Court Opinion

ID: 4141146
Source: CourtListenerOpinion
Date Created: 2017-02-18 03:07:21.823775+00
Date Added: 2024-06-11T14:34:25.724226
License: Public Domain

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~~IllinolsBankers Life~.'As-
                                  surance Company? ,Ana related
                                  matters.
          Your letter of April 2, 1943, requesting the opln-
ion 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 Depart-
     ment 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.
          "'Thefacts 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 prac-
     tices of the captioned company consti.tutebreaches
     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: See Sims vs. McMullen, 22 SW
      ; X:, 318, modified on other grounds, 37 S, W,
     11     .

          '"werespectfully 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 partlci-
     pated 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 be-
tween the Illinois Bankers Life Assoclatlon and the Illlnols
Bankers Life Assurance Company are atifollows:
          "Section 2. IT IS AGREED that upon this con-
     tract becoming effective, as hereinafter set forth,
     the said Association shall, by proper deeds of as-
     signment 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 charac-
     ter 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 there-
     from, shall be invested from time to tLme in ac-
     cordance 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,ess-
     ments and premiums to be paid 'by continuing mem-
     bers, 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 sav-
     ings 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
     ownthe funds, nor less than;;33%; and (C) the sur-
     plus earningsprovlaea in Section  6.

          "Deductions shall include (D) all policy pag-
     ments and claims to the said members on the assess-
     mentplan and to their beneficiaries; and (E) any
     amounts ~apportionedand paid or credited to poll-
     cles 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 pro-
     vided by the terms of such policies,;
          "The Company shall have the power, as afore-
     said, to invest said funds and to use the said funds,
     or the income therefrom, for the purpose of maln-
     taining, 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 requlre-
     ments 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 sur-
     plus, that the total assessment premium income of
     the year bears to the total renewal premium income
     of the Company, lnc,ludtngttieassessment 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,,severalques-
     tions 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 prepar-
     ing 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 Assocla-
     tlon, an assessment life assooiatlon 0 eratlng
     under the Illinois assessment Act of 18 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 pur-
     suant to the provisions of an Illinois statute
     entitled 'An Act relating to the consolidation
     and reinsurance of insurance Companies, Associa-
     tions 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,,TrustFund 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 thenfarms, 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 in-
    come 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 pro-
    ceeds 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, consist-
     ently 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 ae-
     veloping 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 develop-
     ment produces for the retained mineral interests,
     substantial lease bonuses, lease delay rentals
     and even producing royalty. These retained min-
     eral 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 in-
     clude proceeds from the sale of mineral rights
     or non-producing royalty) have been credited as
     Trustee Company income. Thus, although the as-
     set 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,'madeby the
     Illlnols Bankers Life,Assooiation, the,:assesament
     association, prior to Its reinsurance with the
     Illinois Bankers Life Assurance Company. It has
     developedin ,thisexamination that W. H. Woods,
     formerly President of the Association, ,recelved
     a mineral,interest in most of the Oklahoma lands
     mortgaged to the Associat,ioninconsideration
     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 mort-
     gages 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 ques-
tions 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 bene-
     fit of the'members of the Association. e s *"
Considering Section 5 of the relnsuranoe contract in connec-
tion with the other provisions~of said contract, especially
provision No. 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.nseveral Texas
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 ,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,fpublic free
schools, the foundatlon,on which rests the support of the
system of schools which it is made the duty of,the Legisla-
ture 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 inde-
pendent 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 suffi-
cient to justify resort to secured real property and tempo-
rary 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 rela-
     tionship 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   Jurispru-
dence, 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~edqare and dill-
     gence 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 appro-
     priation 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'partof
     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 es-
tate situated in Texas assigned and transferred by the associa-
tion 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

                                 By S/ Ardell Wlllls~~s
                                               Ax-dellWilllams
                                                      Assistant
Approved Apr. 19, 1943
S/Gerald C. Mann
AttQI?Iey General of Texas

AW:mp:bjb