Schumann-Heink v. Folsom

Citation328 Ill. 321,159 N.E. 250
Decision Date21 December 1927
Docket NumberNo. 17498.,17498.
CourtSupreme Court of Illinois


Error to Second Branch, Appellate Court, First District, on Appeal from Circuit Court, Cook County; George Fred Rush, Judge.

Bill by Ernestine Schumann-Heink against Richard S. Folsom and others. From that portion of the decree dismissing her bill as to the named defendant, complainant appealed to the Appellate Court, which affirmed the decree, and complainant brings certiorari.

Affirmed.Stein, Mayer & David, of Chicago (Sigmund W. David and Oscar Fainman, both of Chicago, of counsel), for plaintiff in error.

James G. Skinner, of Chicago, for defendant in error.


Ernestine Schumann-Heink, plaintiff in error, filed her bill in the circuit court of Cook county against Richard S. Folsom, defendant in error, and Andrew P. Mackie, Henry H. Lippert, and Albert G. Hines, as trustees of the Goodland Company, Folsom, Hines, and J. B. Ransom, individually, and Folsom, Mackie, Lippert, Hines, Ransom, and Byron A. Bearce, as copartners owning the shares of stock of the Goodland Company. Folsom and Mackie, the only defendants served with process, answered the bill. There was a hearing before the chancellor, and a decree was entered against Mackie individually for $10,000, and against Mackie and Folsom, as trustees of the Goodland Company, for a like amount payable only out of trust property. The bill was dismissed for want of equity as to Folsom individually and as to Folsom and Mackie as copartners. Plaintiff in error appealed to the Appellate Court from that portion of the decree which dismissed her bill as to Folsom individually and as a partner. The decree was affirmed, and the record is now before this court as a return to a writ of certiorari.

This litigation arises out of a contract entered into April 9, 1920, between plaintiff in error and the Goodland Company, under which there became due plaintiff in error the sum of $8,075.21, with interest at 6 per cent. from date. The contract contained this provision:

‘This obligation is executed in behalf of the trustees under the declaration of trust made and delivered at Boston, Mass., and deposited with the Massachusetts Trust Company, not individually but as such trustees, to bind the trust estate.’

The contract is signed: ‘Goodland Company, by Albert G. Hines, President and Trustee-Attest: Richard S. Folsom, Secretary.’ The seal attached bears the words, ‘Goodland Company, organized under declaration or trust dated May 21, 1919, at Boston, Massachusetts.’ The bill is filed on the theory that the trustees and shareholders could not limit their liability without complying with the laws of Illinois governing the organization and management of corporations or limited partnerships, and that the plan under which Folsom and his associates were doing business was a fraudulent scheme designed to enable them to circumvent the laws of this state.

The declaration of trust under which Folsom and his associates were acting was executed and delivered in the city of Boston, Mass., May 21, 1919. It was deposited with the Massachusetts Trust Company of Boston, and was filed in the office of the commissioner of corporations and taxation of Massachusetts. It was signed by Richard S. Folsom, Andrew P. Mackie, and Henry H. Lippert,who became the first trustees. It commences with a declaration of trust, and provides that the trustees in their collective capacity shall be designated ‘Goodland Company,’ and under such name shall manage and administer the trust estate, execute all their instruments of writting, and do all other things relating to the trust. The declaration of trust, which consists of twelve articles, subdivided into thirty-five sections, is too long to set out in this opinion, but its provisions may be briefly summarized. The trustees are given power to change the name of the trust, to increase the number of trustees, to fill any vacancies caused by beath, resignation, or otherwise, and to fill all places created by an increase in the number of trustees. The trustees, or any officers or committees selected from their number, are given almost unlimited power to deal with the property forming the subject-matter of the trust. They may make all rules and regulations and changes therein, consistently with the declaration of trust, deemed necessary for the management of the trust estate. They may remove a trustee, officer, or member of any committee when they consider the interests of the trust so require and may fill all vacancies caused by such removal. They are given the absolute and exclusive control of all property at any time belonging to the trust, and the shareholders and specifically deprived of any voice in its management. The trustees are given power to fix the compensation of themselves and all officers and employees of trust, and their compensation, together with all expenses, disbursements, losses, and liabilities of the trustees, is made a lien on the trust estate prior to any rights of the shareholders therein. It is provided that all contracts and undertakings of the trustees shall be taken to have been executed or done in their capacity of trustees under the declaration of trust, and it is required that all contracts and undertakings shall recite that the same are executed by the trustees as such and not by them individually. The trustees are prohibited from making a contractwhich binds the shareholders, and it is required that every contract or undertaking shall state that it is enforceable against and payable out of the funds of the trust only, and that there shall be no personal liability of the trustees or the shareholders. The trustees are authorized to issue 10,000 preferred beneficial interest shares of the par value of $100 each and 20,000 common shares of no par value, and the rights of the shareholders of each class are fixed, and the powers of the trustees with respect to changing the rights of the shareholders and increasing or decreasing the number of shares are set forth. It is provided that the trust shall continue for a term of 21 years after the death of the last survivor of the original trustees, and thereupon the affairs of the trust are to be wound up in the manner specified. The only rights possessed by the shareholders are the right to dividends, which shall be declared at the discretion of the trustees, and, in case of the dissolution of the trust, the right to their proportionate shares of the trust estate after the payment of all debts and liabilities.

[1] The trust is a very comprehensive institution. It is as general and as elastic as contract. It originated and was reduced to practice under the jurisdiction of courts by the civil law, was expanded and developed in the courts of chancery, and has been employed in nearly every field of human activity. Of late years it has been and is utilized in the field of commerce and trade as a substitute for the corporate or partnership organization. Such a trust is created by the execution of a declaration of trust by one or more trustees, to whom there has been or will presently be transferred the property or money which is to constitute the corpus of the trust. The interests of the several cestuis que trust are represented by certificates showing the proportionate shares of the holders. Thus the corpus of the trust corresponds to the capital of the incorporated company, the trustees to the board of directors, the beneficiaries to the stockholders, the beneficial interests to shares of stock, and the declaration of trust to the charter. But there are material differences, to be noted later, in each of the five instances of comparison. When the express trust is used as an agency of commerce it is commonly known as a business trust. Because of its development and common use in the state of Massachusetts it is often called a Massachusetts trust, and, because it finds its basis in the law of contract and does not depend upon any statute for its existence it is sometimes called a common-law trust. It may be stated as a general proposition that any one competent to contract may make such disposition of the legal title to his property as he pleases, may annex such conditions and limitations to its enjoyment as he chooses, and may vest it in trustees for the purpose of carrying out his intention. He has the same power to create trusts as he has to alienate the legal title to his property. 1 Perry on Trusts (5th Ed.) § 28. Since 1880 the legality of the business trust has been recognized in England, and for more than 40 years it has been in use in Massachusetts. Sears, in his work on Trust Estates as Business Companies (2d Ed.) § 19, says:

‘It is by no means novel or unusual that trust estates should be created either for embarking in a new business or continuing an old one, and the legal and equitable status of such estates are 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.’

Wrightington, in his work on Unincorporated Associations and Business Trusts (2d Ed.) § 4, says:

‘The newest law to-day concerns the application of old principles to the new problems created by associations for profit, and trusts, and the distinctions between these two forms of business organization.’

If the declaration of trust involved in this case creates a trust, and there is nothing in it which is against the public policy of this state, then the decision of the case depends upon the application of well-established principles of the law of contracts and trusts. Because a new use is being made of the trust does not mean new principles of law are to be applied in determining the rights of the trustees, the cestuis que trust or persons dealing with the trustees.

The business trust is fundamentally different from the...

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