The Position of Shareholders in Business Trusts

Author(s): Calvert Magruder

Source: Columbia Law Review , May, 1923, Vol. 23, No. 5 (May, 1923), pp. 423-443
Published by: Columbia Law Review Association, Inc.

Stable URL: https://www.jstor.org/stable/1112331

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 THE POSITION OF SHAREHOLDERS IN
BUSINESS TRUSTS

Business organizations which fill a genuine need usually have the h

to survive a good deal of judicial manhandling and legislative hostilit
lation of the courts between the aggregate theory and the mercantile
of the firm entity resulted in the development of a body of partner
notorious for its clumsy inconsistencies. However, starting in the ea
with the notion that there was nothing to a partnership but several in
owning property jointly, the tendency of the courts has been a half
tentative, often unconscious, but none the less definite approach tow
mercantile idea, until in the Uniform Partnership Act, in fact, if not
the law for the greater part is brought in harmony with the logic of
conception 1 to which business men have for centuries held. The
partnership developed on the continent of Europe in the Middle
proved to be of great utility; but Anglo-American judges never took i
bosom, with the result that business men kept knocking at the legisla
until by statute the limited partnership became a permissible form of
cial organization.2 So, also, it was too much to expect that the "Bubb
would turn the minds of business men permanently from the use of
stock company device for aggregating capital in commercial and
enterprises.4
The moral of all this is that if the courts as they come to deal with the
business trust adopt a narrow, unimaginative, abstract approach to the
problem, ignoring the sound business sense of the thing, their work is sure to be
undone in the future, in one way or another. It is submitted that the courts
should not take their job to be one simply of squeezing the business trust into
some existing category-an idea which seems to have been given expression by
the Massachusetts Supreme Judicial Court, speaking through Mr. Justice Braley,
in Priestley v. Treasurer &' Receiver General:5
"If what is desired in order to carry out the purposes of a real estate trust is
an organization with a distinct entity, intermediate between a corporation
and a partnership or pure trust, and with its own rights and obligations, the
Legislature and not the courts must be resorted to."

Rather, the business trust should be recognized for what it is, a distinct type
of business association, having its special objects and its special problems;

1 See Judson A. Crane, The Uniform Partnership Act-A Criticism (1915) 28 Harvard Law
Rev. 762; William Draper Lewis, The Uniform Partnership Act-A Reply to Mr. Crane's
Criticism (1915) 29 Harvard Law Rev. 158, 291; Judson A. Crane, The Uniform Partnership
Act and Legal Persons (1916) 29 Harvard Law Rev. 838.
2 See W. S. Holdsworth, The Early History of Commercial Societies (1916) 28 Juridical
Rev. 305, 309-311; Rowley, Modern Law of Partnership (1916) ? 1002.
3 (1719) St. 6 Geo. I, c. 18.
4 See Lindley, Partnership (1st ed. 1860) 145 et seq.; W. S. Holdsworth, op. cit., pp.
340-4.
5 (1918) 230 Mass. 452, 456, 120 N. E. 100.

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424 COLUMBIA LAW REVIEW

and the courts should make use of the wealth of available legal analog
as aids to the attainment of an end kept clearly in view, namely, the
of a body of law promotive of the functional effectiveness of the bu
with a maximum regard to the intent and understanding of business
The device has been in use in Massachusetts for fifty years
particularly for the holding and development of real estate; but in m
years, prompted in part, no doubt, by the numerous burdens impo
corporations, the business trust has come to be used extensively
parts of the country for all kinds of industrial and commercial ent
It is receiving a generous share of attention in text books and legal p
at last it has earned a separate heading in the American Digest;8 an
perhaps it is too early to speak with confidence as to what fields o
activity it will ultimately prove to be best fitted to serve, it seems
that the business trust has come to stay. The law is in the making;
our courts have yet had little or no occasion to deal with the busin
and opportunity lies ahead for intelligent, constructive treatment of
While it is true that the business trust is a distinct type of org
yet in working out its problems it is important to remember that t
business association is the offspring of a union between the uninco
joint stock company and the trust. The unincorporated joint stock
looked very much like a corporation;9 fractional interests in th
were customarily represented by transferable certificates; the b
conducted by a board of directors, or an executive committee elect
ally by the shareholders. As there was neither a corporate entity s
by the legislature nor a trustee to interpose a shield between the s

6 Sears, Trust Estates as Business Companies (2nd ed. 1921) v-vii, ? 184.
7 See generally: Sears, op. cit.; Dunn, Business Trusts (1922); Wrightingto
porated Associations (1916); Guy A. Thompson, Business Trusts as a Substitutef
tion (1920); Thompson, Corporations (2nd ed. 1908, Cumulative Supplement, 1
6812; 9 Fletcher, Cyclopedia Corporations (1920) ?? 6057-6115; H. L. Wilgus, Co
Express Trusts as Business Organizations (1914) 13 Michigan Law Rev. 71, 205;
The Passing of the Corporation in Business (1918) 2 Minnesota Law Rev. 401; The
Trust as a Substitute for Incorporation (1919) 89 Central Law Journ. 275; Wright
ern Business Organizations (1917) 24 Case & Comm. 184; Wrightington, Volun
tions in Massachusetts (1912) 21 Yale Law Journ. 311; James B. Riley, Busine
Their Relation to West Virginia Law (1922) 28 West Virginia Law Quart. 287; R
Limited Liability in Business Trusts (1922) 7 Cornell Law Quart. 116; N. B. Ju
Partnership Liability under the Business Trust (1922) 95 Central Law Journ. 78; F
Survey of the Business Trust (1922) 16 Illinois Law Rev. 370; H. G. Snyder, "Busin
in Oklahoma, Report of Oklahoma State Bar Association, 1920, p. 153; A. D. C
press Trusts under the Common Law (1912); Report of Massachusetts Tax Commi
Voluntary Associations (1912), Pursuant to Mass., Resolves 1911, c. 55; S. R. W
The Massachusetts Trust Form of Organization (1921) 13 Journal American Bank
Since the present article went to press, Prof. Ira P. Hildebrand has comme
of articles in the Texas Law Review (Feb. 1923) entitled "The Massachusetts Tr
the same subject matter from a somewhat different point of view.
8 Title: Joint Stock Companies and Business Trusts, since July, 1922.
9 Since the repeal of the "Bubble Act" it has been well settled that an un
business association, with a joint stock divided into transferable shares, is not
ground that such an association purports to act as a corporation without being
porated. Phillips v. Blatchford (1884) 137 Mass. 510; Spotswood v. Morris (1906
85 Pac. 1094; Sears, op. cit., ?? 173 et seq.; but see an Opinion of Attorney Genera
No. 8498, May 1, 1919, Attorney General's Report, 1919-1920; see also 1 Opinions
General of Ohio (1915) 171, 187 et seq.

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 SHAREHOLDERS IN BUSINESS TRUSTS 425

and the outside world, the courts felt themselves obliged to regard the n
shareholders as the proprietors of the business, actively conducted
appointed agents, the directors or executive committee, chosen usually
among their number. Hence, each shareholder, however small his f
interest, was regarded as liable to his last cent for the debts of a large,
partnership of which he was a member.10 Often, for convenience, legal
the property of the joint stock association was vested in trustees, who
hold subject to the directions of the board of directors or managers; b
effected no change in the legal nature of the association, the shar
being still the proprietors of the business and liable as principals in to
contract."

So much for one parent of the business trust. Of the other parent, the
familiar trust, only a word need be said. Since the overthrow of the profit
sharing test of partnership liability 12 it has been possible for the owner of a
business to transfer it to trustees, upon trust to manage it for his ultimate
pecuniary benefit, and by this means to escape individual liability to creditors.l3
The personal liability of the trustee is his shield; and there has seemed to be no
argument of policy against this sort of thing.14 The shield-of the trustee protects
the cestui que trust from liability in tort, as well as in contract. In Falardeau v.
Boston Art Students' Association,15 the defendant corporation, having a fifteen-
year lease on a building, executed an assignment to trustees upon trust, with
full power to sub-let the premises, collect the rents therefor, pay off certain
described notes, and turn over the residue of the income to the treasurer of
the defendant corporation; the plaintiff was injured by the negligence of a
janitor employed by the trustees; and it was held that the defendant corporation
was not liable for the injury.'6
Now, if we take the unincorporated joint stock association, abolish the
board of managers or directors, and vest the management directly in the
trustees, who hold legal title to all the property, we have the so-called business

10 Harrison v. Heathorn (1843) 6 M. & G. 81; Tappen v. Bailey (Mass. 1842) 4 Metc. 529;
Tyrrell v. Washburn (Mass. 1863) 6 Allen 466; Ashley v. Dowling (1909) 203 Mass. 311, 89 N.
E. 434; Skinner v. Dayton (N. Y. 1822) 19 Johns. 513; McFadden v. Seeka (1891) 48 Ohio St.
513, 28 N. E. 874; Doyle-Kidd Dry Goods Co. v. A. W. Kennedy & Co. (Ark. 1922) 243 S. W. 66.
n Hoadley v. County Com'rs (1870) 105 Mass. 519; Boston & Albany R. R. v. Pearson
(1880) 128 Mass. 445; Smith v. Moore (1880) 129 Mass. 222; Phillips v. Blatchford, supra,
footnote 9; Howe v. Morse (1899) 174 Mass. 491, 55 N. E. 213; Barker v. White (1874) 58 N. Y.
204; Yeaman v. Galveston City Co. (1914) 106 Tex. 389, 167 S. W. 710; Moss's Appeal (1862)
43 Pa. St. 23; Hossack v. Ottawa Development Ass'n (1910) 244 Ill. 274, 91 N. E. 439.
12 Cox v. Hickman (1860) 8 H. L. Cas. *268; see note in (1909) 18 L. R. A. (N. s.) 962 et seq.
13 Wells-Stone Mercantile Co. v. Grover (1898) 7 N. Dak. 460, 75 N. W. 914; Mayo v. Moritz
(1890) 151 Mass. 481, 24 N. E. 1083.
14 The cestuis que trust may be under an equitable obligation pra rata to indemnify or re-
imburse the trustees on account of expenditures properly incurred in the administration of the
trust, where the trust estate is insufficient for that purpose. Hardoon v. Belilios [1901] A. C.
118; A. W. Scott, Liabilities Incurred in the Administration of Trusts (1915) 28 Harvard Law
Rev. 725. But this liability may be contracted away, and the business trust declarations
commonly stipulate that the cestuis que trust shall never be called upon personally. See Mc-
Camey v. Hollister Oil Co. (Tex. Civ. App. 1922) 241 S. W. 689, 693; R. S. Stevens, op. cit., pp.
121 et seq.
15 (1903) 182 Mass. 405, 65 N. E. 797.
16 See also Curry v. Dorr (1912) 210 Mass. 430, 97 N. E. 87.

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426 COLUMBIA LAW REVIEW

trust. The fractional beneficial interests are still represented by tr

certificates, but the shareholders are no longer an association o
carrying on as co-owners a business for profit." 17 The trustees ar
on the business as principals; nothing is better understood in the la
than that the trustee is not an agent for the cestui que trust. Henc
to be abundantly clear that in a real business trust the shareholder
personally liable to third persons, either in contract or in tort. Yet
the Texas courts, which have had numerous occasions recently t
the business trust because of its popularity in that state in the org
of oil companies, have expressed the view that such limitation
is impossible of attainment in this form of unincorporated associat
In Wells v. Mackay Telegraph Cable Co.,18 an oil company was
under a declaration of trust giving the trustees exclusive powers in
ment of the business; the beneficial interests therein were represente
ferable certificates; periodical meetings of the shareholders were pro
but the trust deed gave the said shareholders no powers of control
over the trustees. There was also the common provision that the or
was not to constitute a partnership and that the trustees had no pow
the shareholders personally. The plaintiff brought an action at
several of the shareholders jointly, to recover for services rend
transmission of telegrams for the oil company. It was held that
holders were liable. In the course of its opinion the court said:
"Whatever may be the rule in other jurisdictions, it seems
settled by the decisions of our courts that, when two or more perso
themselves together for the purpose of carrying on a business ente
their mutual profit, the persons so associated are jointly and se
sponsible for the debts incurred in the conduct of such business un
business association is organized as a limited partnership or a c
under our statute providing for such organizations, or speciall
with those with whom the association deals that only the funds an
of the association shall be held liable. ... It seems to us that thi
of a trading concern for profit comes within the purview of our sta
declares that 'any unincorporated joint-stock company or associ
business in this state may be sued without making the individual s
parties, but that a judgment in such suit against the association
be binding upon the joint property unless the stockholders are also
which event a judgment against the association 'shall be equally bin
the individual stockholders or members so served, and executio
against the property of individual stockholders or members, as we
the joint property.' Articles 6149, 6152, and 6153, Vernon's S
Statutes. ... In late years much fine writing has been used in descri
beauties of the common-law trust. The development of the doctrin
extension of the scope of its operation has increased with our ever
business development and expansion, and its usefulness may not be
but it cannot be substituted for statutory methods of limiting the
persons associating themselves together for the purpose of conduct
ness for profit.
17 Uniform Partnership Act, ? 6.
18 (Tex. Civ. App. 1922) 239 S. W. 1001, 1006-7.

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 SHAREHOLDERS IN BUSINESS TRUSTS 427

The public in its dealings with such business organizations has a r

the protection afforded them by our statutes regulating the formation
porations. This protection would be greatly lessened if it should be h
by declaring and recording a declaration of trust persons can associat
selves together for business purposes, giving their organization all th
of a 'corporation and limiting their individual liability, without c
with the statutes which require proof of the funds or assets of such an
tion before a charter will be granted it to conduct its business."

Similar arguments are made by a later case in another Texas court, McC
Hollister Oil Co.,19 where it is said:
"The statutes relating to corporations and limited partnerships
only statutes in this state which provide for and allow a limitation of
vidual liability of the members of any association of persons formed t
business for profit for the debts legally incurred by the association. U
rule, 'Expressio unius est exclusio alterius,' the statutes relating t
partnerships imply a denial of the right of members of a partnershi
their liability, under the common law in any other manner, since 'th
is implied in a statute is as much a part of it as what is expressed.' Su
on Statutory Construction, ?334; 25 R. C. L. ?229, pp. 982, 983; 36 Cy
1145. And the statutes referred to upon the subjects of Corporations
Partnerships, and Unincorporated Joint-Stock Companies or Associati
considered together reflect the public policy of this state and indicat
lative intention to include unincorporated joint-stock companies
character which are organized for profit within the class of those men
the statutes."

It will be noted that the case for holding the shareholders personally is
rested upon the policy of three types of statute, (1) that regulating procedure
against an "unincorporated joint stock company or association," (2) the
limited partnership statute, and (3) the laws regulating incorporation. As to
the first of these, it is sufficient to say that a business trust of the character
in question is not an "unincorporated joint stock association," a phrase having
a well understood application to the overgrown, unwieldy partnership con-
ducted by managers or directors periodically chosen by the shareholders
from among their number.20 The statute referred to is a common one,21 to
provide a procedural remedy against the association and its joint property
without the necessity of joining numerous and scattered shareholders, whose
personal liability, however, remains unimpaired in case the creditor chooses
to avail himself of it. It was certainly not the object of such procedural statutes
to introduce by implication a far reaching modification of the trust principle
that the cestui que trust is not personally liable for the contracts and torts of
the trustee. Nor is there any warrant in the policy of the limited partnership
act and the general incorporation laws for the conclusion that the shareholders
of a non-statutory business trust must necessarily be subjected to personal
19 Supra, footnote 14, p. 699. Here such a sweeping doctrine of liability was unnecessary
to the decision of the case, for the deed of trust reserved to the shareholders certain important
powers of control. See also, Opinion of Attorney General of Illinois, No. 8498, May 1, 1919,
supra, footnote 9.
20 Cf. Crocker v. Malley (1919) 249 U. S. 223, 233, 39 Sup. Ct. 270.
21 Rowley, op. cit., ? 1051.

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428 COLUMBIA LAW REVIEW

liability. The legislature has provided two statutory ways in w

may be carried on for the benefit of investors without their per
sibility. But the limited partnership and corporation laws do n
affect the law of trusts, which developed a third way of limiting
interposing the personal liability of the trustee between the benef
outside parties.
Fundamentally, the assumption is a mistaken one that the sha
in the oil company in Wells v. Mackay Telegraph Cable Co., ha
themselves together for the purpose of conducting a business
As trustees are not the agents of the cestuis que trust, the shareho
conducting a business; if they have associated themselves togethe
by virtue of their common interest in receiving the income from
business conducted by the trustees as principals. Certainly, contr
have no cause for complaint at the non-liability of the beneficiar
are not satisfied with the personal credit of the trustees, they n
with the company at all; and if it be said that the trustees, too,
to limit their personal liability, this again is necessarily a matter
between the creditor and the trustees and furnishes no reason fo
liability on the beneficiaries. It is recognized in Texas, as well
that even partners may by contract limit their liability to th
assets.2

A more plausible argument may be made in favor of persons who have

received tort injuries in the course of the administration of a business trust.
It may be said that after persons have got together and launched a business
enterprise from which they are to receive the profits, they ought not to be
allowed to say to one who has been injured by a business employee that he
must look solely to the trustees, who may be irresponsible. In answer, it may be
suggested, (1) that there is no reason to suppose that trustees having unbridled
management of the property and business of the trust are likely to be irre-
sponsible people, (2) that if in a particular case the trustees should be unable
to respond in damages, under familiar trust principles and by virtue of the
very general provisions of the business trust declarations the injured party
could resort to the trust property,23 and (3) that such immunity from personal
liability is no more than that enjoyed by the cestui que trust of an ordinary
trust, even though such cestui que trust may be also the settlor.24 Thus, in
Curry v. Dorr,25 defendant conveyed the fee of certain premises to one Barlow,
in trust for the grantor, who was to receive the rents and profits; and thereafter
defendant was sued for injuries received by plaintiff due to defective condition
of the sidewalk. He was held not liable, the Massachusetts court saying,

8 2 Industrial Lumber Co. v. Texas Pine Land Ass'n (1903) 31 Tex. Civ. App. 375, 72 S. W.
875.
23 This topic will be developed by my colleague, Professor A. W. Scott, in an article to
appear in a forthcoming number of the Harvard Law Review. And see R. S. Stevens, op. cit.
24 Falardtau v. Boston Art Students' Ass'n, supra, footnote 15; Dantzler v. Mclnnis (1907)
151 Ala. 293, 44 So. 193.
26 Supra, footnote 16.

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 SHAREHOLDERS IN BUSINESS TRUSTS 429

"the defendant is not shown to have been in occupation or to have

the management and control of the property as if it were his own,
title having been in the trustee, he alone would be personally li
plaintiff's injuries."
Upon petition for re-hearing in Wells v. Mackay Telegraph
the attention of the Texas court was drawn to Connally v. Lyons,2
woman, the owner of a mercantile business, conveyed it by deed to
in trust to conduct the same and divide the profits equally between
her father, and the seven brothers of the settlor. It was held that
as trustee was personally liable to a subsequent creditor, and,
dictum, that the beneficiaries would not be liable. In comment
case the court in the Wells case said (at page 1009):
"It is a far cry from the holding in the Connally Case that the
ceipt by the brothers of Mrs. Connally of gratuitous benefits conf
them by a generous donor would not make them partners in the b
ducted by the trustee for their benefit under the trust deed, with t
of which they had no connection, and no control over the business b
them by their donor, to our holding in this case that appellants, by
themselves together for the purpose of carrying on a business ent
their mutual profit, without complying with the limited partners
or the statute providing for the creating of business corporati
jointly and severally liable for the debts incurred in the conduct o
ness. Whether appellants were owners of shares in the business at th
organization was effected and the declaration of trust executed, or
shares issued by the trustees under the trust organization, is imm
purchaser of shares in such a business organization becomes a busin
of the other shareholders and his right to share in the profits of
carries with it the burden of responsibility for debts incurred in
the business."

It is not apparent why the beneficiaries in the trading trust involved in the
Connally case should be in a better position as regards non-liability than the
purchasers of a fractional share in a so-called business trust. The mere fact
that the cestuis que trust in the former case received their interests gratuitously,
while the shareholders in a business trust presumably paid for their interests
(some of them may well have received their shares from a "generous donor")
would hardly support a distinction in this particular. Indeed, if one of the
brothers in the Connally case had sold his equitable interest for value to an
assignee, surely such assignee would not have become personally liable for
the debts of the trust business. When the court in Wells v. Mackay Telegraph
Cable Co. says that the right of a shareholder in a business trust "to share in
the profits of the business carries with it the burden of responsibility for debts
incurred in carrying on the business," it is enunciating at a very late day the
old, discredited, profit-sharing test. The case, it is submitted, should not be
followed, and notwithstanding the confidence of the court in the correctness
of its conclusions it is not too much to hope that the Supreme Court of Texas

26 (1891) 82 Tex. 664, 18 S. W. 799.

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430 COLUMBIA LAW REVIEW

will finally determine the law of that state to be otherwise.27 It is

of some importance, because business trusts have come into such
use in Texas that the attitude of the Texas Supreme Court will have
able influence on the law of other states, especially in that region of t
So far as the question has come before courts in other states, th
recognized that a business trust can be constituted so as to secu
liability to the shareholders.28 As to how far the trust declaration
go in according to the shareholders some latent, residuary power of c
the trustees, it cannot be said that the law has finally crystalliz
the cases contain little careful analysis of the problem. It is an
problem, because its ultimate solution will have a direct bearing on
and utility of the business trust as a means of aggregating capital f
enterprise. If the only means open to shareholders to protect t
against the misconduct of an incompetent, faithless or otherwise uns
trustee (who may have been self-appointed in the original declaratio
is an expensive equity suit,29 it may be doubted whether this type of
tion will commend itself widely to the prudent portion of the gener
public.3 It is submitted that certain powers may properly be reserv
certificate holders consistent with the erection of a genuine tru
consequent personal immunity of the cestuis que trust; that the exi
such powers is purely a matter of internal management; that if the la
effect to the declared intention of the parties to set up the trustees as
with attendant personal liability, creditors will have no compla
proper concern with provisions of the declaration of trust affectin
trustees and shareholders inter se. It is further submitted that the decision as
to the effect of any particular reserved power in the shareholders is not fore-
ordained in the legal nature of things, but will depend chiefly on whether the
court looks upon the business trust device with benevolent or hostile eyes;
and whichever way the decision goes, respectable legal analogy will be available
to sustain the result.
In Williams v. Milton,31 a case cited perhaps oftener than any other in
this connection, the court contrasted on the one hand cases like Hoadley v.
County Commissioners,32 which involved unincorporated joint stock associations
where in effect the shareholders were principals "whose instructions are to be
obeyed by their agent who for their convenience holds the legal title to their

27 A decision by the Supreme Court of Texas on the point is expected shortly. Wells v.
Mackay Telegraph Cable Co., supra, footnote 18, p. 1009. Cf. Howe v. Wichita State Bk. & Tr.
Co. (Tex. Civ. App. 1922) 242 S. W. 1091, 1095; West Side Oil Co. v. McDorman (Tex. Civ. App.
1922) 244 S. W. 167, 176. See also Moss v. Republic Supply Co. (Tex. Civ. App. 1922) 240
S. W. 326; Stroud Motor Mfg. Co. v. Gunzer (Tex. Civ. App. 1922) 240 S. W. 644.
28 See cases cited in subsequent notes.
29 Burnett v. Smith (Tex. Civ. App. 1922) 240 S. W. 1007.
30 See an interesting suggestion upon this point by S. R. Wrightington, Modern Business
Organizations (1917) 24 Case & Comm. 184.
31 (1913) 215 Mass. 1, 102 N. E. 355. The actual case did not deal directly with the lia-
bility of shareholders to creditors, but was a taxation case. The court, however, said: "The
right to tax property as trust or partnership property depends upon what the character of the
property taxed really is." Ibid., p. 6.
32 Supra, footnote 11.

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 SHAREHOLDERS IN BUSINESS TRUSTS 431

property," and on the other hand cases like Mayo v. Moritz,33 wher
were complete masters of the business and "there was no asso
the certificate holders just as there is no association, althoug
interest, among the life tenants or remaindermen in an ordinary
Boston Personal Property Trust involved in Williams v. Milton w
of the latter sort, and the certificate holders not to constitute a
Following is an extract from the opinion (page 10):
"The certificate holders or 'cestuis que trustent,' are in no way as
gether, nor is there any provision in the indenture of trust for any m
held by them. The only act which (under the trust indenture) th
to consent to an alteration or amendment of the trust created by
or to a termination of it before the time fixed in the deed. ... It is for the
trustees to decide whether they will do any one of these things. All that the
certificate holders or 'cestuis que trustent' can do is to give or withhold their
consent to the trustees taking such action. And the giving or withholding of
consent by the cestuis que trust is not to be had in a meeting but is to be given
by them individually. As we have said, no meeting of the cestuis que trust for
that or any other purpose is provided for in the trust indenture. . . . The cer-
tificate holders . . . have a common interest in precisely the same sense that
the members of a class of life tenants . . . have a common interest, but they
are not socii, and it is the trustees, not the certificate holders, who are the
masters of the trust property." [Italics the writer's.]

It will be seen from the above extract, and from other parts of the opinion,
that the court places great emphasis not only on (1) the complete absence of
control in the certificate holders, but also on the fact (2) that no provision
is made for any meeting of the shareholders who are "in no way associated
together."34 What is the significance of this? As a negative test, the lack of
any association may properly be taken to indicate that the shareholders do
not constitute a partnership, for by definition a partnership is an association
of two or more persons to carry on as co-owners a business for profit.35 But
would the result in Williams v. Milton have been different if the declaration
of trust, otherwise unchanged, had provided for periodical meetings of the
certificate holders to receive the reports of the trustees and to consent to any
modification of the trust proposed by the trustees? It is believed that the
mere provision for meetings of the cestuis que trust cannot turn their association
into a partnership. Not every unincorporated association is a partnership;
there must be a business for profit carried on by the associates. In Smith v.
Anderson,36 cited with approval by the court in Williams v. Milton, Cotton,
L. J., said:
"But, in my opinion, what must be shown is that the association by themselves
or by their agents carry on a business. Now, here, how can that be said? That
the certificate holders do it by themselves can, I think, hardly be contended.
All the power which the subscribers of this money had was to attend some-
33 Supra, footnote 13.
34 See also Priestley v. Treasurer & Receiver General, supra, footnote 5, p. 455, again em-
phasizing the point of "association."
36 Uniform Partnership Act, ? 6.
36 (1880) L. R. 15 Ch. D. 247, 284.

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432 COLUMBIA LAW REVIEW

times at meetings, and the meetings which were most usually held
mentioned in clause 26. The only business done at them was to
consider a report from the trustees on the condition and affairs o
to appoint auditors to audit the accounts, and to elect new trustees
vacancies. It is impossible, in my opinion, to say that the certificat
are by themselves in any way carrying on any business by reason
done at these meetings. Then clause 20 says that a re-investme
sanctioned at a meeting of the certificate holders summoned for t
. . . They meet as cestuis que trust to give their assent, not as mem
partnership joining to carry on and control the business of the par
even if it were a business. Then, can it be said that they carry on
by their agents? In my opinion, that cannot be maintained. The tr
are the only persons who are dealing with the investments, an
dealing, not as agents for some principal, but as trustees in whom t
and the management of it are vested, . . .

Therefore, if the shareholders of a business trust are held to be a

it must be, not because they have some meeting or association toge
because by virtue of powers in the trust deed they may fairly be
carrying on the business.
Let us now consider some of the powers that have been reserve
shareholders 37 in various declarations of trust. In Williams v. Boston 38 the
shareholders at any meeting were empowered to authorize or instruct the
trustees in any manner. It will be agreed that with such a provision the
organization is substantially no different from the unincorporated joint stock
company described earlier in this article.39 "There is no magic in the word
'trustees' which necessarily excludes the idea of agency." 40 "The person
in whose name the partnership property stands in such a case is perhaps in
a sense a trustee. But speaking with accuracy he is an agent who for the
principal's convenience holds the legal title to the principal's property." 41 It
is interesting to note, however, an apparently contrary holding in the famous
case of Cox v. Hickman.42 There, an embarrassed trader, by agreement with
his creditors and in full satisfaction of their respective claims, transferred his
business to trustees to operate and to pay the accruing profits to the said
creditors in ratable proportions until their debts were paid, and then to hold
the residue for the grantor. The deed of trust 4 provided for meetings of the
creditors and that

". .. the majority in value of the joint creditors present at any such meeting
. . .should have full power . .. to make, alter, add to, or diminish from

37 There is, perhaps, a psychological advantage in describing them in the trust deed as
"cestuis que trust" rather than "shareholders."
38 (1911) 208 Mass. 497, 94 N. E. 808. See original papers in the case.
39 Morehead v. Greenville Exch. Nat. Bk. (Tex. Civ. App. 1922) 243 S. W. 546. In Taber
v. Breck (1906) 192 Mass. 355, 78 N. E. 472, the trustees were subject to instructions of share-
holders voted at any meeting. See original papers. Likewise, in Bisbee v. Mackay (1913)
215 Mass. 21, 102 N. E. 327, as the original papers disclosed. Cf. Malley v. Howard (C. C. A.
1922) 281 Fed. 363, 368.
40 McCamey v. Hollister Oil Co., supra, footnote 14, p. 700.
41 Williams v. Milton, supra, footnote 31, p. 6.
42 Supra, footnote 12.
3 Set out below, in (1860) 18 C. B. 617, 624.

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 SHAREHOLDERS IN BUSINESS TRUSTS 433

the powers, trusts, and provisions therein contained, and to make any r
or directions relative to the discontinuance of the said business and the p
or future management thereof .. ."

It was held, notwithstanding these powers in the creditors, that they w

liable for subsequent debts incurred by the trustees in operating the bu
under the trust deed. The court's overthrow of profit sharing as a
liability has met with general approval, but the case has been questio
its facts because of the aforesaid powers of control over the details of m
ment which were vested in the creditors.44 Certainly, the House of Lor
influenced by the fact that the real beneficial owner of the business w
the debtor, that the trust deed simply encumbered the profits for the b
of the existing creditors, whose respective interests were limited to a rec
of the amount of their claims.4 It is safe to say that in this country, a
rate, the shareholders in a so-called business trust cannot retain the pow
direct the trustees in the details of management, without being subject
the liability attendant upon membership in an ordinary joint stock associ
Another power which is sometimes vested in the shareholders of a bu
trust is the power, by a majority or a two-thirds or a three-fourths vo
remove the trustees at any time without assigning cause and to sub
others for the vacancy so created. In Frost v. Thompson,47 Priestley v. Tr
& Receiver General,48 Horgan v. Morgan,49 Howe v. Chmielinski,50 and
v. Gifford,56 where this power was reserved, the Massachusetts cou
uniformly regarded the organizations as partnerships, though in each o
cases there was also reserved the power in the shareholders to alter or te
the trust, and it is not clear to which of these powers the court attaches
significance. The case of Neville v. Gifford is curious, in that the two t
were also the owners of all the certificates of beneficial interest. Of co
such circumstances there is no trust at all;52 the defendants were sole pro
of the business in law and in equity, and it was unnecessary for the cou

44 Wrightintgon, Unincorporated Associations (1916) ? 38; see the explanation i

op. cit., ?? 67, 79.
45 Cf. In re Hoyne (C. C. A. 1922) 277 Fed. 668.
46 Of course this liability, so far as contracts are concerned, may be limited by co
with the creditors, and the trust declarations usually require the trustees so to stipul
trouble is, the trustees often fail to do this. It is not entirely settled how far noti
or constructive, of such a provision in the declaration of trust will be held to bind cr
It seems that if the creditors have notice, the shareholders should be protected u
general doctrine of agency that a third person cannot hold a principal upon a contrac
he knows the agent has not the principal's authority to make. Here, by hypothesis, the
knows the trustee has no authority to make a contract, failing to stipulate for the
immunity of the shareholders. See on the point, Bank of Topeka v. Eaton (D. C. 1900)
8, (C. C. A. 1901) 107 Fed. 1003. Burdick, Partnership (3rd ed. 1917) 40-41; Sears
?? 77-88; Wrightington, Voluntary Associations in Massachusetts (1912) 21 Yale Law
311, 313-21; Wrightington, Unincorporated Associations (1916) ?? 30-31; cf. Adam
(1920) 234 Mass. 584, 125 N. E. 857; Staver & Abbott Mfg. Co. v. Blake (1896) 111 M
286, 69 N. W. 508; see Kimball v. Whitney (1919) 233 Mass. 321, 333, 123 N. E. 665.
47 (1914) 219 Mass. 360, 106 N. E. 1009.
48 Supra, footnote 5.
49 (1919) 233 Mass. 381, 124 N. E. 32.
60 (1921) 237 Mass. 532, 130 N. E. 56.
,1 (Mass. 1922) 136 N. E. 160.
52 See Cunningham v. Bright (1917) 228 Mass. 385, 117 N. E. 909.

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434 COLUMBIA LAW REVIEW

base their liability as "shareholders" on the powers of control reserv

trust instrument. As to the effect to be given to a power in the sha
to remove the trustees, a court not favorably inclined to the busines
a new instrument of commerce and industry can argue with some per
that with such a power in the background the shareholders might v
bend the trustees to their will in the conduct of the business; that ind
action of the trustees is out of the question in such circumstances; t
shareholders are the "masters" of the business.
On the other hand, a power in the cestuis que trust to remove a trustee
is not inconsistent with the creation of a valid trust. Such a provision is not
uncommonly found in ordinary trusts,3 and though no doubt a court of equity
might, at the suit of the minority cestuis que trust, interfere to restrain a flagrant
abuse of this power by the majority, it is not suggested in any of these cases
that the trustee is any less a true trustee, or that the power of removal makes
the cestuis que trust principals, personally liable for the acts of their agents,
the trustees. The trustees, so long as they remain in office, have full legal
power in the conduct of the trust, regardless of the wishes of the shareholders;
and if the intent of all the parties as disclosed by the trust instrument is that
the trustees shall as principals interpose their personal credit and liability
between the cestuis que trust and the outside world, no compelling reason of
policy is apparent why the courts should set at naught this declared intent.
Creditors have the tort or-contract liability of the trustees to rely upon; the
uncertain tenure of the trustees in office is purely a matter between the trustees
and the shareholders. Such a power of removal, especially if requiring for its
exercise a concurrence of two-thirds or three-fourths in interest of the share-
holders, may be regarded as a very proper emergency provision in a business
trust, whereby the shareholders may effectively protect their interests without
resort to a tedious equity proceeding. Its purpose is not, in fact, to enable the
shareholders to take detailed control of the management. At least, the courts
ought to say this: that as long as the shareholders have not made use of this
threat of removal to interfere with and assume the actual conduct of the
business, the shareholders should not be personally liable to creditors of the
trust.

Such seems to have been the conclusion of the Rhode Island court in
Rhode. Island Hospital Trust Co. v. Copeland,54 where the trustees were given
"exclusive management and control" of the business, but the common share-
holders were empowered in meeting (1) by a majority vote to remove any
trustee and appoint a new one in his stead, (2) by a two-thirds vote, the trustees
consenting, to alter or amend the trust deed except in certain specified partic-
ulars, and (3) by a two-thirds vote to terminate the trust. Although the

53 Bowditch v. Bannelos (Mass. 1854) 1 Gray 220; May v. May (1897) 167 U. S. 310,
17 Sup. Ct. 824; March v. Romare (C. C. A. 1902) 116 Fed. 355; Reichert v. Missouri & Ill.
Coal Co. (1907) 231 Ill. 238, 83 N..E. 166.
64 (1916) 39 R. I. 193, 98 Atl. 273; see also H. G. Snyder, op. cit., pp. 153, 173, comment-
ing on the Oklahoma statute, which seems to allow a reservation of the power to remove trus-
tees.

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 SHAREHOLDERS IN BUSINESS TRUSTS 435

specific question before the court was confined to the liability of hold
preferred shares, who were given no such powers and were simply en
preferential dividends, the court puts the broad question (at page
the Martin-Copeland Company a co-partnership and the several ho
shares therein individually liable for its debts, or is it a true trust wh
holders are only cestuis que trustent?" And after reviewing the autho
court concludes (page 214): "When we examine the agreement of A
1912, under which the Martin-Copeland Company was organized, in th
of the authorities we have cited, we cannot escape the conclusion t
agreement evidences both in intention and in law a true trust and not a
ship." This case will be referred to again in the subsequent discussion.
If, as has been argued, the power to remove the trustees should
regarded as turning the shareholders into a partnership of the joi
association variety, what shall we say of the power to elect trustees at
(and substantial) intervals? A settlor in an ordinary trust selects his t
in the first instance and he is not thereafter liable for the acts of his a
even though the said settlor is one of the beneficiaries of the trust.55
should there be any difference if new trustees are appointed at periods
two or three years? While they are in office the trust deed gives them
trol of the business and instructions by the shareholders may be disr
Peterson v. Chicago Rock Island & Pacific Ry.56 furnishes an anal
defendant railroad owned a controlling interest in the stock of a local
corporation which in the course of operating a road in Texas ran o
plaintiff's intestate. Service of process was had upon the general mana
the subsidiary corporation upon the theory that the local road was th
of the defendant for the transacting of business in Texas. It was held
service of process should be quashed and the action dismissed for
jurisdiction. The Supreme Court said:
"It is true that the Pacific Company practically owns the controllin
in the Gulf Company, and that both companies constitute element
Rock Island System. But the holding of the majority interest in the s
not mean the control of the active officers and agents of the local co
doing business in Texas. That fact gave the Pacific Company the
control the road by the election of the directors of the Gulf Compan
could in turn elect officers or remove them from the places already
this power does not make it the company transacting the local busine
"This record discloses that the officers and agents of the Gulf Com
control its management. The fact that the Pacific Company owns
trolling amounts of the stock of the Gulf Company and thus has the
to change the management does not give it present control of the cor
property and business."57

That the power to elect trustees annually did not render the share
of a business trust personally liable was the view of the Kansas court
65 Wells-Stone Mercantile Co. v. Grover, supra, footnote 13.
66 (1907) 205 U. S. 364, 27 Sup. Ct. 513.
67 Ibid., p. 391; see also Pullman's Palace Car Co. v. Missouri Pac. Co. (1885)
587, 597, 6 Sup. Ct. 194.

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436 COLUMBIA LAW REVIEW

Lumber Company v. State Charter Board.58 The Charter Board, ap

"Blue Sky" law, refused a permit to sell within the state shares o
interest in a so-called business trust that purported to exemp
holders from personal liability, on the ground that the organizatio
a partnership, and hence that investors were apt to be deceived to t
The court decided that this ground was not well taken, and that th
should be considered on its merits. The court said (at page 159):
"They [the trustees] do not take orders or directions from the sha
are in no sense the agents of the shareholders. . . . The stock
voting strength of the shareholders when trustees are elected, bu
that they choose trustees with the powers conferred by the declar
is not such control as to make the trustees their agents or give the
the character of partners."

So far as the writer's research goes, the Massachusetts cou

definitely passed on the effect of reserving this elective powe
Treasurer & Receiver General,59 though unnecessary to the discu
case,60 it was stated by the court that certificate holders in a rea
were partners where the declaration of trust empowered them to
trustees at each annual meeting to serve for three-year terms, an
thirds vote to alter, amend or terminate the trust at any regular
meeting. It does not appear what the court's view would have
the power to elect trustees had been given. In Kimball v. Whitney
the powers conferred were essentially the same as in the Dana cas
expressly left the question open.62
Still more clearly the mere power in the shareholders to f
among the trustees caused by death or resignation should not con
partners, and so it was held in Smith v. Anderson,6 a case app
Massachusetts Court in Williams v. Milton.64 Such a power is
found in ordinary trusts65 that it certainly cannot be held in a so-
trust to alter the usual incidents of the trustee-cestui que trust r
Another power frequently conferred upon shareholders in bu
is that of accelerating, by a majority or a two-thirds or a three-f

58 (1920) 107 Kan. 153, 190 Pac. 601.

69 (1917) 227 Mass. 562, 565, 116 N. E. 941.
60 A woman died domiciled in Massachusetts, leaving shares in a foreign re
The only question was as to whether Massachusetts could lay an inheritanc
decision that the real estate had been converted into personalty did not depend
the association was a trust or a partnership.
61 Supra, footnote 46.
82 See Whitman v. Porter (1871) 107 Mass. 522, which is meagerly repor
be taken as decisive. Phillips v. Blatchford, supra, footnote 9, cited in the Dana
not in point, for there the shareholders ran the business through elected man
the trustee was subject, and the shareholders were empowered at their meeting
instructions to the managers. See the original papers. So, in Sleeper v. Park
292, 122 N. E. 315, the trustees were removable at any time, and also were
directions of the shareholders.
63 Supra, footnote 36, p. 284; cf. Mallory v. Russell (1887) 71 Iowa 63, 32 N. W. 102;
Oliver's Estate (1890) 136 Pa. St. 43, 20 Atl. 527.
4 Supra, footnote 31.
6 Perry, Trusts (6th ed. 1911) ?? 288 et seq.

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 SHAREHOLDERS IN BUSINESS TRUSTS 437

the termination of the trust, which otherwise would be liqui

expiration of a period of lives in being and twenty-one years, acc
usual provision. In the only case discovered by the writer where t
alone was reserved to the shareholders, the court expressed the op
there was no partnership created.66 In numerous other cases this
present in conjunction with other and more important powers, an
emphasized as having by itself any significance.67 The power
liquidation of the business and a distribution of its assets does
shareholders control of the conduct of the going business. Here aga
is apparent why the usual non-liability of the cestui que trust for t
trustee should not be applicable to this species of trust. In the
where a settlor of an ordinary trust has reserved the power to re
never been suggested that he thereby became personally liable
of the trustee.68 So, too, the cestuis que trust of an ordinary trust
may call for a termination thereof and a conveyance to them
interests.69 But so long as this power is unexercised, the trustees a
and are not the agents of the cestuis que trust.70
Let it be supposed that the trust as originally constituted conf
trustees full and exclusive powers of management, but that the s
in meeting assembled are empowered to "alter or amend the d
trust." This is a common provision. In Simson v. Klipstein 7 there
phatic dictum that the shareholders are necessarily partners in
because they have it in their power to pass an amendment vesting
management in themselves. In Mc Camey v. Hollister Oil Co.,72 sh
having this power were held liable to creditors, but this case was
by the extreme view of liability held in some of the lower Texas
been pointed out earlier in this article. The contrary view was tak
Associated Trust.73 In this case the shareholders were empowered
cies among the trustees and to alter, amend or terminate the
held that the association should be put into bankruptcy as an "uni
company." The court said that to hold the association "a partne
the bankruptcy act 74 would lead to results never contemplated b
and would impose upon the certificate holders obligations which n

66 Davis v. Hudgins (Tex. Civ. App. 1920) 225 S. W. 73; and see Rhode I
Tr. Co. v. Copeland, supra, footnote 54; but see Sears, op. cit., ?? 91, 101, 182
67 See cases cited, supra, footnotes 38, 39, 47-51,-59; cf. Simson v. Klipste
262 Fed. 823.
68 Gaither v. Williams (1881)57 Md. 625; Simsv. Brown (1913) 252 Mo. 58, 158 S. W. 624;
Lines v. Lines (1891) 142 Pa. St. 149, 21 Atl. 809; Perry, op. cit., ? 104.
69 Eakle v. Ingram (1904) 142 Cal. 15, 75 Pac. 566; Dodge v. Dodge (1914) 112 Me. 291,
92 Atl. 49.
70 Falardeau v. Boston Art Students' Ass'n, supra, footnote 15.
71 Supra, footnote 67.
72 Supra, footnote 14; and see Bingham v. Graham (Tex. Civ. App. 1920) 220 S. W. 10
73 (D. C. 1914) 222 Fed. 1012.
74 If the court had regarded the shareholders as liable for the debts of the association,
would have been put into bankruptcy as a "partnership," and the separate estates of th
shareholders drawn into the administration. Burkhart v. German-American Bk. (D. C. 19
137 Fed. 958.

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438 COLUMBIA LAW REVIEW

nor the creditors of the trust supposed existed. It would be a ve

result."
If the business is organized as a trust and the cestuis que trust have nothing
to do with the management, why should the existence of a latent power to
turn it into something different, namely a partnership of the joint stock
association variety, render the shareholders liable as partners now.75 Are
they in any real sense "carrying on a business for profit?" It would be as
reasonable to argue that the stockholders in a corporation are personally
liable to its creditors because the stockholders have the latent power to termi-
nate the corporation and to continue the business thereafter as partners.
In none of the Massachusetts cases has the power to alter or amend stood alone.
It was present in conjunction with the unrestricted power to remove the
trustees, or to give them detailed instructions, in Williams v. Boston,76 Frost v.
Thompson,77 Horgan v. Morgan78 and Howe v. Chmielinski.79 In Dana v.
Treasurer &? Receiver General 80 and in Kimball v. Whitney 81 the shareholders
were empowered to elect trustees for stated terms and to alter, amend or
terminate the trust; in the former the dictum was that a partnership
resulted;82 in the latter the question was left open. No doubt the argu-
ment would be made that with powers such as these the shareholders in
a business trust have substantially the control over the business that they
would have in the ordinary unincorporated joint stock company, where the
shareholders could elect a board of managers or directors and had the power
to amend the memorandum of association; and that to exempt them from
liability in the former case when they are liable in the latter is to sacrifice
substance to form. But there is an important difference, in that in the business
trust the personal liability of the trustee is the creditor's guarantee, whereas
in the joint stock company the board of managers are simply agents of the
shareholders. Hence, resort to the business trust device is not a mere subterfuge
or evasion. As was said by Mr. Justice Holmes in another connection in
Bullen v. Wisconsin:83 "We do not speak of evasion because, when the law
draws a line a case is on one side of it or the other, and if on the safe side is
none the worse legally that a party has availed himself to the full of what the
law permits."

75 See Wrightington, Unincorporated Associations (1916) 58.

76 Supra, footnote 38. See original papers.
77 Supra, footnote 47.
78 Supra, footnote 49.
79 Supra, footnote 50.
80 Supra, footnote 59.
81 Supra, footnote 46.
82 Baker & McGrew v. Union Seed &6 Fertilizer Co. (1916) 125 Ark. 146, 188 S. W. 571,
where the shareholders had these powers, contains a dictum that the association was a part-
nership. The opinion does not set out the declaration of trust, but the writer has seen a copy
of it. It may be noted that the shareholders were not held personally liable to creditors of the
trust. A partnership transferred its assets to a business trust, which was conducted under the
same name. Later, a party bought goods from the new organization not knowing of the
change, and he was held entitled to set off a claim which he had against the old partnership.
The case seems correctly decided on ordinary principles of estoppel.
83 (1916) 240 U. S. 625, 630, 36 Sup. Ct. 473.

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 SHAREHOLDERS IN BUSINESS TRUSTS 439

Another situation which has not received attention is pres

not infrequent provisions in declarations of trust for two classes of
common and preferred.84 Suppose the common shareholders p
of control over the trustees which render them liable as part
preferred shareholders have no such control. May the organizatio
stock association or partnership as to the former, and a trust as
In Rhode Island Hospital Trust Co. v. Copeland,85 the powers of t
shareholders were such (especially that of removing the trustees
that according to the indications of the Massachusetts decisions s
shareholders would have been held liable as partners. A testator d
to the petitioners as trustees certain preferred shares in the trust
Copeland Company." Petitioners asked a court of equity to in
as to whether they as holders of such preferred shares in the co
be under any personal liability, and the court answered in the ne
court apparently lumped the two classes of shareholders together
that the organization was a "true trust", and that neither cl
personal liability. What would the court have said as to the prefe
holders, who had no associated or concerted action and simply re
dividends, if the common shareholders had been liable as partner
difficulties might be suggested. A tort may be committed by a s
by the trustees. Respondeat superior. But who is the superio
the "masters" of the business, the common shareholders, th
mere intermediate agents, and hence not liable for the tort of th
ant.6 As regards the preferred shareholders, are the trustees rea
are called, "trustees," and hence the superiores who must an
servant's tort? It seems hard to say that they are. There is on
fund, the property of the business, and if the "trustees" are
"control" of that, they can hardly have the dignity and resp
trustees either as to the common or preferred shareholders. The
is at the basis of the rule requiring a responsible principal to pay f
torts is met by holding the common shareholders liable. There is
for giving the injured party an additional remedy against the "t
are in the position of the so-called trustee holding for convenien
title to the property of an unincorporated joint stock company
is carried on by the shareholders as co-proprietors. What, then,
of the preferred shareholders in the case supposed? Is it not
that of a dormant partner in an ordinary partnership? Suppose A
to join their capital in a business enterprise, and in the partners
it is stipulated that A shall have exclusive control of the conduct o
that B is to lie "dormant" and simply draw his share of the
certainly liable to firm creditors, even though as between himse
partner he has bargained away his control of the business, and t
84 Venner v. Chicago City Ry. (1913) 258 Ill. 523, 101 N. E. 949; Kimball v.
footnote 46.
85 Supra, footnote 54.
86 Mechem, Agency (2nd ed. 1914) ? 1463.

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 440 COLUMBIA LAW REVIEW

so even though the partnership agreement unknown to the creditors

that the dormant partner should not be liable beyond the amount cont
Have not the preferred shareholders in the case supposed joined thei
as dormant partners in a business enterprise with the common share
having bargained away their voice in the management in return for p
dividends?
Plausible as the dormant partner analogy may seem, its application to
fasten on the preferred shareholders the label of "partners" flagrantly violates
the intention of the parties, and hence prima facie there must be something
wrong with it. Would it not be more in accord with the facts to say that the
business is that of the common shareholders who control it; that the preferred
shareholders, so-called, are in effect really a deferred class of creditors of the
business? It is quite possible for C to furnish goods to A and B, partners,
upon an agreement to look only to the profits of the business for payment,
and such an agreement will not render C liable as a partner.88 So, in these
days, C may lend money to A and B, partners, upon an agreement to receive a
share of the profits in lieu of interest, without thereby rendering himself liable
to creditors of the business.89 Combining these two ideas, the preferred
shareholders in the case supposed have lent money to the business upon
agreement, (1) to receive a share of the profits in the shape of preferential
dividends in lieu of a fixed rate of interest, and (2) to look for re-payment of
the principal only to the assets of the business remaining upon liquidation
after the other creditors have been paid. Where the parties evidently do not
intend to assume the partnership relation, a partnership should not be held
to result if their agreement can be explained on any other basis.90 Of course,
where a group of people get together and contribute capital to start a business,
and vest the legal title to the property in a "trustee" who is to carry on the
business, subject, however, in all particulars to the directions of the associates,
they are liable as partners, regardless of all their declarations "that a trust
and not a partnership is created, and that the shareholders shall not be deemed
or held liable as partners." 91 The "trustee" is only their agent, and whatever
they may say, what they are doing is to "carry on as co-owners a business for
profit." Their position is inexplicable except on the partnership basis. But
the preferred shareholders in the case supposed are not carrying on the business;
are not empowered to do so; do not intend to assume the partnership relation;
and the position they occupy is explicable in a manner consistent with such
intent if we describe them as in substance a class of deferred creditors. "If
parties intend no partnership, the courts should give effect to their intent,
unless somebody has been deceived by their acting or assuming to act as
partners. ". ." 92
87 Burdick, op. cit., p. 383; Rowley, op. cit., ?? 137, 140.
88 Kilshaw v. Jukes (1863) 3 B. & S. *847.
89 Estabrook v. Woods (1906) 192 Mass. 499, 78 N. E. 538; Uniform Partnership Act, ? 6;
Burdick, op. cit., pp. 50 et seq.; cases collected in (1909) 18 L. R. A. (N. s.) 962 et seq.
90 Canton Bridge Co. v. Eaton Rapids (1895) 107 Mich. 613, 615, 65 N. W. 761.
91 Morehead v. Greenzille Exch. Nat Bk., supra, footnote 39.
92 Beecher v. Bush (1881) 45 Mich. 181, 7 N. W. 785.

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 SHAREHOLDERS IN BUSINESS TRUSTS 441

Upon the whole, then, it seems preferable to hold that "prefer

holders" who have no powers of control are not liable as partners e
the common shareholders in the same business trust may be. If th
be accepted, a problem may arise as to the application of the F
ruptcy Act. As a trust estate is not an "entity" which may be
bankrupt, a business trust, as such, may not be put into bankruptcy
cestuis que trust, the shareholders, are not associated together in t
of any joint powers, but simply as individuals receive their dividen
clared.93 If the shareholders have, however, a limited degree of as
and exercise certain joint powers which are not sufficient to r
personally liable, the business trust may be put into bankruptc
incorporated company," and its assets administered for the be
creditors.94 If the powers of control retained by the shareholders a
sive that the shareholders are liable as partners in a joint stock ass
association would be put into bankruptcy as a "partnership,"
separate estates of the partners, so far as not needed for their sep
would be applied to the joint debts.96 In the business trust under co
with common and preferred shareholders, the powers of the comm
holders would have to be looked to in order to determine whether t
tion should be put into bankrupcty as a "partnership" or an "uninc
company." When would such an organization be "insolvent" w
meaning of the Bankruptcy Act, section 1 (15)?97 If, as has been s
the preferred shareholders occupy substantially the position of defe
ors, would the face value of their shares have to be rated as debts o
tion? Apparently not, because from the special nature of the pref
holders' claim they are entitled to be repaid only after all the oth
are satisfied and then only in the event that the remaining assets ar
for that purpose.
How would such a business trust with the two classes of shareholders fare
under various of the federal taxation laws? The Federal Revenue Act of 1921 98
(section 230) imposes a flat tax of 1212% on the "net income" of corporations.
Section 1 provides that "the term 'corporation' includes associations, joint
stock companies, and insurance companies." If a business trust is so organized
that the shareholders are not associated together in the exercise of any powers
of control, it is not taxed as an association but comes under the provisions of
section 219, covering the taxation of income from trust estates.99 "If, however,

93 See In re Parker (C. C. A. 1921) 283 Fed. 404.

94 In re Associated Trust, supra, footnote 73.
95 See Burkhart v. German-American Bk., supra, footnote 74.
96 Bankruptcy Act, ? 5f; 1 Collier, Bankruptcy (12th ed. 1921) 187.
97 "A person shall be deemed insolvent . . . whenever the aggregate of his property . . .
shall not, at a fair valuation, be sufficient in amount to pay his debts."
98 Approved Nov. 23, 1921.
9q Crocker v. Malley, supra, footnote 20. If the income of the trust estate is to be dis-
tributed periodically, whether or not at regular intervals, the trustees make a return, but the
beneficiaries pay the tax. If, however, the trustees are empowered to accumulate the income
for future distribution, the net income is taxed to the trustees. Art. 1504, Treas. Reg. 62, 1922
Ed. In the latter event it may be a disadvantage to be organized as a business trust rather than
a corporation, because as a trust the income is subject to the higher surtaxes, whereas if it
were a corporation a flat tax of 12Y/ per cent is payable.

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442 COLUMBIA LAW REVIEW

the cestuis que trust have a voice in the conduct of the business
whether through the right periodically to elect trustees or other
is an association within the meaning of the statute." 100 In the c
if all the shareholders were in the position of the preferred sha
business trust would be taxed as a trust, and if all were in the p
common shareholders, it would be taxed as an association. In
presence of the two classes of shareholders, must it be taxed
association and in part as a trust? Conceivably the common
alone might be regarded as constituting the "association," and
the net income of that association there would have to be deducted the divi-
dends paid in lieu of interest to the special class of deferred creditors of the
association, called "preferred shareholders." However, it is more likely that
the courts, for the purpose of this particular taxing act, would regard the
two classes of shareholders as grouped together in a single association, which
would be taxed on its net income without deduction of dividends paid to
either class of shareholders. A similar problem would be presented under
the capital stock tax on corporations, which by definition include "associations,
joint stock companies, and insurance companies." If the tax applied at all
to a particular business trust,'10 it would undoubtedly be imposed on the whole
of the capital stock, including that represented by preferred as well as by
common shares. Of course, decisions putting business trusts in one or another
of various arbitrary categories in the construction of taxing statutes are not
necessarily authoritative on the question of the liability of shareholders to
creditors.
SUMMARY

1. No convincing reasons of policy justify the courts in assuming a ho

attitude toward the business trust merely because it is designed to
limited liability for the beneficiaries. Since the overthrow of the profit s
test, there is no "sacred principle" of the law that "to share in the prof
the business carries with it the burden of responsibility for debts incur
in carrying on the business." The business trust, conducted by the t
who are personally liable as principals, makes use of an established do
in the law of trusts which carries with it the immunity of the cestuis que
2. Ordinary incorporation statutes disclose no legislative policy to fo
business into the corporate mould or to render burdensome the use of a
tive forms of business organization allowed by law.102 True, trustees ca
on a business, just as ordinary partners and individual traders, all of whom
personally liable, escape many of the diverse inquisitorial regulations
cable to corporations, and especially, by virtue of article 4, section 2, of
Federal Constitution, they are free from the discriminatory treatm
100 Art. 1504, Treas. Reg. 62, 1922 Ed.; Chicago Title & Tr. Co. v. Smietanka (D. C
275 Fed. 60; and see further, Holmes, Federal Taxes (1923 ed.) 245-249.
101 Malley v. Howard, supra, footnote 39; cf. Malley v. Bowditch (C. C. A. 1919) 259
809.
102 Except, of course, common statutes providing that special kinds of business, such as
banking or insurance, may be done only by corporations. 9 Fletcher, op. cit., ? 6114.

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 SHAREHOLDERS IN BUSINESS TRUSTS 443

which foreign corporations may be subjected.l03 But there is noth

in this. Furthermore, so far as actual experience with the business
prove the necessity, legislatures may from time to time subject th
organization to regulatory laws. Massachusetts 104 and Oklahoma 1
require the declarations of trust to be filed with a designated pub
Business trusts are generally required to comply with the prov
"Blue Sky" laws.106 So, in the matter of taxation, legislatures
part free, if they see fit, to classify business trusts with corporations
purposes.107 These are matters that are better to refer to the futu
of the legislatures, rather than for the courts to take it upon the
circumscribe the utility of business trusts by imposing a partners
upon the shareholders when no partnership relation was contempl
parties.
3. Where a business is thus conducted under a declaration of trust,
with the management exclusively vested in trustees, neither the power in the
shareholders, (1) to fill vacancies among the trustees, nor (2) to elect trustees
at stated intervals, nor (3) to remove trustees, nor (4) to alter or amend the
declaration of trust, nor (5) to terminate the trust, nor (6) any combination
of these powers, should be held to turn the trust into a partnership contrary
to the intent of the parties. In the state of the decisions, as indicated in the
foregoing discussion, it cannot be said that the law has yet taken final shape
on these points.
CALVERT MAGRUDER
HARVARD LAW SCHOOL

103 9 Fletcher, op. cit., ? 6113.

104 Mass., Gen. Laws 1921, c. 182.
105 Okla., Laws 1919, c. 16.
'10 Home .Lumber Co. v. State Charter Board, supra, footnote 58; People v. Clum (1921)
213 Mich. 651, 182 N. W. 136; In re Girard (1921) 186 Cal. 718, 200 Pac. 593; Schmidt v.
Stortz (1922) 208 Mo. App. 439, 236 S. W. 694; but see Superior Oil Syndicate v. Handley
(1921) 99 Ore. 146, 195 Pac. 159. Letters received by the writer from various state agencies
having the duty of enforcing these Blue Sky laws indicate that they have generally adopted a
critical and skeptical attitude towards business trusts; and that consequently it is difficult to
obtain the necessary permit to sell the certificates representing beneficial interests therein.
107 Opinion of the Justices (1908) 196 Mass. 603, 85 N. E. 545; Chicago Title & Tr. Co. v.
Smietanka, supra, footnote 100; Malley v. Howard, supra, footnote 39; Malley v. Bowditch,
supra, footnote 101.

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