, shall remove from the state, then his rights, powers and duties as such trustee shall cease, and the proper court shall appoint his successor, pursuant to the provisions of the act to which this is supplemental." (2988 R. S. of Indiana. 1881.) In Farmers Land & T. Co. v. Chicago, etc. 56 R. W. Co., it was said of this statute: "It is a statute which denies to residents of other states the right to take and hold in trust, otherwise than by last will and testament, real and personal property in Indiana. The right 56(1886), 27 Fed. 146. 194 CHAP. XVI.] CONSTITUTIONAL PROTECTION. [ 129. is asserted to deny to persons, associations, or corporations within or without the state, power to convey to any person in trust, not resident of Indiana, real or personal property within the state. This is a plain discrimination against the residents of other states. If Indiana may disqualify a resident of another state from acting as trustee in a trust deed or mortgage which conveys real or personal property as security for a debt due to himself alone, or for debts due himself and other creditors, it would seem that the state might prohibit citizens of other states from holding property within the state, and to that ex- tent from doing business within the state. No state can do the latter. A person may, and frequently does, acquire a property interest by a conveyance to him in trust. A citizen of the United States can not be denied the right to take and hold absolutely real or personal property in any state of the Union, nor can he be denied the right to accept the conveyance of such property in trust for his sole benefit, or for the benefit of himself and others. This right is incident to national citizenship. Section 2, of Article 4, of the Constitution of the United States de- clares that the 'citizens of each state shall be entitled to all the privileges and immunities of citizens in the several states'. 'Attempt will not be made', say the Supreme Court of the United States, in Ward v. Maryland, 12 Wall, 418, 'to define the words "privileges and immunities", or to specify the rights which they are intended to secure and protect, beyond what may be necessary to the decision of the case before the court. Beyond doubt, those words are words of very comprehensive meaning; but it is sufficient to say that the clause plainly and unmistakably secures and protects the right of a citizen of one state to pass into any other state of the Union for the purpose of engaging in lawful commerce, trade or business, without molestation; to acquire personal property; to take and hold real estate.' " The above was quoted with approval by the Supreme Court of Indiana, and the statute referred to was declared by it to be 195 130.] DIVIDENDS. [CHAP. XVI. unconstitutional. 57 A federal court in one of the districts of the state came to the same conclusion. 58 130. Distribution of Earnings of a Trust Estate in Busi- ness. Possibly there is no feature in the framing of a trust instrument for the creation of a trust estate as a business company more demanding careful attention than what it pro- vides as to distribution of its profits. The estate embarks in trade just as does a corporation or a partnership and this may prove to be a successful venture or the estate may be wrecked on the shoals of disaster. It is an easy matter to provide for the distribution of such income as rents or interest, but a different thing to provide for distribution of profits and still have due regard to a business being conserved, so that profits may continue to be earned. And even the character of the business to be done presents each its own problem. Thus the development and projected exhaustion of a mine is different from the building of, extension and preservation of a mercantile or manufacturing business. The general policy of the former is directly opposed to that of the latter. In corporations the 'declaration of dividends is regulated by statutes only in the way of forbidding their payment out of capital, and it has never been held, that directors should, con- trary to their judgment as to what is the best interests of the corporation, distribute at any time the then total earnings of a corporation. In the first place it's hard to say what are the total earnings because there is wear and tear that should be repaired and only estimates may be made of disbursements necessary to restore property to and keep it in fit condition. In the second place surplus cash may be required to avoid having to pay interest on loans reasonably necessary for the successful prosecution of any business. But as to all this it is contended, that the position of a trust estate in business has every advantage, that may be claimed for a partnership, without the individual liability of partners, and STRoby v. Smith (1891), 131 Ind. 342, 30 N. E. 1093. SSShirk v. LaFayette (1892), 52 Fed. 855. 196 CHAP. XVI.] DIVIDENDS. [ 130. a greatly superior position to that of a corporation. It is thought that a careful perusal of a recent decision 59 by the Massa- chusetts Supreme Judicial Court in connection with a copy of the articles of association of Massachusetts Electric Com- panies, 60 the trust referred to in that decision, will demonstrate both of these propositions. That decision speaks of the common and preferred shares authorized by the trust and the full and exclusive control and management of its property, except "trustees could not sell, mortgage, pledge or incumber or dispose of any shares of stock or other property unless the consent of the holders of at least two-thirds of each class of shares had been given at a meeting called for the purpose." There was a provision that to acquire additional property the trustees could with approval of two- thirds of shareholders issue new shares. But the interest on the preferred shares fell into arrears and no dividend had been paid on common shares. The trustees reported that it was in- advisable to create a floating debt, and asked for authority to issue additional preferred shares to be offered at par in payment t>f arrears of interest to the holders of original preferred shares. The question in the case was whether these additional shares were income, or an enlargement of capital, a life tenant claim- ing the former. The court, however, thought the old and the new shares together were principal. It was said that "while the association is not a creature of our statutes governing the formation and powers of corporations, but is organized and exists at common law, there is no ground for any distinction of the principle announced in our decisions that in whatever man- ner described or apportioned, an addition to capital stock gen- erally is treated as capital belonging to the remainderman, and not to the life tenant." This case demonstrates, that just as a trust instrument is capable, originally, of being framed to suit the creators of the trust, so it may be changed as exigency demands, even to increasing the number of its shares without 59Gardiner v. Gardiner (1912), (Mass.) 99 N. E. 171. OOExhibits, infra. 197 130.] DIVIDENDS. [CHAP. XVI. additions to its capital, if the equitable owners so desire. This a corporation generally would not have the right to do, because its original capital must be divided into no greater number of shares than will make up that capital. In this case, for example, a corporation would have been compelled to do what the trustees avoided doing. They advised that to create a float- ing debt to pay the arrearage of dividends to preferred stock would tend to impair the credit of the trust, therefore, they increased the number of shares in trust assets, by consent of shareholders and they avoided this result. Could a corpora- tion do the same thing? We think not, because a corporation trades on its capital, which falling below the aggregate of its shares would become thereby impaired and such an arrange- ment made for paying dividends would be a statutory offense. But a trust with transferable shares may make the number of its shares as few or as many or increase or diminish them, as contracting parties see fit. This demonstrates that a corpora- tion trades on a basis that may be fictitious, that is to say, on its capitalization, for whether its assets have increased or dimin- ished it must always regard a dead line in the payment of divi- dends. A trust in business trades on its assets and it is at liberty to divide its earnings as net or gross as it pleases, where there is no obligation to remaindermen. Therefore its manage- ment may be with a freer hand if that is desired, or with a stricter one, if it is sought closely to restrict trustees. This theory suggests also, that if it might be desired for an association to distribute assets as dividends and thus go into gradual liquidation or because it has more assets than may be profitably employed there is no restraint upon their doing this, if creditors both subsisting and prospective are honestly dealt with. Conversely if it should be desired to add profits to assets for any reason connected with business needs this could be done at any time. 61 Of course it is to be remembered, that these results must be within the purview of the original trust instrument, either 61 94 of this book on the subject of accumulations. 198 CHAP, xvi.] TRUSTEE'S COMPENSATION. [ 131. as it exists or may be amended, for vested rights must always be respected. It is thought that more minute suggestions ought not to be made on this subject, as each business enterprise de- mands its own treatment. It might be provided as to how notice of payment of dividends should be given, in what form payment is to be made and evidence of receipt thereof, by the holders of shares. 131. Trustees' Compensation. The theory of securing for the management of trust estates absolute impartiality has formulated in English decision the principle that a trustee can "make no profit out of his office." 62 This means that he is not to be placed in any position where his interest may be opposed to his duty. But this principle expresses an ethical, rather than a practical, ideal and if it is not reasonably attainable, it does not demand that otherwise no trust nor trust relationship shall exist. Thus we perceive, that in trusteeships under statute the policy of the law fixes compensation and presumes, that for that compensation the rule of responsibility may be more strictly applied than were gratuitous services rendered. It may be remarked, however, in passing, that though the ideal is that a trustee should serve without compensation, yet the service was so greatly connected with the interests of women and wards in chancery, thai it never was suggested, that rigidity of conduct in gratuitous service by a trustee, made trustees stand like directors of a corporation, as to whom it was thought they should be held to a less degree of care, because their services largely were gratuitous. 63 But this principle of no compensation unless the trust instru- ment specifically so provides is not by any means of universal application. Indeed it has so far fallen short in this regard as 62HPerry on Trusts and Trustees (6th Ed.) 904 and cases cited. 63 135, supra, especially Citizens' Building Ass'n. v. Coriell (1881), 34 N. J. Eq. 383. 199 131o.] TRUSTEE'S COMPENSATION. [CHAP. xvi. to be called "the English rule" as distinguishing it from what is known as the American rule which allows "courts of equity to exercise a just discretion and make or withhold allowance as they consider the particular circumstances require." 64 The opinion in a Florida case goes into an extended review of the English and American cases, and shows that only a very ftw of the latter and those very early in our history followed the form- er. 65 Thus in the Federal Supreme Court, Justice Grier said : "In England courts of equity adhere to the principle, which has its origin in the Roman law that a trustee shall not profit by his trust and therefore that a trustee shall have no allowance for his care and trouble. A different rule prevails generally, if not universally, in this country. Here it is considered just and reasonable that a trustee should receive a fair compensa- tion for his services, and in most cases it is gauged by a fair percentage on the amount of the estate. 66 There appears running through American cases the idea, that in the absence of provision about compensation in the trust instrument or where such provision does not fix the measure, ordinarily this is determined by analogy or from statutes on this subject, 67 though the circumstances may be looked to and a yet larger allowance made than is specifically provided for. In England, however, compensation may be provided for in the trust instrument. 131a. Trust Instrument Fixing Amount of Compensation. Naturally as the English rule is little recognized in this country provisions in trust instruments for compensation of trustees would not receive particularly strict construction. 68 6 * 39 Cyc. 481 and citations. 65Muscogee Lumber Co. v. Hyer (1882), 18 Fla. 698, 43 Am. Rep. 332. 66Barney v. Saunders (1853), 57 U. S. (16 How.) 535, 542. 6 7Wilder v. Hast (1906), 29 Ky. L. Rep. 1181, 96 S. W. 1106; Berry v. Stigall (1907), 125 Mo. App. 264, 102 S. W. 585. 68 For strictness of construction under the English rule, see Clarkson v. Robinson (1900), 2 Ch. 722. 200 CHAP, xvi.] TRUSTEE'S COMPENSATION. [ 131a. Also it may be said, that as the American rule allowed compen- sation, though not provided for in a will creating a trust, a for- tiori would a liberal construction be placed upon provision in other trust instruments and especially in one for the carrying on of business. Whenever the amount of trustee's compensation is by con- tract between trustee and beneficiary its reasonableness is not a matter of inquiry, as "such contracts are not prohibited by law, and when honestly entered into between trustee and bene- ficiary the courts will not interfere therewith. ( Bowker v. Pierce, 130 Mass. 262. )" 69 Even if the deed fixes the compensation and it appears it is too low to procure competent persons as trustees therefor a court of equity will not allow the trust to fail or be administered less faithfully and will correct the matter by al- lowing additional compensation, 70 or if a supplemental agree- ment add other duties than under the original trust additional compensation may be allowed. 71 Thus it is seen, that in trusts of the nature this work treats it is advisable that provisions be specific as to amount of com- pensation to be allowed trustees, making such a definite expense of the business. This indeed is the only way for any determina- tion to be reached as to what are the earnings to be distributed among the cestuis. Of course, it may be provided that com- pensation shall be fixed for a time less than the trust term, and then rearranged by resolution at a meeting, regular or special, of the cestuis. But in one way or other the amount should be determined in advance of the rendition of service for a particu- lar period, so that there will be no occasion for application to a court of equity on this point. As appointees of trustees are their officers and agents, whose 69Ladd v. Pigott (1908), 215 Mo. 361, 370, 114 S. W. 984. See also Louisville Trust Co. v. Warren (1902), 23 Ky. L. Rep. 2118, 66 S. W. 644; Turnbull v. Pomeroy (1885), 140 Mass. 117, 3 N. E. 15. TOBiscoe v. State (1861), 23 Ark. 592. TIJarrett v. Johnson (1905), 216 111. 212, 74 N. E. 756. 201 131a.] TRUSTEE'S COMPENSATION. [CHAP. xvi. compensation is paid by the trust estate it will be a matter for consideration how far it should be left to the discretion of the trustees to fix their salaries and the periods of employment. It is suggested that, as trustees should make reports on all these matters to the shareholders, their discretion in this regard greatly should not be fettered. It is for another reason highly important that the trust instru- ment in the business trust should be specific as to compensation of trustees, because statutes as to compensation contemplate an ordinary trust with income such as rent or interest and not of a trust in business for profits, whose transactions run into enor- mous sums of money both as to receipts and disbursements. It is certain, however, that even with trusts of the ordinary kind the statute may be displaced by contract between parties sui juris, 72 and so much the more would this be true as to these trusts scarcely within the purview of such statutes. T2Bowker v. Pierce (1881), 130 Mass. 262; Louisville Trust Co. v. Warren (1902), 23 Ky. L. Rep. 2118, 66 S. W. 644. 202 CHAPTER XVII. PROTECTION OF CESTUIS' INTERESTS. 132. Preliminary. Generally, the rights of a cestui que trust are only such as are necessary for his protection in se- curing what is due him from the trust estate. He has no inter- est in the property itself; and the kind of trust treated in this book seeks to emphasize his lack of control or management. He is a mere claimant against the trustee, with a right to follow the trust property. Exceptionally, as in the case of an account stated, he has an action of law against the trustee, 1 but generally his remedy is in equity. We have seen that if the trustee's acts are inconsistent with his duties to the trust he may, at the in- stance of the cestui, be removed. 2 The rights of the cestui to in- formation and accountings, to protection when the trustee is dealing with him and with the trust assets, his right to pledge his shares, and to hold meetings are considered in this chapter. It is thought that provisions in these trusts for annual reports, for meetings of the cestuis, and for periodical selection of trus- tees is merely an orderly method of doing what every cestui has the right to have done. In other words, there is not at- tempted to confer any new rights, but only to provide efficient machinery for the orderly observance of old rights. This situation of a business wherein profits go to cestuis, who select trustees, keep informed as to their operations, remove them on occasion, and otherwise see that the business results to their benefit, without said cestuis being liable for the acts or omissions of trustees, is not unique in law or in common ex- perience. Merely by way of illustration, the position of owner and independent contractor may be instanced. Here the owner gets the benefit, he may remove the contractor, or provide for successive contractors, he sees -that the work comes up to specifications and that the contractor performs it honestly, and yet because he exercises no supervision over the contractor's l85, supra. 2 85, 118, supra. 203 133.] PROTECTION OF CESTUIS. [CHAP. XVII. actual manner of doing the work, he cannot be rendered liable either for the contractor's contracts or torts. This illustration might be carried as a further parallel when the lien against the owner's property is looked to as a basis of credit, just as those dealing with a trust estate may have, as stated by Lord Eldon, "something very like a lien" on the trust estate embarked in trade. The status of trustee and cestui as herein expounded is less extreme than that of owner and independent contractor, because the cestui is not only divested of control, but he has no legal title to the property dealt with whatsoever. In order to compare the protection of cestuis que trust, and of stockholders in a corporation, with reference to their respective interests, the status of corporate stockholders is set forth at length. For brevity the term "stockholders" is used to denote owners of shares in a corporation, and the term "certificate holders" to denote the owners of interests in a trust represented by transferable shares. 133. Status of Stockholders. As a corporation is a crea- ture of statute, it necessarily follows that the methods and limits of its activity, the means of its creation of capital, by whom it shall be managed and how interest therein may be acquired or lost, are also under statutory control. Wherein, however, statute may be wanting in specific provisions, it must be conceded, that courts have applied principles of settled law to the protection of valuable rights acquired in the formation of a corporation. In this sense it has been held that: "The stockholders are the equitable owners of the corporate property," 3 which principle, however, militates in no way against any corporation dealing with that property, within the limits of its charter powers as its own. Nor is there any relationship between a stockholder and a corporation, such as that between a trustee and a cestui que trust, which may prevent them dealing with each other as strangers 4 , no one, indeed, having the right to assail transactions SMartin v. Niagara Falls Paper Mfg. Co. (1890), 122 N. Y. 165, 25 N. E. 303. ^Bramblet v. Commonwealth Land & Lumber Co. (1904), 27 Ky. Law Rep. 878, 83 S. W. 599; Moore v. Universal Elevator Co. (1899), 122 Mich. 48, 60; 80 N. W. 1015. 204 CHAP. XVII.] STATUS OF STOCKHOLDERS. [ 133. between them except as fraud between the two may have affected cither's interests. 5 No admissions or declarations of one bind the other, except that the stockholder's ultimate rights may be affected in the value of his shares, and notice to one is not notice to the other in any other sense. In a word the stock- holder is an individual distinct from the corporation in its con- tracts and transaction of business. Thus it comes about that whatever may be the character of property to which a corpor- ation has title, a stockholder's interest is personal property, 6 be- cause as long as the corporation exists it is accountable to its stockholders for no part of any of its property, but only for such profits as it earns from the use of all the property the title to which it owns. When, however, a corporation fails for some reason to attain the object of its creation or by the abuse or transcending of its powers diverts the property vested in it, the beneficiaries of that use may either, under specific pro- visions of statute or by aid of chancery, divest that title and distribute its former assets, subject to claims the corporation has lawfully created. Equally as distinct, as are stockholders and corporation during its life and fulfilling the purpose of its creation, are stockholders from each other so far as their per- sonal rights and liabilities are concerned. They are not partners in any sense. As incident to stockholding they are given, col- lectively, certain statutory powers and, severally, other powers against a corporation or its officers. But the strictly fiduciary relation of a corporation to its stockholders may be said to depend either upon its abusing its powers or as that relation may incidentally arise between any two persons otherwise wholly apart one from the other. Thus it has been said: "A well settled qualification of a rule that a corporation does not stand in a fiduciary relation to its shareholders, but that they may deal with each other at arms' length, in the absence of fraud, is that a corporation is a trustee for its shareholders for the purpose of protecting their titles to their shares ; and to this end SGreat Wfestern Mining & M.fg. Co. v. Harris, 128 Fed. 321, 63 C. C. A. 51, affirmed (1905), 198 U. S. 561. eCummings v. People (1904), 211 111. 392, 71 N. E. 1031. 205 134.] EXAMINATION OF BOOKS BY STOCKHOLDERS. [CHAP. XVII. it is bound to exercise reasonable care ard diligence, and is consequently responsible to a shareholder, who has lost his title to his shares through its negligence or misconduct." 7 The very fact, however, that a corporation may be held to respond out of its general assets, and thus affect the ultimate interest of every shareholder, for its default as to one or more, emphasizes the complete ownership and distinctive personality of a cor- poration. This trust principle arises out of the corporation being the custodian of the shares of stock and bound to trans- fer them when duly directed and not otherwise, it being generally held that the jus disponendi as regards corporate shares is ab- solute. Correlatively there is the right to purchase such shares. 8 While a default of the kind referred to would affect the in- terests of all stockholders, it would not seem one for which a trustee would have any right of indemnity against a trust estate, because it is a matter in which other cestuis would not be con- cerned; yet it is not denied that it might be otherwise provided in a trust instrument. 9 134. Examination of Books and Papers by Stockholder. Statutes provide in varying terms for a stockholder's right to examine the books and papers of the corporation. Except when they give an absolute right, without question of the motive of examination, they may be deemed declaratory of the common law. The U. S. Supreme Court says of this: 10 "The decisive weight of American authority recognizes the common law right of the shareholder, for proper purposes and under reasonable regulations as to place and time, to inspect the books of the 7 10 Cyc. 614, citing numerous cases. SPittsburg Library Ass'n. v. Mercantile Library Hall Co. (1899), 189 Pa. 479, 42 Atl. 142. 9See pages 291, 306, 315, 333 of Exhibits, infra, where language seemingly is broad enough to save the trustee harmless from liability for negligence in issuing or transferring certificates. lOGuthrie v. Harkness (1905), 199 U. S. 148, 26 Sup. Ct. Rep. 4, 50 L. Ed. 130. 206 CHAP. XVII.] STATUS OF CERTIFICATE HOLDERS. [ 135. corporation of which he is a member * * * The rights of in- spection rests upon the proposition that those in charge of the corporation are merely the agents of the stockholders who are the real owners of the property. In issuing the writ of man- damus the court will exercise a sound discretion and grant the right under proper safeguards to protect the interests of all con- cerned. The writ should not be granted for speculative pur- poses or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate purposes." It has also been ruled, that it must be clear that the purpose is illegitimate before inspection may be refused and the burden is on the custodian of books and papers to prove a wrong purpose. 11 135. Status of Certificate Holders. In Chapter XII it has been discussed whether a certificate holder has the ordinary rights and remedies of cestuis que trust, suing either singly or in behalf of others, accordingly as he complained of something affecting the trust or only his interest therein. As these certifi- cate holders resemble stockholders, it is conceivable they may have similar rights and remedies, or rather that stockholders have rights similar to those of cestuis que trust, especially as we have just seen, that the interest of a stockholder is equitable in some sense; directors are likened to trustees and that the right of a stockholder to an inspection of books and papers is a common-law right, of which statutes securing it are generally but declaratory. The same rule of trusteeship on the part of directors of a corporation has been declared as to directors of an unincorporated company. 12 In this case the trustee seemed merely such of a dry trust and the acts complained of were by directors of the association in their accounts, and it would seem that at least officers of an unincorporated association are held as stringently in an equitable way as directors of a corporation. But a late case from Illinois 13 suggests, that an even stricter liStone v. Kellogg (1897), 165 111. 192, 46 N. E. 222, 59 Am. St. Rep. 240. 12Jn re. Fry (1860), 4 Phila. 129. 13Holmes v. McDonald (1907), 226 111. 169, 80 N. E. 714. 207 135.] STATUS OF CERTIFICATE HOLDERS. [CHAP. XVII. rule would be enforced against a trustee of an active trust estate. In this case the cestuis que trust were not certificate holders, but they were such in effect, because they were merely contributors to a trust fund with their interests measured by their contributions, that is to say, the trust fund was created to earn income payable to subscribers or contributors. The scheme was to form "The Chicago Society for Savings," with membership to be by signing the articles of agreement and making deposits with the trustees who were to manage its affairs. The trustees were to serve "without the expectation of emolument and pledg- ing themselves to an upright and conscientious discharge there- of," and "not to be held responsible for any loss which may happen from whatsoever cause, except their wilful, corrupt mis- conduct, in which case those trustees only who are present and guilty of such misconduct shall be answerable for the same." Of the eleven trustees only three were active and these were engaged in the banking business. The other eight testified that, while they assisted in creating the Society they took no part in its affairs afterwards, never investigating its securities nor making any attempt to examine its books. The banking busi- ness of the three not prospering, they went into that of stock brokerage also. One of the eight advised them to close their banking business. He was told they were closing up the busi- ness of the Society and later one of their clerks told him it was closed. As a matter of fact it was closed, except as to three accounts amounting in the aggregate to $817.50. The matter thus stood until the firm composed of the three active trustees was adjudged bankrupt. The owners of these three accounts sued the eight others for an accounting. The Supreme Court reversed the lower court, holding them "jointly and severally liable to these members of the Society for the amount of their respective deposits." The court in its opinion adopts the principle stated in Perry on Trusts, (4th Ed.) Sec. 266: "When trustees have accepted the office they ought to bear in mind that the law knows no such person as a passive trustee and that they cannot sleep upon their trust. If such trustee remains quiet for any reason and 208 CHAP. XVII.] RESPONSIBILITY OF TRUSTEES. [ 135. suffers some other to do all the business he is answerable for the money, as if he had conducted the business. If a loss oc- curs from any want of attention, care or diligence in him after his acceptance, he may be held responsible for failure to do that which he ought to do, as well as for his acts of positive miscon- duct. He must respond in damages for any neglect of duty, ex- press or implied." The opinion had said just before this, that the settled rule as to directors, and officers of a corporation was that of "ordinary care and prudence," and that they agree to "be liable for gross negligence." Farther on the court pointedly draws a distinction as follows : "In our judgment the duties and responsi- bilities of the trustee herein partake more of the character of ordinary trustees than of bank directors or any other officer of an incorporated company. * * * Had these men of business sagacity been actively attentive to their duties, they might all have known, long before the failure as to the condition of (this firm) and withdrawn their deposit." In this case it is perceived, that a rule of stricter responsibility was in the mind of the court than that governing directors of a corporation, and that its application was necessary to enable these cestuis que trust to recover. Considering also that the Illinois Court was construing the ruling of the U. S. Supreme Court, as to the responsibility of one director for the acts of other directors, of a corporation, which could only arise where the wrongful acts of the others were caused by the neglect of a passive director, 14 the Illinois case is especially forceful in presenting the distinction here sought to be emphasized. Among other language approved in Briggs v. Spaulding, supra, was that taken from a Pennsylvania case 15 as follows: "We are dealing now with their responsibility to stockholders, not 14Briggs v. Spaulding (1891), 141 U. S. 132, 11 Sup. Ct. Rep. 924, 35 L. Ed. 662. iSSpering's Appeal (1872), 71 Pa. St. 11. 209 135.] RESPONSIBILITY OF DIRECTORS [CHAP. XVII. to outside parties creditors or depositors. Upon a close exam- ination of all the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to account, except when they have themselves been personally guilty of some fraud on the corpor- ation or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. * * * It is evident that gentle- men selected by the stockholders from their own body ought not to be judged by the same strict standard as the agent or trustee of a private estate. Were such a rule applied, no gentle- men of character or responsibility would be found willing to accept such places." Also, in Briggs v. Spaulding, this more emphatic language is approved: "Whatever may be the case with the trustee, a director cannot be held liable for being defrauded; to do so would be intolerable." 16 And this: "One must be very careful in administering the law of joint stock companies not to press so hard on honest directors as to make them liable for these constructive defaults, the only effect of which would be to deter all men of any property, and perhaps all men who have any character to lose, from becoming directors of a company at all. * * * Wilful default no doubt includes the case of a trus- tee neglecting to sue though he might by suing earlier have recovered a trust fund in that case he is made liable for want of due diligence in his trust. But I think directors are not li- able on the same principle." 17 In a New Jersey case, 18 the theory of a less stringent respons- ibility in regard to directors is thus expressed: "These directors serve without pay. They were selected by their fellow stock- holders to manage gratuitously the affairs of the association in 16Land Credit Company v. Fermoy (1870), L. R. 5 Ch. Appeal Cases 763, 772. 17In re. Forest of Dean Coal Min. Co. (1878), L. R. 10 Ch. Div. 450, 451. ISCitizens' Building Ass'n. v. Coriell (1881), 34 N. J. Eq. 383. 210 CHAP. XVII.] AND TRUSTEES COMPARED. [ 135. which they and the other stockholders were jointly interested. To apply to them the strict rules which are applicable to trustees who assume the discharge of the duties of private trusts would be unjust." In a New York case, 19 cited with approval in Briggs v. Spaulding, supra, a purchaser of corporate stock relying on a statement in the printed business cards of a corporation of "cash capital $150,000," when the company neither had or had ever had any such capital, sued one of the directors, whose name appeared on such cards as a director. It was shown that defendant became a director a few months after the organiza- tion of the corporation, and that he did not know the represen- tations were untrue, but had no good reason to believe them true and made no inquiries to ascertain their truth, but allowed his name to be used without reflection as to the effect. He was held not liable to the stockholder for his purchase of worth- less stock. The opinion pursued the same reasoning as that al- ready shown in extracts, supra. It was said: "They (directors) publish their statements and reports, relying upon the facts and figures furnished by such agents/' and it was thought that no rule of public policy required directors should be in "constant peril" of others being deceived thereby. It is readily perceived that the trustee of a private trust would not be thus excused. How differently is the matter in the case of a private trust is well exemplified in English cases. Thus where a cestui de- sired to effect a loan on his income and referred to the trustee for inquiry, a statement was made by the trustee in good faith, but the lender being misled thereby the trustee was made re- sponsible. The court said: "I think it is clearly settled by authority, that when a trustee is applied to for information with regard to incumbrance on his trust fund, and he gives a distinct answer that there is nothing of the sort, the fact that he has forgotten the existence of an incumbrance is no excuse for him whatever." 20 lWakeman v. Dalley (1872), 51 N. Y. 27. 20Low v. Bouverie (1891), 3 Ch. 82. See also In re. Dartnell <1895), 1 Ch. 474; Re. Skinner (1904), 1 Ch. 289. 211 135.] RESPONSIBILITY OF DIRECTORS [CHAP. XVII. In a Georgia case, 21 there is quoted from 2 Spence's Eq. Jur. 921 as a correct statement of a rule the following: "A trustee is bound to render every necessary information that is required of him, and he who, undertaking to give information, gives but half information, in the view of a court of chancery, conceals ; if he has not all the information necessary, he is bound to seek first, and if practicable obtain it." The court added to this statement the following: "That concealment per se amounts to actual fraud, when, from any reason, one party has the right to expect full communication of the facts from another, is a well settled principle, recognized by both the civil and the moral law." The duty of a trustee and the right of a cestui que trust are well summarized in a Michigan case 22 as follows: It was said there were certain rules "so long established both in England and in this country that a departure therefrom has come to be regarded as a want of capacity or dishonesty in a court which fails to apply them." One of these rules "required the trustee at all times to keep his accounts with the several interests be- longing to the trust in such manner that he could, when properly called upon, give those who were interested in the estate, the situation of the estate and all the information he could of inter- est to them during the progress of its settlement; and allow them and their attorneys, who were acting in good faith, oppor- tunities to inspect the books and papers and all records relating to the estate." A New York case, 23 used the following language as to such duties and rights: "The plaintiff being interested in the property which is to be converted into money and invested for her bene- fit, she has a right, although the trustee is acting in good faith and is exercising the discretion vested in him wisely and prop- erly, to call upon him from time to time, to disclose to her the nature and character of the property in his hands constituting 2lPoullain v. Poullain (1886), 76 Ga. 420, 446. 22Ferrin v. Lepper (1888), 72 Mich. 454, 543. 23Hancox v. Wall (1882), 28 Hun 214, 218. CHAP. XVII.] AND TRUSTEES COMPARED. [ 135. the trust fund, to show its value, the income derived therefrom and the expenses to which the trustee is subjected in its man- agement." Indeed the whole matter appears susceptible of the statement that the policy of the law is not the establishment of the same relation of trust and confidence between a stockholder and a director of a corporation that exists between a trustee and a cestui que trust, for were the same high degree of care required of a director as of an ordinary trustee, men of character and responsibility could not be found to fill the office of director. Any such reason for abating from the responsibility of a trus- tee, however, is repugnant to equity, and if holders of transfer- able shares seek to establish such a relationship with the man- agers of the property in which these shares represent interests they have the undoubted right to their choice. But stockholders are limited in this regard by the policy, which creates a cor- poration. If certificate holders are investors in a trust instead of a corporation, courts will not practically abolish the trust by treating it as a corporation. That would be to make con- tracts for certificate holders, into which they never entered and to take away rights they would otherwise enjoy. 136. Relation Between Stockholders of a Corporation and its Managers. It should not be deemed necessary to more than formulate, or quote a formulation of, the well-settled rule of a trustee's relationship and duty to his cestui que trust. The latter course is pursued in adopting the words of Sanborn, Cir- cuit Judge, as follows : "A trustee or an agent may purchase the trust property directly from his cestui que trust sui juris or principal, on the condition, that the latter intends that the former shall buy, that the former discloses to the latter, before the contract is made, every fact he has learned in the fiduciary relation, which is material to the sale, that he exercises the ut- most good faith, that no advantage is taken by misrepresenta- tion, concealment of, or omission to disclose, important infor- mation gained as trustee or agent, and that the entire transaction 213 136.] DIRECTORS DEALING WITH STOCKHOLDERS. [CHAP. XVII. is fair and open." 24 This would seem to follow from the cases in the preceding section. That a director or other officer of a corporation is bound to no such strictness in purchasing the shares of another stockholder seems plainly deducible from many cases on this subject. 23 Thus it has been said of a direc- tor that: "His obligation to the company overrides that, to an individual holder of stock," 26 a principle true perhaps as to a trustee, in the sense that he can discriminate in favor of no single cestui que trust, but it is impossible to conceive him having a superior obligation to a trust estate than to cestuis as a body. But, if either a director or a trustee may treat stock- holders or shareholders severally than as Judge Sanborn states, he may do the same with them collectively. A sum is merely the aggregate of units. There are a number of cases treating of purchases of stock by directors and managers of corporations from other stock- holders, in which the principle of the relation of trustee to cestui que trust was invoked to set the sale aside or give to the seller other relief. In some all relief was denied and in one or two only was it granted and then because of special facts. Taking the cases in which relief was denied, as first in order, it is found that they hold that "no relationship of a fidu- ciary nature exists between a director and a shareholder in a business corporation." 27 One of these cases was decided by the Supreme Court of Indiana. 28 It was said there the relation of director was "similar to that of trustees for the shareholders" only "in reference to the management by the directors of the property and general affairs of the corporation," which state- 24Byrne v. Jones (1908), 159 Fed. 321, 323, 90 C. C. A. 101. 25"Liabilities of Directors and Trustees to Beneficial Owners Compared" (1912), 74 Cent. L. J. 360. 2 6Qliver v. Oliver (1903), 118 Ga. 362, 368, 45 S. E. 232. 27Strong v. Repide (1909), 213 U. S. 419, 431, stating doctrine of those cases. 28Board of Commissioners v. Reynolds (1873), 44 Ind. 509, 15 Am. Rep. 245. 214 CHAP. XVII.] DIRECTORS DEALING WITH STOCKHOLDERS. [ 136. ment was later approved in the same court 29 and a large number of cases were cited in support. The facts of the former case show a county owned about one-ninth of the total stock of a railroad company, that its President purchased it at ninety cents on the dollar without revealing to the seller that he was nego- tiating a sale of the railroad capitalized at $250,000 for $2,500,000; that the sale was effected, thereby making the stock worth eleven hundred per cent more than was paid for it. The court, in ruling that the county was not entitled to have the sale set aside, said: "We have carefully considered the evidence in the cause, and are satisfied that no actual fraud was established in the purchase of the stock by the defendant from the plaintiff. The defendant, doubtless, knew much more about the condition of the affairs of the company and the value of the stock, both present and prospective, than the plaintiff. He purchased the stock greatly below its real value, as subse- quent events established, but he paid the market value at the time, so far as it seems to have had a market value. It is not shown by the evidence that there was any special trust or con- fidence reposed in the defendant by the plaintiff, which was violated by the former, or of which he took advantage." The court does not pretend to say he did not take advantage of the knowledge he acquired as director, when the only way he could buy was to conceal "the value of the stock both present and prospective," a thing Judge Sanborn thought would, in a trustee or agent, be at least, a fraudulent "omission." This decision was expressly approved in a New Jersey case. 30 It was said: "A director or the treasurer of a corporation is not, because of his office, in duty bound to disclose to an indi- vidual stockholder before purchasing his stock, that which he may know as to the real condition of the corporation affecting the value of that stock." The relation between director and stockholder came up in a 29Board of Commissioners v. Lafayette M. & B. R. Co. (1875), 50 Ind. 85, 97. SOCrowell v. Jackson (1891), 53 N. J. L. 656. % 215 136.] NO FIDUCIARY RELATION [CHAP. XVII. New York case, where stock purchased became of greatly in- creased value by reason of facts not disclosed to the seller, though known to the purchaser, the court said : "It cannot be said that Danforth (the purchaser) was under a legal obligation to say anything about the affairs of the corporation or to dis- close any fact or circumstance material on the question of val- ue." 31 This case has been approved by a late New York case, in which relief was extended to a stockholder, because the cor- poration was managed by directors in conspiracy to cause a "freeze out" for their advantage. It was said this was an "affirmative act designed to injure." 32 In a case decided by the highest appellate tribunal of New York the unanimous opinion of the court declared: "The rela- tions of trust and fidelity existed between the corporation and directors and not between the latter and the shareholders." 33 As the result of such a principle it was held that, where a cor- poration in business only one month became financially wrecked by fraud and dishonesty of the President, Secretary and Treas- urer, the directors being wholly quiescent, the shareholders had no cause of action against the directors, there being "no proof and no charge of any personal dishonesty against any of the directors, and the negligence found consisting entirely in acts of omission, that is in failing to remove the delinquent officers or in want of proper diligence in ascertaining their unfitness for the positions before they were appointed." In Michigan it has been said : "Directors, of course, stand in a fiduciary relation to the corporation itself. They do not stand in that relation, however, when dealing with other stockholders for the purchase or sale of stock. In the purchase and sale of stock between stockholders there must be some actual mis- representation to constitute fraud. Mere silence is not suf- ficient." 34 In this same case it was also said: "An agent may SlCarpenter v. Danforth (1868), 52 Barb. 581. 3 2Von Au v. Magenheimer (1908), 126 N. Y. App. Div. 257. 33Bloom v. Nat'l. Sav. & Loan Co. (1897), 152 N. Y. 114. 34Walsh v. Goulden (1902), 130 Mich. 531, 539; 90 N. W. 406. 216 CHAP. XVII.] BETWEEN DIRECTORS AND STOCKHOLDERS. [ 137. purchase of his principal, so long as he acts in good faith, and his principal is informed of the situation." In a Washington case it was said: "The rule recognized and adopted by the modern authorities is tersely stated by a late text writer, speaking of officers of private corporations as follows: 'The doctrine that officers and directors are trustees of the stockholders applies only in respect to their acts relating to the property or business of the corporation. It does not extend to their private dealings with stockholders or others, though in such dealings they take advantage of knowledge gained through their official position.' " 35 This approved doctrine was quoted, 36 and many cases are cited in its support. 37 Chief Justice Shaw in a leading case 38 said : "There is no legal privity, relation or immediate connection between the holders of shares in a bank and the directors of the bank. The directors are not the bailees, the factors, agents or trustees, of such individual stockholders. The bank is a corporation and body politic, having a separate existence as a distinct person in law, in whom the whole stock and property of the bank are vested, and to whom all agents, debtors, officers and servants are responsible," and from this principle have grown up rulings "adopted by the modern authorities" as above formulated. 137. Cases in Which Directors Were Held Liable to Stock- holders. The case of Strong v. Repide 39 came up from the Supreme Court of the Philippine Islands and as the courts be- low differed in the finding of facts our Supreme Court, under Act of Congress for the Islands, was given the right to review the facts for itself. Upon such review it was held that there 3O'Neile v. Ternes (1903), 32 Wash. 528, 541; 73 Pac. 692. 3621 Am. & Eng. Encyc. 898. STGillett v. Bowen, 23 Fed. 625; Farmers etc. Bank v. Wasson, 48 Iowa 336; Triseoni v. Winship 43 La. Ann. 45, 26 Am. St. Rep. 175. 38Smith v. Kurd (1847), 12 Mete. (Mass.) 371, 384. 39(1909), 213 U. S. 419. 217 137.] NO FIDUCIARY RELATION [CHAP. XVII. was "strong evidence of fraud on the part of the defendant." This defendant was the holder of the majority of the stock that was about to acquire a greatly increased value through nego- tiations with this government for the sale of what was called "the friar lands" in the Philippine Islands. He was purchasing other stock and "concealing his identity so he could by such means avoid" inquiry, etc. Summarizing the facts the court said: "If under all these facts he (defendant) purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or the defendant be cast in dam- ages for fraud. The Supreme Court of the Islands, in holding that there was no fraud in the purchase, said that the respons- ibility of the directors of a corporation to the individual stock- holders did not extend beyond the corporate property actually under the control of the directors; that they did not owe any duty to the members in respect of their individual stock which would prevent them from purchasing the same in the usual manner. While this may in general be true, we think it is not an accurate statement of the case, regard being had to the facts above mentioned." Here the general rule is admitted of no trust relationship be- tween directors and shareholders, but there was not mere silence but a scheme to avoid disclosure on the part of "the chief ne- gotiator for the sale of all the lands, acting substantially as the agent of the shareholders of his company." In other words, it was the agency relation, placed by Judge Sanborn, supra, on the same plane as trust relation, that entitled his principals to relief, and not the relation of director and stockholder. Judge, now associate Justice, Lamar reviews 40 very thor- oughly many of the cases above cited and agrees that they are opposed to the conclusions he and his associates reach. He inveighs strongly against such a doctrine as they support. Thus he said: "To say that a director who has been placed where he himself may raise or depress the value of stock, or in a posi- tion where he first knows of facts which may produce that re- 40Oliver v. Oliver (1903), 118 Ga. 362, 45 S. E. 232. 218 CHAP. XVII.] BETWEEN DIRECTORS AND STOCKHOLDERS. [ 138. suit, may take advantage thereof, and buy from or sell to one whom he is directly representing, without making a full dis- closure and putting the stockholders on an equality of knowl- edge as to these facts would offer a premium for faithless si- lence and give a reward for the suppression of truth. It would sanction concealment by one who is bound to speak and permit him to take advantage of his own wrong a thing "abhorent to a court of conscience." All of this is too true, and it seems a pity that Judge Lamar could call to the support of his views only a short dissenting opinion by one member of the court in Board of Commissioners v. Reynolds 41 and its approval by Judge Thompson who said the majority opinion "proceeds upon a conception which, if extended, would sanction nearly all of the fraud and injustice which the managers of corporations have committed against the stockholders." 42 In the second edition of Judge Thompson's work this excerpt has been elided and it is said: "The officers are not bound to acquaint a stockholder willing to sell his stock with facts which would enhance the price of the stock," 43 and for this a great number of cases are cited and to the contrary three cases 44 by two different courts. Stewart v. Harris supra bases itself mainly on Oliver v. Oliver supra quoting from it extensively and says the other rule "leaves the stockhloders of the corporation the legitimate prey of the managing officers." Stewart v. Smith was a companion case to Stewart v. Harris. 138. Summary. With a great array of authority support- ing the rule against which Judge Lamar and the Kansas Court, 41(1873), 44 Ind. 509, 15 Am. Rep. 245. 423 Thomp. Corp. (1st Ed.) 4034. 434 Thompson Corp. (2nd Ed.) 4031. 44Qliver v. Oliver, supra; Stewart v. Harris (1904), 69 Kan. 498. 77 Pac. 277, 105 Am. St. Rep. 178, 66 L. R. A. 261; Stewart v. Smith (1905), 72 Kan. 77, 82 Pac. 482. 219 139.] TRUSTEE'S ON HIS OWN ACCOUNT [CHAP. xvn. following him alone squarely contend, it may be said that the weight of authority is such, that a legitimate investor in the stock of a corporation takes a heavy risk against the cupidity of its managing officers. Trusteeship in a director even as to the corporation is shown not to be nearly as strict as is that of an agent or ordinary trustee and denied altogether so far as in- dividual stockholders are concerned. 139. Trustees Selling or Purchasing From or Dealing With the Trust Estate. Interposition of Third Parties or "Dummies." We have seen that there is not an absolute inhibition against a trustee dealing on his own account with his cestuis or the trust fund, but it is held that the burden is on the trustee to prove the bona fides of any such transaction. 45 We have seen that this applies to dealings between the cestui and trustee in the purchase of property by the trustee from said cestui. All such transactions call for an application of great moral prin- ciples which come to us from antiquity and are variously ex- pressed in several maxims, i. e., "No one can be judge in his own cause" (Nemo debet esse judex in propria sua causa), "To be at once the person acting and the person acted upon is im- possible." (Idem agens et patiens esse non potest.) "The buyer buys for as little as possible, the vendor sells for as much as possible" (Emptor emit quam minimo potest; venditor vendit quam maximo potest.) "You cannot serve two masters." "You cannot serve both God and Mammon." 46 All that this amounts to is that one having an interest opposed to his duty may prefer the former to the latter. Courts of equity, taking into account human frailty, have declared as a rule that fraud is presumed and the burden is upon the trustee to show a transaction fair, when interest and duty conflict. In corporation law, it has been a difficult task to apply satisfactory remedies, and the most that has been done is to disregard corpor- ate entities in some cases of fraud, and to apply the above rule, 45Byrne v. Jones (1908), 159 Fed. 321, 323, 90 C. C. A. 101. 46Hughes' "Equity in Procedure", 511-522. 220 CHAP. XVII.] DEALING WITH TRUST ASSETS. [ 139. by analogy, but, generally, the burden of proof has been upon those injured and, the facts being so peculiarly within the knowl- edge of defrauding officers, actions for relief often have proven illusory. The spirit of the rule that you cannot serve two masters is frequently violated as to corporations in various ways. One of these devices is to use "dummies" that is to say, persons act- ing under no independent judgment but at the dictation of others. By this means properties are taken over by a corpor- ation at the price dictated by the sellers, or valuable interests of a going concern are sold or leased out to an "inside" company, officered by "dummies", whose stock is really owned by the "insiders" controlling a plundered corporation, or some supply corporation is organized with "dummies" to further assist in the making of dividends for the "insiders" at the expense of stock- holders, who unwittingly engineer their own loss by placing officers on the "inside" who secretly betray the corporation they represent. Where it is necessary for the "dummy" to hold stock, shares are issued to him, with the certificate therefor in- dorsed in blank, and left in the keeping of the real parties in interest. The books, of course, show ownership in the "dum- my". The real owners practically take no risk from any asser- tion of independence by the "dummy". His responsibility cuts no figure, indeed the more irresponsible he is the better. He has no hold on his associates. He, usually, gets no dividends on the stock he apparently owns, and his qualification under the statute may be destroyed whenever the holder fills out the blank indorsement and transfers the stock. How strict is the rule of trusteeship and the burden upon the trustee to show a course of honest conduct is in sharp con- trast to this use of dummies. As stated in a great Federal case, 47 wherein the authorities in England and the United States were exhaustively reviewed: "The rule of equity is in every code of jurisprudence, with which we are acquainted, that a purchase by a trustee or agent of the particular property of 47Michoud v. Girod (1846), 45 U. S. (4 How.) 503, 553. 221 ' 140.] 'TRUSTEE AS ONE OF CESTUIS. [CHAP. XVII. which he has the sale, or in which he represents another, wheth- er he has an interest in it or not, per interpositam personam (through the interposition of a third person,) carries fraud on the face of it." Hence it is seen that fraud is presumed and the burden of explanation, if any can be made, is upon those best able and justly required to produce it. 140. Trustee as One of Cestuis. While it has been shown that a trustee must act with an eye single to the interests of the trust committed to his charge and that he will not be permitted to take any advantage of knowledge gained by him in the ad- ministration of the trust estate in dealing with a cestui, yet it has not been supposed, that himself being a cestui is opposed to his acting with perfect fidelity to his trust and the consequent benefit of his co-cestuis. 48 Indeed, it has been shown that he may deal with a cestui, provided he places him on a full equality with himself as to knowledge, and if he does this, opposition in interest can arise between him and other cestuis no more than where an agent deals with his principal as to the subject matter of the agency. Thus we have seen that courts have recognized that a bene- ficiary under a testamentary trust may qualify as one of several trustees. 49 The court said: "Trusts thus constituted are quite common, and although the trustees other than the beneficiary may die or decline to act, the court has power to supply their place or if need be, take upon itself the execution of the trust, so far as it ought not to be executed by the trustee who is also beneficiary." This happened in this case and "the court substi- tuted its own discretion for that of the trustee." Heard v. March, supra, illustrates that where the acts to be done do not involve the exercise of any discretion to be affected one way or the other by the trustee's personal interest he, though a bene- 48Heard v. March (1853), 12 Cush. (Mass.) 580. "In promoting the interests of the company they to so great an extent promoted their own," was said of trustees in this case, who owned a majority of the certificates of the trust. 49Rogers v. Rogers (1888), 111 N. Y. 228. 222 CHAP. XVII.] INFORMATION FROM TRUSTEES. [ 141. ficiary, stands precisely like any other trustee. Thus two of three trustees owned three-fourths of the shares and the trust in- strument provided that such an interest could direct a sale, the fact of the third trustee not joining in the deed did not invali- date it. It was said, however, that ordinarily the third trustee should have been advised with and consulted or a court of equity would have power to set aside the deed. This case but illustrates the principle, that discretion reposed in trustees must be consulted, unless specific directions as to a particular thing renders this unnecessary. The other case shows, that if personal interest may interfere with that discretion, either the court will step in and substitute its discretion for that of the trustee or other trustees will act for the trust estate. 141. Information From Trustees, It has been shown hereinbefore that the relation of trustee and cestui que trust is one of trust and cpnfidence and that the former must always give information, when properly applied to, to the latter about the affairs of the trust. A strong illustration of this duty is shown in a Rhode Island case, where by the terms of the trust the trustee was required to pay over the income to the bene- ficiary "at such times and in such amounts as may according to the judgment and discretion of the trustee seem best." 50 The court said: "The bill sets out no claim which the complainant has upon the respondent, unless it may be the right to be in- formed of the amount and particulars of the investment of the fund. * * * The discretion of the trustee is not entirely an arbitrary one, but if abused would be corrected by a court of equity. Hence we think the bill may be supported as asking for such an account." All of which is equivalent to saying, that when the complainant applied for this information it should have been given, because the settlor did not specifically say it need not be given. There arises, also, out of the fact that the legal title is vested in the trustee the right in the cestui to require verification of in- formation by the trustee purporting to be sufficient, a principle BOBarbour v. Cummings (1904), 26 R. I. 201, 58 Atl. 660. 223 141.] INFORMATION FROM TRUSTEES. [CHAP. XVII. illustrated by an English case. 51 This case was brought by one of several cestuis in a testamentary trust to compel the trustee under a will to give information as to the amount of consols standing in his name and what stop orders and distrin- gases (if any) had been placed thereon and to produce all deeds, papers and documents in his possession relating to property held by him as trustee and to furnish plaintiff with a generaj account of the estate. The court first granted an order that the trustee should write a letter to the Bank of England to inform the plaintiff as to the amount of consols, and plaintiff afterwards asked for the order to be amended so that informa- tion as to stop orders and distringases might be obtained. The court said: "The general rule is that the trustee must give in- formation to his cestui que trust as to the investment of the trust estate. Where a portion of a trust estate is invested in consols, it is not sufficient for the trustee merely to say that it is so invested, but his cestui que trust is entitled to an authority from the trustee to enable him to make proper application to the bank in order that he may verify the trustee's own state- ment; there may be stock standing in the name of a person who admits he is a trustee of it, which is at the same time incum- bered." There was no charge in this case of the trustee having been guilty of any wrong, but there was a suggestion that, inas- much as the plaintiff owned only one of twelve shares in the trust, he might be getting more information than he was en- titled to. It was thought this should not prevent the order be- ing made. This seems a very pertinent case, the question being strictly confined to the trustee giving information, suit being by one cestui and no other relief being asked. The right of inspection by the cestui que trust goes even to the production of opinions of counsel procured to guide the trustee in the administration of his trust. Thus, Sir John Rom- illy, M. R., said : "There can be no question that the rule is, that where the relation of trustee and cestui que trust is established, all cases submitted and opinions taken by the trustee to guide 5lln re. Tillott, Lee v. Wilson (1892), 1 Ch. 86; Ames' Cases on Trusts 468. 224: CHAP. XVII.] INFORMATION FROM TRUSTEES. [ 141. himself in the administration of the trust and not for his own defense in any litigation against himself, must be produced to the cestui que trust. They are taken for the purpose of admin- istration of the trust, and for the benefit of the persons entitled to the trust estate, who will have to pay the expense thereby incurred." 52 This theory in English cases of no other person having any property interest in a trust estate than its beneficiaries and that they are not like wards in chancery whose advice may not be expected in regard to its management, or that they may not ask for other trustees where they may think that management is detrimental to the trust, has support in a great abundance of English decision, and there are also American cases along the same line, as see Barbour v. Cummings, supra. In a California case it was said that fraud need not be alleged by, nor that any amount is due to, a cestui que trust to entitle him to an accounting. "The very object of an accounting may be, and frequently is, to ascertain how much has been realized and expended, so as to determine whether the cestui que trust is entitled to payment." 53 A very much more recent decision by this court shows that a trustee upon inquiry before suit was begun refused information to his cestui que trust and the court said: "This was not a compliance with his obligation which was to give to his bene- ficiary complete and satisfactory information of his dealings with the trust estate." 54 In Michigan it was said : "The beneficiaries under a trust have the right to be kept informed at all times concerning the man- agement, and it is the duty of the trustees to so inform them. It is not generally presumable that the beneficiaries have such information from independent sources." 55 After announcing 52Wynne v. Humberston (1858), 27 Beav. 421. SSGreen v. Brooks (1889), 81 Cal. 328. 54Bone v. Hays (1908), 154 Cal. 759, 766, 99 Pac. 172. 55Loud v. Winchester (1883), 52 Mich. 174, 183, 17 N. W. 784. 225 141.] INFORMATION FROM TRUSTEES. [CHAP. XVII. this principle Judge Campbell further said: "When, therefore, a bill is filed to call trustees to an account, any testimony throw- ing light on their management bears directly on the perform- ance of this duty, and may be considered in taking the accounts and in determining the view to be taken of the conduct of the trustees." In other words, if a trustee has not at all times kept the cestuis informed, presumptively he is at fault and the bur- den is on him to excuse himself, and, not doing so, this is for consideration in regard to his other acts, and opens the door for proof of misconduct and misappropriation, whether charged in the bill or not. When this case again came before the Michigan Supreme Court Campbell, then Chief Justice, reiterated what is last quoted above. 56 The case considered was where a trust was embarked in business. This same court composed partly of the same bench after- wards animadverted upon the refusal of a trustee to give infor- mation to a cestui que trust who was "obliged to make resort to the proper courts to compel disclosure of facts which common honesty should have induced the trustee to make voluntarily and with pleasure." 57 In North Carolina it was said that: "It was one of the prin- cipal and most important duties of a trustee that he should keep regular and accurate accounts and that he should be always ready to produce those accounts to his cestui que trust." 58 In Ohio failure by the trustee to consult his cestui que trust was instanced, among other things, as showing that his man- agement of the trust estate was arbitrary and unreasonable. 59 In the District of Columbia Court of Appeals it was said of a trustee that : "It was his duty to keep regular and accurate 56Loud v. Winchester (1886), 64 Mich. 23, 30 N. W. 896. 57perrin v. Lepper (1888), 72 Mich. 454, 40 N. W. 859. 58Walker v. Sharpe (1874), 71 N. C. 257. 59Moeller v. Poland (1909), 80 Oh. St. 418, 441, 89 N. E. 100. 226 CHAP, xvii.] TRUSTEE'S REPORTS. [ 142. accounts of his trust, and to be ready at all times to render them whenever called for; and this though he might have be- lieved that on a fair statement of accounts he could owe nothing to his principals or cestuis que trust" otherwise, "all presumptions are adversely indulged and all obscurities and doubts are to be taken most strongly against him." 60 The foregoing cases assume that the right of fullest dis- closure is inherent in a trust relation and, therefore, it may be fairly urged that to retain it is the retention of a right that vests in the cestui que trust just as his interest in the estate is vested. It may be true that a testator or other settlor could deny or qualify that right or a settlor in his own interest could waive it, but where this is not done it remains a right of the same nature as a property right, and if a settlor or a number of settlors creating a trust in their own interests waive it alto- gether, or as the trustee in his discretion might see fit to make disclosures, this might be important upon an inquiry whether or not a trust in equity in fact had been created. Easily then, it may be inferred, that statute or specific provision in a trust instru- ment requiring periodical or formal reports is not to be taken as excluding the right to information at other times or as to special matters, but that such statute or provision is cumulative of such right. 142. Reports Required by Trust Instrument. Restraints on Right to Information. Questioning Motive of Inquiry. Because of the number of shareholders in the kind of trusts about which this work is particularly concerned, and for the further reason that their residences may make personal inquiry inconvenient, and also because it is desirable that written or printed information of precisely similar tenor should be given to all alike, so one may know of what the others have been in- formed, it will be seen from the exhibits which are found at the end of this book that reports are required of trustees. As to what is to be embraced in these reports, so as to present the condition of the estate to the shareholders in an intelligible way 60Richardson v. Van Auken (1895), 5 App. D. C. 209, 215. 227 142. ] RESTRAINTS ON EXAMINATION. [CHAP. XVII. and what should be done in the way of verifying their correct- ness or obtaining supplementary information, if desired, is a matter best for consideration in the formation of a particular trust. An audit by chartered or certified public accountants is sometimes provided for. These reports and their form and contents are matters of detail in management, non-observance of which by trustees would be evidence more or less strong of the want of good faith and diligence on their part. Certainly their suggestions of falsity or suppressions of fact would create strong presumptions of fraud and misconduct, and even were such reports fair upon their face any objection by trustees to free inquiry as to their details or any want of fullness in them, so far as the common interests of the shareholders were concerned, prima facie would be wrongful. Discretion by trustees in management may be of the amplest nature, but the more ample that is, correspond- ingly it is expected that the more freely may inquiry extend to every subject to which that discretion applies. Another use these formal reports subserve is, that they may be guides for shareholders in making such inquiry or investi- gation as shareholders may desire, and their summaries of affairs may be preferred to synopses of books and accounts, which, though exact, might yet present a very incomplete re- port of the condition of a trust estate. Therefore, it may be said, that ,these reports, instead of being regarded as militating against the right of free inquiry and disclosure, are aids to its better exercise. The right to an accounting, upon a proper showing, with the power to question the trustee generally, and thereby secure that accidental evi- dence which discloses truth in unexpected places, will supple- ment, when necessary, the formal evidence of prepared books or papers. It is conceivable, that in a trust, where the shareholders be- cause of the absence of partnership liability, are merely invest- ors, as are stockholders in a corporation, especially as shares 228 CHAP. XVII.] MOTIVE OF EXAMINATION. [ 142. are transferred with the same facility as stock in a corporation, the personal relation of trustee and cestui que trust is greatly eliminated. It may be thought, therefore, that for the protec- tion of the trust property or of the individual interests of share- holders, but not for other reasons, independent individual in- quiry could be restricted. It is clear, that the position of a shareholder ought to extend to nothing except what pertains to his own and the common interests, and, if inquiry at all times without restriction may open the door to abuse and probable detriment to the business of a trust estate, it is in the line of protecting the estate, if reasonable discretion is given the trus- tees in this regard. It is wholly antagonistic, however, to the trust relation that any discrimination should be shown between cestuis as to their right of inquiry, or that trustees should not be obligated to full and free disclosure upon any proper occa- sion. In the New York Court of Appeals this question was touched upon in an action to compel the transfer of shares in a trust purchased in the open market, resistance being made upon the ground that the purchase was not bona fide, but to further the active opposition of the purchaser as a competitor of the trust, and that by ownership he would be enabled "to vex and harrass" the trust. In other words, the objection was personal to the purchaser. 61 The court, after saying that discretionary power must be reserved in the trust instrument otherwise discrimina- tion cannot be made between bona fide purchasers of shares in the open market, thought it did not sufficiently appear that the relief asked "may result oppressively or to the undue prejudice of the" trust. The relief asked was resisted merely upon the ground of motive of the purchaser in purchasing, a different thing than where as a shareholder he would apply for inspection of books. The court dwells upon the fact that "the shares of the trust were unqualifiedly transferable" in the open market. Upon the eiRice v. Rockefeller (1892), 134 N. Y. 174, 31 N. E. 909, 17 L. R. A. 237. 229 143.] SHARES AS COLLATERAL. [CHAP. XVII. whole, this case supports the view that discrimination shall not be shown between bona fide shareholders in any respect and it is not opposed to inspection being kept free of abuse, however, this may be as to the right to interfere with any purchaser, whatever his motive, in purchasing shares in the open market. The case concedes, also, that, had the power been reserved to discriminate as to purchasers, this would be valid. A fortiori would it be true that a reserved power to inquire into motives of inspection would be valid. 143. Using Shares as Collateral Security. Taking it that shares represented by certificates are vendible, it follows that they may be used as collateral security for a loan or debt. In- terests in a trust, even when not represented by issued shares, that is to say by a certain agreed form of certificate, as conclu- sive evidence of ownership of a share or shares, have long been used for the purpose of borrowing money. 62 In this country too it was held that a share represented by a certificate in a syndicate, of which the members were partners, could be ac- cepted as security by a national bank, 63 but thereby such a bank could not be made a partner in the syndicate, such being beyond the power of the bank, and even that qualification was dissented from by a strong minority of the court. But this work has proceeded wholly upon the theory, that there is no partnership relation in a voluntary association, under an agree- ment of trust, where the entire control of the business is in the holder, as trustee, of the legal title, especially where the trust instrument declares, that there is no personal liability and that all persons dealing with the trustee shall be notified, that the trust property alone shall be liable for the contracts of its trustee. Indeed it may be said, that a lender may, with less fear of being involved in the affairs of the borrower, accept certificates 62Low v. Bouverie (1891), 3 Ch. 82; In re. Dartnell (1895), 1 Ch. 474; In re. Skinner (1904), 1 Ch. 289. 1 63Merchants' National Bank v. Wehrmann (1906), 202 U. S. 295, 26 Sup. Ct. Rep. 613, 50 L. Ed. 1036. 230 CHAP. XVII.] SHARES AS COLLATERAL. [ 143. of shares in a trust estate, than, where, under some circum- stances, he might be compromised in accepting corporate shares as collateral. Thus where a national bank accepted as collateral on a. loan to its customer shares in another national bank and upon the note falling due and remaining unpaid caused the shares to be transferred to it, in the name of a nominal holder, it became subject to the liabilities of a stockholder of the bank whose shares were thus transferred, that bank having become insolvent. 64 And it would seem that about the only reason why a similar ruling was not made against another national bank, where, having a claim against a Minnesota corporation, it with other creditors re-organized it and took stock for their debts. This was held a taking of stock in a speculative venture, which was not within the power of a national bank to do, 65 Justices Brewer and Brown dissenting. It seems plain, however, that if the bank had taken stock in an already organized corporation, as Justice Brewer argues, it would have been subjected to the double liability of the Minnesota statute. The Wehrmann case, supra, decides that not even does lending on a share in a part- nership and the bank afterwards becoming owner subject it to liability, but this is "simply a transfer of a right to have the property accounted for and receive a share of any balance left after paying the debts." It appears from decisions submitted, that there is no per- sonal liability of cestuis que trust; that third persons are dealt with solely upon express notice that the trust property alone is to be looked to, and, further, that all contracts of trustees, unless trust property is solely made liable, are their personal contracts. It seems, therefore, impossible for any lender upon shares of a trust estate to become involved in any such way as might happen in lending to stockholders in a corporation, but the value or estimated value of shares in a trust, offered as security, needs alone to be considered. 64National Bank v. Case (1878), 99 U. S. 628; California Nat'l. Bank v. Kenedy (1897), 167 U. S. 362. 65First National Bank v. Converse (1906), 200 U. S. 425. 231 144.] MEETINGS OF CESTU1S. [CHAP. XVII. 144. Meetings of Certificate Holders. Receipts, Acquit- tances and Waivers. As stated by Lord Colton, in Smith v. Anderson, 66 the shareholders at annual meetings, meet as ces- tuis. Hence it is assumed their deliberations or acts at such meetings will neither in fact nor appearance be those of principals. "They meet to receive reports, appoint auditors and elect new trustees." The outline of the record of such a meet- ing is set forth as an exhibit in the back of this book. As a part of such meetings, the minutes may recite the approval or non-approval of the past operations of the trustees and waivers of their rights, so far as disclosed, but as ruled in a great federal case, 67 receipts and acquittances do not affect cestuis' rights, where "they were obviously given without full knowledge of all the circumstances connected with the disposal and manage- ment of the estate." 66(1880), 15 Ch. Div. 247. 67Michoud v. Girod (1846), 4 How. 503, 561. 232 CHAPTER XVIII. INVIOLABILITY OF TRUST FUND. 145. Preliminary. It has been shown in preceding chap- ters that the obligations of trustees of active trusts are personal, but this does not mean that creditors or cestuis que trust ex- haust their remedies in attempts to collect from the trustees. This personal liability, instead of detracting in any way from the creditors' security, enlarges it, leaving unimpaired the prin- ciple that property impressed with a trust may be followed by whomsoever is interested in the enforcement of the trust. The many cases hereinbefore cited and discussed, show that both in England and America the trust estate is reached by creditors through the trustees' right of indemnity and it is scarcely dis- putable but that a creditor, who may subject a trust estate to his debt at all, has a claim superior to that of the cestuis que trust. 1 146. Pursuit by Creditor of Trust Fund. That a trust fund may be pursued and rescued from any hands into which it has come with notice of its character, the numberless cases in which cestuis have followed and rescued it attest. The prin- ciple rests upon wrongful diversion being corrected a status quo being restored. That authority in cases of creditors of a trust pursuing what has been diverted are not so numerous, proves but the lack of incident in this kind of litigation, for, at all events, what is a superior right to that of a cestui ought to have at least equality in remedy. But cases are not entirely lacking as to a creditor's remedy against wrongful diversion of trust assets. The principle of the right of pursuit was impliedly recognized by Putnam, C. J., in holding that stipulation by a trustee for IKufferman v. McGehee (1879), 63 Ga. 250; Rice v. Lane (1896), 166 Mass. 233, 44 N. E. 133. 233 146.] FOLLOWING TRUST FUND. [CHAP. XVIII. exemption from personal liability is valid. 2 The learned judge said: "The entire property of the association was held in trust and therefore subject to administration by the chancery courts, which could apply it equitably and proportionately to the dis- charge of obligations incurred by the trustee, as contemplated by the express direction of the article of association, that the creditors of the trustees should look for payment solely to its property." A Pennsylvania case was brought for the express purpose of having a trust estate applied in the very way Judge Putman describes. Thus a testamentary trust was to carry on the busi- nesses of testator. Both the trust estate and the trustee be- came insolvent. The trustee, while the estate was so insolvent, gave to certain creditors promissory notes with warrants of at- torney to confess judgment, and upon these judgments were entered and executions issued. He also made an assignment of all the property of the estate in trust to pay its creditors. 3 The court said : "The trust estate is principally liable for the debts contracted upon the faith of it. As it is insolvent, and the trustee, as the master finds, is also insolvent, he became a trustee for its creditors. As such he was bound to protect all their rights and preserve the trust estate for distribution among them according to their respective rights and had no right to give a preference to any of them. The estate being insolvent all of its creditors stood upon an equality and a creditor who has received a judgment for the purpose of liquidating his claim has no right to enforce said judgment by execution to the destruction of the estate or the rights of other creditors." It was urged that only the cestuis que trust could proceed as the creditors were proceeding and that the creditors' only rem- edy was by an action at law. The court said : "It is claimed that as the relation between the creditors and the trustee is a con- tractual one, the trustee had a right to give mortgages or con- 2Bank of Topeka v. Eaton (1900), 100 Fed. 8. 3Woddrop v. Wleed (1893), 154 Pa. 307, 26 Atl. 375, 35 Am. St. Rep. 832. 234 CHAP. XVIII.] CORPORATE ASSETS. [ 147. fess judgments. Where the estate, however, has become in- solvent and the rights of creditors have intervened and the estate should be held intact for distribution, a trustee has no right to confess judgments with intent to prefer creditors by giving them the right to issue execution and sell the property." The relief sought in a Massachusetts case against a trust estate carrying on a manufacturing business was by creditors to have their claims paid in full out of the trust property, or, in case it was insufficient for all claims to be paid, in pro rata dis- tribution. The bill was held maintainable and also that it was unnecessary that claims should have been first reduced to judg- ment. 4 There was no contest in this case except for priority among creditors, and this solely because of a change of trustees. All classification of debts was denied, except as to certain special claims which were expenses of administration of the trust. This case cites a great number of cases which are referred to in note. 5 These cases establish the proposition, that in no way may a trust estate be gotten beyond the purpose for which it was created. Of course, debts legitimately incurred may be secured by a lien upon trust assets, where the lien is created in the fair operation of a trust estate in business, as a going concern, for this may be in furtherance of the purpose of the trust, but there is no way whereby any preference may be given to any creditor when it becomes insolvent, nor may its assets be free from pursuit when not disposed of in strict execution of the purposes of the trust, nor any charges otherwise raised against a trust or its income. 147. Corporate Assets as a Trust Fund. The trust fund theory as to corporate assets, that is to say, that corporate prop- 4Mason v. Pomeroy (1890), 151 Mass. 164, 24 N. E. 202, 7 L. R. A. 771. 5 Ex parte Garland, 10 Vcs. 110; Ex parte Richardson, 3 Madd. 138; Burwell v. Mandeville 2, How. 560; Smith v. Ayer, 101 U. S. 320; Jones v. Walker, 103 U. S. 444; Pitkin v. Pitkin, 7 Conn. 307. 235 148.] PREFERENCES BY CORPORATIONS. [CHAP. XVIII. erty may be followed by creditors into the hands of any persons having notice of a corporation's insolvency, has been greatly discussed in this country. The doctrine had its origin in 1824 in a case decided by Judge Story, 6 but that the doctrine has any more extended application than that a corporation must pay its debts before dividing its assets among its stockholders is greatly to be doubted. 7 This is similar to the idea in regard to a partnership whose assets go in preference to partnership credi- tors rather than to the partners or their individual creditors. But it has been held that a corporation debtor "does not hold its property in trust or subject to a lien in favor of its creditors in any other sense than does an individual debtor." 8 For this reason the contention that, if a corporation fails to pursue its rights against third persons, whether arising out of fraud or otherwise, creditors could compel it to do so as being a breach of trust was held not tenable. Also it was held that simple contract creditors could not reach the property of an insolvent corporation, in equity, but must first reduce their claims to judgment. The court further said: "A party may deal with a corporation in respect to its property in the same manner as with an individual owner and with no greater danger of being held to have received into his possession property burdened with a trust or lien." Of course, one dealing with a trustee, if he wishes other security than his personal liability, must look to his authority. If he procures from him property burdened with a trust, it may be followed, and, if a creditor is thus adversely affected, a court of equity does not stop to inquire, if a judg- ment has been first obtained against the trustee. 148. Assignments and Preferences by Corporations. Cor- porations unless specially excepted have the same right to assign for the benefit of creditors as has an individual or partnership, 9 Wood v. Dummer (1824), 3 Mason 308. 7Fogg v. Blair (1890), 133 U. S. 534, 541, 10 Sup. Ct. Rep. 338, 33 L. Ed. 721. SHollins v. Brierfield Coal Co. (1893), 150 U. S. 371, 14 Sup. Ct. Rep. 127, 37 L. Ed. 1113. 9 4 Cyc. 132 and authorities cited. 236 CHAP. XVIII.] UNPAID SUBSCRIPTIONS. [ 150. and also to prefer particular creditors, 10 but we have seen that such is not the case as to a trust. 11 149. Trust Estates Not Subject to Bankruptcy. A trust is scarcely conceivable as a person. It is merely an estate without any capacity contractual or otherwise. As said by Justice Wood: 12 "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 undertak- ing of the trustee." He further shows that a trustee may so contract that the other party is to look solely to the trust estate, but the contracting must be by the trustee who merely places a charge on property. Therefore a trust estate has, in a strict sense, no debts, but may be bound only for debts law- fully created by a proper person. The United States bankruptcy statute 13 says: "Any person, except a municipal, railroad, insurance or banking corporation" may become a bankrupt. Thus by naming subjects trust estates are excluded. Indeed it would be somewhat difficult to see how the provisions of the bankruptcy statute could be applied to a trust estate, if it has no contractual capacity. It cannot create a debt and it can give no preference, and a court of equity, as seen, 14 does not permit the trustee to create preferences, but will apply the entire estate equitably and proportionately ac- cording to principles of equity jurisprudence. 150. Unpaid Subscriptions to Shares in a Trust Estate. To speak of unpaid subscriptions to shares in a trust estate lacks much of precision in language. To explain that it means the amount or balance contracted to be paid for an interest in a trust estate has something more of definiteness about it. But 10 4 Cyc. 166 and authorities cited. HWoddrop v. Weed, 146, supra. 12Taylor v. Davis (1883), 110 U. S. 330, 335. 13Act of July 1, 1898, as amended in 1903, 1906 and 1910, 36 Stat. et L. 838. l*Woddrop v. Weed, supra. 237 150.] UNPAID SUBSCRIPTIONS. [CHAP. XVIII. even this suggests a transaction out of the ordinary in regard to trust estates. The legal characteristic of a trust is that it is a corpus in the custody of a trustee, who holds the legal title with the beneficial estate in others, who are denominated cestuis que trust, where, as in such trusts, as this work especially con- siders, the settlors are the sole cestuis, they contract with each other how severally they may acquire that status. If, for ex- ample, it were determined that there should exist one thousand interests in a trust estate about to be created, it could be agreed by settlors inter sese, that it should be in money or stocks of corporations, bonds, mortgages, negotiable paper, land or any other property, or in part of one and part of others of these things. It competently could be determined that money must be paid by each settlor for an interest in that estate or that he should surrender to it a certain equivalent of money. No one has a right to object, if the settlors themselves are satisfied. But under such arrangement there would be no such thing as unpaid subscrip- tion to a trust fund. As to his interest in the trust fund he would be a cestui, as to his liability to pay for it he would be a debtor, two very different and distinct things as clearly demonstrated in Ames Cases on Trusts. If the equivalent of money, for example, were the promissory note of a settlor, he would own an interest in the trust fund and be liable upon his note. If non-payment of the note worked a forfeiture of the interest, the transaction would be as if it had never been entered into. In either event it would be inaccurate to say there was liability upon a subscriber. This would appear clear if the set- tlor paid for his interest with the note of a third person, whether the condition of forfeiture attached or not. The subscriber would owe nothing, though the maker of the note does. But there would be something more of semblance to an un- paid subscription, if settlors, not desiring that the entire fund should be exacted in limine, should provide in a trust instru- ment that instalment payments, or further payments as called for, should be made by the settlors. It would seem clear, that, if the respective interests became their immediate property, they would owe upon promises supported by valuable consid- 238 CHAP. XVIII.] UNPAID SUBSCRIPTIONS. [ 151. erations, just as certainly as one agreeing similarly to pay for a definite interest in land or a chattel. If the vesting was to be postponed or subject to forfeiture, until payment in full is made, still it would be inaccurate, or, at least, not compre- hensive, to say there is an unpaid subscription. In the former situation the legal status is more accurately defined as indebted- ness in assumpsit; in the latter the contract according to its terms might be either an option by the proposed settlor to re- linquish all interest in the trust or by the trustee either to claim a forfeiture and annul what has been done or sue upon the set- tlor's promise to pay the instalments. Thus, in whatever way the matter is viewed, it is seen that it is merely by way of brevity in expression that we speak of unpaid subscriptions, so far, at least as acquiring interests in a trust is concerned. The lack of complete accuracy in the expression also is ap- parent when we come to consider how the arrangement of sub- stitutes for immediate payment in money is provided for and is to be completed. Thus the settlors require that the trustee shall take legal title to property, some of which is choses in action'. Together these constitute the trust fund. The trustee is in no way interested in how the settlors acquire interests in that fund. The law of contract gives them their several interests and the trustee is responsible to them severally as the trust instrument, presently and prospectively, may provide, just as surely as in a testamentary trust the same thing may be determined. 151. Subscription to Corporate Stock Distinguished. This question would need no consideration here but for the circumstance that the creation of a trust for business purposes suggests, that business arrangements, such as are employed in ordinary business, might be resorted to for a gradual accumula- tion of assets, instead of establishing a completed fund at the beginning, and the evidencing of interests by transferable cer- tificates makes the enterprise take on what resembles a cor- porate venture. The former of these two circumstances would seem to have been sufficiently considered in what already has been said; the latter needs further consideration, because it is 239 151.] UNPAID SUBSCRIPTIONS. [CHAP. XVIII. desired to demonstrate, that decision as to liability of stock- holders in a corporation, extreme or lenient as that may be, in no way is applicable to the holders of transferable shares in a trust estate. In the first place, the writer submits that it has been abund- antly shown, that a cestui is no less such because the evidence of his interest is in a transferable certificate, and, in the second place, he gets his interest not from the trustee or from the trust estate, but by virtue of the trust instrument. A stockholder in a corporation obtains his title from the corporation and his obligation to it is or may be affected by statute attaching certain consequences to his dealing with the corporation. For example, it needs no authority to show, that, if anyone is indebted either to a trust estate or to a corporation, that indebtedness is an asset, which in case of insolvency creditors should have the right to subject to their demands. It is part of the trust fund, so de- nominated when a corporation has become insolvent and so of a trust estate, whether solvent or insolvent. But confusion has arisen, and there is conflict in decision, in corporation cases as to whether or not there is an obligation by a stockholder, where he has paid a corporation less than par but all he agreed to pay for a share of stock, because, it has been contended, the law requires he should have paid no less than par value for that share. Of course, if that contention is true there is an indebtedness which is a trust fund for an insolvent corporation's creditors. This theory is worked out variously, where adhered to at all, as two very interesting articles on what may be called the trust fund theory show. 15 But whether we accept the ruling followed by the New York Court of Ap- peals in a very recent decision 16 that the trust fund theory has no room for application in the absence of positive statute that 15X11 Yale Law Journal (1902), 67; XIII Yale Law Journal (1903), 66. iSSouthworth v. Morgan (1912), N. Y., 98 N. E. 490; contra, McAllister v. American Hospital Ass'n. (1912), (Oregon) 125 Pac. 86. 240 CHAP. XVIII.] CONCLUSION. [ 152. plainly begets a duty to pay full par value to a corporation, or with the opposite view, the question of what a cestui pays for what he acquires under the provisions of a trust instrument is not even remotely affected. Therefore, to discuss the trust fund theory as affecting what a stockholder may or not owe as arising out of his subscription to a purchase of stock in a corporation would be quite foreign to the purpose of this book. It may be further said, that one may become the holder of an interest in a trust fund by dealing with a trustee, as we may see is provided in copies of trust instruments among exhibits at end of this book, but this arises out of a special power delegated to the trustee and, if the trustee lets in a new cestui and covers whatever he pays into the trust fund, he increases trust assets, and, if he pockets what is paid, there is nobody hurt but the other cestuis, because a creditor does one of two things he credits the trustee personally or he relies on the actual and not the supposed assets, and has the right to demand of the trustee full disclosure of their amount and character. Even then he relies on the trustee as to the truth of his disclosure. There- fore whatever may be thought as to subscribing for corporate stock, it must be said there is no rule or statute that may vary an agreement as to interests in a trust estate from intent to create a specific indebtedness thereby, which would constitute an asset of a trust estate, just as a note based on a mortgage in which trust funds are invested is such an asset. Indeed it might be provided, that the purchaser of such an interest could only be- come such, where he does not pay in money or property, by giv- ing a note, and it would be but business prudence to thus require. If however, partial payment is required and a condition of for- feiture annexed to non-completion of payments, this is a form of security. But when the cestui has paid all he has agreed to pay that would end his liability. 152. Conclusion. It seems to the author, that this situ- ation of a trust estate is more attractive to creditors or proposed creditors, than is possible to be obtained under bankruptcy and insolvency statutes, especially the latter, because of their vari- 241 152.] CONCLUSION. [CHAP. xvm. ance in different jurisdictions, and as to both because of decision working out construction in new developments. Statutes are compelled to be arbitrary in certain ways. Their want of flex- ibility often works injustice. Equity is equality, and to attain this there is a freer, but not an arbitrary, will in courts in the settlement of equitable estates. Fraud has no fixed statute of limitations to plead against its exposure, and the conscience of a trustee may be more thoroughly probed than these statutes afford the means therefor. To preserve, regain and distribute a trust estate, in accordance with the purpose of a trust, calls for the application of principles, which are universal and well- settled. The struggle by courts to bring corporate assets to the status of a trust fund is one of the finest tributes to the excel- lence in justice of the theory herein expounded that one might hope to find. 242 CHAPTER XIX STIPULATIONS IN INSTRUMENTS ESTABLISHING TRUST ESTATES IN BUSINESS. Practical Experience General Directions Purposes Name Insurance Temporary Investments. 153. Practical Experience With Trust Estates as Business Companies. It is perceived from cases referred to and dis- cussed in foregoing pages, that the embarking of a trust estate in business has been accomplished in various ways, by will, by deed, for the benefit of others than the settlor and by declara- tion of trust through agreement between the equitable owners. A trust with interests represented by transferable shares has arisen where originated by will, by a single settlor by deed and by an agreement between all of the owners of original certificates of participation, and provision has been made for acquisi- tion of such certificates by future investors. As to none of these forms has the author discovered any adjudication or prin- ciple denying validity of the trust creation, nor any suggestion of provisions, purporting to be found in common-law right, being opposed to public policy. It may be, that some local statute may be thought to be a limitation, more or less, upon the prin- ciples endeavored to be presented in this volume, but, if so, its effect will not be here touched upon, because practitioners in the state, where it may be found, ought to be more competent to consider it than the author. The method in the formation of a trust to carry on business in which this volume principally is concerned has been described in Massachusetts, to be : "voluntary associations organized or doing business under written instru- ments or declarations of trust." 1 An interesting treatment of these associations is found in the report of the tax commissioner of that Commonwealth upon these associations made in January, 1912, to the Senate and House of Representatives of Massachu- iMass. Acts and Resolves, 1911, Ch. 55. 243 153.] PRACTICAL EXPERIENCE [CHAP. XIX. setts along with suggested legislation. He deduces that Mas- sachusetts decision holds them to be partnerships, which the author submits is an erroneous conclusion, where certificate holders are exempt from liability for the contracts of trustees, except merely for the purpose of taxation. 2 The question of liability of certificate holders has been considered. 3 The commissioner shows that the one particularly great growth in these associations was in what is known in Massa- chusetts as "Real Estate Trusts" caused by the inability of associates to organize a corporation for "buying and selling real estate". The trust form of organization for this purpose, there- fore, came into vogue, and it was so attractive to Boston in- vestors that some of them applied it in other states. 4 How greatly, however, it was adopted in Boston may be appreciated by said tax commissioner approving a statement made that: "The real estate trusts in the City of Boston own, it is esti- mated, property valued at $250,000,000," which "afford oppor- tunity for investment in real estate by small as well as large investors, and permit a distribution of such investments among a variety of properties, thus dividing the risk of loss of rent and possible shrinkage of values." The Commissioner thought it could "not be denied that much benefit has resulted to the City of Boston and other places in the improvement of real estate, the addition of property to the tax lists, furnishing ac- commodations for increasing business and the general promo- tion of the growth and prosperity of the Commonwealth." The Commissioner, also, shows that it has been asserted, as the consensus of opinion by investors in these trusts that: "The rights of shareholders, the terms of office of trustees, their compensation, powers, duties, and limitations are more satis- factorily regulated by the terms of the trust agreement, which can be drawn to meet the special needs in each case, than could be possible under the general corporation laws." We think it 2Wiilliams v. Boston (1911), 208 Mass. 500, 94 N. E. 808. SAnte, Chapters X and XI. 4Mallory v. Russell (1887), 71 Iowa 102, 60 Am. Rep. 726. 244 CHAP, xix.] "MASSACHUSETTS TRUSTS'' [ 153. might have been additionally said that there is also an advan- tage in these agreements containing clauses for amendment so as to make them conform to future conditions. The popularity of these real estate trusts most probably in- fluenced the application of agreements of trusts, with interests represented by transferable shares, to authorized lines of cor- porate activity. Therefore "voluntary unincorporated associa- tions for the purpose of carrying on industrial enterprises" were formed in Massachusetts. The Commissioner says that: "In the course of this investigation not more than a dozen of these industrial trusts have been brought to my (his) attention," and "most if not all of them have been reorganized from the corporate form, for the purpose of avoiding publicity of the affairs of a business closely held, for the greater flexibility of management, and to avoid liability for the federal income tax." As in this chapter we are endeavoring to present the prac- tical side of the business trust, the experience of those who have employed the trust method in business should be noted. The Commissioner says: "The advantages which it is claimed accrue to the industrial and real estate trusts have principally to do with the greater freedom of managing the affairs of the trust. They may be stated generally as follows: 1. These associations have been found by the experience of twenty-five years to be a convenient, safe and unobjectionable method of co-operative ownership and management. They are for the interest alike of the investor and the public. 2. The form of organization ensures a continuity of management and control which appeals strongly to investors in real estate which cannot be secured by a corporation with changing officers. The trustees who are the managing officers of a trust are not so likely to be changed as are the officers of a corporation. 3. It affords a more economical and more convenient and flexible form of management than does a corporation. Trustees can transact business with more ease and rapidity than directors." The Commissioner, speaking practically of what has appeared 245 153.] PRACTICAL EXPERIENCE [CHAP. XIX. in Massachusetts, argues that though what is tlaimed may be true, yet experience has been confined to cases where mem- bership has been limited, and there has been something like a close corporation, but he is dubious of equal success for "those associations which seek capital in the open market." He sug- gests that a stockholder in a corporation may be in a better situation than a certificate holder in a trust, because by statute the former may examine books and records, and annual state- ments are required. He does not explain, however, why a trust agreement may not provide for the same thing and why a certificate holder may not compel what is provided for. In- deed, it is to be said that such a statute is but declaratory of the common law. He suggests that "the same publicity should be required of voluntary associations whose membership exceeds a certain number, as is required of the affairs of a business cor- poration." A third class of voluntary associations under trust agreement, the Commissioner calls "Holding Associations." Of these the author deems it not particularly important to speak. By doing so he would be led into discussion about combination and mon- opoly and some real or fancied distinction between such asso- ciations and corporations for a like purpose. This kind of dis- cussion is foreign to the purpose of this work. At least, how- ever, it may be said, that considering this and the other pur- poses to which a business trust has been applied, its adaptability may be thought as manifold and varied as legislation may au- thorize by corporate charters. It may be further said, that the broad principles this volume has been endeavoring to present find their best expression in the consideration of an English case often cited hereinbefore, where it was contended by counsel and denied by the court, that a holding association was a part- nership. 5 Outside of Massachusetts these voluntary associations organ- ized under trust agreement have not greatly appeared, but such as have appeared in judicial decision have been alluded to. SSmith v. Anderson (1880), L. R. 15 Ch. D. 247. 246 CHAP, xix.] "MASSACHUSETTS TRUSTS.'' [ 154. 154. Summary of Situation as Shown by Experience, The report of the Massachusetts Commissioner fails altogether to point out, that any serious harm has come to any one from business being conducted by trustees in the interest of owners represented by transferable shares. Rather he is found arguing, that because many real estate trusts say "a corporation would have answered the purpose of the subscribers quite as well as a trust," the objection to corporations for this purpose should "not now be considered a serious bar" to their formation, and he distinctly declines to advise that these trusts should be pro- hibited, giving as his opinion that this "would be an unwar- ranted interference with the right of contract, and would raise serious constitutional questions." He does think it would be wise to subject them to further regulation by the state, especially such of them as own, hold or control stocks of public service corporations," alluding here to "Holding Associations." Therefore it may be confidently said that the business trust is not an experiment. It has no scandal connected with its operation and it is -openly asserted that "trustees can transact business with more ease and rapidity than directors." When we add to this practical view, derived from an experience of twenty-five years, that a business trust is a carrying on of a business as a right and not as a privilege, both locally ami abroad, that limitations upon the power of its managers may be as strict or as liberal as the owners of that business desire and that these limitations may be enforced according to the principles of equity jurisprudence, its superiority over corporate formation for legitimate business would seem evident. Frau:l may lurk in the formation of business trusts, as it lurks in the formation of corporations, but equity has fully as much power to drag it out of hiding, as statute grants, and more to make it restore its unconscionable gains. It was not in the province of the Commissioner to consider the general constitutional rights of a business trust as compared to those of a statutory coporation, nor the expense of its forma- tion, nor its right to do business at home or abroad. He was 247 154.] CORPORATIONS AND TRUSTS COMPARED. [CHAP. XIX. asked to discover, if he might, that the Massachusetts trusts were a detriment to the State or its inhabitants and he found they were not. This report has been dwelt upon, because it keeps us out of the realm of speculation and within the domain of fact. An article on "The Government and the Corporations" 6 by Mr. Francis Lynde Stetson of the New York bar speaks of voluntary associations under a trust agreement and personal liability of members being thereby avoided and of their possess- ing "all the advantages of a corporation excepting existence for an indefinite period, which, however, is impossible only because of statutes, which may be described generally as pro- hibiting perpetuities." How lacking in seriousness this objection is may be answered by the Massachussetts Commissioner's report and by what has been said ante. 7 But Mr. Stetson also says: "As to ills of corporate management inflicted on the members of the corporation, the derelictions or usurpations of directors, it is to be observed that such ills are such, and such only, as may be practiced by any trustee upon his beneficiary. My own observation is that as to such breaches of trust, the law of corporations and the correction by courts of equity, and criminal courts, are far more specific and comprehensive than usually obtained in cases of personal trust." This author greatly doubts the correctness of Mr. Stetson's observation, and thinks it must have been confined to ordinary trusts, where opportunity for embezzlement was not safeguard- ed against. Why, however, careful provisions in trust instru- ments may not protect beneficiaries of a business trust and dishonesty of trustees not make them amenable to criminal punishment, it is difficult to imagine. The tremendous exac- tions that are made upon corporations at home and abroad are shown by Mr. Stetson and to escape these legitimately should constitute no small incentive for aggregated capital to adopt the trust agreement method of carrying on business. 6Atlantic Monthly, July 1912. 7Chapter XIII. 248 CHAP. XIX.] CONTENTS OF TRUST DECLARATION. [ 155. 155. General Directions in Trust Agreements. The ap- pendix containing precedents adopted by trusts in active opera- tion is perhaps better for guidance in the matter of prescribing directions for the management of a business trust, than general observations on this subject. There are, however, some general rules of law that ought to be observed. 1. The trust instrument should fix the term of duration of the trust, or its earlier cessation by prescribed action, as say by a vote of two-thirds of its certificate holders. The limit within which this term may continue and its form of expression are referable to local law, as explained. 8 2. The particular business to be conducted should be stated with enough of precision to notify those who deal with trustees as to the extent of their powers. 3. The instrument, to resolve all doubt as to its creation of a trust, should, along with the vesting of the legal title, commit to the trustees the absolute control of the trust property, with full power to make it answerable for their acts and contracts in the conduct of the business of the trust. Any power of removal or change of trustees should exclude any right to invalidate prior contracts, or repudiate responsibility for prior acts, within the apparent scope of their powers. 4. The particular property of which the trust estate is to consist, in its original form or as afterwards to be invested, should be described so as to admit of ready identification and by apt words the legal title should be vested in the trustees and their successors. 5. The right of trustees to act singly or by a majority or collectively, either generally or specially, should be set forth, and whether or when their contracts should be in writing, or, if oral, what ratification, if any, of a single trustee's acts should be required as a condition precedent to their validity. Also a collective name may seem to be of advantage to a trust. If so, SChapter XIII, ante. 249 155.] CONTENTS OF TRUST DECLARATION. [CHAP. XIX. the trust instrument should adopt the name, with such signing and counter-signing as it may seem advisable to prescribe. 6. The trust instrument should vest specifically in the trus- tees the right to stipulate for personal exemption from liability in the making of contracts, the right of indemnity out of the trust where they may be held personally liable, and the right to pledge the trust property for their contracts and it should con- tain a clause for exemption of certificate holders from personal liability. It should be provided that all written contracts should contain these features, so as to bring them to the notice of parties contracting with the trustees. 7. The instrument should provide how shares, and the differ- ent kind of shares, if any, in a trust are to be issued, their transfer and how evidenced, that they are personal property to pass by succession as other personal property and that the death of a holder shall not affect in any way the continuance of the trust, nor such death give to any person any right for an accounting or partition. 8. Provisions for meetings of shareholders, regular or special, election, removal or change of trustees, filling vacan- cies, investigation into the affairs of the trust and reports to shareholders, and for amendments of the trust instrument. What right of inquiry a certificate holder should have, of his independent motion, might be thought advisable to be stated, as well as under what circumstances it may be exercised. It is suggested that, if there is a fair reason for independent in- quiry by a certificate holder, this could be made plain to a reasonable number of shareholders, who could join in a request and this right thus not become liable to abuse, as has been alleged in regard to the exercise of such right by a stockholder in a corporation. The place of a business should be stated. 9. Care is to be taken that in change 'of trustees the trust instrument specifically should provide that their successors suc- ceed to the same rights and powers and are subject to the same 250 CHAP. XIX.] UNNECESSARY DETAIL. [ 156. duties and liabilities and have like compensation as the former trustees. 10. All instruments of trust should merely by way of caution, make specific provision that in no instance need any one deal- ing with the trustees have any obligation, either in law or equity, resting upon him to look after the application of any trust funds or property coming into the hands of the trustees. This caution is in view of an old doctrine, about purchasers from trustees seeing to the application of purchase money to purposes of the trust. Such a provision takes away all question as to intent of settlors in this regard. 9 The provisions above instanced would seem to be reasonably required in any trust instrument, where the interests are repre- sented by transferable shares. What others may seem useful would depend greatly upon the business in contemplation. Also, how great discretion may be committed to the trustees, singly or as a body, keeping always in view that the exercise of discretion is more as between shareholders and trustees, than as limiting their powers as to third persons, must rest always with the creators of a trust. 156. Unnecessary Detail in Trust Instruments. A prime consideration in the framing of trust instruments, after clearly stating the purpose of the trust, is not to restrict so greatly the discretion of trustees as to embarrass its operations as a business concern. A trust in trade stands the hazard of loss, especially, if the holders of the legal title may not conduct its business, generally, as if they also possessed the bene- ficial interest. The business management ought to be as free as that with which it is in competition. Business risks must be met by business enterprise, and, generally, it might be thought sufficient for the business policy of a trust to be directed by shareholders in an advisory way and by their selection of trus- tees representative of a declared policy. 9 Ames Cases on Trusts, 269; 2 Perry on Trusts and Trustees (6th Ed.), Sec. 788 et seq. 251 157.] TRUST PURPOSES. [CHAP. XIX. Nevertheless the provisions in a trust instrument are some- what tentative and should be subject to amendment as experi- ence may suggest. While, therefore, a trust instrument is the measure of a trustee's power as to third persons, and of his fidelity to the interests of shareholders, yet its susceptibility of amendment puts it upon a higher plane of preference than that of a charter. Neither might it be thought to make its business or investment therein less stable than as regards a corporation, as amendment would not be permitted to affect existing indebtedness and the touchstone of mutual interest ought to presuppose advantage to beneficiaries. What is for their advantage reacts naturally in creating an improved business status. Furthermore, the owners of a trust do their own amending, while legislatures frequently amend charters. Trust owners always have the privilege of prescribing all that a legis- lature may think appropriate for the management of a corpora- tion, or to vary that for what they may deem better calculated to advance their interests. Indeed, as corporations are formed under constitutional pro- visions reserving the right to amend charters, the position of a business trust seems much superior to that of a corporation, the 'former amending its trust instrument or not, as those interested in the trust may see fit, while stockholders in the latter must accept amendments whether they like them or not. 157. Purposes of Trust Estates in Business. It has been said that: "Every kind of valuable property, both real and personal, that can be assigned at law may be the subject-matter of a trust;" 10 and that: "A trust may be created for any pur- pose for which a contract may lawfully be made." 11 A few states, however, particularly enumerate the lawful purposes of trusts. New York, wherein those involving real property are confined to specified objects 12 is an example of this class. lOPerry on Trusts and Trustees (6th Edition), Sec. 67. UStimson's American Statute Law, Section 1731. 12III Gumming & Gilbert's Gen. Laws of N. Y. (1906), p. 3286, 76. 252 CHAP. XIX.] TRADE NAME. [ 158. Trust estates in business have frequently been created in New York as shown by cases coming before the appellate courts, and these, as well as cases from other states illustrate the diversified range of purposes pursued, for example: the manu- facture and sale of cotton goods ; 13 holding shares in various submarine cable companies; 14 buying, selling and improving real estate; 15 ownership and disposition of patent rights; 16 operating a wagon factory; 17 a railroad, 18 a store, 19 a general mercantile business, 20 , a plantation, 21 a coal mine, 22 a general lumber and salt business. 23 These examples are capable of multiplication indefinitely, but, although the nature and number of purposes of trust estates in business may be thought general- ly to include the entire range of lawful purposes which may actuate any individual in the exercise of his broadest rights to gain a livelihood, still the warning is here given that the statutes of each state should be carefully consulted by local prac- titioners who are better qualified to pass on this matter than the author of this general work. 158. Adoption of Name for a Business Trust. Strictly speaking it may be said that a trust cannot adopt a name. It has no power to do anything implying either volition or dis- sent. It is merely property with a characteristic attached to, or inhering in it. But trustees, who represent it, and may charge ISThorn v. DeBreteuil (1904), 179 N. Y. 64, 71 N. E. 470. l^Smith v. Anderson (1880), 15 Ch. Div. 247. ISHart v. Seymour (1893), 147 111. 598, 53 N. E. 246. l6Mayo v. Moritz (1890), 151 Mass. 481, 24 N. E. 1083. 17Pittsburg Wagon Works' Estate (1903), 204 Pa. 432, 54 Atl. 316. iSWright v. Caney River Ry. Co. (1909), 151 N. C. 529, 66 S. E. 588, 19 Am. & Eng. Anno. Cas. 384. - l9Matthews v. Stephenson (1847), 6 Pa. St. (Barr) 496. 20Connally v. Lyons (1891), 82 Tex. 664, 18 S. W. 799, 21 Am. St. Rep. 935. 21Hewitt v. Phelps (1881), 105 U. S. 393. 22In re. Raybould (1900), 1 Ch. 199, 82 L. T. N. S. 46. 23Loud v. Winchester (1883), 52 Mich. 174. 253 159.] STIPULATIONS IN TRUST INSTRUMENT [CHAP. XIX. it, are individuals, sui juris, and they may adopt a name or names for transacting business, executing contracts or suing and being sued. 24 As the trustees alone contract and their contracts are personal the adoption of a name is by them, though, for the sake of caution, the instrument may so direct. Statutes may put some limitation on the adoption of business names, as is done so far as regards the selection of a name for a corporation, but if they are silent on this subject, it may be said either an artificial name or one that may be applied to a natural person may be -chosen, so long as it does not interfere with a trademark or otherwise be deemed unfair competition. 23 Out of caution it is suggested, that where statute prescribes for registration of names used for business purposes compliance should be had with its provisions. So where it is forbidden for those unincorporated to use a name implying corporation. 26 In such a state the adopted name could have added to it, for ex- ample the words "Not Inc." or "Trustees." The adopted name may be protected for the same reason that may prevent its unfair assumption of a name, as above indicated. 27 The as- sumption of a name, therefore, cannot be supposed to have any bearing on the question of personal liability of trustees. All contracts are their contracts and they are personally liable to third parties, unless they stipulate for exemption, but even though they be so liable their right of indemnity is reserved. 159. Stipulations in Trust Instrument as to Trustee's Con- tracts. As seen, 28 courts diligently but with indifferent suc- cess, have sought to apply to the workings of corporations what is called "the trust fund theory." This is our ideal of inherent justice. The history of corporations strenuously has called, but often in vain, for its application. That history has shown some- 24Carlisle v. People's Bank (1898), 122 Ala. 446, 26 So. 115; Pease v. Pease (1868), 35 Conn. 131, 95 Am. Dec. 225; England v. New York Pub. Co. (1878), 8 Daly (N. Y.) 375. 25England v. N. Y. Pub. Co. supra; 29 Cyc. 270. 26p e0 ple ex rel. Power v. Rose (1905), 219 111. 46, 76 N. E. 42. 27See also Aiello v. Montecalfo (1899), 21 R. I. 496; 44 Atl. 931. 2*Ante Chapter XVIII. 254 , . i CHAP, xix.] AS TO TRUSTEE'S CONTRACTS. [ 159. thing like a vanishing morality. The personality of official* has been obscured. They apply a different rule to their repre- sentative acts from what they observe, not only in their purely personal conduct, but also in what they do in any other fiduci- ary relation. In nothing else, indeed, is there such a reversal of form and fact as in corporate management, in popular opin- ion, and measurably, in legal effect. Because a corporation is a person and, therefore, may contract and be contracted with, it is forgotten that any person besides it is responsible, in foro conscientiae, for its unconscionable acts. It is difficult, if not practically impossible, for the personality of a trustee to be merged in the trust he represents. The near- est approach to such absorption is when he contracts, as a principal, upon the sole responsibility of the trust estate. This, however, expressly must be stipulated for and, ipso facto, he becomes trustee in a two-fold capacity, trustee for the creditor so contracting with him and trustee, as before, for cestuis que trust. Therefore his contracts, with exemption from personal liability, impliedly represent, that the trust estate is solvent, and, if the reverse is the fact, a court of equity might disregard the stipulated exemption, at least, if the trustee conceals the fact of insolvency. Certainly it would seem a fraud for a trus- tee to obtain a release from personal liability under such cir- cumstances, as fraud vitiates all contracts. It is not meant here to intimate that third persons ordinarily may have a personal action against a trustee, where they agree that he shall not be personally bound, because they are obligated to act as prudent men in making inquiries, but, if they do make them, the trustee is bound to full disclosure and, at all events, not to practice any deception. When a corporation contracts, it is not expected that its agent may be fully informed as to its solvency. For this and other reasons it has been thought not sufficient in this character of trust, that there only should be direction for express stipulation with third persons for exemption of trustee 255 161.] INSURANCE. [CHAP. XIX. from personal liability. There should be a general provision for his indemnity as to any act or contract within his rightful discretion as trustee, for which he might be adjudged person- ally liable. 160. Insurance. Making Trustee Secure Against Per- sonal Loss. Insurance of every kind, fire, cyclone, indemnity, or fidelity bonds, add just so much to the credit of the trust estate, as conserving the assets against adverse contingencies. Creditors who have agreed to look only to the trust estate for payment would naturally be interested in their security thus being made "doubly sure". Where tort or implied contract liability may appear, however, self interest dictates to the trus- tees a policy of maintaining every class of insurance which will keep intact the trust fund, so that their right of indemnity may be practicably exercised. The trust instrument may particularly authorize various kinds of insurance, or place it generally within the discretion of trustees. Insurance against tort liability, as now carried by many corporations, is particularly appropriate where the trust is carrying on a business involving these hazards. Bonds from employees may also be considered as particularly desirable. It is conceivable, that arrangements of this kind are greatly more susceptible of application to a trust in business than to a corporation, and that they foster confidence on the part both of third persons contracting with trustees and of investors in the shares of the trust. 161. Directions as to Acts by Subordinate Agents. The fact of giving to trustees power to manage a business with as uncontrolled discretion, as if they were its real owners, implies that they may adopt the usual means to the attainment of the purpose intended. Nevertheless, if restriction in any way as to this is desired, the trust agreement should provide therefor. Care should be exercised, however, that any limitation on gen- eral authority should be clearly expressed, and generally it may be said, that trustees should be directed, where there are several, 256 CHAP. XIX.] TEMPORARY INVESTMENTS. [ 162. to prescribe rules and regulations to be followed by their sub- ordinates and employees. This is a detail in management, and it would rather seem, that it should be left to the trustees. It is to be remembered, always, that trustees are principals and subordinates are their agents, not agents of the trust estate. In their favor is the right of indemnity or not, and, therefore, they should have a free hand in the selection and control of their agents. If they select inefficient agents or do not exercise proper supervision over their acts, the certificate holders have their remedy in a change of trustees, as the trust instrument should provide. Furthermore, it is suggested that a court of equity more closely would scrutinize the reasons for selection or retention of incompetent or unfaithful agents by trustees, when indem- nity for loss on account of their acts or defaults is claimed, than in the case of an officer of a corporation. The burden would be on the trustee to prove his right to indemnity, or, at least, a prima facie case or one calling for explanation more readily might be established against him than against a corporate officer. 162. Temporary Investments by Trustees. The question of investments by trustees generally is understood to mean such employment of funds in their hands as would prevent their being unproductive. In a trust embarked in trade the trust instrument naturally contemplates that the entire capital of the trust estate shall be devoted to the protection and prosecution of that business, with the profits therefrom to be distributed, as income from land or securities is distributed. Therefore, provisions for investment in this character of trust are designed as an aid to the business carried on, with resultant or ultimate benefit to cestuis que trust. In other words, it constitutes a detail in the management of the business and subsidiary to its purpose. It might be resorted to, as occasion arose, as the best means temporarily to measure the assets of the trust estate or keep unimpaired its original capital, as well as to enhance the profits of the business itself. It might apply to any reserve the trustees may be directed by the trust instru- 257 162.] TEMPORARY INVESTMENTS. [CHAP. XIX. ment to keep on hand against contingencies, or to earnings be- ing accumulated during the intervals of prescribed distribution of profits. It is within the province of trust instruments to direct specially or generally the classes of securities required or preferred as investments, or to leave that to the discretion of the trustees. At all events, the whole subject is comprised within the general purpose of judicious management for the earning of profits and having them ready for distribution at such stated intervals as may be prescribed. It might be said, however, that as some investment might be desired other than the ordinary conduct of the business might require, the constating instrument ought to prescribe in reference to the concurrence of approval by the trustees or a majority thereof. Thus it was provided in the trust deed upheld in Smith v. An- derson, 29 that between periods of distribution of income, the trustees could make investments in Exchequer Bills or the in- come deposited in banks at interest. It is thought that decision regarding investment by trustees of funds not embarked in trade do not pertain very closely to the subject in hand, though it might be thought that a general discretion in trustees to invest primarily for the benefit of a trust estate in trade ought to be exercised under like limita- tions, as where a trust fund is designed to be kept unimpaired as a corpus for remaindermen. In other words this discretion should not be exercised so as to jeopardize, in the least, the success of the business of the trust estate, however attractive an investment might appear to be, if that investment partakes in any way of a speculative venture. To do this would be to elevate an incidental power above the main purpose. Happily, however, this question may be taken out of the domain of con- troversy by specific direction in trust instruments, but the principle urged might be useful even in the settling of any ambiguities in expression. How strict the rule in ordinary trusts is against investment in stocks of a speculative character is illustrated by a great 29(1880), 15 Ch. Div. 247. 258 CHAP. XIX.] TEMPORARY INVESTMENTS. [ 162. abundance of decision and statutes generally may be said to be but declaratory of its underlying principles. The formulation of this rule as shown by English cases as this is expressed by a New York Court is as follows: "It may now be regarded as the well-settled rule of the English Court of Chancery that the trustee can only protect himself against risk by investing the trust fund in real or governmental securities." 30 The court further said: "The rule established in England has not been abrogated or altered by any legislative action in this state. Nor has it been impaired or affected by the decision of any of our courts, if indeed it could be changed by judicial authority," the latter clause intimating that it is inherent in a trust estate that its corpus must be preserved, and to invest it other than safely is to take the risk of waste. 31 There is a conflict of view among American Courts as to whether the strictness of the English rule should obtain, 32 there being a more liberal doctrine applied in some State Courts, but it is scarcely conceivable that the temporary investment of idle funds of a trust estate in business would call for its application, because it is of the essence of the exercise of the power of investment in such a case, that the securities should be as readily usable as the money they repre- sent, and that with a minimum of danger of loss. The language of the Pennsylvania Supreme Court regarding a trustee, who should invest, has additional force in a case where the trustee should provide against not being able to produce the principal at all times it may be needed for business purposes. It was said : "The object of a prudent man was to make money, the duty of the trustee was to take care of it." 33 While the object of a trustee of a trust embarked in trade is to make money, it is also his imperative duty to save it to be invested as prescribed. While, therefore, it may be thought that statutes should be looked to to guide a trustee in business as limitations on his pow- SOAckenman v. Emott (1848), 4 Barb. 626, 636. SISee also Penn v. Folger (1899), 182 111. 76, 55 N. E. 192; Sim- mons v. Oliver (1889), 74 Wis. 633, 43 N. Wl 561. 32Willis v. Braucher (1909), 79 Oh. St. 290, 87 N. E. 185. 33Hart's Estate (1902), 203 Pa. 480, 53 Atl. 364. 259 162.] TEMPORARY INVESTMENTS. [CHAP. XIX. er in temporary investment of its funds, as occasion might arise,, yet it would seem they should not be regarded as authority to invest, because such legislation is scarcely to be supposed as having such investments in view. They aim at safe-guarding the corpus of an estate, while furthering intent of income there- from, and preventing its withdrawal from commerce. The capital of a trust in business is ventured along lines wholly outside of statute and investment outside of those lines would be merely incidental. Generally, therefore, it may be thought, that there is no duty upon trustees of a capital embarked in trade to make any use of any part thereof except in that busi- ness, and that to tie it or any part of it up, other than in se- curities readily convertible into money, might be a breach of duty, unless specific authority therefor is contained in the trust instrument. It has been thought advisable, however, to refer to authority regarding ordinary trusts for principles that may, by analogy, be found applicable. The result is that specific provision for investment ought to appear in the trust instru- ment, though general discretion might embrace it as a detail in management. 260 CHAPTER XX. STIPULATIONS IN INSTRUMENTS ESTABLISHING TRUST ESTATES IN BUSINESS. CONTINUED. Capital Shares Publicity Incumbrances Termination of Trust Recording. 163. Corporate Capitalisation. What is seriously thought to be one of the great evils in our age is over-capitalization of corporations. Yet despite it being inveighed against so greatly by economic writers and legislators, statutes for the formation of corporations, instead of curbing overcapitalization, really encour- age it. They attempt to confine statement in the charter asked for to a true showing of actual capital, but they allow as to every- thing but actual money an estimate by corporators or promot- ers to stand for such actual capital. Such large expenses in the way of corporate organization are permitted, as for ex- ample in free stock to promoters and selling original stock be- low its face value, that very often a corporation begins business with far less of actual capital, than the aggregate of its out- standing shares. Indeed, it suggests financial legerdemain to see corporators swearing they have paid par for stock in a new corporation and the latter selling treasury stock at an extraordinary discount even before it begins operations. But let it be supposed that statutes are effective to compel a corporation to begin business with its purported capital wholly intact, yet, if that capital becomes impaired by business losses, that fact is not reported. Indeed, the more greatly losses or depreciation has impaired capital, the more industriously is the fact concealed. This is -one of the secrets of business, of which supposedly the public has no right to be informed, notwith- standing it has every right to know what was its capital when 261 163.] CORPORATE CAPITALIZATION. [CHAP. XX. it began business. And so the public is to be informed when there is a voluntary withdrawal of part of the original capital, statutes generally requiring publication to be made. But how is the public interest subserved by this requirement, if equally it would not be subserved by compelling corporations, whose capital has for any reason become seriously impaired, to publish the fact and forbid the corporation afterwards to claim that its capital remains as it was? Furthermore, where property other than money originally was or subsequently became its capital, either it increases in value or it decreases. It is barely probable that it remains the same. Indeed in some kinds of corporations, as for example a mining corporation, the very purpose of incorporating is first to develop and then exhaust the. capital. Its charter, however, is as unchanging as a law of the Medes and Persians. Any corporation, whose assets increase, either by earnings held as surplus or by property appreciating in value, promptly takes the public into its widely advertised confidence, and pro- fesses to do this often, when that increase is based more on hope than a fair inventory of assets. But, if the reverse is really true, the corporation is overcapitalized, however true and honest was its original capitalization. It is submitted, that what has been recited above as to corporations is well-known to be difficult, if not wholly impossible, completely to rectify by means of statute or any procedure in equity. It has been urged that not only is this an evil, whereby abuse of charter powers affects others than stockholders in corpora- tions, but it militates against business success by corporations trading under the burden of overcapitalization. It has been said that a corporation will stagger under overcapitalization, because it is so pressed for money to pay dividends, that it neither conserves nor improves its plant, nor installs latest de- signs in machinery, nor adopts labor-saving and life-saving de- vices. Certainly its false pretense does not attract loyalty to its management and, indirectly, it encourages graft. It can 262 CHAP. XX.] ASSETS OF TRUST. [ 164. never reserve a surplus for emergencies, for faith in it is a minus quantity, and it is on the way to becoming the sport of adverse conditions and relentless competition. It suffers the fate of discovered hypocrisy, showing that even with a soulless thing "Honesty is the best policy." 164. Capitalisation of Trusts in Business. It may be that to many it will not be clear, that the substitution of volun- tary associations under trust agreements with the like exemp- tion of liability from debts of shareholders, promises any relief from the evils above alluded to. Freely it may be confessed that cestuis que trust may set on foot businesses with pretended assets and trustees may be found responsive to an embarka- tion with bellying canvas too large for safe voyage. Never- theless, it is certain that honest enterprise has the freest oppor- tunity to shape its intent by appropriate provisions in an agreement creating a trust, and also it is certain that behind that intent there lies not the cheese-paring construction that has been applied to corporate rights, powers and liabilities. Familiar principles in the law of fraud should deter cestuis que trust from participating with trustees in representing that a trust estate embarked in business is a different thing in character or value from what it is represented to be. In limine a court of equity would be disposed to hold, that the organiza- tion of a different thing than what was purported to be organized scarcely could be deemed the creation of a trust estate. The last analysis of such a conclusion would be that stipulations and provisions and even notices to third persons touching exemp- tions from liability, in favor either of trustees or cestuis quo trust, were unavailing, and a joint and several liability would extend to all concerned. It requires no stretch in reasoning to extend this conclusion to trustees alone who, in managing a trust estate merely pledge the trust estate, impliedly or expressly representing it is in value and responsibility what it purports to be. A court of equity would be alert in holding them to the exercise of good faith, and all right of indemnity or insur- ance against loss might crumble before an adverse finding. 263 165.] TRUE STATEMENT OF ASSETS. [CHAP. XX. Therefore it seems too risky both for cestuis que trust and trustees to organize a trust estate for business except upon the basis of good faith. And it may be further said, that possibly the last thing in the world an irresponsible promoter with a scheme for bonuses and free stock would conceive, as a sub- stitute for a corporation, would be a trust estate controlled by a court of equity. 165. The Capital of a Trust Estate in Business. A trust estate is merely property, the legal title to which is vested in a trustee with the beneficial interest in another or others. It is therefore property committed to trustees, and immediately there- upon the trust relation arises as to it and every part thereof. For it and all of it and for what arises out of it the trustee becomes forthwith responsible. It may be true, that, if specific property other than money constitutes the trust estate, any valuation set upon it might be lawful between the parties, and even a thousand dollars, for example, might be called another amount, but it is easily to be seen, that this opens up a far greater possibility of embarrassment to trustees, who are per- sonally responsible for what they receive, than might arise out of the like way of doing in the formation of a corporation. No prudent responsible trustee would acknowledge to have received one hundred thousand dollars, when as a matter of fact there had been delivered to him fifty thousand. The transaction would be a badge of fraud and every provision of a supposed trust agreement might be vitiated thereby, with the result that trustees and beneficiaries would become jointly and severally liable for all acts and contracts of the former. We will suppose, then, that the trust agreement provides for a true statement or honest estimate of the value of the property delivered to a trustee to be employed by him as capital in the business intended to be conducted. The creators of the trust may agree among themselves as to the proportions they severally con- tribute to this capital and in what proportions severally they are interested. Also they may provide how other contributions to the original capital may be made and the contributors become 264 CHAP. XX.] DECREASE OF ASSETS SHARES. [ 166. entitled to proportional interests. In other words, the trust agreement may provide for enlarging the trust capital and in- creasing the beneficiaries. The reservation of proportional in- terests by the creators of the trust is as simple a proposition as a testator or other donor embarking a trust in trade for the benefit of several beneficiaries, of which this work has shown several examples, and it is undoubtedly within contractual ar- rangements to provide for other beneficiaries coming in. It may be said that to speak of the capital of a trust estate is properly only to speak of its corpus, while that of a corpor- ation may be taken to be that, which is the aggregate sum of its shares of stock, whether the assets exceed or are below that sum. Considering a trust estate in business with this distinc- tion and where no others are interested than contributors to its corpus, no one but they can object to that corpus becoming impaired, unless they be creditors who are injured by misrepre- sentation by a trustee. As it is true that it is merely property and nothing else that constitutes a trust estate, it may be misleading to call this capital and interests therein should be expressed proportionately or in aliquot parts, that is to say in shares without "par value." This suggestion has been made as to corporate shares and its approp- riateness may seem even clearer as to interests in a trust estate. 166. Interests or Shares in a Trust Estate. As suggested above about defining interests in a trust estate, it is to be further said, that it comports more nearly with the true relation between trustee and cestui que trust, that the latter's aliquot part in the property be shown, than that any arbitrary valuation be placed upon it. Every cestui que trust has a proportional interest in a thing, whether its value be one amount or another, and he is not supposed to make any representation on that subject, and a trustee's representation would not be of any binding effect upon the cestui. It may be thought consistent with the organi- zation of a corporation to speak of par value of shares in capital stock or statute may so require, but for the reasons stated this 265 167.] COMMON AND PREFERRED SHARES. [CHAP. XX. seems out of place in defining interests in a trust estate. It is not intimated, however, that the interests could not be expressed as of so much money value, as this would be merely another method of stating an aliquot part. The real question is whether a trust agreement may provide for shares in a trust estate and evidence thereof in such a way, that they may be transferred as shares of stock in a corporation. In the first place it seems too clear for controversy, that co- owners may agree among themselves, by a competent instru- ment in writing, what are their respective interests in property, the legal title to which they vest in another. If it is competent for them to convey to him absolutely, it is also competent to apportion among themselves their reserved equity. In the next place it is undoubtedly true that one's interest in a trust estate may be assigned by him to another, as it is property that is sub- ject to levy and sale under process. There being then the jus disponendi, it is a mere regulation for the mutual advantage of co-owners to say in advance how the exercise of that right shall be evidenced. As between seller and purchaser this might not be necessary, but that a purchaser might not acquire a status to the possible detriment of the common interest may well be provided for. It will be presumed that it is only by ac- ceding to these regulations that each owner of an interest be- comes such. 167. Preferred Shares in a Trust Estate. May there be interests like preferred stock in a corporation? Preferred stock in a corporation is shares, which, while on a higher plane of preference than ordinary shares, yet is secondary in the scale of obligation by a corporation to the claims of its creditors. If, as has been shown, a trustee may contract so as to be bound in- dividually, or to exempt himself from individual liability by pledging the trust property, why may not a trust agreement provide that he may issue shares of stock making the trust estate liable after creditors are paid, just as are corporate assets liable to holders of preferred stock? It is all a matter of con- tract and, if investors prefer the obligation of a trust estate to 266 CHAP. XX.] PUBLICITY REPORTS. [ 168. pay interest out of net earnings, rather than to invest in common shares with possibly greater profits, that kind of an investment is just as surely a contribution to trust property, so far as general creditors are concerned, as is investment in ordinary shares. 168. Publicity of Affairs of a Trust Estate. Reports Ac- countings. Publicity has been urged as a means for the pre- vention of corporate abuses, and generally it may be said that the dominant note in all argument for supervision of corpora- tions is that the public needs this and should apply it either in the exercise of the State's police power or of Congressional power in the regulation of interstate commerce. The rights of creditors are not so much heard of, though bankruptcy and in- solvency of corporations fill judicial tribunals with questions that never would have arisen under honest organization and management of corporations, and still less do we hear of the need of protecting the rights of stockholders. That publicity is needed for such rights because secrecy may work to their prejudice is shown by a very recent case in New York, in which the lower appellate court was reversed by the higher. 1 In the lower of these courts it was held, and a number of decisions by the U. S. Supreme Court were cited as authority, that a stockholder, paying for stock, for which he has subscribed, less than its par value, impliedly agrees to become bound to the corporation's creditors to the extent of the difference. The higher court held that where the subscription is to pay less than par, there is no public policy in favor of creditors that the agree- ment should not be observed. Nevertheless, the corporation is operating under false pretense of having a capital which pub- licity would show it did not possess. If the lower court was right, creditors should be advised as to corporate assets, and, if the higher co,urt is right, there was a claim of capital which was false. iSouthworth v. Morgan, 128 N. Y. Supp. 196, 143 App. Div. 648; same case (1912), 205 N. Y. , 98 N. E. 490. 267 168.] PUBLICITY REGULATIONS REGARDING. [CHAP. XX. As said supra 2 it is believed by the author that such a repre- sentation would involve both trustee and cestuis que trust in a fraud, making them jointly and severally liable. It must be remembered that a corporation may make representations, but a trust estate cannot, and, therefore, when a trustee in conjunc- tion with others or by their express approval makes a false representation, the matter takes on a different phase. It has, apparently, the elements of a conspiracy, and, if the cestuis que trust do not participate, it is a personal act wholly outside of the trustee's representative capacity. Therefore it is to be thought that publicity, at least in the case of numerous cestuis que trust, who are changing by the sale and purchase of transferable shares, is a privilege greatly to be appreciated by a prudent trustee. If true reports are made by him, he establishes his good faith in the management of what is confided to him, and admits thereby that such is the measure of his obligation to his cestuis que trust. It may be that for business reasons certain information some- times should not be spread broadcast, and such limitation upon indiscriminate publicity could be provided for without the trustee keeping it within his exclusive knowledge. In other words, revelation to a standing committee could be made^ and their judgment relied on as to its being generally announced. If, however, cestuis que trust desire no such limitation on disclosure, the instrument of trust unequivocally may so declare. It is not attempted here to deny, that the state, within its police power or Congress under the interstate commerce clause, or either, for purpose of revenue, may require specific disclosure. That question it is unnecessary to consider. It is submitted, however, that a trust instrument as to publicity and how far it may go and how it shall be made, is greatly superior to a chanter and regulations regarding corporations, because the latter are universal in application, and the former may be framed for a particular business and in accordance with the desires of 2 158, Ante. 268 CHAP. XX.] REPORTS MORTGAGES. [ 169. the owners of that business. Where this does not work out practically, amendment may cure defects. The trust relation is severe in holding the trustee to utmost good faith towards ces- tuis que trust, and his personal responsibility to third persons is absolute, except as specifically excepted, but within these limitations there are the usual rights of individuals sui juris. Providing for reports and restraining the right of indiscrim- inate examination has been treated in 138 of this book. The absence of specific directions leaves the matter as stated by the Illinois Supreme Court: 3 "The fact that the times and manner for accounting for the rents and profits of the trust estate are not fixed, cannot render the trust void. The law will compel the trustee to render ac- counts in proper manner and at proper times. The absence of specific directions as to when and in what manner the trustee shall render his accounts simply leaves that matter to be de- termined by construction. If the trustee and cestui que trust disagree on that subject, the courts may be resorted to for a settlement of the differences. In such a case, the parties, and, if necessary, the court, would be compelled to take into con- sideration the nature of the property, how and when the rents and profits will probably accrue, and all other facts and circum- stances affecting the question." 169. Mortgages by Trustees. It would seem not greatly necessary, in view of authority hereinbefore considered, that it should further be urged that a trustee may, when acting within the scope of authority, so contract that a third person may look only to the trust estate for payment. The extent, however, of that authority might be claimed to be his right to charge the trust estate, while providing for his own exemption from liability, in the contemplated management of a trust estate, and that none of the cases cited holds he can raise funds upon the trust property for subsequent use in its management. Besides, we have seen that there is a limitation upon his power to prefer a SQrr v. Yates (1904), 209 111. 222, 239, 70 N. E. 731. 269 169.] MORTGAGES. [CHAP. XX. creditor by mortgage when the trust estate has become insolv- ent, 4 even though the indebtedness had before that been regu- larly incurred. And it has been emphasized that such an ex- emption depends for its validity on the fact that a court of equity will distribute the trust property equitably and propor- tionally among creditors. 5 Therefore it would be the exercise of a doubtful power for a trustee to incumber trust property, though embarked in trade, under a general power to exercise his discretion in its manage- ment, where the purpose is merely to raise funds, not to discharge present indebtedness, but for the more successful conduct of the business of the trust. An Iowa case goes quite far in expres- sion as to the right of a trustee to mortgage trust property em- barked in trade, but the facts of the case show the mortgage was for indebtedness previously incurred. 6 But it cannot be denied that express power may remove all doubt in this matter. Thus a subscription to a building and loan association by a trustee, as a step toward giving a mortgage on trust property and his executing such mortgage, was upheld under a provision saying that the trustee "for the purpose of managing said trust estate and changing the investment thereof, is hereby authorized at any time, by instrument in writing in which said cestui joins during her life, and without her joining after her death, to pledge, mortgage, sell or exchange or otherwise dispose of all or any portion of the real estate and personal property as he may deem best." 7 And such holding is in clear accord with decision that though a mortgage be unauthorized when exe- *Woddrop v. Weed (1893), 164 Pa. 307, 26 All. 375, 35 Am. St. Rep. 832. SBank of Topeka v. Eaton (1900), 100 Fed. 8; Affd. 107 Fed. 1003, 47 C. C. A. 140. Roberts v. Hale (1904), 124 Iowa 296, 99 N. W. 1075. TBailie v. Carolina Interstate B. & L. Asso. (1896), 100 Ga. 20, 28 S. E. 274; Cottingham v. Equitable B. & L. Asso. (1902), 114 Ga. 940, 41 S. E. 72. 270 CHAP. XX.] MORTGAGES. [ 169. cuted, yet it is validated by ratification of cestuis que trust. 8 Joinder by cestui que trust in a mortgage validates it 9 and if the trustee is one of the cestuis que trust his interest is bound whether the interest of the others is bound or not. 10 It is a universal principle that what one may subsequently ratify he may previously authorize, and vice versa. But while power to borrow money and mortgage trust property might be implied as being a proper and necessary means of executing the purposes of a trust, 11 yet each case under such ruling depends upon its own circumstances and the only prudent thing to do, if it is desired, that a trustee may have power to borrow and mortgage, is for a trust instrument specifically to provide that he may and the circumstances under which the power may be exercised. As this is a power expressly or impliedly to be granted, the conditions of its exercise may be stated as fully as desired. For example, the trustee's power in this special regard might be declared to be exercisable only upon a resolution passed by a majority of shareholders present at some regular or special meet- ing or upon approval of some standing committee of the share- holders. Accordingly as the trust instrument specifically may give to the trustee the right to encumber trust property to raise money either to pay off indebtedness or to create a fund for business operations, prudently it may provide for any temporary exigency or for the creation of a bonded indebtedness extending over several years. SBoon v. Hall (1902), 78 N. Y. Supp. 557, 76 N. Y. App. Div. 520; Magraw v. Pennock (1853), 2 Grant (Pa.) 89. OFonda v. Gibbs (1903), 75 Vt. 406, 56 Atl. 91. lOSternfels v. Watson (1905), 139 Fed. 505. URogers v. Rogers (1888), 111 N. Y. 228, 18 N. E. 636; Chris- tian v. Worsham (1883), 78 Va. 100; In re. Stevenson (1898), 186 Pa. 262, 40 Art. 473. See also Townsend v. Wilson (1904), 77 Conn. 411, 59 Atl. 417. 271 170.] AMENDMENTS. [CHAP. XX. 170. Amending Trust Agreements. To amend a trust agreement means, that the trust continues under the original agreement for the term therein fixed. Therefore all provisions for amendment contemplate that the essential rights of the equitable owners remain unimpaired. The fact, that amend- ments require for their adoption a proportion of the votes of the entire number, instead of the entire number, implies this kind of construction. The most numerous of cases presenting illustrations of this are those which concern fraternal insurance societies, whose constitutions and by-laws, applications for in- surance and benefit certificates are conditioned upon an assured being bound as such constitutions and by-laws exist or may be amended thereafter. This broad language has been held not to extend beyond reasonable amendments which pertain to the management of these societies and not as impairing the contract of the assured. 12 What are the inherent rights of a cestui que trust as distinguished from mere management of the business of the trust estate ought to be easily recognized. There are the property right and the right of full and free disclosure by the trustee and the equitable rule that, while the trustee may bar- gain with the cestui que trust he can take no advantage of him by misrepresentation or any concealment of what it is his inter- est to be informed, and that by amendment no rule of law in the formation or continuance of the trust shall be violated. 171. Voluntary Termination of a Trust Estate. It is considered that it is not further necessary to speak of what steps should be taken in the event a trust estate becomes insolvent, as the cases discussed show, that a court of equity will take charge of its assets and distribute them equitably and proportionally among creditors and dispose of any surplus among its equitable owners. 12Lange v. Royal Highlanders (1905), 75 Neb. 188, 106 N. W. 224, 10 L. R. A. (N. S.) 666, 121 Am. St. Rep. 786; O'Neill v. Sup. Council A. L. H. (1904), 70 N. J. L. 410, 57 Atl. 463; Bragaw v. Sup. Lodge K. & L. H. (1901), 128 N. C. 354, 38 S. ;E. 905, 54 L. R. A. 602; Thibert v. Sup. Lodge K. H. (1899), 78 Minn. 448, 81 N. W. 220, 47 L. R. A. 136, 79 Am. St. Rep. 412. 272 CHAP. XX.] TERMINATION OF TRUST. ( 171. Therefore it is intended here to refer merely to the termina- tion of the trust. We have seen that an express trust may have a term and for its validity that term should be stated to be one within a time not forbidden by statute. This, however, does not require that it can not be terminated earlier. And when a trust is terminated this does not mean that immediately the entire re- lation of trustee and cestui que trust is at an end, but it continues until a final settlement is had. 13 It is conceived, therefore, that it would not be in violation of the rule against perpetuities for the trust instrument to provide that upon the termination of the trust, the assets thereof shall be forthwith converted into money and the proceeds distributed among the then existing sharehold- ers at the earliest practicable moment. This question, however, could be wholly avoided in those states where trust terms may be stated to be upon a certain number of years, New York and a few other states being exceptions where a life or lives fixes the duration. However it is so repugnant to every sense of justice to suppose that a trustee would not have to account after the trust term had ended, that there can be no plausible claim to that effect. Where there exists at all times full power of revocation, we have seen that the rule against perpetuities is not offended, if no trust term is stated. 13a Trust instruments of the character considered in this work should contain provisions for the trust term being cut off by action taken by the cestuis que trust, should they so desire. This may be done by its being provided, that a certain proportion of the holders of shares may at a regular or special meeting, called upon a specified kind of notice, by resolution declare that the trust shall terminate and its affairs be disposed of by a certain date, or as soon thereafter as may be practicable. 131 * v. Bowdrie (1900), 110 Ga. 549, 36 S. E. 89; Tabernacle Baptist Church v. Fifth Ave. Baptist Church (1901), 60 N. Y. App. Div. 327, 70 N. Y. Supp. 181; same case, 172 N. Y. 598, 64 N. E. 1126. 13a 92. ISbHowe v. Morse, 174 Mass. 491, 55 N. E. 213. 273 172.] RECORDING TRUST INSTRUMENT. [CHAP. XX. Provisions for continuance of a stated trust term have been discussed in 96 and 97, ante. Under the view that the trusts created by the instruments, of which copies appear in appendix to this volume, are not subject to the rule against restraints upon alienation, the provisions for continuance found therein would seem to be valid. To such however, as may be of a contrary view and deem those trusts subject to such rule, the writer is disposed to advise the omission of any clause, providing for the continuance of the trust after the period fixed and upon con- sent of a part only of the cestuis. 172. Recording. Actual and Constructive Notice. "Gen- erally the provisions for recording deeds apply to instruments creating a trust." 14 Massachusetts, however, has an additional provision applicable to "voluntary associations under written instrument or declaration of trust" requiring the filing of the deed of trust with the commissioner of corporations, 15 and "with the clerk of every city or town in which such association has a usual place of business." 15 The recording of fictitious names assumed by trustees as a business title is also provided for in that state. 16 It is not contemplated, however, that the recording of the constating instrument of -a trust estate in business, will operate as constructive notice that liabilities are limited. Actual notice is provided for. It is submitted that those who establish a trust estate should welcome the opportunity of placing the instrument where it may be freely inspected by those interested. Merely keeping the orig- inal on file in the company's office, without official recording, should this be permissible in any state, might give some color to a possible claim that those in control as trustees were not per- mitting free access thereto. Moreover, official recording per- mits the securing of certified copies, with a consequent import l^Stimson's American Statute Law, 1711. iSActs of Mass. 1909, Ch. 441. Statute 1907, Chapter 539. l6Acts of Mass. 1907, Chap. 539. 274 CHAP. XX.] RECORDING. [ 172. of verity, and forestalls any serious difficulties arising from loss of the original. Besides, recording affords an easy and conven- ient mode of reference to the trust instrument as to stipulations by a trustee exempting himself from personal liability and making the trust estate solely responsible for his contracts. In such case it becomes the duty of the creditor to inform himself of the powers of the trustee. 17 "Bank of Topeka v. Eaton (1900), 100 Fed. 8. 275 APPENDIX OF EXHIBITS. One of the thoughts upon which the writer has endeavored to lay some stress in the foregoing pages is that provisions in trust instruments for the carrying on of business are, after the trust estate is provided for, susceptible of the widest diversity. Corporate articles are stretched upon a Procrustean bed, which a legislature only may lengthen or lop off. The truth of these statements is in the logic of a corporation being an artificial being and in the trust being a natural person's right of contract. The variety of trust arrangements, which appear in copies of original agreements, which in this appendix are called "Exhibits", are therefore not to be used as forms, in the popular import of that word, but rather as guides, to prevent omission in what ought to be embraced in such an instrument and as suggestions in phraseology to accomplish a desired end. But they may no more be slavishly followed than might the terms in a particular contract when a different purpose is in view or different means are preferred for its performance. As important contracts need skill in their drafting, so does this character of instrument. Nevertheless these precedents should be of great value, be- cause they are supposedly the result of mature consideration, as, in a sense, pioneers in their method of aggregating small in- vestments to be employed after the manner of corporations. We say these exhibits are pioneers, but it is submitted that the prin- ciples they are based on are not only old but they have con- stitutional guaranties behind them. It will be interesting to study the variety of provisions in these exhibits and admire the expansibility of the principles upon which they are based, if it is true that they are not inconsistent with these principles, in fact, or as developed in the pages of 277 EXPLANATION OF EXHIBITS. this work. It also may be suggested that as litigation hereafter may challenge the validity or construction of any terms or pro- visions of any of these instruments, opportunity to consult them in their entirety and compare them with each other might not be amiss. Particular provisions may be located by means of the index at the end of the book. 278 FORM OF DECLARATION OF TRUST ESTABLISHING A REAL ESTATE COMPANY. AN AGREEMENT AND DECLARATION OF TRUST made by the subscribers, this 14th day of April, 1894, for the purpose of purchasing certain real estate known as the Tre- mont House Estate and an adjoining property situated on Tre- mont and Beacon Streets and Tremont Place, in Boston. 1. The trustees under this agreement are authorized as such trustees to purchase said estates and any existing leases thereto, and to proceed to the erection of a new building as soon as practicable, and may as such trustees make all necessary con- tracts and agreements for such purchase and for such new build- ing, including any agreement they may think advisable for straightening or altering boundaries, and may if they deem expedient for the adjustment of boundaries acquire additional adjoining estates or release portions of the trust estate, and may make leases of the property or any part thereof held by them on such terms as they may think best, but they shall make no lease for a term of more than five years or for an annual rent of more than $10,000, unless authorized by vote of the shareholders, except that they may make a lease of certain portions of said building to one tenant for the term of not more than twenty years and at an annual rental of not less than $24,500. After the new building is completed the trustees shall incur no debt or liability except such as may be incidental to the management of the property held by them, and then only for an amount not exceeding in the aggregate at any one time $20,000. The trustees shall have no power to bind the share- holders personally (and in every written contract they shall enter into reference shall be made to this declaration of trust), and the person or corporation contracting with the trustees shall 279 EXHIBITS. look to the funds and property of the trust for the payment under such contract or for the payment of any debt, mortgage, judgment, or decree, or of any money that may otherwise be- come due or payable by reason of the failure on the part of said trustees to perform such contracts in whole or any part, and neither the trustees nor the shareholders present or future in this company shall be personally liable therefor. 2. The title of the trustees shall be "Trustees of the Tre- mont Building," and any property conveyed to them under that description shall be held by them in trust under this agree- ment. 3. The trustees shall give receipts for installments on sub- scriptions when paid, and on the payment of the last installment shall issue certificates in exchange for such receipts in shares of $100.00 each for each $100.00 paid. Such receipts and cer- tificates shall be transferable only on the books of the trustees upon surrender thereof, all installments due having first been paid and the acceptance of a receipt or certificate shall make the person named therein a party to this agreement. The term "shareholder" used in this agreement shall mean holder of record of a receipt or a certificate. 4. Interest at the rate of 4 per cent per annum and all taxes and assessments shall be added to the cost of the building and paid semi-annually to the subscribers from the date of their respective payments of subscriptions until the substantial com- pletion of said building. The cost of said building shall also include 1 per cent on the amount of subscriptions procured by Alexander S. Porter and T. Dennie Boardman (which shall be paid to them for their services and expenses in promoting this enterprise and procuring subscriptions to this agreement) and also 1 per cent on the gross amount of rental on any lease negotiated by them of the lower floor and basement of said build- ing, and also a reasonable compensation to be paid the trustees for their services rendered during construction 280 REAL ESTATE TRUST. 5. The trustees shall have a reasonable compensation after construction of building, and shall make such dividends among the shareholders as they may deem expedient. 6. The trustees shall call meetings of the shareholders an- nually on the third Wednesday of March, and shall report their receipts and expenses for the year ending on the 31st of January preceding. They may call special meetings of the shareholders at any time, and shall do so upon the written request of the holders of one-twentieth of the shares. 7. Notices of meetings, of calls for payments of subscriptions, or for any other purpose, shall be deemed binding upon each subscriber and shareholder if mailed prepaid to the last address given by him to the trustees, or in default thereof, to his last given place of business or abode. Notices of meetings shall be given seven days beforehand, and may be given by advertise- ment for three successive days in two daily papers published in said Boston, or by mail, at the option of the trustees. In notices of special meetings the purpose therefor shall be stated. 8- Shareholders may vote by proxy. At any annual meeting or special meeting called for the purpose the holders of a majority of the entire number of shares may fill any vacancy existing in the number of trustees, may depose any or all of the trustees and elect others in their place, may authorize a sale or mort- gage of the real estate or any part thereof held by trustees, and may alter or amend this agreement. For all other purposes a majority of those shareholders present may decide at such meet- ings, and ten shareholders or their proxies representing one- fifth of all the shares shall constitute a quorum. No such altera- tion or amendment of this agreement or deposition or appoint- ment of trustee shall affect any person not having actual notice thereof until recorded in Registry of Deeds for Suffolk County, nor shall any such alteration or amendment or other action affect rights (previously acquired) of any third person. A certificate signed by the chairman of such meeting shall, if countersigned by at least one of the trustees, be conclusive evidence of the regularity, of the meeting and of the vote having been passed 281 EXHIBITS. by the requisite majority and of all facts stated in such vote or certificate material to title. 9. Any vacancy in the number of trustees may be fi"ed by the remaining trustee until the next annual meeting of the shareholders or special meeting called for the purpose of filling such vacancy- The acting trustee or trustees from time to time shall have all the powers of original trustees. Upon resignation, decease, incapacity, or removal, or vacancy for any cause, the title of the outgoing trustee shall rest in the remaining trustee, and upon the filling of any vacancy by the shareholders as aforesaid the title of the whole trust property shall rest in the new board jointly. 10. No sale or mortgage of the real estate held by the trustees, or any part thereof, shall be made by them unless authorized by vote of the shareholders as provided above, except that the trustees may sell all the trust property at the expiration of the trust in default of action relative therto by the share- holders. 11. This trust shall not continue in any event longer than twenty years after the death of the Last surviving subscriber hereto. The trustees shall not be required to give bond, and each shall be liable only for his own acts, and then only for wilful breach of trust. 12. Any certificate or paper signed by the trustees or any of them or by the shareholders, or a copy of the record of any of their proceedings certified by any one of the trustees which it may be deemed desirable to record in the Registry of Deeds for the County of Suffolk, may be acknowledged by any one of the trustees or parties signing in the manner prescribed for the acknowledgment of deeds in Massachusetts. 13. We the subscribers agree to pay to the trustees the amounts stated against our names, in such sums and at such times as the trustees may require, and in case any subscriber neglects to pay any installment required by the trustees in 282 REAL ESTATE TRUST. twenty days after notice, the amount of his subscription then unpaid may be canceled at the option of the trustees, who may accept another subscriber in his place. 14. The limit of subscriptions hereto shall be the sum of $2,700,000, and no subscription shall be binding until the total amount reaches the sum of $1,400,000. It being understood that the remaining $1,300,000 is to be raised by a mortgage of the said real estate. 15. The first trustees under this agreement shall be Charles E. Getting and Francis C Welch, both of said Boston, who signify their acceptance of the trust by subscribing their names thereto. No surety or sureties shall have to be required of any trustee acting hereunder. CHARLES E. COTTING, FRANCIS C. WELCH, Trustees. Name. Amount- Name. Amount. Estate of Fred L. Ames, by Oliver Ames 2d, Samuel Carr, Exca $200,000 H. H. Hunnewell. . .$200,000 B. P. Cheney, By B. Henry Lee 100,000 P. Cheney, Jr., At- David Sears 50,000 torney 200,000 Grant Walker 60,000 Etc., etc. I, Andrew C. Wheelwright, hereby certify that I was the Chairman of a Special Meeting of the shareholders of the Tremont Building Trust under an Agreement and Declaration of Trust made April 14th, 1894, and recorded with Suffolk Deeds, lib. 2212, Page 210, duly called for the purpose and held at Boston on Tuesday the fifth day of March, A. D. 1901, and that at said meeting the holders of a majority of the entire number of shares passed the following vote, amending said Agreement and Declaration of Trust. 283 EXHIBITS. VOTED: That the Agreement and Declaration of Trust dated April 14th, 1894, and recorded with Suf- folk Deeds, lib. 2212, Page 210, be and the same hereby is altered and amended as follows : The Trustees under said agreement are authorized to purchase the estate on the westerly corner of Beacon Street and Tremont Place, in Boston, now belonging to Walter J. Otis and numbered six on said Beacon Street, and one and three on said Tremont Place, also the adjoining estate on said Tremont Place now belonging to Isidore B. Raggiotti and numbered five on said Tremont Place, containing together about four thousand, eight hundred and sixty-five square feet, and any existing leases and mortgages thereon, and to proceed to erect thereon a "building of the first class," said real estate when so purchased to be held by the said trustees upon the trusts set forth in said agreement and with the same powers in all respects as if the same had been included within the scope of the original trust, and upon the completion of such building or .at any time thereafter said trustees are authorized to issue from time to time such additional stock on such terms as to them shall seem best to pay for said land, the cancellation of leases and mortgages and the construction of such building and any incidental expenses connected therewith. I further certify that at said meeting the holders of a majority of the entire number of shares passed the following vote: VOTED: To provide means of paying for the land situated on the westerly corner of Beacon Street and Tremont Place, numbered six on Beacon Street and one, three, and five on Tremont Place, containing to- gether about four thousand, eight hundred and sixty- five square feet, the cancellation of leases, the discharge of mortgages, and the erection of a building thereon; the trustees are authorized to borrow from time to time such money as in their opinion is necessary for those purposes, and to give the notes or obligations of the 284 TRUST AMENDMENT. trustees therefor on such time and bearing interest at such rate as to the trustees shall seem best, which notes shall be enforceable against any property now or here- after held under the agreement of trust, and to secure payment for such notes or obligations by giving a power of sale, mortgage or mortgages in such form as they may deem expedient covering said land and build- ings. No mortgagee, however, to be under any obliga- tion to see to the application of the money lent. Witness my hand this 30th day of March, A. D. 1901. ANDREW C. WHEELWRIGHT. Countersigned : CHARLES E. COTTING, FRANCIS C. WELCH, Trustees of Tremont Building, Under an Agreement and Declaration of Trust made April 14th, 1894, and re- corded with Suffolk Deeds, lib. 2212, Page 210. Commonwealth of Massachusetts, " Suffolk. / S Then personally appeared the above named Charles E. Cot- ting and Francis C. Welch, and acknowledged the foregoing instrument by them subscribed to be their free act and deed as Trustees. Before me, ERNEST DANE, Recorded : Justice of the Peace. April 2d, 1901, one o'clock and twenty-eight minutes P. M. 285 FORM OF DECLARATION OF TRUST ESTABLISHING A HOLDING COMPANY. Agreement and Declaration of Trust of the MASSACHUSETTS ELECTRIC COMPANIES. Dated: June 29th, 1899. THIS AGREEMENT, made this twenty-ninth day of June, A. D. 1899, by and between E. Rollins Morse, Henry Russell Shaw, Robert W. Emmons, 2d, and George W. Parker, co- partners under the firm name of E. Rollins Morse and Brother, and William A. Tucker, S. Reed Anthony, Philip L. Saltonstall and Nathan Anthony, co-partners under the firm name of Tucker, Anthony and Company, together with their assigns, herein designated as the "SUBSCRIBERS," and Gordon Ab- bott, Charles Francis Adams, 2d, S. Reed Anthony, John N- Beckley, Amos F. Breed, Everett W. Burdett, Charles E. Cot- ting, Eugene N. Foss, Walter Hunnewell, Stillman F. Kelley, E. Rollins Morse, Richard Olney, Percy Parker, S. Endicott Peabody, and Philip L. Saltonstall, together with their succes- sors, herein designated as the "TRUSTEES," witnesseth: That WHEREAS the subscribers propose to transfer, assign, and deliver to the Trustees, under the designation of "MASSA- CHUSETTS ELECTRIC COMPANIES," certain shares of the capital stock and other securities of sundry street railways and other companies and contracts to purchase the same and also other property, as shown in a schedule identified by the signatures of the parties hereto and filed with the Trustees; and the Trustees for the purpose of defining the interests of the subscribers and their assigns in such property, have agreed 286 HOLDING TRUST. to issue to the Subscribers negotiable certificates for two hundred and forty thousand (240,000) shares, of which one hundred and twenty thousand (120,000) shall be preferred and one hundred and twenty thousand (120,000) shall be common, each share to be expressed of the par value of one hundred (100) dollars, and all of said shares to be issued to the Subscribers in the following proportions, viz: To said E. Rollins Morse and Brother, or order, 60,000 pre- ferred shares and 60,000 common shares; to said Tucker, An- thony & Company, or order, 60,000 preferred shares and 60,000 common shares. NOW, THEREFORE, the Trustees hereby declare that they will hold said property so to be transferred to them, as well as all other property which they may acquire as such Trustees, together with the proceeds thereof, in trust, to manage and dis- pose of the same for the benefit of the holders from time to time, of the certificates of shares issued hereunder, according to the priorities expressed in said certificates, and in the man- ner and subject to the stipulations herein contained, to-wit: FIRST. The Trustees, in their collective capacity, shall be designated, so far as practicable, as the "MASSACHUSETTS ELECTRIC COMPANIES," and under that name shall, so far as practicable, conduct all business and execute all instru- ments in writing, in performance of their trust. SECOND. The Trustees shall always be fifteen in number, and of the Trustees herein mentioned by name, S. Reed An- thony, Everett W- Burdett, E. Rollins Morse, S. Endicott Pea- body, and Philip L. Saltonstall, shall hold office until the first annual meeting of the shareholders; Gordon Abbott, John N. Beckley, Amos F. Breed, Walter Hunnewell, and Stillman F. Kelley, shall hold office until the second annual meeting of the shareholders; and Charles Francis Adams, 2d, Charles E. Getting, Eugene N. Foss, Richard Olney, and Percy Parker, shall hold office until the third annual meeting of the share- holders; except that said Trustees, as well as any Trustees 287 EXHIBITS. hereafter elected, shall in all cases hold office until their suc- cessors have been elected and accepted this trust. The shareholders shall, at each annual meeting, or adjourn- ment thereof, elect five Trustees to serve for the term of three years next ensuing. In case of death, resignation, or inability to act of any of said Trustees, the remaining Trustees shall accept any resignation and fill any vacancy for the unexpired term. As soon as any Trustees elected by the shareholders or by the remaining Trustees to fill a vacancy have accepted this trust, the trust estate shall rest in the new Trustees or Trustee, together with the continuing Trustees, without any furher act or conveyance. THIRD. The Trustees shall hold the legal title to all prop- erty at any times belonging to their trust, and shall have and exercise the exclusive management and control of the same ; they shall assume all contracts for and obligations and liabilities in connection with or growing out of the purchase of the stock or securities assigned to them by the Subscribers and men- tioned in the annexed schedule, and to the extent and value of such stock and securities, but not personally, shall agree to hold the Subscribers and any person associated or acting with them harmless and indemnified from and against any loss, cost, expense, or liability upon, by reason of, or in connection with, any such contract, obligation or liability; they may adopt and use a common seal; they shall have power to vote in person or by proxy upon all shares of stock at any time belonging to the trust, and to collect, receive, and receipt for the dividends thereon, and may contract with each or ' any of the controlled companies in respect of any matter or matters relating to the operation of the road or the conduct of the business of any such company or companies, to collect, sue for, receive and receipt for all sums of money at any time coming due to said trust; to employ counsel to begin, prosecute, defend and settle suits at law, in equity or otherwise, and to compromise or refer to arbitration any claims in favor of or against the trust; they may also, with the consent of not less than ten of their number 288 HOLDING TRUST. given at a meeting called for that purpose, but not otherwise, exchange, upon such terms as may be agreed upon, the stock or securities held by them in any corporation for the stock or securities of any other corporation, taking over the property of such corporation by consolidation or otherwise; and with such consent but not otherwise, may loan money to any cor- poration of which they may own a majority of the capital stock, and may subscribe for or acquire additional stock or the securi- ties or obligations of such corporations; and with such consent, but not otherwise, may subscribe for, purchase, and acquire shares in the capital stock of any corporation (1) owning or operating railways or railroads, or engaged in the business of transporting merchandise, mails or express matter, or (2) en- gaged in whole or in part in supplying light, heat, power or other public service, or (3) manufacturing, selling or repairing ma- chines, equipments, supplies or other articles used by corpora- tions of either or both the classes above named, or (4) engaged in the business of insuring corporations of any or all of the foregoing classes against loss by fire or casualty, or (5) en- gaged in the business of advertising in the cars or upon the premises of railways, or railroad companies ; and with such con- sent, but not otherwise, may borrow money for any of the pur- poses aforesaid. With the consent of the holders of at least two-thirds of each class of shares outstanding, at a meeting called for that purpose, but not otherwise except as herein otherwise provided, the Trustees may sell, mortgage, pledge, encumber, or dispose of any shares or stock securities or other property from time to time held by them upon such terms and for such purposes as the shareholders at such meeting may approve. So far as strangers to this trust are concerned, a resolution of the Trustees authorizing a particular act to be done shall be conclusive evidence in favor of such strangers that such act is within the powers of the Trustees, and no purchaser from the Trustees shall be bound to see the application of the purchase money or other consideration paid or delivered by or for said purchaser to or for said Trustees. 289 j EXHIBITS. FOURTH. Stated meetings of the Trustees shall be held at least once a month, and other meetings shall be held from time to time upon the call of the President or any three of the Trustees. A majority of the Board constitutes a quorum, and the concurrence of all the Trustees shall not be necessary to the validity of any action done by them, but the wish of a ma- jority of the Trustees present and voting at any meeting shall be conclusive except as hereinbefore specifically provided. The Trustees may make, adopt, amend, or repeal such by-laws, rules, and regulations, not inconsistent with the terms of this instrument, as they may be deemed necessary or desirable for the conduct of their business and for the government of them- selves and their agents, servants, and representatives. FIFTH. The Trustees shall annually elect from among their number a President and Vice-President of the Board, and shall also annually elect a Treasurer and Secretary, and they shall have authority to appoint such other officers, agents, and attorneys as they may from time to time deem necessary or expedient for the conduct of their business. They shall have authority to accept resignations and to fill any vacancy in the office of President, Vice-President, Treasurer, or Secretary, for the unexpired term; and shall likewise have authority to elect temporary officers to serve during the absence or disability of regular officers. The President, Vice-President, Treasurer, and Secretary shall have the authority and shall perform the duties usually incident to those offices in the case of corporations, so far as applicable thereto, and shall have such other authority and perform such other duties as may from time to time be determined by the Trustees. The Trustees shall fix the com- pensation of any, or all officers and agents whom they may appoint, and are likewise authorized to pay to themselves such compensation for their own services as they may deem reason- able. The Trustees shall also appoint from among their num- ber an Executive Committee of three or five persons, to whom they may delegate such of the powers herein conferred upon the Trustees as they may deem expedient, except so far as those 290 HOLDING TRUST. matters are concerned in which the concurrent action of at least ten Trustees is required. The Trustees shall not be liable for errors of judgment either in holding property originally conveyed to them or in acquiring and afterward holding additional property, nor for any loss arising out of any investment, nor for any act or omission to act performed or omitted by them in the execution of this trust in good faith, nor shall they be liable for the acts or omissions of each other or of any officer, agent, or servant appointed by or acting for them, and they shall not be obliged to give any bond to secure the due performance of this trust by them. SIXTH. Shares hereunder shall be of the par value of one hundred ($100.00) dollars each, and shall be divided into pre- ferred and common shares. The preferred shares shall entitle the holder to accumulative semi-annual dividends at the rate of 4 per centum per annum, and no more, the same to be paid or set apart before any dividend shall be paid or set apart for the common shares; and in case of liquidation, the proceeds of the liquidation shall be first applied to the payment to the holder of preferred shares, of the sum of one hundred dollars per share and any accrued and unpaid dividends thereon, and the balance remaining thereafter shall be divided among the holders of common shares in proportion to their holdings. As evidence of the ownership of said shares, the Trustees shall cause to be issued to each shareholder a negotiable certificate or certificates, which certificates shall be in form following, to-wit: (FORM OF CERTIFICATE OF COMMON STOCK.) MASSACHUSETTS ELECTRIC COMPANIES. No. Shares. Not subject to assessment. This certifies that is the holder of common shares in the MASSACHUSETTS ELECTRIC COMPANIES, which he 291 EXHIBITS. holds subject to an Agreement and Declaration of Trust, dated June 29, 1899, and on file with the Old Colony Trust Company, which is hereby referred to and made a part of this certificate. The shares in said Massachusetts Electric Companies are divided into two classes, known as preferred and common, and the holders of the preferred shares are entitled to receive semi- annual dividends out of the net earnings of the Companies, at the rate of four per centum per annum, and no more, payable semi-annually, on the first days of January and July in each year, which shall be paid or set apart before any dividends shall be paid or set apart on the common shares. The dividends on the preferred shares are cumulative, and if, in any period of six months, semi-annual dividends at the rate of four per centum per annum are not paid on said pre- ferred shares, the accrued and unpaid dividends are a charge on the net earnings of the Companies, payable subsequently be- fore any dividends are paid upon the common shares. In the event of liquidation, the proceeds of liquidation will be first applied to the payment to the holders of preferred shares of the sum of one hundred dollars ($100) per share and any accrued and unpaid dividends thereon ; and the balance remain- ing thereafter will be divided among the holders of common shares in proportion to their holdings. The holders of preferred and common shares are entitled to equal voting powers. This certificate will not be valid until countersigned by the Old Colony Trust Company, Transfer Agent, and the American Trust Company, Agent to Register Transfers; and no transfer hereof will be of any effect as regards the Massachusetts Elec- tric Companies until this certificate has been surrendered and the transfer recorded upon their books. IN WITNESS WHEREOF, the Trustees under said De- claration of Trust, herein designated as the Massachusetts Elec- tric Companies, have caused their common seal to be hereto affixed and this certificate to be executed in their name and behalf, by their Treasurer, thereto duly authorized. 292 HOLDING TRUST. MASSACHUSETTS ELECTRIC COMPANIES. By , Treasurer. Countersigned : Old Colony Trust Company, Transfer Agent. By Assistant Secretary. By Transfer Clerk. Countersigned : American Trust Company, Agent to Register Transfers. By Assistant Secretary. (FORM OF TRANSFER.) For value received, I hereby sell, assign, transfer, and deliver to of the within-named shares of the MASSACHUSETTS ELECTRIC COMPANIES, and I hereby request that said transfer be recorded on the books of said Companies. Witness my hand, this day of , 19 . Witness : (FORM OF CERTIFICATE OF PREFERRED SHARES.) MASSACHUSETTS ELECTRIC COMPANIES. No. Shares. Not subject to assessment. This certifies that is the holder of preferred shares 293 EXHIBITS. in the MASSACHUSETTS ELECTRIC COMPANIES, which he holds subject to an Agreement and Declaration of Trust, dated June 29, 1899, and on file with the Old Colony Trust Company, which is hereby referred to and made a part of this certificate. The shares in said Massachusetts Electric Companies are divided into two classes, known as preferred and common, and the holders of the preferred shares are entitled to receive semi- annual dividends out of the net earnings of the Companies, at the rate of four per centum per annum, and no more, payable semi-annually, on the first days of January and July in each year, which shall be paid or set apart before any dividends shall be paid or set apart on the common shares. The dividends on the preferred shares are cumulative, and if, in any period of six months, semi-annual dividends at the rate of four per centum per annum are not paid on said preferred shares, the accrued and unpaid dividends are a charge on the net earnings of the Companies, payable subsequently before any dividends are paid upon the common shares. In the event of liquidation, the proceeds of liquidation will be first applied to the payment to the holders of preferred shares of the sum of one hundred dollars ($100) per share and any accrued and unpaid dividends thereon; and the balance remain- ing thereafter will be divided among the holders of common shares in proportion to their holdings. The holders of preferred and common shares are entitled to equal voting powers. This certificate will not be valid until countersigned by the Old Colony Trust Company, Transfer Agent, and the American Trust Company, Agent to Register Transfers; and no transfer hereof will be of any effect as regards the Massachusetts Electric Companies until this certificate has been surrendered and the transfer recorded upon their books. IN WITNESS WHEREOF, the Trustees under said Declar- ation of Trust, herein designated as the Massachusetts Electric Companies, have caused their common seal to be hereto affixed, and this certificate to be executed in their name and behalf, by their Treasurer, thereto duly authorized. 294 HOLDING TRUST. MASSACHUSETTS ELECTRIC COMPANIES. By , Treasurer. Countersigned : Old Colony Trust Company, Transfer Agent: By Assistant Secretary. By Transfer Clerk. Countersigned : American Trust Company, Agent to Register Transfers. By Assistant Secretary. (FORM OF TRANSFER.) For value received, I hereby sell, assign, transfer and deliver to of the within-named shares of the MASSACHUSETTS ELECTRIC COMPANIES; and I hereby request that said transfer be recorded on the books of the Companies. Witness my hand, this day of 19 . Witness : SEVENTH. In addition to the shares to be originally issued to the subscribers as hereinbefore provided, the Trustees shall issue and sell, at public or private sale, upon such terms and for such prices as they may deem expedient, such additional pre- ferred or common shares, or both, as may be necessary to pro- vide means to pay for the stock of the New Bedford, Middle- borough, and Brockton Street Railway Company, the contract 295 EXHIBITS. for the purchase of which is to be assigned to and assumed by the Trustees. Except as aforesaid, no share shall be issued by the Trustees in excess of the amount to be originally issued to the Subscribers, as hereinbefore stated. But the Trustees may from time to time, for the purpose of acquiring means for the acquisition of additional property or otherwise accomplishing the purpose of this trust, with the consent of at least two-thirds of the preferred stockholders and two-thirds of the common shareholders, present and voting, at any meeting called for that purpose, issue and dispose of additional shares upon such terms and in such manner as the shareholders at such meeting may determine. In case of the loss or destruction of any certificates of shares issued by the Trustees, the Trustees may, under such condition as they may deem expedient, issue a new certificate or certificates in the place of the one lost or destroyed. EIGHTH. The Trustees may from time to time declare and pay dividends out of the net earnings from time to time received by them, but the amount of such dividends and the payment of them shall be wholly in the discretion of the Trustees ; except that the dividends on the preferred shares shall be payable semi-annually on the first days of June and December in each year, at the rate of 4 per cent per annum, and no more, and shall be cumulative, and said semi-annual dividends shall be paid or set apart before any dividends are paid on the common shares. NINTH. The fiscal year of the Trustees shall end on the thirteenth day of September in each year. Annual meetings for the election of five Trustees and for the transaction of other business, shall be held in Boston, on the Wednesday following the first Monday of November, in each year, beginning with the year 1900, of which meetings notice shall be given by the Secretary, by mail, to each shareholder, at his registered ad- dress, at least ten days before said meeting. 296 HOLDING TRUST. Special meetings of the shareholders may be called at any time, upon seven days' notice given as above stated, when or- dered by the President or Trustees. At all meetings of the Shareholders, each holder of shares, whether preferred or com- mon, shall be entitled to one vote for each share held by him, and any shareholder may vote by proxy. No business shall be transacted at any special meeting of the shareholders unless notice of such business has been given in the call for the meeting. No business except to adjourn shall be transacted at any meeting of the Shareholders unless the holders of a majority of all the shares outstanding are present in person or by proxy. TENTH. The death of a Shareholder or Trustee during the continuance of this trust shall not operate to determine the trust, nor shall it entitle the legal representative of the deceased shareholder to an accounting, or to take any action in the courts, or elsewhere, against the Trustees; but the executors, adminis- trators, or assigns of any deceased shareholder shall succeed to the rights of said decedent under this trust, upon surrender of the certificate for the shares owned by him. The ownership of shares hereunder shall not entitle the share- holders to any title in or to the trust property whatsoever, or right to call for a partition or division of the same, or for an accounting. 1 ELEVENTH. The Trustees shall have no power to bind the shareholders personally, and the subscribers and their assigns and all persons or corporations extending credit to, contracting with, or having any claim against the Trustees shall look only to the funds and property of the trust for payment under such iThis author takes the prohibition of "an accounting" to mean an accounting so far as title to trust property or in any proceeding for its partition or division, and that it is not intended to debar a cestui from any disclosure properly demanded as this may be re- quired so far as his interest may be concerned. For comparison see form on page 335. See also 21, 135, 141, 142, 168. 297 EXHIBITS. contract or claim, or for the payment of any debt, damage, judg- ment, or decree, or of any money that may otherwise become due or payable to them from the Trustees, so that neither the Trustees nor the shareholders, present or future, shall be per- sonally liable therefor. In every written order, contract, or obligation which the Trustees shall give or enter into, it shall be the duty of the Trustees to stipulate that neither the Trustees nor the Share- holders shall be held to any personal liability under or by reason of such order, contract, or obligation. TWELFTH. This trust shall continue for the term of twenty-one years, at which time the then Board of Trustees shall proceed to wind up its affairs, liquidate its assets, and dis- tribute the same among the holders of preferred and common shares according to the priorities hereinbefore expressed, PRO- VIDED, HOWEVER, that if prior to the expiration of said period, the holders of at least two-thirds of the shares then outstanding shall, at a meeting called for that purpose, vote to terminate or to continue this trust, then said trust shall either terminate or continue in existence for such further period as may then be determined. 1 For the purpose of winding up their affairs and liquidating the assets of the trust, the then Board of Trustees shall con- tinue in office until such duties have been fully performed. This agreement and declaration of trust may be amended or altered except as regards the liabilities of the Trustees at any annual or special meeting of the shareholders with the consent of the holders of at least two-thirds of the shares of each class then outstanding; provided notice of the proposed amendment or alteration shall have been given in the call for the meeting; and in case of such alteration or amendment, the same shall be attached to and made a part of this agreement, and a copy thereof shall be filed with the OLD COLONY TRUST COM- PANY. lAs to validity or not of this proviso see 96, 97, 171. 298 HOLDING TRUST. IN WITNESS WHEREOF, the said Gordon Abbott, Charles Francis Adams, 3d, S. Reed Anthony, John N. Beckley, Amos F. Breed, Everett W. Burdett, Charles E. Cotting, Eugene N. Foss, Walter Hunnewell, Stillman F. Kelley, E. Rollins Morse, Richard Olney, Percy Parker, S. Endicott Peabody, and Philip L. Saltonstall, Trustees, hereinbefore mentioned, have hereunto set their hands and seals, in token of their acceptance of the trust hereinbefore mentioned, for themselves and their succes- sors, and the said E. Rollins Morse, Henry Russell Shaw, Robert W. Emmons, 2d, and George W. Parker, as co-partners under the firm name of E. Rollins Morse and Brothers, and William A. Tucker, S. Reed Anthony, Philip L. Saltonstall, and Nathan Anthony, as co-partners under the firm name of Tucker, An- thony and Company, Subscribers, have hereunto set their hands and seals, in token of their assent to and approval of said terms of trust, for themselves and their assigns, the day and year first above written. (Signed) E. Rollins Morse, Henry Russell Shaw, Robert W. Emmons, 3d, George W. Parker, William A. Tucker, S. Reed Anthony, Philip L. Saltonstall, Nathan Anthony, Gordon Abbott, Charles F. Adams, 2d, S. Reed Anthony, John N. Beckley, Amos F. Breed, Everett W. Burdett, Charles E. Cotting, Eugene N. Foss, CO-PARTNERS UNDER THE FIRM NAME OF E. ROLLINS MORSE & BROTHERS. CO-PARTNERS UNDER THE FIRM NAME OF TUCKER, AN- THONY & COMPANY. Walter Hunnewell, Stillman F. Kelley, E. Rollins Morse, Richard Olney, Percy Parker, S. E. Peabody, Philip L. Saltonstall. 299 EXHIBITS. Agreement and Declaration of Trust of the MASSACHUSETTS ELECTRIC COMPANIES. For three years: Richard Olney, Eugene N. Foss, Charles E. Cotting, Percy Parker, Charles Francis Adams, 2d. For two years: Gordon Abbott, John N. Beckley, Amos F. Breed, Stillman F. Kelley, Walter N. Hunnewell. For one year: S. Endicott Peabody, Everett W. Burdett, S. Reed Anthony, Philip L. Saltonstall, E. Rollins Morse. OFFICERS. President Amos F. Breed. Vice-President Charles E. Cotting. Secretary Everett W. Burdett. Treasurer Joseph H. Goodspeed. General Manager P. F. Sullivan. Executive Committee: Gordon Abbott, Chairman, Charles F. Adams, 2d, Percy Parker, Eugene N. Foss, Philip L. Saltonstall. 300 FORM OF DECLARATION OF TRUST ESTABLISHING A MANUFAC- TURING COMPANY. Agreement and Declaration of Trust of the MASSACHUSETTS GAS COMPANIES. THIS AGREEMENT, made this twenty-fifth day of Sep- tember, A. D. nineteen hundred and two, by and between Charles Francis Adams, 2d, Walter Cabot Baylies, Samuel Carr, Robert Clarence Pruyn, Joseph Ballister Russell, Frederic El- mer Snow, Charles Augustus Stone, Albert Strauss, Christopher Minot Weld, and Robert Winsor, together with their successors (herein designated as the "Trustees"), and Francis H. Peabody, Frank G. Webster, Frank E. Peabody, and Robert Winsor, co- partners, carrying on business in the city of Boston under the name of Kidder, Peabody & Company, and James Seligman, Isaac N. Seligman, Henry Seligman, Jefferson Seligman, Emil Carlebach, Albert Strauss, and Frederick Strauss, co-partners, carrying on business in the city of New York under the name of J. & W. Seligman & Company, together with their assigns (herein designated as the "Subscribers"), witnesseth: WHEREAS it is proposed that the Trustees shall acquire from the subscribers, upon such terms and conditions as may be agreed upon, certain property and cash, and shall employ and manage the same and all other property which they may here- after acquire as such Trustees, in the manner hereinafter stated ; and it is likewise proposed that the beneficial interest in the property, from time to time held by the Trustees, and in the business conducted by them, shall be divided into shares to be evidenced by certificates therefor, as hereinafter provided: NOW, THEREFOR, the Trustees hereby declare that they will hold said property and cash so to be acquired by them as 301 EXHIBITS. well as all other property which they may acquire as such Trustees, together with the proceeds thereof, in trust, to man- age and dispose of the same for the benefit of the holders, from time to time, of the certificates of shares issued and to be issued hereunder, according to the priorities expressed in said certifi- cates, and in the manner and subject to the stipulations herein contained, to-wit: FIRST. The Trustees, in their collective capacity, shall be designated, so far as practicable, as the "Massachusetts Gas Companies" and under that name shall, so far as practicable, conduct all business and execute all instruments in writing, in the performance of their trust. SECOND. The Trustees shall be ten in number; and, of the Trustees herein mentioned by name, Charles Francis Adams, 2d, Walter Cabot Baylies, Samuel Carr, Robert Clarence Pruyn and Joseph Ballister Russell shall hold office until the first annual meeting of the shareholders, and Frederic Elmer Snow, Charles Augustus Stone, Albert Strauss, Christopher Minot Weld and Robert Winsor shall hold office until the second an- nual meeting of the shareholders, except that said Trustees, as well as any Trustees hereafter elected, shall in all cases hold office until their successors have been elected, and accepted this trust. The shareholders shall, at each annual meeting, or adjourn- ment thereof, elect five Trustees to serve for the term of two years next ensuing. In case of the death, resignation, or in- ability to act of any of said Trustees, the remaining Trustees shall fill any vacancies for the unexpired term. As soon as any Trustees elected by the shareholders or by the remaining Trustees to fill a vacancy have accepted this trust, the trust estate shall vest in the new Trustees or Trustee, together with the continuing Trustees, without any further act or conveyance. Upon the election of any Trustee either by the remaining Trustees to fill a vacancy, or by the shareholders, he shall forth- with execute a written acceptance of this trust, which, together 302 MANUFACTURING TRUST. with a certificate of the Secretary of the election of such trustee shall be forthwith filed with the Trust Company at that time having the custody of the duplicate original of this instrument. THIRD. The Trustees are authorized to engage (a) In the business of manufacturing, buying, selling and dealing in coal, oil, coke, gas and all products thereof; (b) In the business of manufacturing and supplying gas or electricity or any other agent for light, heat, power, or other purposes ; (c) In the business of acquiring, owning, managing, ex- changing, selling, and dealing in the stocks, shares and securities of corporations, trusts or associations engaged, in whole or in part, in any business above mentioned, or in owning or operating railways or railroads or transporting passengers, merchandise, mails or express matter, or in manufacturing, selling or repair- ing machines, equipments, supplies, or other articles used by corporations, trusts or associations of any of the classes above mentioned, and or in the business of acquiring, owning, manag- ing, exchanging, selling, or dealing in the stocks, shares or securities of any corporation, trust or association which owns, or whose stock or securities are based upon or secured by the stocks or securities of any corporation, trust or association of the character above mentioned; (d) In any business similar in character to that above men- tioned which the trustees may deem expedient, and to acquire, hold, and dispose of the stocks, shares or securities of corpor- ations, trusts or associations doing business of a character similar to any business above described. The Trustees shall hold the legal title to all property at any time belonging to this trust, and, subject only to the specific limitations herein contained, they shall have the absolute con- trol, management, and disposition thereof, and shall likewise have the absolute control of the conduct of all business of the 303 EXHIBITS. trust; and the following enumeration of specific duties and powers shall not be construed in any way as a limitation upon the general powers intended to be conferred upon them. The Trustees shall have authority to adopt and use a common seal; to make all such contracts as they may deem expedient in the conduct of the business of the trust; from time to time to release, sell, exchange, or otherwise dispose of, at public or private sale, any or all of the trust property, whether real or personal, for such prices either in cash or the stocks, shares, or securities of other corporations, trusts or associations and upon such terms as to credit or otherwise as they may deem expedient ; to guarantee or assume the obligations of other corporations, trusts or associations and to enter into such agreements by way of indemnity or otherwise as they may deem expedient in con- nection with the acquisition of property from the subscribers as hereinbefore provided or otherwise; to confer, by way of substitution, such power and authority on the President, Treas- urer, Secretary, and Executive Committee, and other officers and agents appointed by them, as they may deem expedient; to borrow money for the purposes of the trust and give the obli- gations to the Trustees therefor; to loan any money from time to time in the hands of the Trustees, with or without security, on such terms as they may deem expedient; to subscribe for, acquire, own, sell, or otherwise dispose of such real or personal property, including the stocks, shares, and securities of any other corporations, trusts or associations, as they may deem expedient in connection with the purposes of the trust; to vote in person or by proxy on all shares of stock at any time held by them, and to collect and receive the income, interest, and profits of any such stock or securities ; to collect, sue for, receive, and re- ceipt for all sums of money at any time becoming due to said trust; to employ counsel and to begin, prosecute, defend, and settle suits at law, in equity or otherwise, and to compromise or refer to arbitration any claims in favor of or against the trust; and in general to do all such matters and things as in their judgment will promote or advance the business which they are authorized to carry on, although such matters and things may 304 MANUFACTURING TRUST. be neither specifically authorized nor incidental to any matters or things specifically authorized. In addition to the powers herein granted the Trustees shall have all powers with reference to the conduct of the business and management of the property of the trust which are possessed by directors of a manufacturing corporation under the laws of the Commonwealth of Massachu- setts. So far as strangers to the trust are concerned, a resolution of the Trustees authorizing a particular act to be done shall be conclusive evidence in favor of strangers that such act is within the power of the Trustees ; and no purchaser from the Trustees shall be bound to see to the application of the purchase money or other consideration paid or delivered by or for said purchaser to or for the Trustees. FOURTH. Stated meetings of the Trustees shall be held at least once a month, and other meetings shall be held from time to time upon the call of the President or any three of the Trustees. A majority of the Trustees shall constitute a quorum ; and the concurrence of all the Trustees shall not be necessary to the validity of any action taken by them, but the decision ex- pressed by vote of a majority of the Trustees present and voting at any meeting shall be conclusive. The Trustees may make, adopt, amend, or repeal such by-laws, rules, and regulations not inconsistent with the terms of this instrument as they may deem necessary or desirable for the conduct of their business and for the government of themselves, their agents, servants and representatives. FIFTH. The Trustees shall annually elect from among their number a President, and shall also elect from among their number or otherwise, a Treasurer, a Secretary, and, in their discretion, one or more Vice-Presidents, and one or more Assist- ant Treasurers or Secretaries, and they shall have authority to appoint such other officers, agents, and attorneys as they may deem necessary or expedient in the conduct of their business. They shall also have authority to accept resignations and to fill 305 EXHIBITS. any vacancies in the offices appointed by them, for the unexpired term, and shall likewise have authority to elect temporary of- ficers to serve during the absence or disability of regular officers. They may also by a majority vote of all the Trustees, remove any officer or agent elected or appointed by them. The President, Treasurer, and Secretary shall have the author- ity and perform the duties usually incident to those offices in the case of corporations, so far as applicable thereto, and shall have such other authority and perform such other duties as may from time to time be determined by the Trustees. The Trustees shall fix the compensation, if any, of all officers and agents whom they may elect or appoint, and may also pay to themselves such compensation for their own services as they may deem reasonable. The Trustees may also appoint from among their number an Executive Committee of three or five persons, to whom they may delegate such of the powers herein conferred upon the Trustees as they may deem expedient. The Trustees shall cause to be kept by the Secretary elected by them a record of all meetings of the shareholders, Trustees and Executive Committee, which record shall be of the same character and effect as that kept in the case of corporations, and so far as strangers to the trust are concerned, shall be conclusive against the Trustees of the facts and doings therein stated. The Trustees shall not be liable for any error of judgment, or for any loss arising out of any act or omission in the exe- cution of this trust, so long as they act in good faith, nor shall they be personally liable for the acts or omissions of each other, or for the acts or omissions of any officer, agent, or servant elected or appointed by or acting for them; and they shall not be obliged to give any bond to secure the due per- formance of this trust by them. 306 MANUFACTURING TRUST. Any Trustee may acquire, own, and dispose of shares in this trust to the same extent as if he were not a Trustee. SIXTH. The beneficial interest in this trust shall, in the first instance, be divided into three hundred thousand (300,000) shares of the par value of one hundred (100) dollars each, of which one hundred and fifty thousand (150,000) shares shall be preferred and one hundred and fifty thousand (150,000) common. The preferred shares shall entitle the holder to receive out of the net profits of the trust, a semi-annual, preferential, cumu- lative dividend at the rate of four per centum per annum, and no more, commencing to accrue on the first day of December, 1902, payable on the first days of June and December in each year, and to be paid or provided for before any dividend shall be set apart or paid on the common shares, provided that after the payment or setting aside of a semi-annual dividend on the preferred shares at the rate of four per centum per annum, all previously accrued dividends thereon having been paid or set aside, the Trustees may forthwith, without waiting for the expiration of the year, pay or set aside a semi-annual dividend on the common shares; and, in case of liquidation, the pro- ceeds of liquidation shall be first applied to the payment to the holders of preferred shares of the sum of one hundred dollars per share and accrued and unpaid dividends thereon, and the balance remaining thereafter shall be divided among the holders of common shares in proportion to their holdings. As evidence of the ownership of said shares the Trustees shall cause to be issued to each shareholder a negotiable cer- tificate, or certificates, to be signed by such transfer agent or transfer agents and registrar or registrars as the Trustees may determine, and by the President or any Vice-President, and 307 EXHIBITS. attested by any Secretary or Assistant Secretary, which cer- tificates shall be in the form following, to-wit: MASSACHUSETTS GAS COMPANIES. No. Preferred Shares. Not subject to assessment. This certifies that is the holder of Preferred Shares in the Massachusetts Gas Companies, which he holds subject to an Agreement and Declaration of Trust dated September 25th, 1902, a duplicate original of which is on file with the Trust Company, and which is hereby re- ferred to and made a part of this certificate. The shares in the Massachusetts Gas Companies are of the par value of one hundred dollars each, and are divided into preferred and common shares. It is mutually agreed between the holder hereof and the Massachusetts Gas Companies and its shareholders as follows: that the preferred shares are entitled out of the net profits of the Companies to a semi-annual, preferential, cumulative divi- dend at the rate of four per centum per annum, and no more, commencing to accrue on the 1st day of December, 1902, pay- able on the first days of June and December in each year, and to be paid or provided for before any dividend shall be set apart or paid on the common shares, provided that after the payment or setting aside of a semi-annual dividend on the preferred shares at the rate of four per centum per annum, all previously accrued dividends thereon having been paid or set aside, the Massachusetts Gas Companies may forthwith, without waiting for the expiration of the year, pay or set aside a semi-annual dividend on the common shares ; that in the event of liquidation the proceeds of liquidation shall be first applied to the payment, to holders of the preferred shares, of the sum of one hundred dollars per share and accrued and unpaid dividends thereon, and the balance remaining thereafter shall be divided among 308 CERTIFICATES OF SHARES. the holders of common shares in proportion to their holdings; that the holders of preferred and common shares shall have equal voting powers, and that the preferred and common shares may be increased or reduced as provided in the Agreement and Declaration of Trust herein referred to. This certificate must be signed by the Transfer Agent and Registrar of the shares of the Massachusetts Gas Companies, who sign solely to indicate that the shares represented by this and all other outstanding certificates bearing their signatures do not exceed the issue of shares fixed by the votes of the Mas- sachusetts Gas Companies. No transfer hereof will be of any effect as regards the Mass- achusetts Gas Companies until this certificate has been surren- dered and the transfer recorded upon their books. IN WITNESS WHEREOF, the Trustees under said Declar- ation of Trust herein designated as the Massachusetts Gas Companies, have caused their common seal to be hereto affixed and this certificate to be executed in their name and behalf, by their President, and attested by their Secretary, this day of 19 . MASSACHUSETTS GAS COMPANIES. By , President. Attest : By , Secretary. By , Transfer Agent. By , Registrar. By 309 EXHIBITS. 2 5 ojj g For value received o*|jl hereby sell, assign, and transfer unto S a. preferred shares of the Massachusetts Gas * salt's Companies, represented by the within certificate, and do tO 3 > ^ * """SflSl hereby irrevocably constitute and appoint _g "S^S ^S&Sgfc attorney, to transfer the said shares on wf*sf & the books of the within-named Companies, with full Hcli^jq power of substitution in the premises. fcfllfi Witness hand this day of 4**F J In presence of MASSACHUSETTS GAS COMPANIES. No. Common Shares. Not subject to assessment. This certifies that is the holder of Common Shares in the Massachusetts Gas Companies, which he holds subject to an Agreement and Declaration of Trust dated September 25th, 1902, a duplicate original of which is on file with the Old Colony Trust Company, and which is hereby referred to and made a part of this certificate. The shares in the Massachusetts Gas Companies are of the par value of one hundred dollars each, and are divided into preferred and common shares. It is mutually agreed between the holder hereof and the Mass- achusetts Gas Companies and its shareholders as follows; that the preferred shares are entitled out of the net profits of the Companies to a semi-annual, preferential, cumulative dividend at the rate of four per centum per annum, and no more, com- mencing to accrue on the 1st day of December, 1902, payable on the first days of June and December in each year, and to be paid or provided for before any dividend shall be set apart or paid on the common shares, provided that after the payment or setting aside of a semi-annual dividend on the preferred shares 310 CERTIFICATES OF SHARES. at the rate of four per centum per annum, all previously accrued dividends thereon having been paid or set aside, the Massachu- setts Gas Companies may forthwith, without waiting for the expiration of the year, pay or set aside a semi-annual dividend on the common shares; that in the event of liquidation the pro- ceeds of liquidation shall be first applied to the payment, to holders of the preferred shares, of the sum of one hundred dollars per share and accrued and unpaid dividends thereon, and the balance remaining thereafter shall be divided among the holders of common shares in proportion to their holdings ; that the holders of preferred and common shares shall have equal voting powers ; and that the preferred and common shares may be increased or reduced as provided in the agreement and Declaration of Trust herein referred to. This certificate must be signed by the Transfer Agent and Registrar of the shares of the Massachusetts Gas Companies, who sign solely to indicate that the shares represented by this and all other outstanding certificates bearing their signatures do not exceed the issue of shares fixed by the votes of the Massa- chusetts Gas Companies. No transfer hereof will be of any effect as regards the Massa- chusetts Gas Companies until this certificate has been surren- dered and the transfer recorded upon their books. IN WITNESS WHEREOF, the Trustees under said Declar- ation of Trust, herein designated as the Massachusetts Gas Companies, have caused their common seal to be hereto affixed and this certificate to be executed in their name and behalf by their President, and attested by their Secretary, this day of , 19 . MASSACHUSETTS GAS COMPANIES. By , President. Attest : By , Secretary. 311 EXHIBITS. By , Transfer Agent. By , Registrar. By S.J3 For value received S'o^fs hereby sell, assign, and transfer unto slab's common shares of the Massachusetts Gas gfcafcg^. Companies represented by the within certificate, and do "|*c hereby irrevocably constitute and appoint V 3s* attorney, to transfer the said shares on glSf^l the books of the within-named Companies, with full glls5 power of substitution in the premises. otao f ^lllf I Witness hand this day of In presence of SEVENTH. The shares hereunder shall be transferable by an appropriate instrument in writing and upon the surrender of the certificate therefor, but no such transfer shall be of any effect as regards the Trustees until it has been recorded upon the books of the Trustees kept for that purpose. EIGHTH. The Trustees shall issue to the Subscribers, or their assigns, certificates for said original three hundred thousand shares, in payment for and as evidence of their ownership of the beneficial interest in the property and cash proposed to be transferred to the Trustees by the Subscribers, as hereinbefore stated. NINTH. For any of the purposes of the Trust the number of shares may from time to time, with the consent of the holders of not less than two-thirds of such of the shares as are represented and voted upon at any meeting called for that pur- pose, but not otherwise, be increased or reduced. In case the number of shares is increased, the additional shares shall be issued and disposed of upon such terms and in such manner as the shareholders at such meeting may determine, and in case of 312 MANUFACTURING TRUST. such increase such proportion of the new shares may be made preferred as the shareholders in authorizing such increase may determine. TENTH. In case of the loss or destruction of any certificate for shares the Trustees may, under such conditions as they may deem expedient, issue a new certificate or certificates in place of the one lost or destroyed. ELEVENTH. The Trustees may, with the consent of the holders of at least two-thirds of each class of shares outstanding, given at a meeting called for that purpose, but not otherwise, mortgage or pledge any property in their hands, upon such terms and for such purposes as the shareholders at such meeting may approve. TWELFTH. The Trustees may from time to time declare and pay dividends out of the net earnings from time to time received by them but the amount of such dividends and the payment of them shall be wholly in the discretion of the Trustees, except that the dividends on the preferred shares shall be pay- able semi-annually on the first day of June and December in each year, at the rate of four per centum per annum and no more, and shall be cumulative, and said semi-annual dividends shall be paid or set apart before any dividends are paid on the common shares. THIRTEENTH. The fiscal year of the Trustees shall end on the first day of July in each year. Annual meetings for the election of Trustees and for the transaction of other business shall be held in Boston, on the second Tuesday of October in each year, beginning with the year 1903, of which meetings notice shall be given by the Secre- tary by mailing such notice to each shareholder at .his registered address at least ten days before said meeting. Special meetings of the shareholders may be called at any time upon seven days' notice, given as above stated, when or- dered by the President or Trustees. 313 EXHIBITS. At all meetings of the shareholders, each holder of shares, whether preferred or common, shall be entitled to one vote for each share held by him ; and any shareholder may vote by proxy. No business shall be transacted at any special meeting of the shareholders unless notice of such business has been given in the call for the meeting. No business, except to adjourn, shall be transacted at any meeting of the shareholders unless the holders of a majority of all the shares outstanding are present in person or by proxy. FOURTEENTH. Shares hereunder shall be personal prop- erty, giving only the rights in this instrument, and in the cer- tificates thereof, specifically set forth. The death of a share- holder during the continuance of this trust shall not operate to determine this trust, nor shall it entitle the representatives of the deceased shareholder to an accounting or to take any action in the courts or elsewhere against the Trustees; but the executors, administrators, or assigns of any deceased shareholder shall succeed to the rights of said decedent under this trust, upon the surrender of the certificate of shares owned by them. The ownership of shares hereunder shall not entitle the share- holders to any title in or to the trust property whatsoever, or right to call for a partition or division of the same, or for an accounting; 1 and no shareholder shall have any other or further rights than the rights of a stockholder in a corporation, so far as the same may be applicable. 2 FIFTEENTH. The Trustees shall have no power to bind the shareholders personally, or to call upon them for the payment of any sum of money or any assessment whatever other than such sums as they may at any time personally agree to pay by way of subscription to new shares or otherwise. All persons or corporations extending credit to, contracting with, or having any claim against' the Trustees shall look only to the funds and iSee note on page 297. 2It is not considered that this clause would change or was in- tended to change the trustee's responsibility, as see 135, where the duties and responsibilities of trustees and directors are dis- tinguished. 314 MANUFACTURING TRUST. property of the trust for the payment of any such contract or claim, or for the payment of any debt, damage, judgment, or decree, or of any money that may otherwise become due or payable to them from the Trustees, so that neither the Trustees, shareholders, nor officers, present or future, shall be personally liable therefor. In every written order, contract, or obligation which the Trus- tees or officers shall give, authorize, or enter into, it shall be the duty of the Trustees and officers to stipulate, or cause to be stipulated, that neither the Trustees, officers, nor shareholders shall be held to any personal liability under or by reason of such order, contract or obligation. It is further expressly agreed that in case any Trustee, officer, or shareholder shall at any time for any reason be held to or be under any personal liability as such Trustee, officer, or share- holder, not due to his acts in bad faith, then such Trustee, officer, or shareholder, shall be held harmless and indemnified out of the trust estate from and of all loss, cost, damage, or expense by reason of such liability: and, if at any time the trust estate shall be insufficient to provide for such indemnity and to satisfy all liabilities of and claims upon it, then the trust estate shall, in preference and priority over any and all other claims or liens whatsoever, except mortgages, and except as otherwise expressly provided by law, be applied first to the indemnification of the Trustees from any loss, cost, damage or expense in connection with any personal liability which they may be under or have incurred except as aforesaid : next, to the indemnification in the same manner of the officers, and thereafter to the indemnifica- tion in like manner of the shareholders. SIXTEENTH. This trust shall continue for the term of twenty-one years after the death of the last survivor of the persons whose names are signed hereto, at which time the then Trustees shall proceed to wind up its affairs, liquidate its assets, and distribute the same among the holders of preferred and common shares: provided, however, that, if prior to the expir- ation of said period the holders of at least two-thirds of the 315 EXHIBITS. shares then outstanding shall, at a meeting called for that pur- pose, vote to terminate or continue this trust, then said trust shall either forthwith terminate or continue in existence for such further period as may then be determined. 3 For the pur- pose of winding up their affairs and liquidating this trust the then Trustees shall continue in office until such duties have been fully performed. SEVENTEENTH. This Agreement and Declaration of Trust may be amended or altered in any particular whatsoever, except as regards the exemption from personal liability of the Trustees, officers, and shareholders, and except as regards the priorities of the preferred shares, at any annual or special meet- ing of the shareholders, with the consent of the holders of at least two-thirds of the shares of each class then outstanding, provided notice of the proposed amendment or alteration shall have been given in the call for the meeting: and in case of such alteration or amendment the same shall be attached to and made a part of this agreement, and a copy thereof, with a certificate of the Secretary as to its adoption, shall be filed with the Trust Company at that time having the custody of the duplicate orig- inal of this instrument. Nothing in this article contained shall in any way be con- strued to limit the power to increase or reduce the number of shares as provided in the ninth article hereof. EIGHTEENTH. A duplicate original of this Agreement and Declaration of Trust shall be deposited with such Trust Company in the City of Boston as the Trustees may from time to time designate, and the Trustees shall have power at any time to change the company with which such duplicate original is de- posited. NINETEENTH. The Trustees from time to time shall determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the Trustees or any of them shall be open to the 3As to validity or not of this proviso see 96, 97, 171. 316 MANUFACTURING TRUST. inspection of the shareholders, and no shareholder shall have any right to inspect any account or book or document of the Trustees except as authorized by the Trustees or by resolution of the shareholders. IN WITNESS WHEREOF, the said Charles Francis Adams, 2d, Walter Cabot Baylies, Samuel Carr, Robert Clarence Pruyn, Joseph Ballister Russell, Frederic Elmer Snow, Charles Augustus Stone, Albert Strauss, Christopher Minot Weld, and Robert Winsor, Trustees hereinbefore mentioned, have hereunto set their hands and seals in token of their acceptance of the trust hereinbefore mentioned, for themselves and their successors, and the said Francis H. Peabody, Frank G. Webster, Frank E. Peabody, and Robert Winsor, co-partners, carrying on business in the City of Boston under the name of Kidder, Peabody & Company, and James Seligman, Isaac N. Seligman, Henry Selig- man, Jefferson Seligman, Emil Carlebach, Albert Strauss and Frederick Strauss, co-partners, carrying on business in the City of New York, under the name of J. & W. Seligman & Company, have hereunto set their hand and seals in token of their assent to and approval of said terms of trust, for themselves and their assigns, the day and year first above written. Charles Francis Adams 2nd (seal) p.p. a. Francis H. Peabody (seal) Frank E. Peabody Walter Cabot Baylies " Frank G. Webster Samuel Carr " Frank E. Peabody " Robert Clarence Pruyn Robert Winsor " Joseph Ballister Russell James Seligman " Trustees Isaac N. Seligman Frederic Elmer Snow (seal) by Henry Seligman, Atty. Charles Augustus Stone Henry Seligman Albert Strauss Jefferson Seligman Christopher Minot Weld Emil Carlebach Robert Winsor Albert Strauss Frederick Strauss 317 EXHIBITS. Commonwealth of Massachusetts, ) Suffolk, ) SS ' Boston, Sept. 25, 1902. Then personally appeared the above named Charles Francis Adams 2nd, Walter Cabot Baylies, Robert Clarence Pruyn, Joseph Ballister Russell, Frederic Elmer Snow, Charles Au- gustus Stone, Albert Strauss, Christopher Minot Weld, Robert Winsor and Frank E. Peabody and acknowledged the forego- ing instrument to be their free act and deed. Before me, VINCENT FARNSWORTH, (Notarial Seal) Notary Public. Commonwealth of Massachusetts, } Suffolk, J S Boston, Sept. 26, 1902. Then personally appeared the above-named Samuel Carr, and acknowledged the foregoing instrument to be his free act and deed. Before me, VINCENT FARNSWORTH, (Notarial Seal) Notary Public. September 25th, 1902. We, the undersigned, Trustees under an Agreement and Declaration of Trust of the Massachusetts Gas Companies dated the 25th day of September, 1902, hereby acknowledge that we have received due notice of the meeting of said Trustees to be held at 115 Devonshire St., Boston, Mass., on the 25th day of September, 1902, at 10 o'clock A. M., for the purposes of organi- zation, including the election of officers, adoption of by-laws and transaction of business incidental thereto, for the purpose 318 MANUFACTURING TRUST. of considering and acting upon a proposition from Kidder, Pea- body & Company and J. & W. Seligman & Company relative to the transfer to the Massachusetts Gas Companies of certain properties and cash as mentioned in the Declaration of Trust of said Massachusetts Gas Companies, and taking such action as may be necessary to carry the same into effect if the offer contained in said proposition is accepted; and we hereby con- sent and agree that said meeting shall be held at the time and place above mentioned for the purpose above stated. (Signed) CHARLES FRANCIS ADAMS, 2ND WALTER CABOT BAYLIES ROBERT CLARENCE PRUYN JOSEPH BALLISTER RUSSELL FREDERIC ELMER SNOW CHARLES AUGUSTUS STONE ALBERT STRAUSS CHRISTOPHER Mi NOT WELD ROBERT WINSOR. September 25, 1902. We, the undersigned, Trustees under an Agreement and Declaration of Trust of the Massachusetts Gas Companies dated the 25th day of September, 1902, hereby acknowledge that we have received due notice of the meeting of said trustees to be held at 115 Devonshire St., Boston, Mass., on the 25th day of September, 1902, at 10 o'clock A. M., for the purposes of organ- ization, including the election of officers, adoption of by-laws and transaction of business incidental thereto, for the purpose of considering and acting upon a proposition from Kidder, Pea- body & Company and J. & W. Seligman & Company relative to the transfer to the Massachusetts Gas Companies of certain properties and cash as mentioned in the Declaration of Trust of said Massachusetts Gas Companies, and taking such action as may be necessary to carry the same into effect if the offer contained in said proposition is accepted; and we hereby con- sent and agree that said meeting shall be held at the time and place above mentioned for the purposes above stated. (Signed) SAMUEL CARR. 319 STIPULATION ON STATIONERY. The stationery of the Massachusetts Gas Companies has printed in red ink in the upper right hand corner, the following: "The name 'Massachusetts Gas Companies' is the designation of the Trustees for the time being under an agreement and declaration of Trust, dated 1902, and all persons dealing with the Massachusetts Gas Companies must look solely to the Trust property for the enforcement of any claim against the Com- panies, as neither the Trustees, Officers nor Shareholders as- sume any personal liability for obligations entered into on behalf of the Companies." 320 AGREEMENT COVERING REORGANIZATION FROM INCORPORATION TO TRUSTEESHIP. AGREEMENT made this day of , A. D. 191 , between both of hereinafter called the Organizers, parties of the first part, the National Bank, doing 1 business at said hereinafter called the Depository, party of the second part, and such holders of stock in the Company, a corporation organized according to law and having a usual place of business at as shall become parties to this agreement, by signing the same or any copy hereof, hereinafter designated as the Subscribers, par- ties of the third part. WHEREAS the Organizers, consider that it will be for the best interests of the individual stockholders of the said Company that a Voluntary Association under a written Declaration of Trust be created, to be known as the (or by some other name satisfactory to the Organizers), a copy of which Declaration of Trust, iden- tified by the signatures of the Organizers, is to be filed with the Depository above-named, and which is hereby referred to as a part of this agreement as fully as if the same were herein set forth, for a statement of the purposes, scope, terms and pro- visions of and pertaining to said Association, it being under- stood that the persons to act as Trustees under said Declara- tion are to be hereafter selected by said Organizers, and their names to be by them inserted in said Declaration, and that the number of shares to be originally issued thereunder by the Trustees is to be hereafter determined and inserted therein by the Organizers, subject to this express stipulation, however, that in the entire amount of shares to be originally issued under said 321 EXHIBITS. Declaration, the number of shares of each class in said Associa- tion issued to each Subscriber, shall, as to the total number of shares in each like class of the Association to be originally issued, be exactly proportional to the amount which the respective shares of stock standing on the books of the (corporation) in the name of said Subscriber at the date of transfer, bear to the whole amount of outstanding stock of the like class of the said (corporation) and if any such stock is preferred the shares of the Associa- tion issued for such shall have the same preference and be is- sued share for share. WHEREAS the object of said Association, in addition to the objects set forth in said Declaration of Trust, shall be to acquire and become the owner of at least a majority of the issued capital stock of the said (corporation). WHEREAS the Subscribers are willing and desirous to sell, transfer and assign their said respective shares in said cor- poration to the Organizers, for and in consideration and upon the basis of exchange hereinafter specified: NOW THEREFORE, in consideration of the premises, and in further consideration of the sum of One Dollar, to each of the Subscribers by the Organizers in hand paid, the receipt of which by each of the Subscribers is hereby respectively acknowl- edged, the Subscribers do hereby severally, but not jointly, agree to and with the Organizers as follows : 1. The Subscribers do hereby severally agree to sell to the Organizers the number of shares of capital stock of the said (corporation) to the amount set opposite their respective names or stated in the certificates of deposit issued to them respectively by the Depository as here- inafter provided, it being understood and agreed that such holders of stock shall in all cases deposit the certificates for their stock, and also such transfers, assignments and powers of attorney as may be required by the Organizers in order to vest in said Organizers, and to enable them to transfer the complete 322 REORGANIZATION FROM INCORPORATION. and absolute title to said stock, and the Subscribers agree re- spectively at any time on demand of the Organizers to execute any and all other transfers, assignments and writings required for vesting the complete ownership of the stock hereunder in the Organizers or their nominee, for the purpose of enabling the Organizers to carry out the purposes of this agreement. 2. The Depository shall issue to the Subscribers so deposit- ing their stock, its certificates of deposit therefor, specifying the amount and kind of stock, said certificates to entitle the holders thereof to (1) a return of their stock in the (corporation) on or before , or such later date as may be fixed, as hereinafter provided, in case of the failure of the Organizers to carry out the purpose of this agree- ment, or (2) in the event of the plan being by the Organizers or one of them declared in writing to the Depository to be operative and in force, then to the amounts of shares of the Association set forth in the holders' certificates of deposit respectively. All rights of such Subscribers in respect of such deposits shall be such only as shall be evidenced by their respective certificates of deposit; and therefore the holder of any such certificate or of any certificate issued in lieu thereof, or in exchange there- for, shall be subject to this agreement, and entitled to have, and exercise, the rights of the original Subscribers under the certificate issued to him or her in respect of the securities therein mentioned, and these rights shall pass to any executor or administrator of a Subscriber in the same manner as though such were certificates of stock, without any formal transfer what- ever. By accepting any such certificate, every recipient or holder thereof shall thereby become a party to this agreement, with the same force and effect as though an actual Subscriber hereto. Until a deposit shall have been fully completed hereunder, and 323 EXHIBITS. a certificate therefor actually issued to the depositor, neither the depositor nor any one claiming under him or her shall have any right hereunder, and then only as specified in such certifi- cate. 3. For shares, so deposited hereunder, the amount of the stock of which hereinafter required to make this plan operative, shall have been so deposited as aforesaid the Depository shall, when this agreement shall have become operative, and when and as the new securities shall have been received by the Depository from the Organizers, deliver to the Subscribers, or to such other persons as shall be entitled thereto, the following : For every share of common stock of the (corporation) common shares of the Association to be originally issued. 4. To make this agreement binding, operative and effective, there must have been deposited hereunder at least shares of the (corporation). 5. is hereby fixed as the date of the expiration of the time for the deposit of the shares, but such time may be extended not exceeding Thirty days thereafter, by agreement between the Organizers and the Depository, and in case the Organizers shall not notify the Depository that they are ready to complete the purchase of the shares within thirty days after said , the shares deposited hereunder shall be returned by the Depository without charge to the depositors of the same, respectively, or to the holders of said certificates of deposit, upon the surrender to the Depository of said certificates of deposit, duly endorsed. 6. When the Organizers or any of them declare in writing to the Depository the plan herein contemplated to be operative, the said Subscribers, for the consideration aforesaid, do further nominate and appoint their true and law- ful attorney irrevocable, to transfer to the order of said Organ- izers the said respective shares of stock of the and further agree that the delivery to the said Depository by 324 REORGANIZATION FROM INCORPORATION. said Organizers of the said respective shares in said Associa- tion, shall be accepted in full payment for said shares, and con- stitute an absolute and irrevocable sale of the said stock of the (corporation) and that thereafter all the Subscribers' rights shall be only those secured to him or her as a shareholder in said Association as shall be described in said Declaration of Trust. 7. In the event of the death of any of said Organizers, the survivors or survivor shall succeed to all the rights and powers of the deceased, and may proceed to carry out said agreement. 8. The Depository aforesaid agrees to receive said shares of said (corporation) stock, to hold and deliver under the terms of this agreement. 9. The organizers, in consideration of the premises and promises above set forth, agree to use their best efforts to carry out and complete the organization of said Voluntary Association, and the execution of the plan contemplated in this instrument. IN WITNESS WHEREOF, the said Organizers have hereto affixed their signatures, and the Depository has caused these presents to be signed in its name and behalf by its , and its corporate seal to be hereto af- fixed, and the Subscribers either have affixed their signatures hereto or to an instrument of which the within is a copy, and have deposited the respective number of shares of the stock of the (corporation) held by them with the Depository, under the terms of this instrument. Bank, by Cashier. Organizers. SUBSCRIBERS. Signature. Number of Shares. 325 FORM OF TRUST TAKING OVER CORPORATION. Agreement and Declaration of Trust of the Company. THIS AGREEMENT made and entered into this day of A. D. 191 , by and between Trustees, and the Bank, the Depository. WHEREAS, the Bank, the Depository above named, has transferred to the Trustees, certain property, to wit : shares being more than a majority of the shares of the capital stock of the Company, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts, and WHEREAS, the Trustees have issued to the Depository negotiable certificates to the amount of shares, representing the entire beneficial interest in the property, the legal title to which has been vested in the Trustees, the same to be given to the subscribers to the agreement, dated 191 , under the authority of which this Declaration of Trust has been entered into, and to such others as may become bene- ficially interested herein as Cestuis que Trustent, and WHEREAS, it is the purpose and intention that the business of said Trust shall be to own and acquire at least a majority of the issued and outstanding shares of the capital stock of the Company (corporation) and such of the properties and assets of said corporation as may from time to time be deemed expedient, and to engage in and conduct the busi- ness heretofore conducted by said corporation any other business such as by the Trustees may be considered advisable, and tend- ing to enhance the value of the shares of the Trust ; to participate in the benefits of the same, as Cestuis que Trustent, ratably ac- cording to their several holdings of shares and subject to their 326 TRUST SUCCESSOR TO CORPORATION. respective rights, including herein not only such property as has been transferred to the Trustees, but all such further and addi- tional property as may be acquired by the Trustees under the authority herein conferred. NOW THEREFORE, the Trustees declare that they hold the property and assets that have been acquired under the foregoing provisions, together with all such property and assets as may be hereafter acquired, in trust, the same to manage, invest, reinvest and dispose of, as follows, to wit: ARTICLE I. The Trustees herein named, and those that shall from time to time be elected under the provisions of the Articles of Agree- ment and this Declaration of Trust, in their collective capacity, shall be designated as, and act under the name of ARTICLE II. The beneficial interest in this Association and its business and assets is divided into common shares of no nominal or par value, as shown and set forth in the negotiable certificates issued by the Depository. The Trustees may, at any time, under the authority of a vote of a majority of the holders of the common shares, at a meeting duly called and held for the purpose, cause to be issued negotiable certificates or evidences of interest, as Cestuis que Trustent, additional shares, describe what class, whether preferred or common, they shall represent, and under what terms and conditions they shall be issued, and at what prices they shall be sold. The Trustees, for the payment of dividends or for any other purpose, are not required to recognize as a shareholder, any one whose name does not appear as such upon the books of the Association kept for the purpose. In connection with the trans- fer of shares of this Association, certificates already issued and outstanding, with duly executed authority for the purpose, must be surrendered for cancellation. 327 EXHIBITS. ARTICLE III. The number of the Trustees of this Association shall be to hold until the next annual meeting, until the second annual meeting, until the third annual meeting. At each annual meeting, the shareholders shall elect a sufficient number to fill vacancies, whether for the full term of three years, or for one of the shorter terms. Each Trustee shall hold office until his successor is duly elected and qualified. Vacancies in any of the offices of Trustees which may arise between meetings, shall be filled by the remaining or surviving Trustees or Trustee, the new Trustee or Trustees to hold until the next annual meet- ing. Any of the Trustees may resign, in which case the legal title to the property and business of the Association shall pass to the succeeding Trustees without any formal transfer. In the event that all the Trustees of this Association shall have resigned or deceased, leaving no Trustee surviving, the legal title to the property and business thereof, shall be vested in the executors and administrators of the deceased Trustees, pending the election of new Trustees, and when the latter are elected, the property formerly held by the deceased Trustees, shall vest in them. Should the offices of all the Trustees become vacant by death, resignation or otherwise, Shareholders may cause a special meeting of their members to be called and held, to elect new Trustees to fill the vacancies. ARTICLE IV. The Trustees shall have and hold the legal title to the prop- erty of the Association, and have the exclusive management and control of the same ; the Trustees may hold equitable titles should occasion require. They shall, as Trustees hereunder, but not personally, as- sume all contracts, obligations, and liabilities in connection with, 328 TRUST SUCCESSOR TO CORPORATION. or arising out of, the acquiring of the property hereinbefore re- ferred to as assigned and conveyed to them; and as such Trus- tees, but not personally, to the extent of the value of the same, agree to hold the Depository harmless and indemnified from and against any damage, expense, or liability upon, by reason of, or in connection with the same. They may adopt and use a com- mon seal ; they shall have power to vote in person or by proxy upon all shares of stock at any time belonging to the Trust ; they may collect, receive and receipt for any dividends thereon; they may collect, bring suit, receive and receipt for any sums of money becoming due to said Trust; they may employ counsel; may begin, defend, and settle suits at law or in equity. They may, from time to time, borrow money and issue notes or other obliga- tions, except bonds, to evidence such debts, but, except by vote of the holders of a majority of the common shares of the Trust, issued and outstanding, they shall not borrow money in excess of the sum of dollars. Except for the pur- pose of qualifying persons to act as Directors or officers of cor- porations, they shall not mortgage or pledge any property of the Trust or issue bonds of the Trust except upon such terms and for such purposes as may be approved by the holders of at least two thirds of the common shares of the Trust then issued and outstanding, given at an annual meeting of the shareholders or at .a special meeting called and held for that purpose. So far as strangers to this Trust are concerned, a resolution of the Trustees authorizing a particular act to be done shall be con- clusive evidence in favor of such strangers that such act is within the power of the Trustees, and no purchaser from the Trustees shall be bound to see to the application of the purchase money or other consideration paid or delivered by or for said purchaser to or for said Trustees. For the purpose of establishing as to strangers to the Trust the succession of the Trustees and the titles of the Trustees from time to time to any property of the Trust, whenever any change shall occur in the personnel of the Trustees an affidavit of the remaining Trustees or any one of them recorded with the County, 329 EXHIBITS. Registry of Deeds, or in the event of the death of all the Trustees an affidavit of an executor of a deceased Trustee shall be suffi- cient and conclusive evidence as to such strangers, that the change in personnel of the Trustees has taken place, that the Trustee or Trustees as named therein have retired as Trustees and that the new successor Trustee or Trustees have succeeded to all the authority formerly possessed by the retired Trustee or Trustees, all as therein set forth, and that the Trustees then qualified to act are as set forth therein. ARTICLE V. Meetings of the Trustees shall be held at the office of the Com- pany in or at such other convenient place as may be agreed upon by them, on the days of in each year and at such other times as the President or at least two of the Trustees may request. Notice of such meeting, regular or special, shall be mailed or delivered to each Trustee at least days before such meet- ing is to be held. A majority of the Trustees shall constitute a quorum for the transaction of any business that may lawfully come before any meeting, and the vote of a majority of the Trustees present and acting at any meeting shall be conclusive and binding upon the Trustees and this Association. A certificate of the Secretary shall be conclusive as to the regularity of any meeting, of those present thereat, and of the result of any action, vote or resolution that may have been taken or adopted at such meeting. The Trustees may make, adopt, amend or repeal such by-laws, rules and regulations not inconsistent with the terms of this instrument as they may deem necessary or desirable for the conduct of their business and for the government of themselves and their agents, servants or representatives. 330 TRUST SUCCESSOR TO CORPORATION. ARTICLE VI. The Trustees shall elect a President at each annual meeting, from their own number, and also a Treasurer and Secretary, and have full power and authority, to appoint and employ all such other officers, agents, servants and attorneys as they may deem necessary or expedient; to fill vacancies in the elective or ap- pointive offices wherever any vacancies may occur, and make tem- porary appointments during the absence of any regular appointee. The President, Treasurer and Secretary shall have such authority and perform such duties, and receive such compensa- tion as may from time to time be determined by the Trustees, the Secretary to keep accurate written records and to be sworn. The Trustees shall fix the compensation, if any, of all officers and agents whom .they may appoint, and are likewise authorized to pay to themselves as trustees such compensation for their own services as they may deem reasonable; but any trustee may be employed by the trustees to perform any special, legal, financial or other service, and may be elected or appointed to any office, and shall in any such case be entitled to receive such additional compensation as the trustees may fix and determine. Any trustee may acquire, hold, own, and dispose of shares in the Trust in his individual name and on his personal account, or jointly with other persons, or as a member of a firm, without being thereby disqualified to act as Trustee ; and while so owning and holding any Trust shares on his personal account shall be entitled to all and the same rights and privileges of and as any other share- holder. The Trustees may also appoint from among their num- ber committees to whom they may delegate such of the powers herein conferred upon the Trustees as they may deem expedient. The Trustees shall not be liable for errors of judgment in ac- quiring, managing, holding, or transferring any of the property of this Trust, either that originally conveyed to them or that here- after acquired, nor for any loss arising out of any investment, nor for any act or omission to act, performed or omitted by them in the execution of this Trust in good faith; nor shall they nor 331 EXHIBITS. any or either of them be liable for the acts or omissions of each other or of any officer, agent, or servant appointed by or acting for them, and they shall not be obliged to give any bond to secure the due performance of this Trust by them. Provided, in the management and the conduct of the business of this Trust, it shall be claimed by any party or adjudged by a court of com- petent jurisdiction that the said Trustees, or any of them, are liable personally for any act or omission to act on their part, or on the part of any officer, agent or servant appointed by or acting for them, in connection with their holding and managing the property of, or carrying on the execution of this Trust in good faith, whether such claim or judgment be in the nature of damage for a tort, or in the nature of a decree of a fine in criminal proceedings, being in either case a claim for a debt, damage, judgment or decree, for which they, or any of them, would otherwise be liable personally, they are hereby expressly authorized to treat such claim, judgment, or decree as though the same were in the nature of a stipulated sum based upon an ex- press contract for which the property in their hands as Trustees would be liable, and to pay the same from the property of the Trust, and they are expressly authorized to enter into contracts of insurance with such party or parties as they may deem exped- ient for their proper personal protection against such liabilities. ARTICLE VII. The original issue of the shares of this Association shall be common, but nothing herein shall prevent the shareholders, by vote of a majority of the shares at a meeting called for the purpose, authorizing the issue of additional shares. The certificates to be used by the Trustees for the issue of original or subsequent shares shall be substantially as per form annexed to this Declaration of Trust. ARTICLE VIII. Whenever it shall have been voted to increase the number of authorized issue of shares beyond the amount of the original issue, the Trustees shall give written notice to each of the share- 332 TRUST SUCCESSOR TO CORPORATION. holders, of the proposed issue and each holder of common shares shall be entitled to take at the same valuation that proportion of the new shares to be issued which his holding of common shares issued and outstanding bears to the total number of new common shares to be issued ; and be entitled to subscribe in writ- ing within thirty days from the time of the notice at the price fixed by the shareholders for each new common share, to be payable in cash upon the issue of the certificate. If, after thirty days, any of the new shares remain unsubscribed for the Trustees are authorized to sell the same on such terms and conditions as may to them seem advisable. Unless, and until all of the proposed issue of new shares shall have been subscribed for or sold, the Trustees are under no obligation to issue any of them, and to this end, the Trustees may reserve the right of delivering and demanding payment for the new shares, or of withdrawing the issue from subscription. A Trustee may, individually or jointly with others, purchase any additional shares of the Trust as issued. ARTICLE IX. In the event of the loss or destruction of a certificate, a new one may be issued, on such terms as the Trustees may prescribe. ARTICLE x. DIVIDENDS. The Trustees may, from time to time, declare and pay dividends upon the shares of the Trust out of the income from time to time received by them from the management of the Trust. The amount of such dividends upon the Trust shares and the payment of them shall, however, be wholly in the discretion of the Trustees, and subject always to the priorities and prefer- ences of any preferred shares which may be issued over the com- mon shares ; and the Trustees shall have full power and authority, except as herein limited, to determine what portions of any re- ceipts or expenditures shall fairly be considered as income, and 333 EXHIBITS. they shall have the authority to reserve, as they may deem fit, such a sum from the gross income actually collected as a reserve or surplus fund, with power to invest the same, or the proceeds thereof, in such form as they may determine, and they may change their determination as to such funds or investments, or any part thereof, from time to time, as to them shall seem prudent and expedient, absolutely at their own discretion. ARTICLE XI. The fiscal year of the business of this Association shall begin and end of each year. ARTICLE XII. The annual meeting of the shareholders shall be held at the office of the Company at on the day of in each year, the first meeting to be held in of 19 Notice in writing of the annual meeting shall be mailed, postage prepaid, by the Secretary to, or be served in person upon, each shareholder of record as shown by the books of the Company, at least seven days before each meeting. The notice of the annual meeting need contain no statement of the business to be transacted thereat, and all shareholders shall be held to recognize that at such meeting any action authorized under the terms of this Declaration of Trust and of the Agree- ment of which it forms a part may be taken by the Shareholders. Special meetings of the Shareholders may be called and held on seven days' notice to be given by the Secretary as in the case of the annual meeting, at the direction of the President or upon the request of a majority of the Trustees, or of shareholders repre- senting at least shares. At special meetings, no business shall be transacted excepting such as is contained in the notice of the meeting, excepting to adjourn. At all meetings each shareholder shall be entitled to one vote for each share held by him in the Association. Any shareholder may vote by proxy. 334 TRUST SUCCESSOR TO CORPORATION. A quorum for the transaction of business shall consist of a majority, to be represented in person or by proxy, of the shares of the Association. A less number may adjourn a meeting. No notice of any regular or special meeting of the shareholders need be given, provided all the registered shareholders are present thereat in person or by proxy, or have in writing waived notice of the meeting. ARTICLE XIII. The death of a shareholder or Trustee during the continuance of this Trust shall not operate to determine the Trust, nor shall it entitle the legal representative of the deceased shareholder to an accounting, or to take any action in the courts, or elsewhere, against the Trustees ; but the executors, administrators or assigns of any deceased shareholder shall succeed to the rights of said decedent under this Trust upon the surrender of the certificate for shares owned by him. The ownership of shares hereunder shall not entitle the shareholders to any title in or to the Trust prop- erty whatsoever, or the right to call for a partition or division of the same. And it is expressly declared and agreed that the shareholders are Cestuis que Trustent, and hold no other relation to the Trustees than that of Cestuis que Trustent hereunder. ARTICLE XIV. The Trustees shall have no power to bind the shareholders per- sonally, and the shareholders and their assigns and all parties whatsoever extending credit to, contracting with, or having any claim against the Trustees shall look only to the funds and prop- erty of the Trust for payment under such contract or claim, or for the payment of any debt, damage, judgment or decree; or of any money or property that may otherwise be or become due, payable or transferable to them from the Trustees, so that neither the Trustees nor the shareholders at any time shall be personally liable for such. In every written order, contract or obligation which the Trustees by themselves or by any officer or agent shall give or enter into, it shall be the duty of the Trustees to refer to 335 EXHIBITS. this declaration and to stipulate that neither the Trustees nor the shareholders shall be held to any personal liability under or by reason of said order, contract or obligation. For the purpose of protecting themselves as Trustees against any personal liability hereunder, they are expressly authorized as Trustees to enter into such contracts of insurance as to them may seem expedient or advisable. ARTICLE xv. The original of this declaration of trust and any amendments hereafter made shall be filed for record in the office of public records in the county of in this state, and after the same has been recorded it shall be kept for safety in such depository as the said trustees may from time to time select. ARTICLE XVI. TERM OF TRUST. This trust shall continue for the term of twenty years after the death of the last survivor of the following named persons, to wit : At the expiration of which term or at such earlier time as the holders of at least two thirds of the common shares then out- standing may, at a meeting called for that purpose, by vote or resolution appoint, the then trustees shall terminate this trust by selling all property then held by them as such trustees and dividing the proceeds thereof among the shareholders according to their respective holdings and in accordance with and subject to the respective rights and priority of the holders of preferred shares and of common shares as hereinbefore expressed. Pro- vided, however, that upon the request of the holders of at least two thirds of the common shares then outstanding, by vote and resolution thereof, at a meeting of the shareholders called and held for that purpose, the trustees may, if it seems to them judicious so to do, convey the trust property to new or other trustees or to a corporation, according to the terms of such request and in the manner stated therein, being first duly in- 336 FORM OF RUBBER STAMP USED ON CONTRACTS. demnified for any outstanding obligations; and the then trustees, upon filing with the County, Registry of Deeds, their certificate, or that of a majority of their number, that they have complied with such re- quest, shall be under no further obligations, provided further, however, that it is especially understood and agreed that nothing in these provisions contained shall be considered as making it obligatory upon the trustees to comply with such request. 1 For the purpose of winding up its affairs and liquidating the assets of the Trust, the then Board of Trustees shall continue in office until such duties have been duly performed. ARTICLE XVII. AMENDMENT OF DECLARATION OF TRUST. This Agreement and Declaration of Trust may be added to, except as regards the liability of the trustees and except as regards the con- tract between the trustees and the shareholders as to the issue and disposition of new common shares and except as to the respective rights of the holders of preferred and common shares, at any annual or special meeting of the shareholders by vote or resolu- tion of the holders of at least a majority of the common shares then outstanding, provided that notice of the proposed alteration or addition shall have been given in the call for the meeting and that the same is not inconsistent with the acquired rights of any third person or the preferential rights of the holders. ARTICLE XVIII. In case any addition, or Amendment to this Declaration of Trust is made by the Shareholders, a copy thereof, duly certified by the Secretary, is to be added to the Declaration of Trust and filed with the Depository herein named, and any other depository where the original Declaration is filed as provided herein. Form of Rubber Stamp Used on Contracts. This contract is made and entered into on the part of the Company, the Trustees, under such designa- !As to validity or not of this proviso see 96, 97, 171. 337 EXHIBITS. tion, and any officer or agent of the same, strictly in accordance with the terms of a Declaration of Trust signed by the Trustees under the same, dated and recorded in the registry of public records Book page in the county of state of which is hereby referred to and made a part of this agreement. As provided therein, all parties whatsoever entering into any con- tract with the Trustees, shall look only to the funds and property of the Trust, and in no event to the Trustees or shareholders per- sonally, for payment of the same. 338 EXHIBITS. CERTIFICATE WITHOUT PAR VALUE. Shares. Shares. Total Number of Shares 1,500,000. No Shares GREAT NORTHERN IRON ORE PROPERTIES. Trustees Certificate of Beneficial Interest. The undersigned, as trustees under a certain indenture entered into between them and the Lake Superior Company, Limited, on the seventh day of December, A. D. One Thousand, Nine Hundred and Six, do hereby certify that is the owner of Shares of the beneficial interest therein specifically described. This certificate is transferable only upon the books of the trustees in person or by attorney and upon the surrender of this certificate. This cer- tificate shall not become valid until countersigned by the Registrar of Transfers. In Testimony Whereof, the trustees have signed this certifi- cate this day of , A. D Trustees. By. Trustees and Attorneys for the Other Trustees. Countersigned and registered this day of , 19 TRUST COMPANY, Registrar of Transfers. By ., Secretary. 339 PLAN OF THE MERCHANTS' BANK. Note. The following is taken from the "Works of Hamil- ton" as published under order of Congress (Vol. VII, pp. 838- 844), and is referred to by Senator Verplanck in Warner v. Beers (1804), 23 Wend. 103, 151; see Section 80 of this book. If we change the words "directors" to "trustees", "stockholders" to "cestuis que trust" and the general title of "limited partner- ship" to "trust", we have a perfect example of the method of business organizations considered in this book. The Merchants' Bank operated under this instrument as drawn by Alexander Hamilton until forced to comply with a "Restraining Act of 1804" passed by the New York Legislature and described in "Paine's Banking Laws," page 13, as follows: "It enacted that from and after the passing of this act, no person unauthorized by law should subscribe to or become a member of any associa- tion, institution or company, or proprietor of any bank or fund for the purpose of issuing notes, receiving deposits, making dis- counts or transacting any other business which incorporated banks may or do transact by virtue of their respective acts of incorporation ; 'and if any person unauthorized by law as afore- said, shall hereafter subscribe or become a member or proprietor as aforesaid, he shall forfeit and pay for every such offense the sum of $1,000, to be recovered by any person who shall sue for the same, in an action of debt, one-half thereof to his own use, and the other half to the use of the people of this State ; and all notes and securities for the payment of money, or the delivery of property, made or given to any such association, institution or company, not authorized as aforesaid, shall be null and void : Provided, nevertheless, that nothing herein contained shall be held in any way to extend to the association in the city of Al- bany, known by the name of the Mercantile Company, nor the association in the city of New York, known by the name of the Merchants' Bank, until the first Tuesday in May, 1805'." 340 PLAN OF THE MERCHANTS BANK. To all to whom these presents shall come, or in any wise concern. Be it known and made manifest, that we the subscribers, have formed a company or limited partnership, and do hereby associate and agree with each other, to conduct business in the manner here- inafter specified and described, by and under the name and stylo of the ''MERCHANTS' BANK," and we do hereby mutually cov- enant, declare, and agree, that the following are and shall be the fundamental articles of this our association and agreement with each other, by which we, and all persons who at any time here- after may transact business with the said company, shall be bound and concluded. I. The capital stock of the said company shall consist of one million two hundred and fifty thousand dollars, in money of the United States. The said capital stock shall be divided into shares of fifty dollars each: two dollars and fifty cents on each share shall be paid at the time of subscribing, and the remainder shall be paid at such times, and in such proportions as the board of directors shall order and appoint, under pain of forfeiting to the said company the said shares, and all previous payments thereon : but no payment shall be required, unless by a notice to be pub- lished for at least fifteen days, in two newspapers printed in the city of New York. II. The affairs of the said company, shall be conducted by six- teen directors, who shall elect one of their number to be the presi- dent thereof, and nine of the directors shall form a board cr quorum for transacting all the business of the company, except ordinary discounts, which it shall be in the power of any five of the directors to perform, of whom the president shall always be one, except in case of his sickness or necessary absence, when his place may be supplied by any other director, whom he by writing under his hand, shall nominate for that purpose ; and until the second Tuesday in June, one thousand eight hundred and four, Oliver Wolcott, Richard Varick, Peter Jay Munro, Joshua Sands, Thomas Storm, William W. Woolsey, John Hone, John Kane, Joshua Jones, Robert Gilchrist, Wynant Van Zandt, jun., Isaac Bronson, James Roosevelt, John Swartwout, Henry I. Wy- 341 PLAN OF THE MERCHANTS' BANK coff, and Isaac Hicks, shall be directors of the said company ; the directors from and after that period, shall be elected for one year by the stockholders, for the time being, and each director shall be a stockholder at the time of his election, and shall cease to be a director if he should cease to be a stockholder : and the number of votes which each stockholder shall be entitled to, shall be equal to the number of shares which he shall have held on the books of the company, for at least sixty days prior to the election ; and all stockholders shall vote at elections by ballot, either personally or by proxy ; to be made in such form as the board of directors may appoint. III. A general meeting of the stockholders of the company shall be holden upon the first Tuesday of June, in every year (ex- cepting in June now next ensuing), at such place as the board of directors shall appoint, by notice, to be published in two news- papers printed in the city of New York, at least fifteen days pre- vious to such meeting, for the purpose of electing directors for the ensuing year, who shall take their seats at the board on the second Tuesday in the same month of June, and immediately pro- ceed to elect the president. IV. The board of directors are hereby fully empowered to make, revise, and alter or annul, all such rules, by-laws, and regu- lations, for the government of the company, and that of their officers, servants, and affairs as they, or a majority of them, shall from time to time think expedient, not inconsistent with law, or these articles of association ; and to use, employ, and dispose of the joint stock, funds or property of the said company (subject only to the restrictions hereinafter contained) as to them, or a majority of them, shall seem expedient. V. All bills, bonds, notes, and every contract and engage- ment on behalf of the company, shall be signed by the president ; and countersigned or attested by the cashier of the company; and the funds of the company shall in no case be heki respon- sible for any contract or engagement whatever, unless the same shall be so signed and countersigned, or attested as aforesaid. 342 DRAWN BY ALEXANDER HAMILTON. VI. The books, papers, correspondence and funds of the company, shall at all times be subject to the inspection of the directors. VII. The said board of directors shall have power to ap- point a cashier, and all other officers and servants, for execut- ing the business of the company; and to establish the com- pensations to be paid to the president and all the other officers and servants of the company respectively; all which, together with all other necessary expenses, shall be defrayed out of the funds of the company. VIII. A majority of the directors shall have power to call a general meeting of the stockholders, for purposes relative to the concerns of the company; giving at least thirty days' notice, in two of the public newspapers, printed in the city of New York, and specifying in such notice the object or objects of such meeting. IX. The shares of capital stock, at any time owned by any individual stockholder, shall be transferable on the books of the company, according to such rules as, conformable to law, may be established in that behalf by the board of directors; but all debts actually due and payable to the company, by a stockholder requesting a transfer, must be satisfied before such transfer shall be made, unless the board of directors shall direct to the contrary. X. No transfer of stock in this company shall be considered as binding upon the company, unless made in a book or books, to be kept for that purpose by the company. And it is hereby further expressly agreed and declared, that any stockholder, who shall transfer in manner aforesaid all his stock or shares in this company, to any other person or persons whatever, shall ipso facto cease to be a member of this company; and that any person or persons whatever, who shall accept a transfer of .any stock or share in this company, shall ipso facto become and be a member of this company, according to these articles of as- sociation. 343 PLAN OF THE MERCHANTS BANK XL It is hereby expressly and explicitly declared to be the object and the intention of the persons who associate under the style or firm of the ''MERCHANTS' BANK," that the joint stock or property of the said company (exclusive of dividends to be made in the manner hereinafter mentioned) shall alone be responsible for the debts and engagements of the said com- pany. And that no person, who shall or may deal with this company, or to whom they shall or may become in any wise indebted, shall on any pretense whatever have recourse against the separate property of any present or future member of this company, or against their persons, further than may be neces- sary to secure the faithful application of the funds thereof, to the purpose to which by these presents they are liable. But all persons accepting any bond, bill, note, or other contract of this company, signed by the president, and countersigned or attested by the cashier of the company for the time being, or dealing with it in any other manner whatsoever, thereby respec- tively give credit to the said joint-stock or property of the said company, and thereby respectively disavow having recourse, or any pretense whatever, to the person or separate property of any present or future member of this company, except as above mentioned. And all suits to be brought against this company (if any shall be) shall be brought against the president for the time being; and in case of his death or removal from office, pending any suit against him, measures shall be taken at the expense of the company for substituting his successor in office as a defendant; so that persons having demands upon the com- pany, may not be prejudiced or delayed by that event, or if the person suing shall go on against the person first named as defendant (notwithstanding his death or removal from of- fice), this company shall take no advantage by writ of error, or otherwise, of such proceeding, on that account ; and all re- coveries had in manner aforesaid, shall be conclusive upon the company, so far as to render the company's said joint stock or property liable thereby, and no further; and the company shall immediately pay the amount of such recovery out of their joint stock, but not otherwise. And in case of any suit at law, the president shall sign his appearance upon the writ, or file com- 344 DRAWN BY ALEXANDER HAMILTON. mon bail thereto; it being expressly understood and declared, that all persons dealing with the said company agree to these terms, and are to be bound thereby. XII. Dividends of the profits of the company, or of so much of the said profits as shall be deemed expedient and proper, shall be declared and paid half yearly during the months of May and November in every year, and shall from time to time be determined by a majority of the said directors, at a meeting to be held for that purpose, and shall in no case exceed the amount of the net profits actually acquired by the company; so that the capital stock of the company shall never be impaired by the dividends : and at the expiration of three years, from the first Tuesday of June next, a dividend of surplus profits shall be made, but the directors shall be at liberty to retain at least one per cent, upon the capital, as a fund for future con- tingencies. XIII. If the said directors shall at any time, wilfully and knowingly, make or declare any dividend which shall impair the said capital stock, all the directors present at the making or declaring such dividend, and consenting thereto, shall be liable, in their individual capacities, to the company, for the amount or proportion of the said capital stock so divided by the said directors. And each director who shall be present at the mak- ing or declaring of such dividend, shall be deemed to have consented thereto, unless he shall immediately enter, in writing, his dissent on the minutes of the proceedings of the board, and give public notice to the stockholders, that such dividend has been declared. XIV. The articles of agreement shall be published in at least three newspapers, printed in the city of New York, for one month ; and for the further information of all persons, who may transact business with, or in any manner give credit to this company, every bond, bill, note, or other instrument or con- tract, by the effect or terms of which the company may be charged or held liable for the payment of money, shall specially 345 PLAN OF THE MERCHANTS' BANK declare in such form as the board of directors shall prescribe, that payment shall be made out of the joint funds of the Mer- chants' Bank, according to the present articles of association, and not otherwise; and a copy of the eleventh article of this association shall be inserted in the bank book of every person depositing money, or other valuable property, with the company for safe custody, or a printed copy shall be delivered to every such person, before any such deposit shall be received from him. And it is hereby expressly declared, that no engagement can be legally made in the name of the said company, unless it con- tains a limitation or restriction, to the effect above recited. And the company hereby expressly disavow all responsibility, for any debt or engagement, which may be made in their name, not containing a limitation or restriction to the effect aforesaid. XV. The company shall in no case be owners of any ships or vessels, or directly or indirectly concerned in trade, or the importation or exportation, purchase or sale of any goods, wares, or merchandise whatever (bullion only excepted), unless by selling such goods, wares and merchandise, as shall be truly pledged to them, by way of security for debts due to the said company. XVI. If a vacancy shall at any time happen among the directors, by death, resignation, or otherwise, the residue of the directors, for the time being, shall immediately elect a direc- tor, to fill the said vacancy, until the next election of directors, to be made according to the second article of these presents. XVII. This association shall continue until the first Tues- day of June, one thousand eight hundred and fifteen, and no longer ; but the proprietors of two thirds of the capital stock of the company may, by their concurring votes, at a general meeting to be called for that express purpose, dissolve the same at any prior period; provided that notice of such a meeting, and of its objects, shall be published in at least three news- papers, to be printed in the city of New York, for at least six months previous to the time appointed for such meeting. 346 DRAWN BY ALEXANDER HAMILTON. XVIII. Immediately on any dissolution of this association, effectual measure shall be taken by the directors then existing for closing all the concerns of the company, and for dividing the capital and profits, which may remain, among the stock- holders, in proportion to their respective interests. In witness thereof, we have hereunto set our names or firms the seventh day of April, one thousand eight hundred and three. 347 FORM OF INDENTURE SECURING THE PAYMENT ov NOTES OR DEBENTURE BONDS OF A BUSINESS TRUST. INDENTURE, dated as of the day of ,19 , made by and between as Trustees under a certain agreement and declaration of trust, dated , creating a trust fund called Company, for themselves as such Trustees and other stock- holders in the said trust hereinafter called the Promissors, par- ties of the first part, and Trust Company, a corporation of the State of , hereinafter called the Trustee, party of the second part: WHEREAS, among the provisions of said agreement and declaration of trust are the following: (The term "Trustee" therein referring to the Promisors, parties of the first part, to this Indenture), to-wit: Here insert particular or general provision in the declaration of trust authorizing the creation of the note or bond issue. AND, WHEREAS, this indenture is substantially in the form authorized; and WHEREAS, the notes to be issued unto and to be secured by this indenture, the coupons for interest annexed thereto, and the certificate to be indorsed thereon are to be in substantially the following form: (Form of Note.) No $ United States of America. Company, years, per cent. Secured gold note. Due , 19 348 INDENTURE SECURING BOND ISSUE. The undersigned, not individually, but as trustees under an agreement and declaration of trust, dated , 19 , creating a trust called the Company, for value received, hereby promise to pay to the bearer, or if registered, to the registered holder hereof, dollars on the first day of , 19 , and to pay interest on said principal sum at the rate of per cent per annum from the day of , 19 , payable on the days of of each year, but only upon presentation and surrender, as they shall severally mature, of the coupons annexed hereto. All such pay- ments of both principal and interest shall be made at the office of Trust Company in the City of and State of , in gold coin of the United States of America, of or equal to the standard of weight and fineness of the year 19 , and without deduction for any tax or taxes which the undersigned Trustees or a trustee in the trust in- denture hereinafter mentioned may be required to pay there- on, or to retain therefrom, under any present or future law or ordinance of the United States or of any State, Territory, County or Municipality, or any other lawful taxing authority therein. This note is one of a series of notes known as years, per cent, secured gold notes of the Company for an aggregate principal sum not exceeding dollars at any one time outstanding, issued and to be issued under and in pursuance of and all equally secured by, a trust in- denture dated , 19 , between the undersigned Trustees and the Trust Company, as trustee, to which indenture reference is hereby made for a specification of the property therein assigned and pledged and agreed to be assigned and pledged, as security for the payment of the notes of this series, and the nature and extent of such security. The entire series of notes at any time outstanding, but not a part thereof, may be redeemed at the option of the Trustees, on notice published at least once a week for successive weeks immediately preceding the date of redemption specified $49 EXHIBITS. in such notice in a newspaper published in the City of , upon payment, if such redemption be made on or before 19 , of the principal of said notes and the premium of per cent thereon and accrued interest, and upon payment, if such redemption be made after said , 19 , and be- fore the maturity hereof of said principal, and a premium of 1 per cent thereon and accrued interest. If an event of default, as defined in the above mentioned trust indenture, shall occur, the principal of all said notes shall become or declared due and payable in the manner and with the effect provided in said trust indenture. This note is secured by the undersigned Trustees, not in- dividually, but as trustees in the aforesaid agreement and declar- ation of trust, dated ,19 , to which reference is hereby made ; and all personal liability in any present or future Trustee is expressly and strictly limited to the ap- plication and distribution of the property from time to time constituting the trust estate, in accordance with the provision of said agreement and declaration of trust and the trust indenture above referred to; and any and all liability of any present or future Trustees (except as aforesaid), or member of the Execu- tive Committee in said agreement and declaration of trust named or provided for, or shareholder or other beneficiary there- under, is, by the acceptance and as a consideration for the is- sue and execution hereof, expressly waived by the holders hereof. The principal and interest in respect of this note shall be payable without regard to any equities between the Trustees and the original or any intermediate holders hereof; the bearer, or if registered, the registered holder hereof, may sue hereon in his own name, and this note shall have all other attributes of a negotiable instrument. Every holder hereof, by accepting this note, assents to the foregoing provisions. This note shall pass by delivery unless registered in the owner's name, on the books of the undersigned Trustees, at the 350 INDENTURE SECURING BOND ISSUE. office or agency in the City of , State of , and such registration is noted hereon. After such registration, no transfers shall be valid unless made on such books by the registered owner in person, or by his attorney thereunto duly authorized and similarly noted hereon; but this note may be discharged from registration by being transferred to bearer, and thereupon transferability by delivery shall be restored ; from time to time this note may again be registered or transferred to bearer as before. No such registration, however, shall affect the negotiability of the coupons which shall continue to be trans- ferable by delivery merely and shall remain payable to bearer. This note shall not become obligatory for any purpose unless and until it shall have been authenticated by the certificate in- dorsed hereon of the Trustees in said trust indenture. IN WITNESS WHEREOF, at the City of in the State of , the undersigned Trustees have caused their names to be hereunto affixed by one of their agents duly authorized, under the designation of Assistant Treasurer, on the day of , 19 As Trustees under the agreement and declaration of trust, dated ,19 , creating the trust called the Company, and not individually. By... Assistant Treasurer. (Form of Interest Coupon.) No $ On the day of , 19 , upon the presentation and surrender hereof, at the office of Trust Company, in the City of , the bearer will be entitled to receive dollars, United States gold coin, without deductions for taxes, being months' in- terest then due on the year per cent secured gold note of the Company, No. , unless such note shall have been called for prior redemption. , Assistant Treasurer. 351 EXHIBITS. (Form of Trustee's Certificate.) This is one of the notes described in the within mentioned trust indenture. Trust Company, Trustee. By AND, WHEREAS, all acts and things prescribed by the aforesaid agreement and declaration of trust dated , to make said year per cent secured gold notes, when secured by the promisors and authenticated by the Trus- tees, valid, legal and binding obligations, and to make this indenture a valid, legal and binding agreement for the security thereof, have been duly performed and complied with: NOW, THEREFORE, THIS INDENTURE W I T- NESSETH : That in consideration of the premises and of the purchase and acceptance of such notes by the holders thereof, and of the sum of $1.00 to the Promisors by the Trustees at or before the ensealing and delivery of these presents, receipt whereof is hereby acknowledged, and in order to secure the payment of the principal and interest of all such notes at any time issued and outstanding in this indenture, according to their tenor and effect, and the performance of all covenants herein contained, and to declare the terms and conditions upon which such notes shall be issued, received, and held, the Promisors have executed and delivered these presents, and have sold, pledged, assigned, transferred and set over, unto the Trustee, party of the second part, its successors and assigns forever, the following property, that is: Here insert description of property pledged to secure notes. TO HAVE AND TO HOLD the properties hereby assigned and pledged, or intended to be assigned and pledged, or here- 352 INDENTURE SECURING BOND ISSUE. after to be assigned and pledged, unto the Trustee, its suc- cessor or successors and assigns, forever: BUT IN TRUST, NEVERTHELESS, for the equal and proportionate benefit and security of each and every present and future holder of any of the notes, or the coupons thereto appertaining, issued under and secured by this indenture, and for the enforcement of the payment of said notes and coupons, when due, according to their tenor, purport and effect, and the performance of, and the compliance with, the covenants and conditions of said notes and of this indenture, without prefer- ence, priority or distinction, as to lien, or otherwise, of any of said notes over any of the others of said notes issued here- under, by reason of priority in the time of issue or negotiation thereof, or otherwise howsoever, so that each and every note issued or to be issued hereunder shall have the same right, lien and priority under and by virtue of this indenture as if all of said notes had been duly issued and negotiated simultan- eously with the execution and delivery of this indenture. AND IT IS HEREBY EXPRESSLY COVENANTED, that any and all personal liability of the Promisors in connec- tion with this indenture or the notes issued hereunder shall be expressly and strictly limited to the application and dis- tribution, in accordance with the provisions of the agreement and declaration of trust, dated ,19 , and hereof, of the property from time to time constituting the trust estate; that any and all liability of the Promisors (ex- cept as aforesaid), or member of the Executive Committee in said agreement and declaration named or provided for, or shareholder or other beneficiary thereunder, is expressly waived by the takers and holder^ of said notes, who, by such taking, agree that the same shall be payable only out of the property from time to time constituting the trust estate; and that all such notes, and the coupons for interest thereon, are to be issued, authenticated, delivered, received and negotiated, and that the securities pledged hereunder are to be held by the 353 EXHIBITS. Trustee, subject to the following further trusts, covenants, con- ditions and provisions, viz : ARTICLE FIRST. Section 1. The amount of notes to be issued hereunder which may be executed by the Promisors, and which may be authenticated by the Trustee, shall never exceed the aggregate principal sum of $ at any one time outstanding. The notes to be issued hereunder shall from time to time be signed by the Promisors, as Trustees under said agreement and declaration of trust, dated , 19 , and not individually, or such notes bearing the name of each of the Promisors, as such Trustees, shall be signed by one of their agents duly appointed as hereinafter provided in section 1 of Article Sixth hereof, and such notes shall then be delivered for authentication to the Trustee; and thereupon, the said notes shall be authenticated and delivered as is provided in sections 3 and 4 of this Article First and not otherwise. In case any of the trustees in whose names any of the said notes shall have been signed shall cease to be trustees or trus- tee under said agreement and declaration of trust dated , 19 , and thereby shall cease to be Promisors or Promisor hereunder, or in case any agent who, on behalf of the Promisors, shall have signed any of said notes shall cease to be such agent, before the notes so signed shall have been actually executed, and authenticated and delivered by the Trustee, such notes may nevertheless be executed, and when so executed may be issued, authenticated and delivered as though the said three persons in whose names such notes had been signed, or the agent who had signed such notes on behalf of the Promisors, had not ceased to be such trustees and Promisors, or Trustee and Promisor, or such agent, as the case may be. And any note may be signed on behalf of the Promisors by the person who shall be their agent at the actual time of such signature, although at the time of the date of the note such person shall not have been the agent of the Promisors. 354 INDENTURE SECURING BOND ISSUE. The coupons for interest on said notes shall be authenticated by the fac-simile signature of any present or future agent of the Promisors, and for that purpose the Promisors may adopt and use the fac-simile signature of any present or future agent, notwithstanding the fact that he may have ceased to be such agent at the time when such notes shall be actually issued, authenticated and delivered. Section 2. Only such of said notes as shall bear thereon a certificate substantially in the form hereinbefore recited, duly signed by the Trustee, shall be secured by this indenture, or shall be entitled to any lien or benefit hereunder. No such note or any coupon thereunto appertaining shall be valid for any pur- pose unless and until such certificate shall have been duly in- dorsed on such note. Such certificate of the Trustee upon any notes signed by or on behalf of the Promisors shall be con- clusive and the only evidence that the note so authenticated was duly issued hereunder, and is entitled to the benefit of the trust and security hereof. Section 3. The Promisors shall keep at an office in the City of and State of , proper books wherein they will, upon presentation of any of the notes for such purpose and under such reasonable regula- tions as they may prescribe, register, or transfer said notes. Such registration shall be noted on the note, after which no transfer shall be valid unless made by the registered holder in person or by his attorney duly authorized, and similarly noted on the note, but any note may be discharged from regis- tration by being in like manner re-transferred to bearer, after which it shall be transferable by delivery; and such notes may again and from time to time be registered or transferred to bearer as before. No such registration shall affect the negoti- ability of the coupons appertaining to any note, but the coupons shall continue to be transferable by delivery and shall remain payable to bearer. For any transfer or registration under the provisions of this Section 3, the Promisors may require the payment of a sum 355 EXHIBITS. sufficient to reimburse them for any stamp tax or other govern- mental charges. The person in whose name any note shall be registered shall for all purposes of this indenture be deemed and regarded as the owner thereof, and thereafter payment of the principal of such registered notes shall be made only to or upon the order of such registered holder thereof. All such payments shall be valid and effectual to satisfy and discharge liability upon such notes to the extent of the sum or sums so paid. The Promisors and the Trustee may deem and treat the bearer of any note which shall not at any time be registered and the bearer of any coupon for interest upon any note, whether such note shall be registered or not, as the absolute owner of such note or coupon for the purpose of receiving payment thereof and for all other purposes whatsoever, and the Promisors and the Trustee shall not be affected by any notice to the contrary. Section 4. Until the definitive notes can be prepared the Promisors may sign and the Trustee shall authenticate and de- liver, in lieu of such definitive notes and subject to the same pro- visions, limitations and conditions, temporary typewritten, printed or lithographed notes, substantially of the tenor of the definitive notes, except that no coupons shall be attached to any of such temporary notes and that each of such temporary notes may be for one thousand dollars of principal or any multiple thereof. Each such temporary note shall bear upon its face the words "Temporary Year Per cent. Secured Gold Note," and shall be authenticated by the Trustee in like manner as hereinabove provided for the definitive notes; and the authentication by the Trustee shall be the only and conclusive evidence that the note so authenticated has been duly issued hereunder and that the holder is entitled to the benefit of this indenture. Such temporary notes shall be exchangeable, without charge or expense to the holder, for a like aggregate face amount of temporary notes of such different denominations, as the Promis- 356 INDENTURE SECURING BOND ISSUE. ors may issue, or for a like aggregate face amount of definitive notes when the same are ready for delivery, and upon the sur- render of any such temporary notes for exchange such tem- porary notes shall forthwith be canceled by the Trustee and delivered to the Promisors on their written demand, and the Promisors thereupon, but only after such surrender and can- cellation, at their own expense shall issue and the Trustee shall authenticate and deliver in exchange therefor, temporary or definitive notes for the same aggregate face amount as the tem- porary notes surrendered. Until so exchanged, each of said temporary notes in all respects shall be entitled to the lien and security in this indenture as if it were a definitive note issued and authenticated hereunder; and interest thereon when and as payable shall be paid and such payment indorsed thereon. Section 5. In case any note issued hereunder shall become mutilated or be destroyed or lost, the Promisors, in their dis- cretion, and on such terms as they may prescribe, may execute and thereupon the Trustee shall authenticate and deliver in substitution therefor a new note of like tenor and amount and bearing the same serial number as the note so mutilated, de- stroyed or lost. In case of mutilation the applicant for such new note and coupons shall surrender the mutilated note and the coupons appertaining thereto for cancellation. In case of destruction or loss the applicant for new note and coupons shall furnish to the Promisors and also to the Trustee evidence satisfactory to them of the destruction or loss of such note and coupons, and also such security or indemnity as may be required by the Promisors and the Trustee. ARTICLE SECOND. The Promisors, as trustees under the aforesaid agreement and declaration of trust, dated , 19 , and not individually, covenant and agree, so long as any of the notes issued under this indenture, or the interest to accrue thereon, shall be outstanding or unpaid, that Section 1. They will duly and punctually pay the principal 357 EXHIBITS. of and interest on every note issued hereunder, according to the terms thereof. The principal amount, and the premium thereon, if any, of each such note shall be payable only upon presentation and surrender thereof at the office of Trust Company, in the City of . The interest shall be payable at the office of Trust Company, but only upon presentation and surrender of the coupons therefor as they severally mature, and when and as paid all such coupons shall forthwith be cancelled by the Trustee. In order to prevent any accumulation of coupons appertaining to the secured notes after maturity, the Promisors will not, directly or indirectly, extend or assent to the extension of the time for payment of any said coupons ; and the Promisors will not, directly or indirectly, be parties to or approve any such ar- rangement by purchasing or funding said coupons or in any other manner. Section 2. Whenever demanded by the Trustee, they will do, execute, acknowledge and deliver, or will cause to be done, exe- cuted, acknowledged and delivered, all such further acts, deeds, transfers and assurances as the Trustee may reasonably require for the better assuring and confirming unto the Trustee all and singular the securities pledged hereunder or intended so to be or for better accomplishing the provisions and purposes of this indenture or effectuating the intention hereof or for securing the payment of the principal and interest of the notes issued hereunder. ARTICLE THIRD. The entire series of the notes issued hereunder and at any time outstanding, but not a part thereof, may be redeemed at the option of the Promisors on any interest payment date upon notice published at least once a week for succes- sive weeks immediately preceding the date of redemption speci- fied in such notice, in a newspaper of general circulation pub- lished in the of '. If such date 338 INDENTURE SECURING BOND ISSUE. of redemption shall be on or before 19 , the Promisors shall pay, as hereinafter provided, the principal of such notes, a premium of per cent thereon and ac- crued interest, and if such date shall be after said , 19 , and prior to the maturity of said notes, the Promisors shall pay, as hereinafter provided, the principal of such notes, a premium of per cent thereon and accrued interest. On or prior to the date fixed for such redemption the Promisors shall deposit with the Trustee a sum of money equal to the face amount of said notes, together with the premium thereon and in- terest accrued thereon to said date of redemption so fixed. In case notice of redemption shall have been published as aforesaid, and said sum of money shall be so deposited with the Trustee, interest on said notes shall cease from and after said date of redemption. On and after said date the holders of said notes may present the same at the office of the Trustee and receive payment therefor out of the funds so deposited by the Promisors at the rate above provided. Said notes so redeemed shall not be re-issued, but shall be canceled by the Trustee upon payment thereof and delivered when so canceled to the Promisors upon their request. In case the Promisors shall not, on or prior to the date fixed for such redemption, deposit with the Trustee the sum of money sufficient to enable the Trustee to pay all such notes in the manner above stated, interest shall continue to run on said notes, and said notes, together with the interest accrued thereon, shall thereupon at the election of the respective holders thereof, be due and payable. ARTICLE FOURTH. Section 1. If one or more of the following events, hereinafter termed the events of default, shall happen, that is to say, (a) Default shall be made by the Promisors in the punctual payment of any part of the principal of the notes issued here- uader, as and when the same shall become due and payable, or (b) Default shall be made by the Promisors in the punctual payment of any part of any instalment of the interest on said 359 EXHIBITS. notes, as and when the same shall become due and payable, and such default shall continue for a period of thirty days, or (c) Default shall be made in the performance of any of the covenants, promises or agreements, on the part of the Promisors herein contained or referred to, to be by them kept or performed, and any such last-mentioned default shall continue for a period of thirty days after demand in writing by the Trustee for such performance ; Then and in every such case the Trustee may, and if thereunto requested in writing by the holders of a majority in interest of said notes then outstanding, shall (a) If the principal of said notes be not already due and payable by the terms thereof, by written notice to the Promisors declare such principal, to be, and the same shall forthwith be- come, due and payable; (b) Collect and receive all dividends, interest, income and revenues on or from the securities pledged hereunder; (c) Personally or by attorney, sell to the highest bidder all or any of the securities pledged hereunder at any brokers' board, or at any public or private sale, free from any claim of the Promisors in law or in equity, in one lot and as an entirety, or in separate lots, which said sale or sales may be held at such place or places, and at such time or times as the Trustee may determine, and which said sale or sales may be conducted in such manner generally as the Trustee may deem to the best advan- tage of the holders of the notes issued hereunder; (d) Proceed to protect and enforce its rights and the rights of holders of the notes issued hereunder by a suit or suits in equity or at law, whether for the specific performance of any covenant or agreement contained herein or in aid of the execu- tion of any power herein granted, or for the foreclosure of this indenture, or for the enforcement of any other appropriate legal or equitable remedy as the Trustee, being advised by counsel, 360 INDENTURE SECURING BOND ISSUE. shall deem most effectual to protect and enforce its rights and the rights of the holders of said notes. Section 2. In case the Trustee shall have proceeded to enforce any right under this indenture by foreclosure or otherwise, and such proceeding shall have been discontinued or abandoned, for any reason, or shall have been determined adversely to the Trus- tee, then and in every such case the Promisors and the Trustee shall be restored to their former positions and rights hereunder in respect of the securities pledged hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. Section 3. Whenever any public sale is made pursuant to any provision of this indenture, notice of such sale shall state the time and place, or times and places, when and where the same is to be made, and shall contain a brief general description of the property to be sold, and shall be deemed sufficient if published once in each week, for successive weeks, prior to such sale, in a newspaper published in the of From time to time the Trustee may adjourn any public sale to be made by it under the provisions of this indenture by announce- ment at the time and place appointed for such sale or for such adjourned sale or sales, and, without further notice or publica- tion, it may make such sale at the time and place to which the same shall be so adjourned. Upon the completion of any sale or sales under this indenture the Trustee shall deliver to the accepted purchaser or purchasers the shares of stock or other property sold and may execute suffi- cient transfers thereof, and the Trustee and its successors are hereby appointed the true and lawful attorney or attorneys ir- revocable of the Promisors, in their name and stead to make the necessary assignments, transfers and conveyances of the bonds, shares of stock, or other property thus sold. Any sale or sales made under or by virtue of this indenture, 361 EXHIBITS. whether under the power of sale hereby granted and conferred or under or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either in law or in equity, of the Promisors of, in and to the property so sold, and shall be a perpetual bar both at law and in equity against the Promisors, their successors and assigns, and against any and all persons claiming or to claim the property sold, or any part thereof, from, through or under the Promisors, their successors or assigns. The receipt of the Trustee shall be a sufficient discharge to any purchaser or purchasers of the property, or any part thereof, sold as aforesaid, for the purchase money; and no such purchaser, nor his representatives, vendees or assigns, after paying such pur- chase money and receiving said receipt, shall be bound to see to the application of such purchase money in accordance with the terms of this indenture, or shall be bound to inquire as to the authorization, necessity or regularity of any such sales. In case of any such sale, whether under the power of sale hereby granted or pursuant to judicial proceedings, the principal of all the notes issued hereunder and then outstanding, if not previously due by declaration or otherwise, shall become due and payable forthwith, anything in said notes or in this indenture con- tained to the contrary notwithstanding. The purchase money, proceeds or avails of any such sale or sales, whether under the power of sale hereby granted or pur- suant to judicial proceedings, together with any other sums which then may be held by the Trustee or be payable to it under any of the provisions of this indenture as part of the trust estate or the proceeds thereof, shall be applied as follows : (a) To the payment of the costs and expenses of such sale, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all expenses, liabilities and advances made or incurred by the Trustee under this indenture and to the payment of all taxes, assessments or liens prior to the lien of these presents, except any taxes, assessments or other superior liens, subject to which such sales shall have been made; 362 INDENTURE SECURING BOND ISSUE. (b) Any surplus then remaining, to the payment of the whole amount owing and unpaid upon the notes issued hereunder or any of them, for principal and interest, with interest at the rate of six per cent per annum on the over due instalments of interest ; and in case such proceeds shall be insufficient to pay in full the whole amount so due and unpaid upon the said notes, then to the payment of such principal and interest due upon said notes, rat- ably, without reference or priority of principal over interest, or of interest over principal, or of any instalment of interest over any other instalment of interest; (c) Any surplus then remaining, to the payment to the Promisors, their successors, or assigns, or whomsoever may law- fully be entitled to receive the same. Section 4. Upon any such sale of the securities, or any part thereof, pledged hereunder or any part thereof whether under the power of sale hereby granted and conferred, or pursuant to judicial proceedings, any purchaser, in settlement or payment of the purchase price of the property purchased, shall be entitled to use, and apply toward the payment of the purchase price, any notes issued hereunder and any matured and unpaid coupons ap- pertaining thereto, by presenting such notes and coupons in order that there may be credited thereon the sums applicable to the pay- ment thereof under section 3 of this Article ; and such purchaser thereupon shall be credited, on account of such purchase price payable by him, with the sums so applicable to the payment of, and credited on the notes or coupons so presented; and, at any such sale, any holders of the notes issued hereunder or the Trus- tee may bid for and purchase such property, and may make pay- ment therefor as aforesaid, and, upon compliance with the terms of sale, may hold, retain and dispose of such property without fur- ther accountability. Section 5. No holder of any note issued hereunder shall have any right to institute any suit, action or proceeding in equity or at law for the foreclosure of this indenture, or for the execu- tion of any trust or power hereof or for any other remedy here- 363 EXHIBITS. under, or in respect of the securities pledged hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof for the period, if any, specified therefor as in section 1 of Article Fourth of this indenture ; nor unless, also, the holders of a majority in interest of the notes issued hereunder, then .outstanding, shall have made written request upon the Trustee after the happening of such default, and the continuance thereof, if any, as afore- said, and shall have afforded to it a reasonable opportunity either to proceed to exercise the powers of sale hereinbefore granted or to institute such action, suit or proceeding in its own name, nor unless, also, they shall have offered to the Trustee adequate security and indemnity against the costs and expenses to be in- curred therein or thereby ; and such notification, request and offer of indemnity are hereby declared, in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of this indenture, and to any action or cause of action for foreclosure or for any other remedy here- under; it being understood and intended that no one or more holders of notes shall have any right in any manner whatever to affect, disturb or prejudice the lien of this indenture by his or their action, or to enforce any right hereunder, except in the manner herein provided, and that all proceedings hereunder at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all holders of such outstanding notes. In no event shall the custody and holding of the securities pledged hereunder be in anywise dis- turbed. But the foregoing provisions of this section shall not be construed to affect any discretion or power by any provision of this indenture given to the Trustee to determine whether or not it shall take action in respect of any default without such notice or request from the note holders, or affect any other discretion or power given to the Trustee. Section 6. Except as herein expressly provided to the con- trary, no remedy herein conferred upon or reserved to the Trus- tee, or to the holders of notes issued hereunder is intended to be exclusive of any other remedy, but each and every such remedy 364 INDENTURE SECURING BOND ISSUE. shall be cumulative, and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Section 7. No delay or omission of the Trustee, or of any holders of notes issued hereunder, to exercise any right or power accruing upon any default continuing 1 as aforesaid, shall impair any such right or power, or shall be construed to be a waiver of any such default, or an acquiescence therein or shall extend to any subsequent default; and every power and remedy given by this Article to the Trustee, or to the holders of the notes, may be exercised from time to time, and as often as may be deemed ex- pedient, by the Trustee or by the holders of the notes. ARTICLE FIFTH. Anything to the contrary herein notwithstanding, it is expressly understood and agreed that this indenture and the notes issued hereunder are executed by the Promisors, not individually, but as Trustees under the agreement and declaration of trust herein- before mentioned, dated ,19 , to which reference is hereby made, and that any and all liability of the Promisors shall be expressly and strictly limited to the application and distribution, in accordance with the provisions of said agree- ment and declaration of trust, and hereof, of the property from time to time constituting the trust estate, and any and all per- sonal liability of the Promisors (except as aforesaid), the Execu- tive Committee, the shareholders and all beneficiaries under said agreement as therein mentioned, is, by the acceptance of said notes and as a consideration for the issue and execution thereof and of this indenture, expressly waived by the holders of any and all notes issued hereunder; it being further understood and agreed that the payment of the principal of and the interest on said notes shall only be sought for and enforcible against and collected out of the property from time to time constituting the trust estate created by said agreement and declaration of trust. ARTICLE SIXTH. Section 1. From time to time, the Promisors as trustees under 365 EXHIBITS. the said agreement and declaration of trust, dated , 19 , may execute, and may file with the Trustee, a writing ap- pointing any person or persons, or any copartnership or corpora- tion, the agent or agents of the Promisors, under such designa- tion as they may determine and specify, in the name, place and stead of the Promisors, to sign any note or coupon to be issued under this indenture, or to sign any order or authority to deliver any such note, when authenticated, or to sign any other order or authority which the Promisors themselves might sign; and thereupon the Trustee shall be authorized to authenticate any note or notes authorized to be issued hereunder, which shall have been signed by such agent or agents in the name of the Promisors, and to deliver any such note, when authenticated, upon the order in writing of such agent or agents, or to release and surrender any or all the securities, pledged hereunder, and to do and perform any act or to take any proceeding which, pursuant to the provi- sions of this indenture, the Trustee is authorized to perform or to take upon the written order of the Promisors. From time to time the Promisors may revoke any such appoint- ment previously made, and may appoint a substitute or substitutes with like power and authority; but no such revocation shall operate to annul, or in anywise to affect, any act or proceeding done or taken by any agent or agents previous to such revoca- tion of authority and service of notice in writing thereof upon the Trustee, or shall operate to annul, or in anywise to affect, any act or proceeding done or taken by the Trustee pursuant to the order of any agent or agents appointed or theretofore ap- pointed as provided in this sectnon, of the revocation of whose authority notice in writing shall not have been given to the Trustee as aforesaid. and are each hereby appointed the agent of the Promisors, as trustees under said agreement and declaration of trust dated , 19 , in behalf of the Promisors, and under the designation of "Assistant Treasurer" to sign any note authorized to be issued under this indenture, and until the revocation of his appoint- ment as such agent in the manner above provided, each one of 366 INDENTURE SECURING BOND ISSUE. them may and is authorized to exercise the aforesaid powers of such agent under the designation above specified, without any further act or appointment hereunder. The fac-simile signature of either of such agents under the designation of "Assistant Treasurer" is hereby adopted for the purpose of authenticating the coupons appertaining to said notes. The death of the Promisors, or any of them, or of any suc- cessor to them, shall not operate to revoke any agency created pursuant to the provisions of this section. Section 2. For every purpose of this indenture, including the execution, issue and use of any and all notes hereby secured, the term "Promisors" includes and means not only the parties of the first part hereto but also their successors as trustees under the said agreement and declaration of trust, dated 19 , and the survivors or survivor of them. Such successors and such survivors and survivor shall possess and from time to time may exercise each and every right and power hereunder of the Promisors, in the name of the Promisors or of the said successors, survivors or survivor. Whenever any Trustee shall cease to act as such under the agreement and declaration of trust, dated , 19 , he shall without any further act, cease to be a Promisor hereunder, and the election of any successor Trustee under said agreement and declaration of trust, dated , 19 , shall, without any further act, constitute such successor a Promisor hereunder, as if herein specifically mentioned as one of the parties of the first part. Section 3. This agreement shall be deemed to be and shall be construed as a contract of the State of , and all the rights of the parties hereto and of the holders of the notes issued hereunder shall be governed and determined according to the laws of the State of Section 4. This indenture is executed in counter parts each of which so executed shall be deemed to be an origi- 367 EXHIBITS. nal, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, at the of , in the State of , , , and , as Trustees under said agreement and declaration of trust dated , 19 , and as parties hereto of the first part, have hereunto caused their names and seals to be hereunto affixed, and Trust Company, party hereto of the second part, in token of the acceptance of the trust hereby created, has caused this agree- ment to be signed by its President or Vice-President and its cor- porate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary as of the day and year first above written. (L. S.) (L. S.) (L. S.) As Trustees under the agreement and declaration of trust, dated 19 , creating the trust therein called the Company, and not individually. Trust Company. By , President. Attest : Secretary. Acknowledgments before Notary. 368 t MINUTES OF CESTUIS' MEETING. FORM OF CESTUIS' MEETING, PURSUANT TO NOTICE, WHICH WAS GIVEN IN ACCORDANCE WITH THE AGREEMENT OF TRUST. The annual meeting of the shareholders, i. e., cestuis que trust ent, of the was held at the time and place named in said notice , namely, on , 19 , at o'clock. President in the chair. The Secretary read the call for the meeting. The records of the last annual meeting of the shareholders, held , were read and approved. On motion duly made and seconded, it was VOTED that a committee of three be appointed by the chair to examine all proxies and receive, sort and count all votes at the meeting. The chair appointed as such committee Messrs. On motion duly made and seconded, it was VOTED that the reading of the annual report of the trustees to the shareholders be dispensed with, and that said report be accepted, approved and placed on file. (Copy of the report is annexed to record of the meeting.) On motion duly made and seconded, it was VOTED to proceed to the election by written or printed bal- lots of trustees to serve for the term of years next ensuing. The ballots being cast, were collected and counted by the 369 EXHIBITS. committee previously appointed, which committee reported, through its chairman as follows : That the number of votes cast was: Preferred Shares Common Shares Total and that the following persons had thus received the total number of votes cast, namely, The total number of shares outstanding being as follows: Preferred Common Total And the number necessary for a quorum and an election being , the chair declared the above named per- sons duly elected to serve for the term of years next en- suing. On motion duly made and seconded, it was VOTED that the acts and doings of the trustees for the past year, as the same appear of record be approved, ratified and coa- firmed. No further business having come before the meeting it was VOTED that the annual meeting of the share- holders of the , be dissolved. And the meeting was accordingly dissolved. A true record 370 GENERAL INDEX. All references to provisions in Exhibits are under the title "Exhibits". (The references to text are by sections, the exhibits by pages.) A. ACCOUNTING, general rights of cestui, 135. provisions in instrument for, 168. right to, not incident to death of cestui, 21. ACCUMULATION, statutes against, 94. ACTIONS, cestuis as parties, 107. foreign jurisdiction, 103, 104. liability of trust estate, 106. statutory and express trustees distinguished, 105. trustees as plaintiffs, 102. trustees parties defendant, 100, 101. trustee principal and not agent, 99. ACTIVE TRUSTS, distinguished from dry or active, 17. settlors own benefit, 22, 23, 24. AGENTS, control of by trustees, 161. trustee, action against, 99. trustees not, 26, 27. ALIENATION, suspension of, 89-98. suspension, lawful period, 95. 371 INDEX. (The references to text are by sections, the exhibits by pages.) AMENDMENT, of trust agreements, 170. APPLICATION of trust funds, obligation of third persons to see to, 155, clause 10. "ANTI-TRUST" laws, 2. APPOINTMENT, trustees terms, 118. occasion of, 119. ASSIGNMENT, by corporation, 148. deed of, creditors as cestuis, 71. ASSOCIATION, articles creating trust estate, English ruling, 10, 11. American cases, 12. B. BANKRUPTCY, trust estate not subject to, 149. BENEFICIARIES, see "cestuis". BOOK, plan of treatment, 3. purpose of, 1. BOOKS, examination of, see "Information". 372 INDEX. (The references to text are by sections, the exhibits by pages.) "BUBBLE ACT," 51-53. not applied in America, 66. C. CESTUIS, as parties to actions, 107. creditors as, 64. creditors, deed of assignment, 71. devisees, 65. devisees, non-liability of, 70. foreign trust, taxation, 112. holders of certificates of shares, 86. interests of, protected, 132-144. meetings of, 144. need not be under any disability, 89. non-liability of to creditors, 74-77. ^ for trustees' tort, 34. proportional contributors, (53. receipts to trustee, effect of, 144. relations inter sese, 83, 84. rights against trustee, 85. right to appoint and remove trustees, 118. right to information, 141. settlors of, trust estate, 9. shareholders as, 62, 78-79. taxation of, 111-113. trustees as, 140. CERTIFICATES OF SHARES, as evidence of rights, 62. cestuis, owners, 86. non-holders of, 73. status of holders, 135. without par value, 166. 373 INDEX. (The references to text are by sections, the exhibits by pages.} CLASSIFICATION OF TRUSTEES, 117. COLLATERAL, using trust shares as, 143. COMBINES IN RESTRAINT OF TRADE, 2. COMPENSATION, of trustees, 131, 131o. COMMON shares, see "shares". CONTRACTS, non-liability of cestuis, 74, 75, 76, 77. special provision against personal liability, 49. stipulation for trustees' indemnity, 159. CONTRIBUTIONS, non-certificate holding, 73. CONTRIBUTORS, proportional interest, 63. CORPORATION, assignments and preferences, 148. assets as trust funds, 147. capacity at domicile, 127, 128. disadvantages of, 1, 2a. effect upon, by changing statutes, 2a. examination of books by stockholder, 134. excise taxes, 110. liability of directors to stockholders, 137. over-capitalization, evils of, 163. relation of stockholders to, 136. status of stockholders, 133. unpaid subscriptions, 150, 151. 374 INDEX. (The references to text are by sections, the exhibits by pages.) CO-TRUSTEES, see "trustees". COURTS, advisory power as to trustees, 123-126. CREDITORS, cestuis as, 64. deed of assignment, cestuis, 71. liability of trustee, 68. "lien" on trust assets, 40. pursuit of trust fund, 146. pursuit of trustees' right of indemnity, 39. reaching income of cestui, 14, 15. trusts for debtor and them, 5-8. D. DEBTOR, cestuis himself and creditors, 5, 6, 7, 8. DEBTS, see liabilities. DECLARATIONS OF TRUST, see trust agreements. DEVISEES, cestuis, 65. trading trust, non-liability, 70. DIRECTORS, see corporation. 375 INDEX. (The references to text are by sections, the exhibits by pages.) DIVIDENDS, of trust estate in business, 130. suit for, by cestuis, 85. DRY TRUSTS, distinguished from active, 17. for settlor's own benefit, 20, 21. E. ELECTION, of trustees' successors, 120. EXHIBITS, (References to exhibits are by pages.) agreement by trustees to holders of certificates, p. 287. amendment of trust agreement, pp. 284, 285, 298. amendment of trust agreement, limitations thereon, p. 337. amendment of trust investment, p. 316. annual meeting and special meetings of shareholders, pp. 288, 313. minutes of, pp. 369-370. application of trust funds, third person not bound to see to, pp. 289, 305, 331, 362. by-laws, adoption of by trustees, p. 330. cestuis' meetings, form of, pp. 369-370. cestuis' exemption from personal liability, p. 297. certificates without par value, form of, p. 339. classes and terms of trustees, p. 288. common and preferred shares, p. 307. converting corporation into trust estate, preliminary agreement, pp. 321-325. death of shareholder or trustee, effect thereof, p. 335. dividends, declaration and payment of, pp. 294, 296, 313, 333. 376 INDEX. (The references to text are by sections, the exhibits by pages.) election of trustees, pp. 302, 328. election of officers by trustees and their power, p. 305. executive committees, p. 306. exemption of shareholders from personal liability, p. 314. fiscal year and annual meetings, p. 296. form of bond and coupons, pp. 348-351. form of certificates, pp. 308-311. holding company, pp. 286-300. increase of shares, p. 332. increase or reduction of shares, p. 312. indenture to secure issue of bonds of trust, pp. 348-368. legal title, control and management vested in trustees, p. 288. liabilities, stipulations in contracts against, p. 298. lost certificate, p. 313. manufacturing company, pp. 301-320. meetings and quorums of trustees, p. 330. Merchants' Bank, plan of Alexander Hamilton, pp. 340-347. name of company, pp. 280, 287, 302, 341. notices of meetings and calls, method of making, pp. 281, 334. number and classes of trustees, pp. 287, 302, 320. obligation by subscribers, p. 282. officers' election of by trustees and defining their duties, trustees' compensation, p. 331. powers of trustees, pp. 303-304, 328-329. powers of trustees in real estate trust, p. 279. provisions for sale on mortgage, p. 282. real estate trust, pp. 279-285. recording of declaration and amendments, p. 336. regulations as to inspection of books by shareholders, p. 316. resignation and death of trustees, p. 328. shareholder death of, trustee death of, p. 297. 377 INDEX. (The references to text are by sections, the exhibits by pages.) shareholders' exemption from personal liability, trustees' exemption from personal liability, p. 335. shareholders' meetings, annual and special, pp. 328, 334. liability, stipulation against, p. 344. special meetings, p. 297. voting personally and by proxy, p. 281. shares, common and preferred, pp. 294, 328. without par value, pp. 328, 339. forms of certificates, pp. 291-295. original and additional, p. 332. to be personal property, p. 314. stated meeting by trustees, adoption of by-laws, p. 305. stipulation against personal liability "stamped" on con- tracts, pp. 337-338. stipulations making trust estate liable on trust contracts, p. 315. subscriptions, provisional on amount subscription, p. 283. termination of trust, pp. 336, 346. transfer of shares, p. 343. transferability of shares, p. 312. trust term, p. 282. trust term and winding up, p. 298. trust term and extension thereof, p. 315. trustees' compensation, p. 281. trustees, election of officers, and vesting of authority, p. 290. filling vacancies, p. 282. insurance for personal protection, p. 332. meetings, called by, p. 281. non-liability for error of judgment, pp. 306, 291, 331. provision for exemption from personal liability, p. 315. right to issue additional shares, p. 295. stated meetings, by-laws of, p. 290. unpaid subscriptions, installments on, p. 280. 378 INDEX. (The references to text are by sections, the exhibits by pages.) EXTENSION, of trust term, 96. F. FOREIGN CORPORATIONS, see corporations. FORMS, see Exhibits. I. INDEMNITY, torts of trustee, 41, 42, 43, 44. trustees' right to, 39, 40. stipulation for, 159. INFORMATION, right of cestui to, 141. motive in seeking, 142. restraint on right to, 142. INSURANCE, protection of to trustees, creditors and cestuis, 160. INVESTMENT, temporary, by trustees, 162. J- JOINT LIABILITY, see "Liability". JOINT-STOCK COMPANIES, see unincorporated associations. 379 INDEX. (The references to text are by sections, the exhibits by pages.) L. LIABILITY, of trust estate, 69. of trust estate, express provision, 46, 47. of trustees joint and several, 121. . of trustee, stipulation against, 29, 30, 31, 32. negligence by trustee, 33, 34, 35, 36. personal, of trustee, 28. see also non-liability. M. MANAGEMENT, negligence of trustee, 33-36. MAJORITY, management by trustees, 117. MONOPOLIES, illegal, 2. MEETINGS, of cestuis, 144. MORTGAGES, by trustees, 169. N. NAME, adoption of, for trust estate, 158. NEGLIGENCE, of trustee, 33-36. NON-LIABILITY, cestuis, contracts of trustees, 74-75, 76, 77. devisees, trading trust, 70. 380 INDEX. (The references to text are by sections, the exhibits by pages.} NOTE, by trustees, proper stipulation in against personal lia- bility, 30. NOTICE, recording of trust agreement as, 172. P. PARTIES, actions of statutory and express trustees, 105. foreign jurisdiction, 103, 104. trustees as plaintiffs, 102. trustees, action against, 100, 101. PARTITION, restraint upon, 97. PARTNERSHIPS, shareholders, 83-84. PASSIVE TRUSTS, see "dry trusts". PERPETUITIES, 89-98. PERSONAL RESPONSIBILITY, corporations and trusts compared, 2c. see also "cestuis" and "trustees". PLEDGE, see collateral. PRECEDENTS, see Exhibits. 381 INDEX. (The references to text are by sections, the exhibits by pages.) PREFERENCES TO CREDITORS, By corporations, 148. cannot be made by trustees, 146. PREFERRED SHARES, see "shares". PRINCIPAL, trustee is, 26, 27. PURPOSES, trust estate in business, variety and extent, 157. R. REAL ESTATE TRUSTS, 24, 153. RECORDING, trust agreement, 172. REINVESTMENT, suspension of alienation, 93. REMAINDERMAN, right to a "stock" dividend, 130. REMOVAL OF TRUSTEES, 85. REPORTS, as protection, 132. provisions in trust instrument for, 168. see also "information". RESPONSIBILITY, legitimate escape of, 2. 382 INDEX. (The references to text are by sections, the exhibits by pages.) RESTRAINTS, upon alienation, 89-98. upon partition, 97. REVOCABILITY, with reference to restraints on alienation, 92, 926. S. SALARIES, see "compensation". SETTLORS, active trusts for own benefit, 22, 23, 24. dry trust for their benefit, 20, 21. estates for self and others, 5, 6, 7, 8. for own benefit, 9, 15, 16. trusts for self and another, 19. trust, for own benefit, perpetuities, 89. SHAREHOLDERS, cestuis as, 62. partners or not, 83, 84. unincorporated association, liability of, 80. see also "cestuis". SHARES, in trust without par value, 166. preferred in trust estate, 167. see also "transferable shares". STIPULATION, personal liability of trustee exempted by, 29, 30, 31, 32. when oral, burden of proof, 29. 383 INDEX. (The references to text are by sections, the exhibits by pages.) STOCKHOLDERS, see corporations. SUBSCRIPTIONS, unpaid, trust estates and corporations distinguished. 150, 151. SUITS, see Actions. T. TAXATION, double prohibited, 111. excise tax, 110. foreign trusts, resident cestui, 112. TERMINATION, voluntary, of trust estate, 171. TORTS, insurance against liability for, 160. liability of trustees, 33-36. right of trustee to indemnity, American cases, 41-44. TRADE, trust in, transferable shares, 55-61. trust estates embarked in, debts, 48. TRANSFERABLE SHARES, collateral security, 143. trading trust, 55-61. unincorporated associations, 52, 53. 384 INDEX. (The references to te.vt are by sections, the exhibits by pages. > TRUST AGREEMENT, amendment, 170. contents of, 153, 171. general directions in, 155. recording of, 172. unnecessary detail to be avoided, 156. TRUST ESTATE, adoption of name, 158. assets, its capital, 164, 165. distribution of earnings, $ 130. history of as business companies, 153, 154. in business, uses of, 2b. liability under express provision, 46, 47. liability of, 69. not subject to bankruptcy, 149. preferred shares in, 167. publicity reports accounting, 168. shares in, 166. status of, 14. status of settlors' benefit, 15, 16. statement of purposed, 157. stipulation in trust instruments, 153-171. voluntary termination, 171. TRUST FUND, corporate assets, 147. inviolability of, 145-152. pursuit of by creditor, 146. TRUST METHOD, advocacy of, 2. TRUST TERM, extension, 96. 385 INDEX. (The references to text are by sections, the exhibits by pages.) TRUSTEES, actions in foreign jurisdiction, 103, 104. statutory and express, trustees distinguished, 105. appointment and terms, 118. as managers, 115-131a. care of cestuis, 140. compensation, 131, 13 la. creditors', liability to, 68. defaults of co-trustees, 122. direction by courts, 123, 124, 125. discretion, control of, by courts, 117. importance of being uncontrolled by cestuis, 3, 60. dry trust, duties of, 17. election of, 120. embarked in trade, transferable shares, 55-61. emergency, cases of, right of single trustee to act, 117. employment of agents, 161. independent status, 26, 27. information to cestuis, 141. insurance against loss, 160. liability, joint and several, 121. liability of cestuis, 85. liability to unincorporated association, 87. liability stringent, 28. management by majority, 117. mortgages by, 169. occasion of appointment, 119. parties defendant, and as plaintiffs, 100, 101, 102. personal liability, stipulation against, 29, 30, 31, 32. purchasing trust assets, "dummies," 139. ratification by, 117. receipts from cestuis, effect of, 144. removal of, 85. 386 INDEX. (The references to text are by sections, the exhibits by pages.} reports required by trust instrument, 142. right to indemnity, 39, 40. special contract against personal liability, 49. stipulation for indemnity, 159. trustees doing business abroad, 128, 129. temporary investments by, 162. tort, right of indemnity, American cases, 41, 42, 43, 44. unity of management, 116. TRUSTS, embarking in trade, debts, 48. for settlors and another, 19. passive and active distinguished, 17. settlors' benefit, perpetuities, 89. U. UNINCORPORATED ASSOCIATIONS, common law, 51. transferable shares, 52, 53. liability of shareholders, 80. liability of trustee to, 87. UNINCORPORATED COMPANY, articles of association, English ruling, 10, 11. American cases, 12. W. WILLS, creating business trust, 4. devisees as ccstuis, 65. 387 University of California SOUTHERN REGIONAL LIBRARY FACILITY 405 Hilgard Avenue, Los Angeles, CA 90024-1388 Return this material to the library from which it was borrowed. 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