Opinion ID: 1927641
Heading Depth: 1
Heading Rank: 5

Heading: Duties imposed by law.

Text: Burlington Northern relies upon the general common law of trusts and successive estates which would impose a duty on trustees to treat term and reversion interests impartially and to refrain from committing waste upon properties allocable to either interest. The Arms counter that the common law of trusts and estates is not applicable to a business trust of wasting assets such as they argue this trust to be. The Arms also argue that the trustees are legally obligated to liquidate trust assets before trust termination in order to maximize current income from a business trust and to prevent Burlington Northern from receiving lands which it allegedly is prohibited from holding by the Hepburn Act, Minnesota land laws since amended, and the Great Northern Railway charter through the Burlington Northern merger agreement. We hold that the well-established common law of trusts and successive estates governs the exercise of the trustees' discretionary powers of sale and distribution in this trust. We find respondents' contrary arguments unpersuasive. The Arms' first argument is that Great Northern Iron Ore Properties should be considered a business trust and, as such, exempted from duties imposed by the law of trusts and successive estates. This argument is not persuasive. We recognize that a commonly employed business form known as the common-law or Massachusetts business trust is governed by a special body of laws in some respects different from the common law of trusts, [15] however, it is not at all clear that the trust in this case is properly characterized as such a business trust. Not every trust which conducts a business is a common-law or Massachusetts business trust. Bogert, Trusts and Trustees (Rev. 2 ed.) § 247, cl. B. This trust is like the common-law or Massachusetts business trust in that the income interest in the trust is owned by several thousand holders of transferable certificates of beneficial interest. Id. cl. A. However, unlike the business trust form, this trust was not created by a contractual arrangement combining capital contributions from the original certificate holders but rather by a gift from Lake Superior Co., Ltd., of property originally purchased with either the private funds of James J. Hill or the 1906 earned surplus account of Great Northern. [16] Unlike the business trust form, the original certificate holders here were not themselves the trust settlors. [17] Rather, as in the ordinary family trust, a trust settlor other than the appointed income beneficiaries has reserved a reversion to itself in the trust properties. The trustees here do not actively conduct a mining operation but, similar to any family trust, simply hold lands which they let under long-term royalty leases and collect the income for distribution to the certificate holders. The fact that this trust has been held taxable as an association under the Federal Internal Revenue Code [18] clearly does not control treatment of the trust under trust law. On balance, this trust seems to bear more of the characteristics of an ordinary trust conducting a business than of a common-law or Massachusetts business trust. If the trust is not such a business trust, it is unquestionably governed, in trust matters, by the common law of trusts and successive estates. Id. cl. B. But we need not finally decide the proper characterization of the trust to resolve the extent of the trustees' duties because it has been recognized that even a common-law or Massachusetts business trust, although governed by special corporate-like rules in certain respects, is subject to the underlying equitable and fiduciary duties toward trust beneficiaries imposed by the common law of trusts. [19] It may be true, as the Arms argue, that this fiduciary duty toward trust beneficiaries would impel the trustees to maximize cash proceeds during the trust term, even by liquidation of unmined lands, were the certificate holders the only trust beneficiaries as in the typical Massachusetts trust. But here, the certificate holders are not the only beneficiaries, and the law of trusts imposes a fiduciary duty to guard the interests of the trust reversioner as well as those of the certificate holders. A second legal argument asserted by the Arms in an effort to exempt the trustees from any legal duties toward the trust reversioner is a reference to the law of wasting assets. The Arms, and the trial court by its incorporation of part of the Arms' trial brief into its memorandum of instructions to the trustees, have cited authorities recognizing that when an estate or trust consists of mining property, a wasting asset, the holder of the term interest does not commit waste by mining the property to gradual consumption or exhaustion during the term. [20] These cases, however, are not pertinent to the issue. The trustees' authority to exhaust minerals on the trust lands through ordinary mining operations during the trust term has not been questioned and must be recognized in furtherance of the purpose for which this trust was established. The authorities cited by the Arms, however, do not justify the sale of all trust lands containing more minerals than can be mined to exhaustion within the trust term. Such complete and deliberate liquidation of the entire reversion for the benefit of income beneficiaries cannot be allowed with impunity. The Arms third argument is that the trustees are under no legal duty to the reversioner and indeed are obligated to liquidate the reversion because the Hepburn Act, [21] certain amended Minnesota land laws, [22] and limitations in the Great Northern Railway charter through the Burlington Northern merger agreement [23] allegedly make it illegal for the railroad to acquire and own mineral lands. Without reaching the legality or illegality of Burlington Northern's future fee ownership of trust lands, we hold that the legal proscriptions cited by the Arms do not invalidate the reversion provided in the trust instrument. With regard to the Hepburn Act, we repeat our holding in the prior opinion in this case (308 Minn. 230, 243 N.W.2d 307):    Even if the carriage of the ore were held to be illegal,    it does not follow that this alone would render invalid what is an otherwise valid [reversionary] provision in this trust. We extend our reasoning there to all of the other potential legal proscriptions against the railroad's owning mining lands invoked by the Arms. In fact, it is not clear that these legal proscriptions had any potential effect on the reversioner until 1913, when the railroad first acquired the settlor's reversionary interest. As stated in our prior opinion,    [W]e are not prepared to say that this transfer 7 years [after creation of the trust] is controlling in ascertaining the intent of the grantor when this trust was drawn. 308 Minn. 229, 243 N.W.2d 307. Although courts will not actively enforce illegal contracts, [24] we do not have here a contract which was illegal at its inception but rather a validly created trust reversion. The trust properties must be allowed to pass under the trust instrument. The proper remedy for any claimed future illegality in Burlington Northern's acquisition of the trust lands would be an enforcement action under the Hepburn Act or Minn.St. 301.12 (ultra vires) [25] at that future time. None of the arguments advanced by the Arms exempts the trustees from their legal duties toward the trust reversioner according to the law of trusts and successive estates. Having found that this trust is governed by the common law of trusts and successive estates, we turn now to examine what duties are imposed upon the trustees by that law. It is fundamental trust law that trustees are under a legal duty to manage the trust with equal consideration for the interests of all beneficiaries. Restatement, Trusts 2d, §§ 183, 232; Bogert, Trusts and Trustees (2 ed.) § 541 (1977 Supp.); II Scott, Trusts (3 ed.) § 183; III Scott, Trusts (3 ed.) § 232. We adopt and approve Restatement, Trusts 2d, §§ 183, 232 and comments, quoted in part below, as an accurate statement of the law in this jurisdiction. § 183. Duty to Deal Impartially with Beneficiaries When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them.       § 232. Impartiality between Successive Beneficiaries If a trust is created for beneficiaries in succession, the trustee is under a duty to the successive beneficiaries to act with due regard to their respective interests. Comment:        b. Duty to each of successive beneficiaries. If by the terms of a trust the trustee is directed to pay the income to a beneficiary during a designated period and on the expiration of the period to pay the principal to another beneficiary, the trustee is under a duty to the former beneficiary to take care not merely to preserve the trust property but to make it productive so that a reasonable income will be available for him, and he is under a duty to the latter beneficiary to take care to preserve the trust property for him. This court has long recognized that the equitable duty of impartiality governs exercise of trustees' powers in a trust such as this one. In Congdon v. Congdon, 160 Minn. 343, 376, 200 N.W. 76, 88 (1924), involving a trust of mining stock very similar to this trust at its creation, we said:    In short, it is the duty of the trustees to consult the interests of both life tenants and remaindermen impartially so as not to give either an advantage at the expense or to the prejudice of the other; and it is the duty of courts of equity to preserve the proper relation between capital and income, so that the integrity of the corpus of the trust may not be destroyed or impaired. The object of the rule is to secure a fair adjustment of the benefits of all the cestui que trustent in succession. Since the trust instrument creates both term and reversionary interests, the law of trusts protects both interests against prejudicial exercise of powers granted in the instrument. Accordingly, the trustees are instructed that their authority to convert trust assets to cash may be exercised only when to do so will serve the interests of both the certificate holders and Burlington Northern. It may be noted finally that, if a need arises, the trustees may petition the district court for further instructions defining what is required to balance the equities of term and reversion with respect to any particular future decision in trust management. The order of the district court instructing the trustees is reversed with directions to enter an order instructing the trustees in accordance with the views expressed herein. Reversed. OTIS and TODD, JJ., took no part in the consideration or decision of this case.