Honorable 0. P. Lockhart, Chairman 

Board of Insurance Commissioners 

Austin, Texas 

Dear Slrt Opinion No. O-5182 

Re: What is the extent of the trust 

fund created by the reinsuranoe 

agreement between the Ill'lnois 

Bankers Life Assoclatlon and 

the~~Illinols Bankers Life~.'Assurance Company? ,Ana related 

matters. 

Your letter of April 2, 1943, requesting the oplnion of this department on the matters stated therein reads 

as follows: 

"Enclosed in duplicate are photostatic copies of 

"1 . Relnsurance contract of November 19, 1929 

by which the stock life Insurance company above named 

reinsured and assumed the then existing business of 

a mutual assessment life InsUrance company known as 

Illinois Bankers Life Association. 

"2 * Letter of March 24, 1943 to this Department from our Examiner, Mr. Hunter McLean, who is 

engaged in a convention examination of the above 

named company at this time. 

"The reinsurance agreement as a whole (and 

especially paragraph 5 thereof) appears plainly to 

create a trust; and we certify to you as facts all 

of the statements made in Mr. McLean's letter in 

so far as they purport to be factual in nature. 

"'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 the matters 

indicated in the paragraph next preceding, and if 

possible your answers to the specific questions 

propounded in our Examiner's letter. 

"In oonnection with the use of the words 

‘fund’ or ‘funds’ as embracing real estate as well 

as increments of all kin& growing out of same, 

as well as other classes or property whether real, 

personal or mlxea: 

11 

See Sims vs. McMullen, 22 SW 

; X:, 318, modified on other grounds, 37 S, W, 

. 

'"we respectfully request 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 examination of the company Is partlcipated in by the examlnlng authorities of several 

states whereln the company does business, and we 

need your opinion as early as possible to guide 

us in framing the report of such examination which 

will very soon come to a close." 

Sections 2 and 5 of the contract of relnsurance between the Illinois Bankers Life Assoclatlon and the Illlnols 

Bankers Life Assurance Company are ati follows: 

"Section 2. IT IS AGREED that upon this contract becoming effective, as hereinafter set forth, 

the said Association 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." 

"Section 5. All the present funds of the 

Association shall be considered as Trust Funds 

for the benefit of the members of the Association, 

and, with accretions thereto and deductions therefrom, shall be invested from time to tLme in accordance with the provisions of the statute as 

to the investments of 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) 

"Accretions shall consist of (A) the ass,essments and premiums to be paid 'by continuing members, less contributions to expenses as set forth 

in Section 4; (B) interest accumulations at the 

rate of 4?t$ per annum on the reserves accumulated 

on the so-called Individual Reserve Policies, and 

at the rate of 4% per annum on the accumulated savings contributed by holders of Savings Accumulation 

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 

own the funds, nor less than;; 33%; and (C) the surplus earnings provlaea in Section 6. 

"Deductions shall 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 certificates which may be converted as : 

hereinafter set forth. 

'There shall 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 certificates assumed hereunder, 

and the special funda created in connection with 

policies on the Savings Plan and the reserves on 

the so-called Individual Reserve policies as provided by the terms of such policies,; 

"The Company 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: 

"In conslderatlon 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 calendar year 

It will pay into the Trust Fund set apart for the 

benefit of the members of said Association, that 

proportion of the surplus earnings of the Company 
Honorable 0. P. Lockhart, Page 4 (o-5182) 

accumulated Uurlng the year, as set forth in the 

Annual Statement made In conformity with 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 earned on 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 assessment premium 

income.': 

The letter of March 24, 1943, referred to in the 

second paragraph of your letter as quoted above reads in 

part as follows: 

"There are submitted herewith,,several questions arising In the present examination of the 

Illinois Bankers 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 examination report 

and in making demands for performance upon the 

officials of the company. 

"The Illinois Bankers Life Assurance Company, 

a stock company, was incorporated September 13, 

1929 under and In accordance with the provisions 

of the Illlnols legal reserve Act of 1869 and all 

amendments thereto. It was organized to reinsure 

the business of the Illinois Bankers Life Assoclatlon, an assessment life assooiatlon 0 eratlng 

under the Illinois assessment Act of 1 8 93. 

"The contract of relnsurance was approved by 

the members of the Assoclatlon~ on November 19, 

1929 and by the Illinois Insurance Department on 

the same date. The letter approval was given pursuant to the provisions of an Illinois statute 

entitled 'An Act relating to the consolidation 

and reinsurance of insurance Companies, Associations and Societies,' which was enacted July 1, 

1919 * 

n . . . . 

"In the management 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 accounting dates the Company pays to 

the Trust Fund 3s; or more, interest 'upon, the 

book value of the,,Trust Fund assets,,includlng 

Its real estate. In the sale of Trust Fund real 

estate, profits and losses were considers&to ,be 

the gain or loss of the TrustFund., Although the, 

contract Is not specific in these matters, that 

appears to be the implied method 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 is no 

arpmen t . 

"The Trust Fund owns hundreds of farms in 

Texas, Oklahoma and Kansas, and has owned these 

farms since the depression years. It also owns 

farms in other States, however we are principally 

concerned with the Texas, Oklahoma and Kansas 

farm properties and,,if given the law in those 

States Can answer the questions arisingin the 

remaining States without difficulty. 

"The Texas, Oklahoma and Kansas farms have, 

in many Instances , proven to be,in or near ~11 

development? Thus, high prices have been offered 

the Company for then farms, in' fee; high prices 

have been offered for the mlneral rights; high 

prices have beeh. offered and received for leases 

and much money,in delay rentals has been received 

under oil leases; and, high prices have been of-' 

fered for royalty, producing and non-produo,ing. 

"Until this time, the Company has taken the 

position that all products of an.011 play are income and therefore the property'of the Trustee 

Company,, and not the property of the Trust Fund. 

These products include lease bonuses, delay rentals, 

income from producing royalty, proceeds from the 

sale of mineral rights and non-produoingroyaltya 

The Company now ooncedes,~after discussing the 

distr,ibutlo,n of these proceeds, that the laws of 

Texas are such 8s to vest any of the above proceeds in the Trust Fund as receipts from the sale 

of real estate,'be they lease bon~uses, delay rentals, 

producing royalty, 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 (bonuses and 

delay rentals) as well 88 producing royalty are 
Honorable 0. P. Lockhart, Page 6 (O-5182) 

income and 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-producing royalty, In Oklahoma and 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. 

"The Company 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 farms within an 

oil play area. Numerous offers have been made for 

Trust Fund farms, where some 011 interest was aeveloping for amounts well 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 lease was negotiated. 

In only two or three instances has the Trustee 

Company sold mineral rights or non-producing 

royalty, thereby benefiting the Trust Fund, but, 

to the contrary, the lands have been held and 

leased, the proceeds going 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 

that would benefit the Trustee Company. 

"In several Instances where the surface and 

a portion of the minerals in Trust Fund lands 

have been sold at a loss subsequent oil development produces for the retained mineral interests, 

substantial lease bonuses, lease delay rentals 

and even producing royalty. These retained mineral interests are carried in the Trust Fund at 

$1.00 book value, yet under the practice of the 

Trustee Company heretOfQr-3, .?dl proceeds from 

these mineral Interests (now admitted not to include proceeds from the sale of mineral rights 

or non-producing royalty) 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?)., : 

"Most of the mortgage loansj through which 

this real estate was acquired, were,'made by the 

Illlnols Bankers Life,Assooiation, the,:assesament 

association, prior to Its reinsurance with the 

Illinois Bankers Life Assurance Company. It has 

developedin ,this examination that W. H. Woods, 

formerly President of the Association, ,recelved 

a mineral,interest in most of the Oklahoma lands 

mortgaged to the Associat,ion inconsideration 

for the Association having made the,.l,oan. The 

demand of ,these ,min~eral interests by Woods s,erves 

to emphasize that some of the value assigned to 

the land at the time of execution of the mortgages undoubtedly rested in the possibility of 

oil development. Row that such a development has 

taken place, the Trust Fund reaps a,negligible 

part of the benefits. 

As we understand your request one of the first questions presented Is vhether or not the real estate involved 

constitutes a apart of the trust fund? It will be noted that 

Section 5 of the relnsurance contract expressly provides in 

part: 

"All the present ~funds of the Assoblatlon 

shall be considered as Trust Funds for the benefit of the'members of the Association. e s *" 

Considering Section 5 of the relnsuranoe contract in connection with the other provisions~ of said contract, especially 

provision No. 2 and provisionNo. 6, it is our ,opinion ,that 

the real estate Involved ,constitutes a part of the trust 

funds of the association. 

The wora."fund" has been defined,l.n several Texas 

cases. In the case of Galveston, H. Eb S. A. Railway Company 

v. State, 13 S. W. 619, it is stated in effect that the word 

"fund", as used ,in Vernon's Annotated State Constitution, 

Article 7, Section 2, providing for the establishment of a 

perpetual school fund, means the entire property from which 

money Is to be derived for the maintenance o,f public free 

schools, the foundatlon,on which rests the support of the 

system of schools which it is made the duty of,the Legislature to establish and maintain. 

In the case of Hayes v.'Gadner, 40' 3. v. (2) 917, 

it is stated in effect that the word"funds", as used in the 

order directing paymentof compensation to a receiver and 
Honorable 0. P. Lockhart, Page 8 (o-5182) 

the receiver's attorney's fee means cash on hand or personal 

assets acquired by 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 petition by 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 justify resort to secured real property and temporary restraining order enjoinlng its sale, since I'fund" in its 

broad meaning includes property 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 stated by Bogert in his Text on Trusts and 

Trustees, Vol. 1, page 1, that 

"A trust may be defined as a fiduciary relationship in which one person holds a property 

interest, subject0 to an equitable obligation to 

keep or use that interest for the benefit of 

another. This statement is especially appropriate 

to the most common type of the trust, namely, the 

express private trust. . . ." 

It is further stated by Bog&t in Vol. 1, page 3, 

"The trust 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 specific property, real or personal, is always 

an element of the trust. . .'I 

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

"In accounts with the cestul, the trustee 

is chargeable with 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 protection of trust property. Lost 

property must be accounted for--that is to say, 
Honorable 0. P. LOCkhart,~Page 9 (!731@).. ,,, ,, 

the trustee must,s.hoy. that he,us~ed qare and dillgence in the biistody 'and ,for the'prsservation 

of the property which was lost. As to misappll-, 

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 losses borne by the trustee 

himself." 

Inthe case of Murphy-Bolanz Land and Loan Company 

v.,McKibben, 236 3. W. 78, it Is stated among other things: 

"There must be no speculation on then 'part of 

the trustee in dealing with the trust fund,. ,The 

law does not give to him the same freedom of choice 

in making investments which may be and often is 

exercised by prudent business men in the conduct 

of their own affairs." 

It Is stated by Bogert in his Text on Trusts and 

Trustee$, Vol. 4, page 2393, 

"It is, of course, common that a trustee who 

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 compared with 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 transferred by the association to the Illinois Bankers Life Assurance Company constitutes 

a part of the trust fund of the association. It is our further 

opinion that the proceeds from lease bonuses, delayed rentals 

income from producing royalty, proceeds from sale of mineral 

rights and non-producing royalty 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 is not 

entitled to such expenses as taxes, insurance, necessary 

repairs, expenses of any litigation, or any other reasonable 

expenses incurred for the protection of the trust property. 

It will be noted that the examiner raises 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 to such 
Honorable 0. P. Lockhart, Page 10, (0-5182) 

questions. We express no opinion concerning the questions 

regarding the laws of other states. 

Yours very truly 

ATTORNEY GENERAL OF TEXAS 

Approved Apr. 19, 1943 

By S/ Ardell Wlllls~~s 

Ax-dell Willlams 

Assistant 

S/Gerald C. Mann 

AttQI?Iey General of Texas 

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