Baker v. Stern

Rosenberry, • J. This court is called upon in this case for the first time to deal with some of the legal aspects of a business trust, a business device which had its development principally in Massachusetts and is consequently frequently referred to as a Massachusetts trust. The business trust is of comparatively recent origin and courts in other states have been called upon to consider it with relation to taxation, incorporation statutes, bankruptcy laws, laws regulating the sale of securities commonly called “blue sky laws,” rights of creditors, and liabilities of the beneficiaries or certificate holders. As respects their fundamental characteristics, business trusts have almost uniformly been held to be valid. They have been held to be gwcm-corporations, Hoey v. Coleman (1891), 46 Fed. 221; joint-stock companies, Hart v. Seymour (1893), 147 Ill. 598, 35 N. E. 246; partnerships, Clagett v. Kilhourne (1861), 1 Black (66 U. S.) 346, 17 Lawy. Ed. 213, Whitman v. Porter (1871), 107 Mass. 522; both joint-stock company and partnership, Spotswood v. Morris (1906), 12 Idaho, 360, 85 Pac. 1094; a pure trust, Crocker v. Motley (1919), 249 U. S. 223, 39 Sup. Ct. 270, — 261 — Williams v. Milton (1913), 215 Mass. 1, 102 N. E. 355; a distinct legal entity, Forgan v. Mackie (1925), 232 Mich. 476, 205 N. W. 600; not to be a distinct legal entity, Guthmann v. Adco Dry S. B. Co. (1924), 232 Ill. App. 327; to be within the bankruptcy act, Burk-Waggoner Oil Asso. v. Hopkins (1925), 269 U. S. 110, 46 Sup. Ct. 48; not to be distinguishable from corporations, Weber Engine Co. v. Alter (1926), 120 Kan. 557, 245 Pac. 143, 46 A. L. R. 158. The authorities are collected and analyzed in notes to 7 A. L. R. 612, 10 A. L. R. 887, 31 A. L. R. 851, 35 A. L. R. 502, 46 A. L. R. 169. Notes discussing the application of “blue sky laws” to a Massachusetts trust are to be found in 24 A. L. R. 529 and in 40 A. L. R. 1016. We make these general observations for two reasons: (1st) We are asked to hold that upon the allegations of fact appearing in the complaint the contract should be specifically enforced. If the contract is held to be specifically enforceable, it is necessarily held to be a valid contract in its entirety. This involves the question of whether or not the plan of the trust is in any of its aspects contrary to public policy. In determining this question we have not had assistance of counsel, but have reached the conclusion that a general plan such as is disclosed by the allegations of the complaint is not contrary to public policy. We reach this conclusion more readily because business trusts, whether existing under the laws 'of this or other states, are recognized as being valid by legislative act. Regulations prescribing the conditions under which such organizations may transact business in this state are found in sec. 226.14, Stats, (ch. 431, Laws 1923). (2d) In view of the variety of plans devised to meet varying situations arising in the business world, no broad dogmatic statements can be made. Each plan must be tested by applicable rules of law in order, that its nature and validity may be determined. Attention is directed to the fact that what may be said in the course of the — 262 — opinion is specifically limited to the facts presented in this case and is not to be construed as a wholesale approval of any form of so-called business trusts which may be hereafter considered. We are called upon to deal with the interpretation of statutes and decisions enacted and pronounced without having in contemplation a trust of the nature disclosed by the pleadings in this case. The particular grounds of invalidity urged against the trust agreement and the land trust certificates are, first, that the agreement and certificates violate the rule against perpetuities and the rule relating to the suspension of the power of alienation of property set forth in sec. 230.15 as amended by the Laws of 1927 (the amendment increased- the period from two lives in being and twenty-one years thereafter to a life or lives in being and thirty years thereafter). The solution of this question requires a brief analysis of the plan. By the terms of the trust agreement the.trustee is to hold the title to the fee and tp -the. lease in trust for two purposes: (1) To pay the holders of .land trust certificates $50 per year per share in quarterly payments, -and from any excess fund in its hands to- retire the-land trust certificates in the manner provided. (2) Upon the retirement of the land trust certificates to distribute the rent, and in case of sale of the property the proceeds of the sale-to the holders of the ultimate title certificates. By this plan two things,are accomplished: first, the land trust certificate holder acquires-an interest in the transaction (whether this interest- is real estate or personal property we do not now decide) which is vendible, and the owners of the property may avail themselves of the funds derived- from a transfer of that interest for present purposes without personal liability, the payment being secured .solely upon the trust estate without the personal liability, of any one; and second, in the event of a default as that term is defined in the trust instrument, a sale of the premises can be had, apparently without a right of redemption in any one (whether such — 263 — right if it exists is or may be cut off in the manner provided is not determined). No definite trust period is prescribed. Upon the facts appearing in the case it cannot be determined as a matter of calculation whether the land trust certificates will be retired in ten or fifty years or longer. The trust agreement provides a method whereby the trustee may be required to make a sale of the property and the trustee is authorized in certain contingencies to make sale. Sec. 230.15, Stats. 1927, is as follows: “The absolute power of alienation shall not be suspended by any limitation or condition whatever for a longer period than during the continuance of a life or lives in being at the creation of the estate and thirty years thereafter, except in the single case mentioned in section 230.16 [contingent remainder in fee], and except when real estate is given, granted or devised to a charitable use or to literary or charitable corporations which shall have been organized under the laws of this state, for their sole use and benefit, or to any cemetery corporation, society or association.” Sec. 230.14 provides: “Every future estate shall be void in its creation which shall suspend the absolute power of alienation for a longer period than is prescribed in this chapter; such power of alienation is suspended when there are no persons in being by whom an absolute fee in possession can be conveyed.” The subject matter of these sections was thoroughly considered in Becker v. Chester, 115 Wis. 90, 106, 91 N. W. 87, 650. It was there held that “the power of alienation of realty is not suspended where there are living parties, however numerous, who have unitedly the entire ownership and may, presently, lawfully join in an absolute conveyance of the same.” See, also, Holmes v. Walter, 118 Wis. 409, 95 N. W. 380; Eggleston v. Swartz, 145 Wis. 106, 129 N. W. 48. While the parties to this transaction possibly may be very numerous, yet it is apparent that if the holders of the — 264 — land trust certificates and the ultimáte title certificates and the trustee unite in a conveyance, which they may do at any time without violating the trust agreement, they can convey an absolute title to the trust estate. The arrangement, therefore, does not violate the statute forbidding the suspension of the power of alienation for a term longer than that prescribed. The second contention made is that the trust is not by its terms limited upon a life or lives in being and thirty years thereafter and is therefore in violation of sub.' (5) of sec. 231.11. Title XX of the Wisconsin Statutes is entitled “Real Property, and the Nature and Qualities of Estates Therein,” and contains five chapters. Ch. 230 is entitled “Nature and Qualities of Estates in Real Property, and Restrictions on Alienation;” ch. 231, “Uses and Trusts;” ch. 232, “Powers;” ch. 233, “Dower and Curtesy;” ch. 234, “Landlords and Tenants and General Provisions.” Sec. 231.01 provides: “Uses and. trusts, except as authorized and modified in this chapter, are abolished; and every estate and interest in lands shall be deemed a legal right, cognizable as such in the courts of law, except when otherwise provided in these statutes.” The trust disclosed in the trust agreement in this case is no doubt one provided for by sub. (5) of sec. 231.11: “Express trusts may be created for any or either of the following purposes: . . . “(5) For the beneficial interests of any person or persons, when such trust is fully expressed and clearly defined upon the face of the instrument creating it, subject to the limitations as to.time and the exceptions thereto relating to literary and charitable corporations prescribed in this title. “(6) . . .” The trust instrument in this case does not prescribe any definite time for the termination of the trust; the trust is not limited upon a life or lives in being and not more than — 265 — thirty years thereafter and is said, therefore, to be in violation of the provisiqns of sub. (5), sec. 231.11. The language of this section first appears in title XV, ch. 57, of the Revised Statutes of 1849. Sec. 1 of ch. 57, R. S. 1849, is identical with sec. 231.01 already quoted except that the word “title” is used in the last line instead of “statutes.” Sec. 11 of ch. 57, R. S. 1849, provides: “Express trusts may be created for any or either of -the following purposes : . . . “5. For the beneficial interest of any person or persons, when such trust is fully expressed and clearly defined upon the face of the instrument creating it, subject to the limitations as to time prescribed in this title.” By the revision of 1878 the words “and the exceptions thereto, relating to literary and' charitable corporations,” were inserted between the word “time” and the word “prescribed.” Respecting the addition of these words the re-visors said: “In sec.'2081 [now sec. 231.11] words are inserted in the fifth subdivision to clearly indicate that the provisions apply to corporations, and to give perpetual trusts in aid of literary and charitable corporations, for reasons indicated in note to preceding chapter; and it is also to be observed that under the fourth subdivision a trust to accumulate rents and profits for such corporations may be created by reason of the change in the preceding chapter.” Respecting sec. 2039 (now sec. 230.15) the revisors said: “Amendment is made to allow grants or devises in perpetuity to literary or charitable corporations. It is thought that this ought not to be extended to religious corporations, but left only to those which are formed for advancing literary or charitable ends. The decision in Ruth v. Oberbrunner, 40 Wis. 238, shows a defect in the law as it is, which is generally admitted to require amendment. We have endeavored to afford it without too great innovation. In' that spirit, it is provided that corporations under our laws can — 266 — alone enjoy the benefit of stich a grant, because they are within legislative control under the constitution, while they can' readily be formed to possess all necessary powers for the full enjoyment of all the benefits which should follow such a provision in the law.” Ruth v. Oberbrunner, 40 Wis. 238, involved the question of whether or not trusts for charitable purposes were abolished, and it was held in conformity with the weight of authority in the state of New York, from which the statute was taken, that they were abolished. The court said: “Our statute contains a provision in regard to that class of trusts, not found in the statutes of that state. It is the fifth subdivision of sec. 11, and reads as follows: ‘An express trust may be created for the beneficial interests of any person or persons, when such trust is fully expressed and clearly defined on the face of the instrument creating it, subject to the limitations as to time prescribed in this title.’ It is attempted to sustain the devise under this provision; and it is apparent that if it can be upheld at all, it must be because it falls within or conforms to the requirements of this subdivision. Assuming, then, for the purposes of the case, that a trust to a charity may be created under the provision, it can only be so created upon the prescribed terms and limitations. And what are those conditions ? The statute gives a distinct answer to the question. A trust for the beneficial interest of another is valid, ‘when it is fully expressed and clearly defined upon the face of the instrument creating it,’ and so limited as to time as not to violate the statute against perpetuities.” So much for the history of the section. It is considered that the words “subject to the limitations as to time prescribed in this title” should be interpreted in the sense in which they were used in the Statutes of 1849, for the reason that the amendment engrafted upon the section by the revisors of 1878 was in the^ature of an exception. It is argued that sub. (5) should % construed as if it originally read:: “for the beneficial interests of any person or persons when such trust is fully expressed and clearly — 267 — defined, provided it shall terminate within a period not longer than two lives in being,” as the original statute was. This interpretation fails to take any account of the fact that the reference is to limitations as to time. In the original title there was not only a limitation as to future estates, but there was* a limitation as to accumulations of rents and profits, sec. 37, ch. 56, R. S. 1849 (now sec. 230.38); also a limitation as to disposition of rents and profits of real estate, sec. 36, ch. 56, R. S. 1849 (now sec. 230.37). In the title there are other provisions involving a time element. If the language of sub. (5) is to be lield to fix the time within which a trust must be terminated and to refer to all of the limitations as to time contained in the title, then no trust could continue for a longer time than the shortest time limited by any provision contained in the title. The first subdivision of sec. 37, ch. 56, R. S. 1849, relating to accumulations of rents and profits, provides: “If such accumulation be directed to commence on the creation of the estate out of which the rents and profits are to arise, it must be made for the benefit of one or more minors then in being, and terminate at the expiration of their minority.” (Now sub. (1) of sec. 23.0.37.) It is considered that to hold that no trust could be created for a longer time than that limited" in this subdivision would put an unreasonable construction upon the statute. From the language of the statute as well as the comments of the re-visors and the language of the court, it appears that no such limitation as that was intended; that the words in sub. (5), “subject to the limitations as to time prescribed in this title,” merely import into sub. (5) the limitation as to the time during which the power of alienation may be suspended; the limitation of time as to the accumulation of rents and profits; the limitation of time prescribed for disposition of rents and profits; and other limitations, if any, which are contained in the title. The limitations prescribed — 268 — are applicable only when by the terms of the trust a future estate is created or the accumulation of rents and profits is provided for or a disposition of rents and profits is made or other provisions of the statute relating to estates are involved when a limitation as to time is made. Under the terms of the trust agreement in this case we have no difficulty in holding that the power of alienation is not suspended in violation of the statute; nor does the trust agreement provide for the accumulation of rents and profits; nor does it contravene sec. 230.36, which provides: “Disposition of the rents and profits of lands, to accrue and be received at any time subsequent to the execution of the instrument creating such disposition, shall be governed by the rules established in this chapter in relation to future estates in land.” The trust agreement provides for the disposition of rents and profits and is for that reason subject to the limitation contained in sec. 230.36. But applying the “rules established in this chapter in relation- to future estates in land,” we find that the disposition made by the trust agreement does not violate the statute because the trust may, under the terms of the trust agreement, be terminated at any time by persons in being, and with the termination of the trust the disposition of the rents and profits comes to an end. The rule of the section is not violated. As was said in Holmes v. Walter, 118 Wis. 409, 422, 95 N. W. 380: “Again, since the will contains no prohibition, 'express or implied, against terminating- the trust, and all parties that can be interested are in esse, when all are sui juris they can by uniting cause its termination, subject to the restraints contained in secs. 2089 and 2091, Stats. 1898. (Cases cited.) The mere fact that the trust is in terms perpetual does not affect it. That feature is not objectionable so long as it does not offend against the prohibition against suspending the absolute power of alienation.” It is further argued that because the certificates are by — 269 — their terms assignable they violate the provisions of the statute. Sec. 231.19 provides: . . “No person beneficially interested in a trust for the receipt of the rents and profits of lands can assign or in any manner dispose of such interest; but the rights and interests of every person for whose benefit a trust for the payment of a sum in gross is . created are assignable.” The trust agreement creates a trust- for the disposition of rents and profits, the certificate holders are beneficially interested therein, and the payment to be made is not a sum in gross, and if the statute applies, the certificates are not assignable, under the provisions of sec. 231.19. In determining the question presented by this contention the objects and purposes of the plan should be considered. While in a technical sense the holders of certificates may be beneficiaries, their real relation to the transaction is more nearly that of a purchaser. Upon the execution and delivery of the trust agreement the certificates are held by or for the benefit of the settlor and represent his interest in the property which has been, transferred to the trustee. Any one gaining title thereafter to a certificate does so. by gift or purchase and not by the terms of the trust instrument. In that aspect the rights of a holder of a certificate have little resemblance to the rights of a beneficiary under the terms of a non-business trust. The certificate holder of either class has a right to have the trust agreement carried out according to .its terms; to that extent only is he a beneficiary of the trust. Manifestly, the statute was not enacted for the purpose of. limiting the. right of such a beneficiary to transfer his own property. .The question was dealt with by the court of appeals in Schenck v. Barnes, 156 N. Y. 316, 50 N. E. 967. The applicable statute of the state of New York is identical with that of this state. The court said: “The statute is obviously designed to assist the creators of trusts in protecting and caring for the beneficiaries who — 270 — are the natural objects of their solicitude and care, but it cannot be invoked by a debtor to protect a trust which he has created to serve in time of need as a refuge from his creditors.” In that case a person not indebted to any one had created a trust for his own benefit and the benefit of third persons; he subsequently incurred indebtedness and his creditors sought to reach his interest in the trust, and he invoked the statute of the state of New York which provides as does our statute that no person beneficially interested in a trust for the receipt of rents and profits in land could in any manner assign the same, and claimed that by reason thereof his interest was not subject to seizure and sale upon execution. The court said: “A trust created by a debtor and under which he is the beneficiary is not affected by the provision of the Revised Statutes (1 R. S. p. 730, § 63) which prohibits a person beneficially interested in a trust for the receipt of the rents and profits of lands from assigning or disposing of the same. “The policy of this statute is clear, when applied to trusts created by third parties, but is without force when the debtor creates the trust.” The reasoning applies to the holder of a certificate whether he be the creator of the trust or a purchaser from the creator. The statute in question is often referred to as a spendthrift statute and was intended to protect beneficiaries against their own improvident acts whereby the purpose of the trust might be defeated. It can have no application where the beneficiary is in reality a purchaser and not the object of the care and solicitude of the settlor. It is therefore considered that the fact that the certificates are assignable does not make them invalid because in violation of the provisions of sec. 231.19. By the Court. — The order appealed from is affirmed.