Honorable 0. P. Lockhart, Chairman

Board of InsuranceCommissioners Austin, Texas
Dear Slrt Opinion No. O-5182 Re: What is the extent of the trust fund created by the reinsuranoe agreementbetween the Ill'lnois Bankers Life Assoclatlon and the~~Illinols

Bankers Life~.'Assurance Company? ,Anarelated matters.
Your letter of April 2, 1943, requesting the oplnion of this department on thematters stated therein reads as follows:

"Enclosedin duplicate are photostatic copies of
"1

. Relnsurance contract of November 19, 1929 by which the stock life Insurancecompany above named reinsured and assumed the then existingbusiness of a mutual assessment life InsUrancecompany known as IllinoisBankers Life Association.
"2* Letter of March 24, 1943 to this Departmentfrom our Examiner, Mr. Hunter McLean,who is engaged in a convention examination of the above named company at this time.
"Thereinsurance agreement as a whole (and especiallyparagraph 5 thereof) appears plainly to create a trust; and we certify toyou as facts all of the statementsmade in Mr. McLean's letter in so far as they purport to be factual innature.
"'The facts stated by our Examiner seem to raise the question as to the extent of the trust fund created by the reinsurance agreement, and to raise the issue as to whether the stated practices of the captioned company consti.tute breaches of trust under the agreemt, and if so wherein and to what extent.Honorable 0. P. Lockhart, Page 2 (o-5182)

"We request your oplnlon upon thematters indicated in the paragraphnext preceding, and if possibleyour answers to the specific questions propounded in our Examiner's letter.

"Inoonnectionwith the use of the words


### ‘fund’ or 

### ‘funds’ as embracingreal estate as well as incrementsof all kin& growing out of same, as well as other classes or propertywhether real, personal or mlxea:
11 See Sims vs. McMullen, 22 SW ; X:, 318, modified on other grounds, 37 S, W,

. '"we respectfullyrequest that your Department use the utmost possible expedition in giving us your opinion upon the matters involved,not only on account of the importance thereof, and the amounts involved,but also because the present convention examinationof the company Is partlcipated in by the examlnlng authorities of several stateswhereln the company does business, and we need your opinion as early as possible to guide us in framing the report of such examinationwhich will very soon come to a close." Sections2 and 5 of the contract of relnsurance between the IllinoisBankers Life Assoclatlon and the Illlnols Bankers Life Assurance Company are atifollows:

"Section2. IT IS AGREED that upon this contract becoming effective,as hereinafter set forth, the saidAssociation shall,by proper deeds of assignment and transfer, convey and set over to the said Company all of its assets,moneys, notes, bonds, mortgages, securities, judgments,choses in action, real property and property of every kind and character and wheresoever situated,belonging to the said Assoclatlon." "Section5. All the present funds of the Association shall be considered as Trust Funds for the benefit of themembers of the Association, and, with accretions thereto and deductions therefrom, shall be invested from time to tLme in accordancewith the provisionsof the statute as to the investmentsof Legal Reserve Life Insurance Companies; and the Company shall, at all times, keep books of account of said funds.Honorable 0. P. Lockhart, Page 3 (0-5182)

"Accretionsshall consist of (A) the ass,essments and premiums to be paid 'bycontinuingmembers, less contributions to expenses as set forth in Section 4; (B) interest accumulationsat the rate of 4?t$

per annum on the reserves accumulated on the so-called IndividualReserve Policies, and at the rate of 4% per annum on the accumulated savings contributedby holders of SavingsAccumulation policies, and at the rate of 3& per annum on the remainder of such funds, but in no event at a rate greater than the actual net rate of Interest earned ownthe funds, nor less than;; 33%; and (C) the surplus earnings

provlaea in Section 6. "Deductionsshall include (D) all policy pagments and claims to the said members on the assessmentplan and to their beneficiaries;and (E) any amounts~apportioned and paid or credited to pollcles or certificateswhich may be converted as : hereinafter set forth.
'Thereshall be set up by the Company from the aforesaid Trust Funds the legal reserve from time to tFme required to be set up to the credit of all policies or certificatesassumed hereunder, and the special funda created in connectionwith policies on the Savings Plan and the reserves on the so-called IndividualReserve policies as provided by the terms of such policies,;
"TheCompany shall have the power, as aforesaid, to invest said funds and to use the said funds, or the income therefrom, for the purpose of malntaining, as far as possible, the sald present rates of the said certificates, or for the benefit of the members of the sala Association. NO dividends shall ever be paid by the said Company out of the funds of the Association or accretions thereto as herein provided.': Section 6 of said contract of reinsurance provides:

"Inconslderatlon of said transfer of insurance and of the contributions to expenses herein provided and any excess interest earnings or otherwise, said Company agrees that at the end of each calendaryear It will pay into the Trust Fund set apart for the benefit of the members of said Association, that proportionof the surplus earnings of the CompanyHonorable 0. P. Lockhart, Page 4 (o-5182)

accumulatedUurlng the year, as set forth in the Annual Statementmade In conformitywith the requlrements of the Department of Trade and Commerce of Illinois, exclusLve of dlvlden&spaid or apportioned to participating legal reserve policy holders and interest earnedon the capital and unassigned surplus, that the total assessment premium income of the year bears to the total renewal premium income of the Company, lnc,ludtng ttie assessmentpremium income.':
The letter of March 24, 1943, referred to in the second paragraph of your letter as quoted above reads in part as follows:

"Thereare submitted herewith,,severalquestions arising In the present examination of the IllinoisBankers Life Assurance Company. The amount of money involved to date is rather large and could amount in the future to a very great amount, and therefore, I seek the opinion of the Attorney General of Texas to guide me in preparing the balance sheet of the examinationreport and in making demands for performanceupon the officials of the company. "The IllinoisBankers Life Assurance Company, a stock company,was incorporatedSeptember 13, 1929 under and In accordancewith the provisions of the Illlnols legal reserve Act of 1869 and all amendments thereto. It was organized to reinsure the business of the IllinoisBankers Life Assoclatlon, an assessment life assooiatlon 0 eratlng under the Illinois assessmentAct of 1893.
"Thecontract of relnsurancewas approvedby themembers of the Assoclatlon~ on November 19, 1929 and by the Illinois InsuranceDepartment on the same date. The letter approvalwas given pursuant to the provisionsof an Illinois statute entitled 'AnAct relating to the consolidation and reinsurance of insuranceCompanies,Associations and Societies,'which was enacted July 1, 1919 *
n

. . . . "In themanagement of'the Trust Fund, the Company has received all Income f%om Trust Fund real estate and borne all real estate expenses.Honorable 0. P. Lodkhart, Page 5 (0-5182,)

., i

At annual accountingdates the Company pays to the Trust Fund 3s; ormore, interest 'upon, the book value of the,,Trust Fund assets,,includlng Its real estate. In the sale of Trust Fund real estate, profits and losseswere considers&to ,be the gain or loss of the TrustFund., Although the, contract Is not specific in thesematters, that appears to be the impliedmethod to be followed. Also, there is no question concerning~the~~posltion of the Company as a Trustee of the,Assoclatlonls Trust Funds, and, upon that point, there isno arpmen t

. "TheTrust Fund owns hundreds of farms in Texas, Oklahoma and Kansas,and has owned these farms since the depressionyears. It also owns farms in other States, howeverwe are principally concernedwith the Texas, Oklahoma and Kansas farm properties and,,if given the law in those States Cananswer the questions arisingin the remaining Stateswithout difficulty.
"TheTexas, Oklahoma and Kansas farms have, inmany Instances,proven to be,in or near ~11 development? Thus, high prices have been offered the Company for thenfarms, in' fee; high prices have been offered for themlneral rights; high prices have beeh.offered and received for leases andmuch money,in delay rentals has been received under oil leases; and, high prices have been of-' fered for royalty, producing and non-produo,ing.
"Untilthis time, the Company has taken the position that all products ofan.011 play are income and therefore the property'of the Trustee Company,,

and not the property of the Trust Fund. These products include leasebonuses, delay rentals, income from producingroyalty, proceeds from the sale ofmineral rights and non-produoingroyaltya The Company now ooncedes,~afterdiscussing the distr,ibutlo,n

of these proceeds, that the laws of Texas are such 8s to vest any of the above proceeds in theTrust Fund as receipts from the sale of real estate,'be they lease bon~uses, delay rentals, producingroyalty, from the sale of mineral'interests or non-producing royalty. However, the Trustee Company argues that the laws of Oklahoma and Kansas vary from'those of Texas and that In those two States the proceeds of leases (bonusesand delay rentals) as well 88 producing royalty areHonorable 0. P. Lockhart, Page 6 (O-5182)

incomeand therefore the proper,ty:!or;thk ;L;,i: Trustee Company and not the property of the Trust Fund received as the proceeds of real estate sales, or otherwise. The Company now concedes, also, that proceeds from the sale of mineral rights and non-producingroyalty, In Oklahomaand Kansas, are property of the Trust Fund as proceeds from the sale of real estate.
"So far as we have been able to determine, this Is the first time thebe questions have been raised or considered by the Company officials.
"TheCompany has, until recently, consistently refused to sell Trust Fund real estate, even when offered a fair price. This speculation is particularly true in the cases of farmswithin an oil play area. Numerous offers have beenmade for Trust Fund farms,where some 011 interestwas aeveloping for amountswell in excess of the value of the surface rights. In the vast majority of such instances, the offer was refused and if the play developed further, a leasewas negotiated. In only two or three instances has the Trustee Company soldmineral rights or non-producing royalty, therebybenefiting the Trust Fund, but, to the contrary, the lands have been held and leased, the proceedsgoing to the Trustee Com-

. Thus, the position of the Trustee Company, ~~%ingly or unknowingly, has been to refuse offers for the sale of real estate that would have benefited the Trust Fund and hold out for leases and production thatwould benefit the Trustee Company.
"In several Instanceswhere the surface and a portion of theminerals in Trust Fund lands have been sold at a loss subsequent oil development produces for the retainedmineral interests, substantial leasebonuses, lease delay rentals and even producing royalty. These retainedmineral interestsare carried in the Trust Fund at $1.00book value,yet under the practice of the Trustee Company heretOfQr-3, .?dlproceeds from thesemineral Interests (now admittednot to include proceeds from the sale ofmineral rights or non-producingroyalty) have been credited as Trustee Company income. Thus, although the asset was in the Trust Fund, all proceeds from it went to the Trustee Company.Honorable 0. P. Lockhart, Page 7 (,o-518?)., :

"Mostof themortgage loansj throughwhich this real estatewas acquired,were,'made by the IlllnolsBankersLife,Assooiation, the,:assesament association, prior to Its reinsurancewith the IllinoisBankers Life Assurance Company. It has developedin ,thisexamination thatW. H. Woods, formerly President of theAssociation, ,recelved a mineral,interest inmost of the Oklahoma lands mortgaged to theAssociat,ioninconsideration for theAssociation havingmade the,.l,oan. The demand of ,these,min~eral interestsby Woods s,erves to emphasize that some of the value assigned to the land at the time of execution of themortgages undoubtedlyrested in the possibilityof oil development. Row that such a developmenthas taken place, the Trust Fund reaps a,negligible part of the benefits.

As we understandyour request one of the first questions presented Is vhether or not the real estate involved constitutes a apartof the trust fund? It will be noted that Section 5 of the relnsurance contract expressly provides in part:
"Allthe present~fundsof theAssoblatlon shall be considered as Trust Funds for the benefit of the'members of the Association. e s *" ConsideringSection 5 of the relnsuranoe contract in connectionwith the other provisions~ of said contract, especially provisionNo. 2 and provisionNo. 6, it is our ,opinion,that the real estate Involved,constitutesa part of the trust funds of the association.

The wora."fund" has been defined,l.n severalTexas cases. In the case of Galveston, H. EbS. A. Railway Company v. State, 13 S. W. 619, it is stated in effect that the word "fund",as used ,inVernon's Annotated State Constitution, Article 7, Section 2, providing for the establishmentof a perpetual school fund,means the entire property from which money Is to be derived for themaintenance o,f public free schools, the foundatlon,onwhich rests the support of the system of schoolswhich it is made the duty of,the Legislature to establish and maintain.

In the case ofHayes v.'Gadner, 40' 3. v. (2) 917, it is stated in effect that theword"funds", as used in the order directing paymentof compensation to a receiver andHonorable 0. P. Lockhart, Page 8 (o-5182)

the receiver'sattorney's feemeans cash on hand or personal assets acquiredby receiver on account of, and during the operation of the business of the corporation.

In the case of Etter v. Tuck, 91 S. W. (2) 875 it is stated In effect that allegations of a petitionby independent executor to enjoin sale under deed of trust of real property belonging to an estate that the estate had no funds with which to pay first and second class claims held sufficient to justifyresort to securedreal propertyand temporary restrainingorder enjoinlng its sale, since I'fund" in its broad meaning includesproperty of every kind.

In view of the foregoing authorities it is our opinion, as stated above, that the term "funds"as used in the contract of reinsurance is broad enough to Include real estate.
It is statedby Bogert in his Text on Trusts and Trustees,Vol. 1, page 1, that

"A trustmay be defined as a fiduciary relationship in which one person holds a property interest, subject0 to an equitableobligation to keep or use that interest for the benefit of another. This statement is especially appropriate to themost common type of the trust,namely, the express private trust.

. . ."
It is further statedby Bog&t inVol. 1, page 3,
"Thetrust property is the Interest in a thing, real or personal,which the trustee holds, subject to the r,i.ghts of another.
"It should first be noticed that an interest in specificproperty, real or personal, is always an element of the trust.

. .'I Generally speaking It Is stated in Texas Jurisprudence,Vol, 42, page 722, that

"Inaccountswith the cestul, the trustee is chargeablewith all proceeds of the sale of and income from trust property. He is entitled on such accounting to credit for outgoings, such as taxes, insurance,necessary repairs also for the expenses of any litlgatlon,reasonably under: taken, for the protectionof trust property. Lost propertymust be accounted for--that is to say,Honorable 0. P. LOCkhart,~Page 9 (!731@).. ,,, ,,

the trusteemust,s.hoy. that he,us~ed

qare and dillgence in the biistody'and,forthe'prsservation of the propertywhich was lost. As tomisappll-, cationof funds,'the rule of equity is, that all the gain made by the trustee,by a wrongful appropriation of;,t,be:trust.,f%ld, shall go to the cestui que trust',

and all the lossesborne by the trustee himself."
Inthe case ofMurphy-Bolanz Land and Loan Company v.,McKibben,236 3.W. 78, it Is stated among other things:

"Theremust be no speculation on then'partof the trustee in dealing with the trust fund,.,The law does not give to him the same freedom of choice inmaking investmentswhich may be and often is exercisedby prudentbusinessmen in the conduct of their own affairs."

It Is statedby Bogert in his Text on Trusts and Trustee$,Vol. 4, page 2393,

"It is, of course, common that a trusteewho has a power of sale, but no duty to sell, disposes of trust property and makes a profit on the sale; when the sale price is comparedwith the inventory or cost price of the property. Such a profit Is quite universally held to go to the capital of the trust fund.

. 0 .'
In view of the foregoing facts and 'authorities, as heretofore stated, it is our opinion that all of'the real estate situated in Texas assigned and transferredby the association to the IllinoisBankers Life Assurance Company constitutes a part of the trust fund of the association. It is our further opinion that the proceeds from leasebonuses, delayed rentals income from producingroyalty, proceeds from sale ofmineral rights and non-producingroyalty from Texas lands belong to and should be credited to the trust fund of the association and not to the trustee company. However, this opinion is not to be construed as holding that the trustee company isnot entitled to such expenses as taxes, insurance,necessary repairs, expenses of any litigation,or any other reasonable expenses incurred for the protectionof the trust property.

It will be noted that the examinerraises severkl specific questions in his letter as quoted above. We believe what has been said above answers his questions in a general manner except to the law in other states pertaining tosuchHonorable 0. P. Lockhart, Page 10, (0-5182)

questions. We expressno opinion concerning the questions regarding the laws of other states.
Yours very truly
ATTORNEYGENERAL OF TEXAS

ApprovedApr. 19, 1943 By S/ ArdellWlllls~~s Ax-dell

Willlams Assistant

S/Gerald C. Mann
AttQI?Iey General of Texas AW:mp:bjb