Court Opinion

ID: 3981932
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:38:41.133465+00
Date Added: 2024-06-11T07:44:13.475164
License: Public Domain

The writer does not construe the holding in Connally v. Lyons,82 Tex. 664, 18 S.W. 799, 27 Am. St. Rep. 935, as does Justice DUNKLIN. In the writer's judgment the facts there shown put the beneficiaries practically in the same position as that occupied by the so-called stockholders in the instant case. M. A. T. Connally, on February 25, 1875, executed a trust for the benefit of her father, C. P. Connally, and her 7 brothers, some of whom at the time of such execution were grown, some minors. She divided her property, consisting of a going business in the town of Sulphur Springs, the building in which the business was conducted, etc., into 9 equal portions, and conveyed one of said portions to her father and one to each of her brothers, retaining the title to one portion in herself. She appointed her father, C. P. Connally, trustee to manage said business. She provided in this declaration of trust that the property should be kept intact until her youngest brother was 25 years of age, or, if he should die before he reached said age, then until he would have become 25 years old had he lived. She further provided that at the expiration of the period of said trust, her father, as said trustee, should pay to each of said brothers his pro rata part of the trust estate; and the trustee was authorized, upon a certain specified condition, when any brother should reach 25 years of age, to pay him his pro rata part. C. P. Connally accepted the trust and conducted the business *Page 338 
and managed the trust estate until his death, probably in 1882. On March 24th of that year, and after the death of C. P. Connally, the district court, "all parties at interest being before the court," assumed jurisdiction and appointed one of the brothers, Nathan Connally, as trustee. He accepted the trust and conducted the business and managed the trust estate until January 20, 1886, when some of the creditors of Connally  Co., owned by the trust estate, filed an attachment for debt. The debts of the estate amounted to more than $11,000 above the assets. Suit was filed against Nathan Connally to hold him personally liable for certain goods sold to the firm of Connally  Co. The Supreme Court held him liable. The court said:
"Mere participation in profits does not constitute partnership, although there should be a contract from which they were derived. Buzard v. Bank, 67 Tex. 89. There was no contract of partnership in this case. The defendant Nathan Connally acted as trustee under an appointment from the court, and had the entire control and sole management of the business. There was no right of control whatever reserved in the instrument executed by M. A. T. Connally to her father C. P. Connally, as trustee, either for herself or for the beneficiaries as such. A test of partnership is the right of control over the property or profits, or to make disposition thereof. 1 Bates on Partnership, § 37. There was no right whatever in the brothers of the grantor, who were beneficiaries therein, either to control or withdraw their several interests. From the terms of the instrument the business was to be conducted until the youngest was 25 years of age, or, if he died before that time, to such a time as he would have been 25 if he had lived. We must also infer that at least some of the beneficiaries were minors, and it will not be contended that they could be partners, although the instrument might indicate a partnership. The finding of the court is further strengthened by the fact that there is no statement of facts brought up with the record, and there may have been proof of other facts to sustain his conclusion that Nathan Connally was the trustee of a trust estate. We think, however, that a proper construction of the instrument alone would lead to the same conclusion. There was no evidence to make the beneficiaries partners by holding out, but such a partner would not be a necessary party."
The business mentioned in the declaration of trust in the Connally Case, of which defendant was a trustee, was a business for profit. The writer is unable to see why the beneficiaries thereunder, who accepted the benefits to be derived from the conduct of the business, some of whom, at least, were evidently adults, should be protected from liability, while, as in this case, the beneficiaries, shareholders we may call them for the sake of argument, who had no part in the conduct of the business, nor in the election or control of the trustees, who, as shown in our original opinion, were self-elected and self-perpetuating, should be held liable. See Fink v. Brown, 215 S.W. 846, 847, by the Commission of Appeals, approved by the Supreme Court. In that case Cudahy Packing Co. v. Hibou, by the Mississippi Supreme Court (92 Miss. 234, 46 So. 73, 18 L.R.A. [N. S.] pp. 975, 1079), was cited, and it was held that a participation in the net profits of a business or undertaking did not make such parties so participating partners, and cited also Connally v. Lyons, supra. The Mississippi case, as reported in 18 L.R.A. (N.S.), has voluminous notes and citations, which see. Nor is it sufficient to show that parties in an adventure or business share in the gross profits. H. T. C. Ry. Co. v. McFadden  Bro., 91 Tex. 194, 40 S.W. 216,42 S.W. 593; Buzard v. Bank, 67 Tex. 89, 2 S.W. 54, 60 Am.Rep. 7; Beecher v. Bush, 45 Mich. 188, 7 N.W. 785, 40 Am.Rep. 465; 39 Cyc. p. 333. Since plaintiff below pleaded the declaration of trust, and cited the volume and page of the deed records of Stephens county in which it was recorded, and made the declaration a part of his petition, if in fact it did not know at the time it furnished the goods, and took the note therefore signed by the alleged officer of the Man O'War Oil Syndicate, that the goods were being furnished to an association under a declaration of trust, the writer thinks such fact should have been pleaded, and, in the absence of such plea, that in support of the judgment it should be presumed that it did know such fact. The writer is of the opinion that a court might take judicial cognizance of the general practice in Texas, at least, of those forming an association to operate under a declaration of trust to file such declarations in the deed records of the county of the association's domicile, and in the counties where they are operating, and that, in view of that general practice, one extending credit to the trustees of the association, or to the association itself, ought to be charged with notice of that general practice, and thereby is charged with the duty of examining the records to determine the limitations provided in such declaration of the terms thereof, and the limitations of liability on the part of the shareholders or beneficiaries.
If it knew such fact, and with such knowledge furnished the goods, the writer believes it would be precluded, in any event, from asserting a liability against the holders of these units of stock. Dayle L. Smith Oil Co. v. Continental Supply Co., by the San Antonio Court of Civil Appeals,268 S.W. 489, and authorities there cited; Collier on Partnerships, p. 24, citing Warner v. Beers, 23 Wend. (N.Y.) 150. See Victor Refining Co. v. City National Bank, 263 S.W. 622, by the Amarillo Court of Civil Appeals, apparently contra, writ of error granted.
In 7 A.L.R. p. 613 and following, there is *Page 339 
a full discussion of the holding of the courts of different jurisdictions as to the liability of trustees and of shareholders, in the so-called "Massachusetts trust." The statement is made that in a considerable number of cases in the different jurisdictions the courts have apparently expressly or impliedly upheld the validity of such trusts, and there are cited a number of cases from the United States courts, the courts of Illinois, Iowa, Massachusetts, New York, Ohio, Pennsylvania, Texas (including the case of Connally v. Lyons, supra), and England.
In a recent paper, read before the Texas Bar Association, by Professor Hildebrand of the law department of the University of Texas, and published in the February number, 1923, of the Texas Law Review, and in the January and February number, 1925, of the American Law Review, Professor Hildebrand discusses at length the nature and character of the "Masschusetts trust." He cites the cases of McCarthy v. Parker (1923)243 Mass. 465, 138 N.E. 8, in which the Supreme Court of Massachusetts held that, if a creditor knew at the time he extended the credit to such trust that the trustees had no power to bind the shareholders personally, and all persons, associations, or corporations extending credit to, contracting with, or having any claim against, the trustees should look only to the funds or property of the association for payment, and even though at the time of the suit the company was insolvent, that the plaintiff could not recover against the shareholders as partners. See Hussey v. Arnold, 185 Mass. 202, 70 N.E. 87; William Cameron Co. v. First National Bank, 4 Tex. Civ. App. 309, 23 S.W. 334; Willis v. Greiner (Tex.Civ.App.) 26 S.W. 858; Buford v. Lewis, 87 Ark. 418,112 S.W. 963; Meehan v. Valentine, 145 U.S. 611, 12 S. Ct. 972,36 L. Ed. 835; Shackelford v. Williams, 182 Ala. 87, 62 So. 54; Feighenspan v. McDonnell, 201 Mass. 341,87 N.E. 624; First Nat. Bank v. Stadden,103 Minn. 403, 115 N.W. 198.
From the above authorities, and many others that might be cited, it seems fairly well settled that a third party dealing with a joint-stock company or a partnership is bound by known limitations of the authority of a partner or any agent of the firm, and of the known limitations as to liability of a stockholder. In the recent case of Betts v. Hackathorn,159 Ark. 621, 252 S.W. 602, 31 A.L.R. 847, the Supreme Court of Arkansas held that the shareholders are not liable at all for any of the debts incurred by the trustees if the company is a pure trust. The writer agrees with this holding where the creditor-plaintiff knew at the time he extended the credit of the limitation of liability as against the shareholder.
But the writer will not extend this dissent further, and will merely discuss one of the statements contained in the majority opinion, on the motion for rehearing. Justice DUNKLIN refers to the Act of the Thirty-Seventh Legislature, c. 73, 1922 Supplement, beginning with article 5950 1/2. This act was passed by the Legislature in 1921, and was presented to the Governor of Texas for his approval on March 12, 1921, but was not signed by him nor returned to the house in which it originated, and became effective 90 days after adjournment, which was on March 12, 1921. The pleading of plaintiff shows that the note sued on was given May 12, 1921. Hence the act quoted in the majority opinion was not effective at the time of the creation of the obligation sued on in this case.
The writer believes that the judgment below should be affirmed, as expressed in our original opinion. *Page 340