Hamilton v. Charles

• Decision Date: 10 May 1924
• Docket Number: 25,265
• Citation: 225 P. 1045,116 Kan. 128
• Parties: J. E. HAMILTON, Appellant, v. FRED C. YOUNG and U. G. CHARLES, Appellees
• Court: Kansas Supreme Court

225 P. 1045

116 Kan. 128

J. E. HAMILTON, Appellant, v. FRED C. YOUNG and U. G. CHARLES, Appellees

No. 25,265

Supreme Court of Kansas

May 10, 1924

Decided January, 1924.

Appeal from Sedgwick district court, division No. 2; THORNTON W SARGENT, judge.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. ASSOCIATION--In Form a Massachusetts Trust--Possessing the Powers and Privileges Characteristic of a Corporation--A Legal Entity Distinct from the Persons Who Compose It. An association, in form a Massachusetts trust, which, in the absence of the constitutional definition of a corporation (Art. 12, § 6), would constitute a trust and not a partnership, but which, according to the trust instrument, possesses powers and privileges characteristic of a corporation, is, by virtue of the definition, a corporation to the extent that it is a legal entity distinct from the persons who compose it.

2. SAME--Promissory Note--Signed by Officers of Associations--Officers Not Personally Liable. A negotiable promissory note was signed "The Victory Oil Company, by U. G. Charles, President. Attest: Fred C. Young, Secretary." The Victory Oil Company is an association of the character indicated in paragraph 1. Charles and Young were respectively its president and secretary, and were duly authorized to execute the note. Held, section 20 of the negotiable-instruments law (R. S. 52-220), exempts them from personal liability on the note.

John Madden, John Madden, jr., J. T. Rogers, all of Wichita, and Dennis Madden, of Topeka, for the appellant.

A. L. Noble, W. A. Ayres, Hal M. Black, and C. A. McCorkle, all of Wichita, for the appellees.

Burch J. Harvey. J., concurring specially.

OPINION

BURCH, J.:

The action was one to recover on a promissory note. The district court directed a verdict for defendants, on the pleadings and opening statements of counsel. Plaintiff appeals.

The petition alleged that Charles and Young executed and delivered to plaintiff their promissory note, which was due and unpaid. A copy of the note was made part of the petition. The note was in the ordinary form of a "We promise to pay" negotiable instrument, and was signed, "The Victory Oil Company, By U. G. Charles, President. Attest: Fred C. Young, Secretary." The answer alleged The Victory Oil Company is a common-law trust, created by an agreement and declaration of trust, for the purpose of taking title to real property, and producing, refining and marketing oil. A copy of the trust instrument was made part of the answer. It provides that legal title to property vests solely in five trustees, who have exclusive management and control of the trust enterprise and all its business affairs. The trustees have a collective name, "The Victory Oil Company." They are empowered to make and use a common seal, to adopt rules and regulations for government of the trust and conduct of its affairs, and to elect from their number a president, secretary, and treasurer, whose duties are the same as the duties of corresponding officers of corporations. The trustees are elected by majority vote of shares present at an annual shareholders' meeting, hold office for one year and until successors are elected and qualified, and may fill vacancies. Title and function pass to successors by the mere fact of election or appointment, and qualification. The trustees have power to borrow money on notes, bonds, or otherwise, have general authority to execute all forms of instruments in writing which they deem proper in conducting the trust business, and have power to fulfill all obligations and pay all liabilities properly assumed by them as trustees. The trustees were required to issue certificates of units to the number of 10,000, of no par value, evidencing aliquot parts of the trust estate, and to sell them as shares of corporate stock are issued and sold. The certificates are transferable, and records of certificates and transfers are kept, after the manner of corporate stock. In case of death or insolvency of a shareholder, his shares vest in his successor in interest, without right to an accounting or division of estate or profits. The trustees may declare and pay to shareholders dividends out of earnings. In all other respects the organization takes the form of a corporation for profit. The agreement provides for liability of the trust estate for debts, for nonliability of shareholders to assessment, and for nonliability of trustees and shareholders personally on account of powers executed or obligations created or assumed by the trustees in their official capacity. The trust agreement may be altered or amended, except as to liability of trustees and shareholders. The term of the trust is twenty-one years. At the end of the term, the trustees shall wind up the trust, liquidate its assets, and distribute the proceeds among shareholders.

The answer alleged that, when the note was executed, Charles was president and Young was secretary of The Victory Oil Company; that, as such officers, they were authorized to execute the note on behalf of The Victory Oil Company as its obligation; and that they executed the note by the authority and in the capacities stated. The reply was an unverified general denial, and counsel for plaintiff admitted execution of the trust instrument, in connection with his opening statement.

On the face of the note, defendants are not liable. Prima facie, the name "The Victory Oil Company," imports the name of a corporate body. Allen v. Hopkins, 62 Kan. 175, 61 P. 750; The State v. Toliver, 109 Kan. 660, 667, 202 P. 99.) The signature is the signature of the corporation, affixed by its president and attested by its secretary, on its behalf. Prima facie, the execution was authorized. (Town Co. v. Swigart, 43 Kan. 292, 23 P. 569.) Without the negotiable instruments law, nonliability of Charles and Young appeared on the face of the note, and by virtue of that law they are not liable.

"Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability." (R. S. 52-220.)

How did the answer affect the matter?

Plaintiff reads the trust articles, and reaches the correct conclusion that the persons associated under the name "The Victory Oil Company" are not partners. While the shareholders may elect trustees, and may consent to a change in the articles of association which does not alter their liability or the liability of the trustees, they have no control over the trust enterprise. The trustees control. (Lumber Co. v. State Charter Board, 107 Kan. 153, 190 P. 601.)

In an interesting article, "The Mysterious Massachusetts Trusts," in the American Bar Association Journal for December, 1923 (Vol. 9, No. 12, p. 763), William W. Cook says the test of control is unsound. He is of the opinion that, if the organization carry on an active business, those who take profits ought to be liable to creditors, as partners, for debts and losses. When persons merely furnish capital for an active business enterprise, to trustees who have full legal title and absolute management and control, this court is unable to see that they should be held personally liable to creditors who have direct resort to the trust estate, any more than holders of corporate stock entitled to dividends out of profits should be personally liable to creditors.

Since a partnership was not formed, plaintiff concludes the trust instrument created a pure trust, and that the trustee of such a trust is always liable on his contracts, even if he sign as trustee, unless he stipulate that the other party to the contract shall look solely to the trust estate, or otherwise lawfully restrict his liability in the contract itself. ( Wells-Stone Mercantile Co. v. Grover, 7 N.D. 460, 41 L. R. A. 252, 75 N.W. 911.) Conceding for present purposes that a trust of the ancient kind, which courts of equity have dealt with for centuries, was created, the very modern negotiable-instruments law specifies how personal liability on a negotiable instrument may be precluded. The trustees of a so-called Massachusetts trust may adopt a name for business purposes, just as individuals, partnerships and corporations may do so. (Rand v. Farquhar, 226 Mass. 91, 115 N.E. 286.) Promissory notes may be given in the collective name. Those authoritatively using the collective name may indicate that they are not binding themselves personally. If they do so, conformably to the statute, they are not individually liable.

If in this instance the note had been signed "The Victory Oil Company, by U. G. Charles, President officially, not personally. Attest: Fred C. Young, Secretary, officially, not personally," the individuals would not be bound. The words "by" and "attest" having been employed in the signatures, commercial usage and common sense imply the words "officially and not personally," and the court declares such to be the law of this state. If there were any ambiguity about it, parol evidence would be admissible, as between the original parties, to show the capacity in which Charles and Young signed. (Bank v. Trust Co., 107 Kan. 700, 193 P. 316.) There is, however, no ambiguity. Under all the authorities cited by plaintiff, a trustee may stipulate that he shall not be personally liable. The negotiable-instruments law tells how the stipulation may be expressed in a promissory note, and we have here a plain case of a note in which the trustees affixing and attesting the trust's signature, excluded...