Berry v. McCourt

• Citation: 204 N.E.2d 235,1 Ohio App.2d 172
• Parties: , 30 O.O.2d 203 BERRY et al., Appellants, v. McCOURT et al., Appellants; Berry et al., Appellees.
• Decision Date: 27 January 1965
• Court: Ohio Court of Appeals

Page 172

1 Ohio App.2d 172

204 N.E.2d 235, 30 O.O.2d 203

BERRY et al., Appellants, v. McCOURT et al., Appellants; Berry et al., Appellees.

Court of Appeals of Ohio, Tenth District, Franklin County.

Jan. 27, 1965.

Lucas, Prendergast, Albright & Warren, Columbus, for appellants.

Hamilton & Kramer, Columbus, for appellees Paul F. Berry, Girard F. Berry and Edward A. Berry.

Key, Butler, Harrison & Carlisle, Columbus, for appellee Urban J. Berry.

DUFFEY, Judge.

This is an appeal on question of law and fact involving the interpretation and enforcement of an alleged inter vivos trust. The case is, therefore, before this court on its merits for a de novo determination based on the pleadings and evidence.

The action arises out of an alleged inter vivos trust created by Richard G. Berry, Sr., in 1924. He conveyed certain property to his five sons as trustees and as beneficiaries. In 1952, Richard G. Berry, Jr. (II), died leaving five children. Two of the children, Richard G. Berry (III) and Patrick J. Berry, brought this action against the surviving trustees-beneficiaries. The other three children of Richard G. Berry, Jr. (II), are joined as defendants.

The principal issues presented are (1) the nature and validity of the trust instrument, (2) the rights of the plaintiffs to income of the trust since 1952, (3) the rights of the trustees to withdraw funds for 'salaries,' and (4) the obligation of the trustees to invest certain unproductive bonds. By their answer, three of the trustees have added an affirmative defense regarding the plaintiffs' standing or right to maintain this action.

Richard G. Berry, Sr., was the owner and sole proprietor of an industrial plant and business known as Berry Brothers. On September 17, 1924, he executed an instrument entitled 'Deed of Trust.' It complies with all the required formalities of a deed, and conveys 'my bolt and nut works, plant and business, located on East First Avenue, in said city, in trust, for certain designated purposes and uses * * *.' Grantees were the settlor's five sons--Paul, Girard, Edward, Richard, Jr. (now deceased), and Urban. The granting clause contains a legal description of real property and also transfers the bolt works, plant, machinery, stock and business, good will and business name, all subject to existing indebtedness which is to be assumed by the grantees.

The terms of the trust are certainly most unusual and perhaps unique. Under Item First, the five sons are made trustees in their 'collective capacity,' to own, control, operate and manage the business. It further provides that the 'grantees are each expressly given the right and privilege to participate in said property and business, and the profits, dividents [sic], earnings and increase thereof * * *.' Item Third provides that 'each of the five several interests of said grantees' shall be evidenced by a certificate. The holder of the certificate 'shall be entitled to one-fifth of all dividends shall be declared and paid from the net profits * * *.'

The trust instrument contains provisions and uses a drafting approach common to the once popular business trust or so-called 'Massachusetts Trust,' although it is, of course, tailored to fit certain apparent desires of the settlor, Richard G. Berry, Sr. Item First contains a declaration that no 'merger' shall occur because of identity of the persons who are trustees and beneficiaries. Item Fifth contains a disclaimer of various rules of partnerships. Most striking are the provisions on 'shareholder' certificates in establishing the issuance of certificates. Item Third provides they are to be 'alienable and transferable.' However, it also immediately provides that no interest shall be sold, pledged or otherwise disposed of, except with the consent of a majority of the trustees, or until first offered for sale to the trustees. The trustees have the option for one year of having a three-man appraisal and then purchasing at the appraised value. Any interest so purchased can be held as part of the corpus or sold. The form of certificate is set out in full.

Item Fourth is an exculpatory provision for the benefit of the trustees and will be discussed later.

Item Fifth contains provisions purporting to limit beneficiary rights. However, particularly pertinent is the provision that 'the heirs, devisees, executors, administrators or assigns of any deceased shareholder shall succeed to the rights of such decedent * * *.' However, the successor is not to acquire any of the powers of the trustee. Rather, such powers are to remain in the originally-named trustees.

Item Sixth provides for three methods of termination:

(1) Upon the death of four of the five grantees-trustees.

(2) Upon unanimous vote of the trustees 'of all their number.'

(3) Upon unanimous vote of the trustees 'of all their members' to transfer to a corporation, in which event the shares of the corporation are to be distributed according to the interests in the trust.

From 1926 through 1934, each of the settlors drew an equal amount as 'salary.' In that year, Urban became inactive in the business operations, and his four brothers cut his participation very substantially. Urban brought a suit which was settled in 1942. The settlement contrary provided for the 'compensation' and 'salary' of the 'active' trustees as opposed to that of Urban so long as he remained inactive in the management of the business. A majority of the 'active' trustees were to fix the salary. However, the contract explicitly provided that the active trustees were to receive 'not more than twenty thousand dollars ($20,000) each, per year,' and Urban J. Berry $9,500. (Emphasis added.) It further provided that if the salaries were fixed 'at lesser sums' for any active trustee, then Urban's salary shall be as set forth in the table. The table ranges from $20,000 down to $1,000 for active trustees, and correspondingly from $9,500 to $250 for Urban.

Paragraph two of the contract provided that if the affairs and net profit justify it, the active trustees could set aside such surplus, sinking and depreciation funds as they deem advisable and declare an 'annual dividend.' Provision was made for Urban to become active again. There was a peculiar provision for termination when only two trustees remained alive. The contract also provided for certain lump sum payments as settlement of the disputes arising from earlier years, plus a release from all claims, etc., and a declaration that the contract was not intended as a termination of the trust.

Defendant's exhibit No. 1 shows that in fact the contract was never followed from the time of its execution through 1958. In 1943, the four active brothers drew $40,000 each and Urban $30,106. From 1944 through 1957, the active brothers drew salaries ranging from $45,000 to $32,500 each, and Urban between $35,000 and $22,500. Pertinent here is the fact that from the death of Richard, Jr., in 1951, through 1959 the four surviving brothers withdrew a total of $889,000 in 'salaries' and $80,000 in 'dividends.' The heirs of Richard, Jr., during the same period received $20,000 ($4,000 each).

The fundamental issue in this case is the nature and legal effect of the 1924 'Deed of Trust.' The defendants contend that the instrument did not create a private trust, but rather a so-called 'business trust,' often called a 'Massachusetts Trust.' One defendant has suggested that if it was not a valid business trust it would be a partnership.

The legal effect of the instrument and the relationship among the five sons created by it obviously could not be a partnership. One of the most elementary attributes of a partnership is the voluntary, consensual, contractual basis of the arrangement. No partnership can be created or imposed upon another by the donation of property.

The so-called 'business trust' is a voluntary combination or pooling of capital by a number of persons for the purpose of investment for profit. A comprehensive study of the law with respect to such devices may be found in 'Massachusetts or business trusts,' 156 A.L.R. 22. See also, Bogert, Trusts and Trustees (Second Ed.) 571 et seq., Section 291 et seq. It has never been a popular business device in Ohio. Its validity under our corporation and partnership laws has never been directly passed upon, although comments can be found in Goubeaux, Recr., v. Krickenberger, Exrx. (1933), 126 Ohio St. 302, 185 N.E. 201. The court there strongly indicated that most such arrangements undertaken in Ohio would legally constitute a partnership. The court also implicitly suggested that to avoid patnership the device would have to meet the prerequisites of a valid private trust.

In states which give liberal recognition to the 'business trust,' it manages to escape much of the basic doctrine applicable to private trusts. The basis for evading trust law essentially is that the business trust is in fact a voluntary, consensual and contractual relationship. It is a device for profit making which arises from the consensual combination of capital and a contractual agreement by a number of investors. By an underlying contract, or in the provisions of a business trust instrument, or both, the parties agree on the operations of the venture. In effect, they agree, notwithstanding trust law, to forego rights and accept limitations which would otherwise apply. It is this unique contractual feature, plus the purpose of the combination, which has led courts of other states to permit the device to operate in ways quite at variance with trust law. It is, therefore, not so much a trust as a contractual relationship based on trust form which in result is about half partnership and half corporate.

The transaction here cannot be characterized as a business trust. It arose from a gift--the grant by Richard G. Berry, Sr., as donor. Neither the grantees-trustees nor the beneficiaries (who initially were the same persons) contributed any capital. They did...