Betts v. Hackathorn

• Citation: 252 S.W. 602,159 Ark. 621
• Decision Date: 25 June 1923
• Docket Number: 81
• Parties: BETTS v. HACKATHORN
• Court: Supreme Court of Arkansas

252 S.W. 602

159 Ark. 621

BETTS v. HACKATHORN

No. 81

Supreme Court of Arkansas

June 25, 1923

Appeal from Hempstead Circuit Court; George R. Haynie, Judge reversed in part.

Judgment affirmed as to trustees, and reversed and cause remanded as to Kinser and Simms.

Gentry & Purkins, for appellants.

The court erred in sustaining the demurrer to the answer. The instrument or agreement created a pure common-law, or "Massachusetts," trust, and not a partnership, and there is no individual liability of members for the acts of the trustees. 249 U.S. 223; 102 N.E. 355; 88 N.J.Eq. 229; 39 R. S. 193; 107 Kan. 190; 41 L. R. A. (N. D.) 252; 225 S.W 273. There is nothing to warrant the construction of this instrument as a partnership agreement. 137 Ark. 80; 138 Ark 281; 87 Ark. 416; Sears on Trust Estates, 138 par. 90.

E. F. McFadden, for appellee.

Are the trustees or shareholders under a common-law declaration of trust liable as partners to creditors or other third persons, in the absence of a question of estoppel? Our cases seem to settle question in affirmative. 125 Ark. 146; 243 S.W. 66. Authorities on subject generally, "Common Law Trust," "Business Trust," "Trust Estate," "Massachusetts Trusts," Wrightington on Unincorporated Associations (1917), Thompson on Business Trusts as Substitutes for Business Corporations (1920); Sears, Trust Estates as Business Companies (1921); 7 Am. Law Rep. 612, annotation "Massachusetts Trust," 10 Am. Law Rep. 887; 115 Am. St. Rep. annotation 407. The trustees are individually liable. 110 U.S. 330, 28 L. ed. 163; Thompson on Business Trusts, 3536. Shareholders as members liable to appellee. Doyle-Kidd v. Kennedy, supra. Alleged trust only a joint stock company. Association defined. Anderson's Law Dictionary; Words & Phrases; 241 S.W. (Tex. Civ. App.) 689; Baker-McGrew Co. v. Union Seed & Fertilizer Co., supra; 239 S.W. 1001; 262 F. 783; 242 S.W. 1091; 10 A. L. R. 743; 221 S.W. 251. All the appellants are liable as partners to third persons on the grounds of public policy. 239 S.W. 1001; 25 Ark. 634; 32 Cyc. 1251; Doyle-Kidd Dry Goods Co. v. Kennedy, supra. Regulation of Arkansas Corporations, § 1726, C. & M. Digest, and also chapter 137; Sears on Trust Estates, 343; Thompson on Business Trusts, 18.

OPINION

HUMPHREYS, J.

Appellee instituted suit against appellant in the circuit court of Hempstead County to recover $ 180 for goods sold and delivered to the Hope Oil Trust, a concern doing business under a written declaration commonly known as the "Massachusetts trust." The suit is based upon an allegation that the Hope Oil Trust is a partnership, and that appellants are members thereof, and as such are individually liable for the indebtedness of the concern. The six appellants first named were denominated trustees in the declaration. They filed a separate answer, admitting the amount of the account and that the goods were sold to the Hope Oil Trust, but denying individual liability, upon the ground that they are exempted from liability under paragraph 21 of the declaration, which in part is as follows:

"Every act done, power exercised, or obligation assumed by the trustees, pursuant to the provisions of this agreement, or in carrying out the trusts herein contained, shall be held to be done, exercised, or assumed, as the case may be, by them as trustees, and not as individuals, and every person or corporation contracting with the trustees, as well as every beneficiary hereunder, shall look only to the fund and property of the trust for payment under such contract, or for the payment of any debt, mortgage, judgment, or decree, or the payment of any money that may otherwise become due or payable on account of the trusts herein provided for, and any other obligation arising under this agreement, in whole or in part; and neither the trustees nor the shareholders, present or future, shall be personally liable therefor."

The two last named appellants are shareholders, and filed a separate answer denying liability, upon the ground that, under the terms of the declaration, they are cestuis que trust. They claim exemption under paragraph 21, quoted above, and paragraphs 9 and 20, which are as follows: "9. The trustees under this agreement shall have the sole legal title to all property, in any part of the United States of America, or in any foreign country, at any time held, acquired or received by them, as trustees under the terms of this agreement, or in which the shareholders under this agreement shall have any beneficial interest as such shareholders, and they shall have and exercise the exclusive management and control of the same, in any manner that they shall deem for the best interest of the shareholders, with all the rights and powers of absolute owners thereof. "

"20. Shareholders hereunder shall not be liable for any assessment, and the trustees shall have no power to bind the shareholders personally."

Demurrers were filed to the separate answers, and sustained by the court. Appellants stood upon their answers and refused to plead further, whereupon the court rendered judgment against them, from which is this appeal.

The appeal involves the sole question of the personal liability of the trustees and certificate owners in the business operated under the trust declaration. The instrument is long, and it would unduly extend this opinion to set it out in extenso, a statement of the substance thereof being sufficient for the purposes of this cause. In short, the instrument reflects that trustees associated themselves together for the purpose of selling certificates of stock in the name of Hope Oil Trust, and of using the proceeds for investment in securities and enterprises for the equal benefit of the shareholders. The trustees reserved the entire management and control of the business in themselves, the right to hold the title to all the property and dispose of same, and to elect their own successors in case of the resignation or death of either one of them. The indenture, in effect, provided that the trustees should be masters of the trust property, as well as the business, without suggestion, supervision, or interference on the part of the stockholders. No authority or power whatever was conferred upon the stockholders. In fact, all authority and control of the property and business was withheld from them. No provision was even made for a meeting of the stockholders at any time for any purpose. Under the terms of the declaration they were non-participants, save to share in dividends and profits that might be declared and distributed among them by the trustees. The paragraphs of the declaration exempting the shareholders from personal liability have been set out in full.

The statutes of this State provide for and regulate two kinds of business concerns, limited partnerships and corporations. The other business organizations operate in this State under the general law of the land, not under statutory protection and restrictions. General partnerships, joint stock companies, business trusts, and other associations are not prohibited from doing business in this State. With these preliminary remarks we proceed at once to determine whether the trustees and shareholders in the Hope Oil Trust are individually liable for the account sued upon. We will first determine the liability of the trustees.

A general rule in the law of trusts is that a trustee is a principal, and not an agent for the cestui que trust. It follows from this rule that the trustee and not the cestui que trust is personally responsible for an indebtedness growing out of transactions in relation to the trust estate. The creditor's guarantee is the personal liability of the trustee. We see no reason why the trustees here should be exempt from this general rule. Their declaration exempting them from personal liability cannot prevent individual liability from attaching, as...