Reilly v. Clyne

• Decision Date: 04 March 1925
• Docket Number: Civil 2216
• Citation: 234 P. 35,27 Ariz. 432
• Parties: JOHN I. REILLY, GEORGE T. FISHER, E. R. SWARTHOUT and WALTER P. CAPEHART, Trustees Operating Under a Declaration of Trust as THE INTERNATIONAL INVESTMENT AND CONSTRUCTION ASSOCIATION, Appellants, v. MEADE CLYNE, Appellee
• Court: Arizona Supreme Court

234 P. 35

27 Ariz. 432

JOHN I. REILLY, GEORGE T. FISHER, E. R. SWARTHOUT and WALTER P. CAPEHART, Trustees Operating Under a Declaration of Trust as THE INTERNATIONAL INVESTMENT AND CONSTRUCTION ASSOCIATION, Appellants, v. MEADE CLYNE, Appellee

Civil No. 2216

Supreme Court of Arizona

March 4, 1925

APPEAL from a judgment of the Superior Court of the County of Pima. George R. Darnell, Judge. Affirmed.

Messrs Richey & Richey, for Appellants.

Mr James R. Dunseath and Messrs. Curley & Pattee, for Appellee.

OPINION

ROSS, J.

The plaintiffs, alleging themselves to be the trustees of the International Investment & Construction Association, brought this action against defendant to recover on a promissory note made by defendant to plaintiffs in their collective name. The payee is what is known as a common-law business trust, or what is generally designated in this country as the "Massachusetts Trust." The declaration of trust, it is asserted by plaintiffs, which we find to be true, is almost identical with that involved in Williams v. Milton, 215 Mass. 1, 102 N.E. 355, which was held by that court to be "an investment trust and nothing more."

The defendant subscribed for 5,000 shares, or units, of the International Investment & Construction Association, and agreed to pay therefor in four promissory notes for $1,250 each. He paid three of these notes, but refused to pay the fourth one, and this suit was instituted by plaintiffs to recover on it. No certificate has been issued to defendant.

These things all appear in the pleadings. By reason of plaintiffs' character, as thus exhibited, defendant contends they have no standing in court; it appearing that they have failed to comply with the laws of the state in reference to corporations, associations, and joint-stock companies, or our Blue Sky Laws concerning investment companies. The defendant on these grounds resists the payment of the note sued on, and counterclaims for money had and received for the $3,750 theretofore paid.

The judgment denied plaintiffs any relief and went against them as trustees for the amount of the counterclaim.

The plaintiffs by their assignments present these questions for determination: (1) They assert that the payee of the note is a true trust, and not a corporation, or joint-stock association, or company, or copartnership, or an association, and hence does not come under the jurisdiction or control of the statutes of Arizona; (2) that defendant, having dealt with the trust as a trust, knowing its character, is now estopped to deny or question the same; (3) that the state alone can question the plaintiffs' legality or capacity; and (4) conceding the transaction was illegal and void, defendant was in pari delicto with plaintiffs, and therefore not entitled to any relief.

In support of their first contention plaintiffs cite Williams v. Milton, supra; Crocker v. Malley, 249 U.S. 223, 2 A.L.R. 1601, 63 L.Ed. 573, 39 S.Ct. 270, and Eliott v. Freeman, 220 U.S. 178, 55 L.Ed. 424, 31 S.Ct. 360 (see, also, Rose's U.S. Notes).

These cases involve revenue laws and the right to collect taxes against the certificate holders of business trusts. They all recognize the legality of such trusts in the jurisdictions involved and, because of the wording of the revenue laws, hold that such shares were not subject to taxation. In Eliott v. Freeman the question was whether such certificates could be taxed under a law which imposed a tax on "every corporation, joint-stock company, or association, organized for profit, and having a capital stock represented by shares . . . now, or hereafter organized under the laws of the United States or of any state or territory. . . . " Since the trust involved in that case was not organized under the laws of the United States, or of any state or territory, it clearly did not fall within the terms of the statute. The question involved in the other two cases is of a like nature.

The defendant's contention is that these decisions are not controlling in this state, because of the provisions of our Constitution and the statutes. Section 1 of article 14 of the Constitution is as follows:

"The term 'corporation,' as used in this article, shall be construed to include all associations and joint-stock companies having any powers or privileges of corporations not possessed by individuals or copartnerships, and corporations shall have the right to sue and shall be subject to be sued, in all courts, in like cases as natural persons."

This language of the Constitution is incorporated as paragraph 2099 of the Civil Code of 1913, being a part of chapter 2, title 9, entitled "Corporations in General," and extends to all associations and joint-stock companies described in title 9. Paragraph 2096 provides that any number of persons may associate themselves together and become incorporated for the transaction of business, but that such corporations shall have no powers or privileges not possessed by natural persons, except as provided by law. The exceptional powers and privileges granted to corporations are enumerated in paragraph 2097 as follows:

"(1) To have perpetual succession.

"(2) To sue and be sued by the corporate name.

"(3) To have a common seal and alter the same at pleasure.

"(4) To render the shares or interest of stockholders transferable and prescribe the mode of making such transfers.

"(5) To exempt the private property of members from liability for corporate debts.

"(6) To make contracts, acquire and transfer property, possessing the same powers in such respects as private individuals now enjoy.

"(7) To establish by-laws and make all rules and regulations deemed expedient for the management of their affairs not inconsistent with the Constitution and laws of the state of Arizona."

It is said plaintiffs are exercising powers and privileges not possessed by individuals, or copartnerships, and that such powers and privileges are denied them, unless they comply with the above and other provisions of the law. Among the privileges to be exercised by plaintiffs under their declaration of trust, not common to individuals, or copartnerships, are that neither the trustees nor the cestuis que trust are personally liable as partners or otherwise, and that the trust debts shall be a liability against the trust fund only.

The cestuis que trust, or certificate holders, are not personally liable in any event. Only incorporations and their stockholders can claim these rights. The trust property is held during the existence of the trust agreement free from the rules of tenants in common, and the trust is not dissolved by the death of a certificate holder or trustee. In these respects it is unlike a copartnership, since the death of a copartner dissolves the partnership. A stockholder may negotiate his certificate without the consent of other stockholders. This a partner may not do and the partnership continue. The trust business is owned and managed entirely by the trustees, or a majority thereof, free of the will of the certificate holders, whereas in a copartnership all the partners participate in the management of their business. The trust has power to sue, and be sued, to purchase, receive, hold, mortgage, and grant lands and chattels in the collective name of the trustees, who are empowered to invest and reinvest the trust funds without consulting shareholders. It has perpetual succession. These powers are not enjoyed by copartners or by individuals. Exercising, as the International Investment & Construction Association has undertaken to do under its declaration of trust, so many of the powers and privileges of a corporation, the question is whether it may do so, or whether the laws of the state were not intended to require such an association before exercising such powers and privileges to conform with the laws governing corporations, associations, and joint-stock companies, and especially those laws governing such companies when dealing in investments.

Many of the states of the Union have constitutional provisions like ours defining what are corporations. But the question that we have here does not seem to have been directly passed upon very many times, which perhaps may be accounted for from the fact that the legislatures of the different states have not until more recent years enacted laws giving to state boards, such as our Corporation Commission, visitorial and inquisitorial powers over corporations, joint-stock companies, and associations, with a view of protecting the public by seeing that their securities are worthy and their purposes honest. Two courts, in one form or another, have recently passed upon the question. In Home Lumber Co. v. Hopkins, 107 Kan. 153, 10 A.L.R. 879, 190 P. 601, it was held that the Massachusetts Trust was a corporation within the meaning of section 6, article 12, of the state Constitution (our section 1, article 14), since under its organization agreement it claimed to exercise and enjoy powers and privileges not possessed by individuals and copartnerships, and could sell securities and stocks only by conforming to the regulations imposed by statute upon corporations. In Harris v. United States, etc., 110 Kan. 532, 204 P. 754, the syllabus is as follows:

"A 'Massachusetts Trust' is a corporation within the meaning of that word as defined in section 6 of article 12 of the Kansas Constitution as including 'all associations and joint-stock companies, having powers and privileges not possessed by individuals or partnerships,' and as used in statutes the subject matter of which makes the definition pertinent and within the reason of the legislation."

In the more recent case of Hamilton v. Young, 116 Kan. 128, 35 A.L.R. 496, 225 P. 1045, it was said concerning the same point:

...