P R E P A R E D B Y D O N A L D T . T R A U T M A N P R O F E S S O R O F L A W
H A R V A R D U N I V E R S I T Y
Document préliminaire No 2 de mai 1982 Preliminary Document No 2 of May 1982
The purpose o f this study is to provide the basis f o r deciding whether the proposed treaty f o r the récognition o f private trusts i n civil law countries should i n -clude business trusts and charitable trusts. A related purpose is to provide appropriate language to accom-plish whatever décisions are made o n inclusion or exclu-sion o f such trusts. I n addition, an objective is to provide an explanation of the conception, structure, and workings o f t h è s e institutions f o r civil law jurists, who may find it h e l p f u l f o r their participation in a meaningful fashion in the drafting o f a treaty.
A Preliminary issues
Some preliminary issues r e q ù i r e d é c i s i o n ; the questions to which this study is addressed may well be resolved or at least immeasurably simplified i f some clarity could be achieved about the purposes and premises o f the basic treaty. T h è s e issues o f the purposes and premises of the treaty may well be the ones which w i l l call f o r discussion among the advisers hère and later w i t h the r e p r é s e n t a t i v e s o f other common law countries.
T h è s e preliminary issues can be stated quite simply and résolve themselves into a question o f whether the treaty has a relatively narrow and spécifie purpose or a more gênerai and perhaps more expansive one. The f o r m e r w o u l d presumably be the case i f the basic concern is to single out the trust because it has been a particularly troublesome device f o r civil law countries and provides a promising subject f o r a symbolic step toward c o o p é r -ation. O n tilis view, the treaty w o u l d be limited to those ordinary forms o f trust that visibly are a p r o b l e m ; it might i n this situation be thought that the effort w o u l d be impeded by introducing the refinements and compli-cations involved i n the more exotic forms o f organiza-tion, as f o r example could be thought to be the case o f the business trust. A more expansive view o f the treaty w o u l d proceed f r o m the premise that some forms o f association, like the corporation and partnership, are sufficiently similar to civil law forms that no acute d i f -ficulties arise but that some forms o f organization, like the trust, involve conceptual distinctions and difficulties f o r the civil law that it w o u l d be useful to address i n a treaty. O n this view, the treaty might well include any organization that makes use o f the trust f o r m w i t h its conceptual snares, w i t h a view to achieving improve-ment i n civil law treatimprove-ment o f ail forms o f private asso-ciation, so that charitable and business trusts should clearly be included to whatever extent they possess some o f the troublesome attributes o f private trusts."
B Organization of the study
First, i f the answers to the above questions lead t o w a r d more expansive views o f the scope o f the treaty, pre-sumably charitable trusts and business trusts should be included because, as organizations that might well create no difficulty abroad i f cast in the corporate f o r m , they p r é s e n t f o r civil law countries the same formai dif-ficulties that the private trust p r é s e n t s . Thus, the study must address the question o f the soundness o f the pre-mise that charitable trusts and business trusts do p r é s e n t the same f o r m a i difficulties as the private trust. Conse-quently, i n the f o l l o w i n g study this is the first question sought to be answered.
Second, i f either charitable or business trusts involve additional f o r m a i difficulties, that factor w o u l d become relevant even i f very expansive views o f the treaty were taken; civil law countries must be made aware o f those spécial problems, and presumably the treaty should spe-cifically address them so that fair notice is given to ail o f what the treaty encompasses. A fortiori, i f less expan-sive views are taken o f the scope o f the treaty, any spé-cial difficulties presented by the charitable or business trust should be assessed to d é t e r m i n e whether it is worthwhile to ask f o r inclusion o f t h è s e trusts i n the treaty. Thus, i n the f o l l o w i n g study the second gênerai question sought to be answered is that o f the extent to which t h è s e two types o f trusts involve additional d i f f i -culties o f a formai nature beyond those presented by the private trust.
T h i r d , on the assumption that more limited views are taken o f the scope o f the treaty, some c o n s i d é r a t i o n should be given to the purposes and functions o f the charitable and business trust i n m o d e m affairs so that some fair answer is possible to the question whether a treaty dealing w i t h trusts should on some practical or functional view o f their significance include the chari-table trust and the business trust.
Fourth, the study w i l l attempt to suggest language f o r identifying the charitable trust and the business trust, on the assumption that whether one or the other or both should be included or excluded, or whether its inclusion or exclusion is to be left open, t h è s e décisions should be reflected by appropriate language i n the body o f the treaty.
Finally, the study w i l l address choice-of-law questions.
Presumably other w o r k now under way w i l l address the appropriate choice-of-law treatment f o r private trusts, so that, f o r example, issues concerning the powers or authority o f the trust or trustée can be resolved by réfé r e n c e to the choiceoflaw provisions o f the treaty. U n -til it is k n o w n what f o r m and content those provisions are likely to have, ail it seems possible f o r this study to undertake at présent is to identify any particular choiceoflaw problems that charitable and business trusts p r é -sent and, i f possible, to suggest appropriate solutions within the traditional patterns o f choice-of-law f o r trusts.
I n particular, it may safely be assumed that the primar-ily concerned jurisdictions i n the case o f private trusts w i l l be those o f the c o m m u n i t y o f the settlor o f the trust and o f the community where the trust is administered.
For any problems o f validity that might p r é s e n t
partic-' An even more expansive view would be to consider ail unusual devices for private association as between civil law and common law countries, with the two-way po-tential of providing also for récognition in common law countries of civil law devices with which common law countries are unfamiliar. This study assumes that such an expansive view will not be adopted and in any event that such a view would go beyond the functions of this study.
A middie position might be to consider those.forms of trust that présent particular problems internationally. It may well be that only the private trust, which mobile members of Society may désire to establish outside the jurisdictions in which trusts are normally used, would meet this pragmatic test; no évidence has been uncovered at this preliminary stage that there is a substantial interest in establishing charitable or business trusts to be administered in civil law countries.
ular problems f o r civil law countries, presumably the place o f administration o f the charitable and business trust w i l l play a dominant rôle, and the only problem of significance to be addressed is identification o f that place f o r charitable and business trusts.
The f o l l o w i n g is written o n the assumption that it w i l l s u p p l é m e n t a gênerai study o f the private trust being made by others. When that study is available, it may be necessary to s u p p l é m e n t or m o d i f y this study. I n the intérim, we assume (1) that the gênerai study w i l l deal w i t h the f o l l o w i n g problems that private trusts may pré-sent f o r civil law countries and (2) that no independent discussion o f thèse problems is needed except to the extent that charitable and business trusts p r é s e n t thèse problems i n spécial or d i f f é r e n t ways:
1 légal personality;
2 split ownership o f property;
3 fiduciary obligations o f t r u s t é e ; 4 duration o f trust; and
5 establishment and régulation by public authority.
THE BUSINESS T R U S T
Introduction. Functionally a business trust is like a corporation, but i n f o r m it has many characteristics o f the trust. Following a brief summary o f the principal features o f a business trust, this part o f the study w i l l examine the f o r m a i characteristics o f the business trust and compare them w i t h those o f the private trust; the objective is to d é t e r m i n e the extent to which a treaty overcoming objections to the private trust could or should also deal w i t h the business trust.
I n a typical business trust^, individual shareholders con-tribute assets to the trust, the légal title to which assets is vested i n the trustées. The shareholders are given cer-tificates o f bénéficiai interest i n the trust, which are t r a n s f é r a b l e i n the same way as stock i n a corporation.
The rights and liabilities o f the . shareholders, trustées, and t h i r d parties w i t h w h o m the trust does business are set f o r t h i n an instrument called a d é c l a r a t i o n o f trust.
The business trust has its roots i n the unincorporated j o i n t stock company and the trust.' The j o i n t stock Com-pany itself strongly resembled a corporation: under a j o i n t stock organization the shareholders received trans-I ferable certificates representing their fractional interests
! i n the enterprise. The business was conducted by a board o f directors w h o m the shareholders elected. The shareholders, however, were held by the courts to be personally liable f o r the debts o f a large partnership o f which they were members, because the j o i n t stock com-pany as such was not a corporate entity sanctioned by the législature. N o r was there a t r u s t é e to interpose a shield between the shareholders and the w o r l d at large.
The shareholders were regarded as principals conduct-ing a business through their appointed agents.
The other parent o f the business trust was the simple trust. The proprietors o f a business placed the business in trust f o r their ultimate pecuniary benefit. Under this arrangement, a t r u s t é e w o u l d manage the property, and
^ The literature on business trusts is relatively sparse, but enough has been found to give assurance thaï ail the basic features of the business trust have been consid-ered. The most gênerai treatments found are G. G. Bogert and G. T. Bogert. The
Xffniïts and Trustées § 247 {Rev. 2d éd., 1977, Supp. 1981), (hereinafter cited t-^-yi^'^i, a i i u rtiinoi., Moûerh Status of the Massachusetts or Business Trust, 88 A.L.R. 3d 704 (1978, Supp. 1981), superceding Annot., Massachusetts or business trusts, 156 A.L.R. 22 (1945). Other treatments found especially useful include E.
Lalty and G. Framplon, Basic Business Associations, 589-593 (1963) and some ear-lier Law Review pièces: [C] Magruder, The Position of Shareholders in Business Trusts, 23 Colum. L. Rev. 423 (1923); Note, The Business Trust as a Means of Securing Limited Liability, 29 Mich. L. Rev. 1052 (1932); Barrel and deVaipine, Taxation of Business Trusts and Other Unincorporated Massachusetts Entities with
his Personal liability w o u l d act as a shield against the individual liability o f the owner/beneficiary." This shield was good, moreover, against suits i n tort as well as i n contract.
The combination o f multiple certificate holders contrib-uting to a single enterprise, and the enterprise itself being placed i n trust, resulted i n the business trust.
The central purpose o f the business trust is the achieve-ment o f limited liability o f the shareholders. The alter-native solution f o r obtaining limited liability - and the one which historically most state législatures prescribe -is incorporation. I n c o r p o r a t i o n , however, carries w i t h it certain disadvantages which burden the venture unnec-essarily - at least i n the eyes o f some. Thus the orga-nization o f a corporation may involve heavy ex-pense i n the f o r m o f lawyers' fees, filing fees\ and or-ganization taxes. Once it has been f o r m e d , the corpora-tion is again subject to spécial taxes or to less favorable tax treatment than business trusts.* Because the corpo-ration is organized under state statutes, it is subject to régulation by the state: it must submit detailed reports and open itself up to investigation. Its purposes, pow-ers, and term o f existence may be so restricted that its desired objectives may be frustrated.
A business trust, o n the other hand, may side-step thèse burdens, or some o f them, because it is a créature o f common law contract between private parties rather than o f state statutory law. M a n y courts, on the other hand, regard the over-all entity as so resembling a cor-poration that they treat it as such, or as a partnership.'
1 Formai characteristics of business trust also presented by private trust
a Absence of légal personality. Like a private trust, the business trust as such generally lacks légal personality, so that such powers as capacity to sue and be sued, and capacity to hold, receive and transfer title to property, to name what presumably are some o f the most sensitive questions f o r civil law countries, are i n the trustée, not the trust.*
I n thèse respects, then, the business trust differs entirely f r o m the corporation and might well be thought to re-quire the same assistance f r o m a treaty as the private trust. Immediately presented is the question o f the pur-pose o f the treaty discussed i n the introduction. Clearly i f it is assumed that the trust has been selected f o r i n -clusion i n a treaty because, unlike other forms o f orga-nization such as the corporation, it involves légal arrange-ments u n f a m i l i a r to civil law countries, the business trust should also be included. O n the other hand, i f the trust has been selected because it p r é s e n t s a significant problem which can be dealt with because i t can readi-ly be understood and regulated i n a treaty, the case f o r business trusts is probably weak. F r o m ail indications, it seems unlikely that international incidents involving business trusts are o f m u c h significance i n the gênerai picture.
< See Bogert, 163 at nn. 61, 62; Note, 29 Mich. L. Rev. 1052 (1931); Magruder, op.
cit., supra n. 2; 3 Scott on Trusts § 274.1 (3d ed. 1967). See generally Bogert §§
247 E-H.
' There are, however, filing requiremenls for business trusts in some states. E.g.
Mass. Cen. Laws Ann., ch. 182 § 2 (West 1958); see Bogert § 247Q.
» Considérable impetus has been given to business trusts as a resuit of favorable fédéral tax treatment since 1960 of Real Estate Investment Trusts, comparable to the treatment of investors in mutual funds. For références, see B. Bittker & J.
Eustice, Fédéral Income Taxation of Corporations and Shareholders, § 1.06 (1979, Supp. 1981); Halpern, Real Estate Investment Trusts and the Tax Reform Act of 1976, 31 Tax Law. 329 (1978); Phillips & Cowen, Tax Reform Implications for Real Estate Investment Trusts, 55 Taxes 84 (1977); Bogert 230-236.
Since 1976, the fédéral tax law has provided the same treatment even if the Reit is incorporated. For a discussion, see Halpern, id. at 334, 383-385.
' For a gênerai discussion and références, see Bogert §§ 247C, 247D, 247Q.
* In some states, statutes or judicial décision may allow suit against, e.g., Mass. Gen.
b Split ownership of property. Again, like the private trust, the business trust does p r é s e n t the phenomenon o f a division o f légal and é q u i t a b l e ownership o f prop-erty, a phenomenon w h i c h has proved troublesome to civilians. Presumably, whether the difïiculties are con-ceptual or more a practical inability to appreciate the common law's mechanisms f o r dealing w i t h the division of responsiblility f o r and enjoyment o f property, the business trust and the private trust stand on the same f o o t i n g i n this regard.
Likewise, as w i t h the problem o f lack o f légal person-ality, whether the treaty should deal w i t h the business trust d é p e n d s primarily on the purpose o f the treaty:
should the treaty deal w i t h u n f a m i l i a r concepts proto-typically presented by the private trust, or is the purpose to résolve difficulties w i t h a significant institutional ar-rangement like the private trust?
c Fiduciary obligations.^ T h è s e issues dérive directiy f r o m the lack o f légal personality o f the trust and per-haps also f r o m the splitting o f ownership o f the proper-ty. I n principle they are presented as much w i t h the business tmst as w i t h the private trust. I n practice, how-ever, one w o u l d suppose - although vérification o f this supposition w o u l d require data not available to us -that i n several respects the ways i n w h i c h thèse prob-lems are likely to arise i n business trusts might well dififer f r o m ways i n w h i c h they w o u l d arise i n more i n f o r m a i private trusts. M i n g l i n g o f bank accounts, f o r example, seems unlikely to arise i n any well-managed organization, whether it is a private trust, a business trust, or any other f o r m o f private association. Rules o f good accounting, privately inspired, can be relied on to achieve s é p a r a t i o n o f funds. Public control, however, is in principle absent, both f o r private tmsts and business tmsts, to an extent that it may not be f o r incorporated associations.
Self-dealing o f a more sophisticated nature than mingl-ing o f funds may also p r é s e n t problems o f public con-cern that are less well resolved f o r private trusts and business trusts, on the one hand, than they may be f o r corporations. N o case law has been f o u n d distinguish-ing the fiduciary duty o f a t r u s t é e o f a private trust f r o m that o f a fiduciary o f a business trust, but the substantive law o f corporations o n the fiduciary duty o f directors is an obvions source o f e x p é r i e n c e and t h i n k i n g f r o m w h i c h it could easily be reasoned by analogy that the fiduciary duty o f the t r u s t é e o f a business trust might be less rigorous - or more regardful o f the private interests o f the t r u s t é e - than f o r trustées o f private (and com-parable questions b o t h i n its corporate institutions and in its spécifie institutions that mirror the common law trust. There is no apparent reason, at least prima fade, f o r not dealing w i t h the issue as it arises i n business trusts unless the treaty's scope is to be a narrow one o f dealing only w i t h the significant issues presented by private trusts.
d Duration of trust. So far as can be ascertained, the issue o f the p e r p é t u a i existence o f a business tmst is not entirely settled." Just what position needs to be taken
' For références, see Bogert § 247U.
'° Cf. Barret and deValpine, op cil. supra n.2, at 331 n. 16; Bogert 211.
" Many business trusts avoid the problem by providing for a termination date short of the period permitted under the Rule against Perpetuities. See Bogert 196. There has been discussion of the problem, see Whileside, Restrictions on the Duration of Business Trusts, 9 Cornell L.Q. 422 (1924), and the better view is clearly that the Rule does not apply since ail the interests are vested. 1 Scoll on Trusts 606 (3d ed.
on this issue can await the gênerai study o f the private trust and o f civil law reaction to the private trust. As a question o f first impression, the issues here are ones o f mortmain and the dead hand, issues dealt w i t h at com-mon law by The Rule Against Perpetuities. Presumably there is no such policy problem w i t h business trusts, so that even i f they are conceived to have p e r p é t u a i exis-tence no difficulty should arise on the score o f r é c e p t i o n of the business trust i n the civil law, any more than w i t h r é c e p t i o n o f the corporation, w i t h p e r p é t u a i existence, in the civil law.
e Establishment and régulation by public authority.
Clearly a principal d i f f é r e n c e i n theory between the trust, including business trusts, and the corporation is the absence o f a mechanism f o r regularizing its estab-lishment and f o r exercising regulatory control. Just how meaningful this d i f f é r e n c e is i n practice is hard to as-sess, especially i n light o f American practice w i t h cor-porations w h i c h permits incorporation i n states like De-laware having no real ties w i t h the business o f the cor-poration. Again, the theoretical d i f f é r e n c e may to some extent be mitigated by f é d é r a l tax controls, w h i c h clear-ly have an impact on the business trust and private trusts.
Whatever difficulties civilians have w i t h the absence o f public controls over private trusts w o u l d also presum-ably arise w i t h business trusts, although the actual (as distinguished f r o m the f o r m a i ) extent o f control may differ as between the private trust and the business trust.
As a resuit, a treaty o f broad scope dealing w i t h trusts should probably be expansive enough to deal w i t h business trusts.
2 Formai characteristics of business trust presenting dif-ficulties in addition to those of private trust
Trusts as the product o f private ordering w i t h o u t spécial enabling législation presumably p r é s e n t a conceptual difficulty that many other common institutions, such as contract and partnership, i n principle also p r é s e n t f o r civil law thinking.'2 Business trusts may p r é s e n t that problem i n acute f o r m , since everywhere i n the U n i t e d States enabling législation does exist f o r the c r é a t i o n o f business corporations; failure to comply w i t h this légis-lation might seem to a civilian, and has seemed to some American courts," to resuit simply i n a defectively or-ganized corporation.
This c o n s i d é r a t i o n , coupled w i t h the rarity w i t h w h i c h business trusts are used, may suggest that inclusion o f business trusts i n a treaty on trusts is unwise. O n the other hand, where there is no choice-of-law difficulty and it is clear that the business trust is an accepted f o r m of business organization, as i n Massachusetts, it may seein strange not to ask civil law countries to accept the business tmst once they have become w i l l i n g to accept comparable f o r m a i difficulties w i t h the private trust.
3 Purposes and functions of business trust in modem affairs
A l t h o u g h it w o u l d be useful to have much more insight than library research has provided, it seems fair to
con-divided. Compare E. Latty and G. Framplon. op. cit. supra n.2, at 593 {semble, that the Rule applies to business trusts); with Bogert § 247P (persuasive position that Rule does not apply); Barret and deValpine, op. cit. supra n.2, al 331, 331 n.l8a (citing Massachusetts cases holding valid business trusts whose duration is longer than the period of the Rule). Statutory prescriptions may be read as calling for
con-divided. Compare E. Latty and G. Framplon. op. cit. supra n.2, at 593 {semble, that the Rule applies to business trusts); with Bogert § 247P (persuasive position that Rule does not apply); Barret and deValpine, op. cit. supra n.2, al 331, 331 n.l8a (citing Massachusetts cases holding valid business trusts whose duration is longer than the period of the Rule). Statutory prescriptions may be read as calling for