Bryan v. Hamrick

106 F.2d 245, 1939 U.S. App. LEXIS 4703

• Court: Court of Appeals for the Tenth Circuit
• Decided: April 4, 1939
• Docket: No. 1696
• Status: Published

Opinions

LEWIS, Circuit Judge.

December 1, 1920, E. S. Horn, John E. Horn and H. O. Bland, of Tulsa, Oklahoma, executed and filed for record with the registrar of deeds of Tulsa County, Oklahoma, an instrument which they denominated “Declaration of Trust of the Imperial Royalties Company”. They named themselves as the trustees of said trust and stated that said trustees should hold all of the funds and property called the trust fund then or thereafter paid, transferred or conveyed to them or their successors as trustees in trust for the purposes and with the powers and subject to the limitations thereinafter declared for the benefit of the cestuis que trustent (shareholders). It was stated that neither the trustees nor the cestuis que trustent (shareholders) shall ever be personally liable as partners or otherwise; that it was not a partnership, but that for all debts the trust should be liable as such to the extent of the trust fund only; that in all contracts or instrument? it should be expressly stipulated that the cestuis que trustent (shareholders) shall not be liable; that the trustees should have the power and discretion as if absolute owners to invest the trust fund for the operation of the business of owning, buying, selling and otherwise acquiring oil and gas royalties and leases, both developed and undeveloped, in the United States of America and Old Mexico.

The trust was capitalized in the sum of $1,000,000, divided into 500,000 preferred shares of the par value of $1 each and 500,000 common shares of the par value of $1 each to be fully paid and non-assessable. Three separate tracts of land containing in the aggregate 330 acres, all situate in Oklahoma, /were described in which E. S. Horn had acquired as trustee an interest in their oil and gas contents and which should be taken- over by the trust on payment of $10,000 out of the trust fund to be raised by selling shares to those who would purchase, and the trustees were authorized to purchase such additional oil royalties as they might deem advisable, using any of the trust funds provided by cestuis que trustent (shareholders) for that purpose, said purchases to be in the names of the trustees, they to hold all properties so acquired subject to the provisions of the declaration for the sole use and benefit of the cestuis que trustent who should be trust beneficiaries only.

The form of the certificates for preferred and common shares was prescribed in the- declaration. The price at which they were to be sold was left to the determination of the trustees. The preferred shares however entitled the holders to an annual dividend of 12 per cent out of the net profits of the trust, and the common shares up to 6 per cent annually, and if any surplus of earnings remained after payment of dividends on both classes of shares such surplus might be used at the discretion of the trustees in acquiring additional royalty interests for the trust or disbursed as extra dividends, both classes of shares participating equally.’ All holders of shares were to be bound by the declaration of trust. The office of the trust was to be maintained at Tulsa, Oklahoma, unless the trustees deemed it advisable to move it elsewhere. 'The Oklahoma statute (Section 11821, 60 Okl. St.Ann. § 172) provides:

“Such express trusts shall be limited in the duration thereof either to a definite period not to exceed twenty-one (21) years, or to the period of the life or lives of the beneficiary or beneficiaries thereof. ■ The instrument creating the trust shall specify the period of duration thereof within the limitations herein provided.” In the declaration of trust the term of the trust was to be for a period of 20 years and lives in being, but the trustees were given power at their discretion to terminate the trust by dividing the trust fund or the proceeds thereof among the cestuis que trustent. It is conceded this trust will expire on December 1, 1940. In case of decision by the trustees to terminate the trust all property interests owned by the Trust shall be converted into money, and proceeds of sale less actual expenses shall be distributed in accordance with their respective interests to the cestuis que trustent (shareholders). It is declared that, should it seem judicious .to the trustees so to do, they at their discretion may convey the trust funds and other assets to trustees of a new trust or to a corporation.

°“The Trustees shall have the power and authority to enlarge the Trust Estate at any time by increasing the number of Beneficial Interests comprising the Trust, and any such increase in the capitalization of the Trust shall be in accordance with the plan of organization and operation as outlined herein for the management and conduct of the Trust Estate. * * *

“The ownership of shares hereunder shall not entitle the shareholder to any title in or to the Trust property, or right to call for a partition, division or accounting of the same.

“This Declaration of Trust may be altered or amended by the Trustees, provided that such alterations or amendments are in conformity to the laws governing Common Law Trusts, and in case of amendment or alteration, a copy thereof shall be filed with the Recorder of Deeds, in the county where this instrument has been filed, and then the same shall be attached to and made a part of this instrument.”

The three trustees signed and acknowledged the declaration a-s a deed 'would be executed in Oklahoma.

On December 26, 1922, the trustees, E. S. Horn, John E. Horn and H. O. Bland, amended the declaration of trust by increasing its capitalization from $1,000,000 to $2,000,000 to be represented by 1,000,-000 preferred shares par value $1 each and 1,000,000 common shares of no par value.

On May 12, 1925, the said trustees again amended the declaration of trust by increasing the fund to $6,000,000 to be divided into 3,000,000 preferred shares of the par value of $1 each and 3,000,000 common shares of no par value.

December 1, 1930, E. S. Horn, H. O. Bland and John E. Horn again amended the declaration of trust in capitalization, thus:

“This Trust shall be divided into Five’ Million (5,000,000) Preferred shares of the par value of One Dollar ($1.00) each, Three Hundred Thousand (300,000) Class A Common shares of no par value, all such shares of each class to be issued fully paid and non-assessable.

“Class A Preferred shares represented by certificates outstanding shall be entitled to dividends or distributions at $1.80 per share per annum out of the receipts of the trust before any dividends may be paid on the Common shares of either class; * * * and shall represent and shall in all respects, including all rights to dividends, distributions and payments be equal to and the same as a block of fifteen (15) Preferred shares, except that Class A Preferred shares shall never be entitled to dividends exceeding $1.80 per share per annum (save and except such additional or special and extra dividends as the trustees may declare under the provisions of subdivisions (b) and (c) of paragraph 19 following); and said Class A Preferred shares shall always be entitled to fifteen times the annual dividends paid on Preferred shares, not exceeding, however (except as to the additional, or special and extra dividends aforesaid), One Dollar and Eighty Cents ($1.80) per share per annum,

“Class A Common shares shall represent and shall in all respects, including all rights to dividends, distributions and payments, be equal to, and the same as, a block of fifteen (15) Common shares. * * *

“The Preferred shares and the Class A Preferred shares shall, up to their respective preferences of Twelve Cents (12c) per share and One Dollar and Eighty Cents ($1.80) per share provided therefor, share ■or pro rate the total of all dividends paid upon all outstanding Preferred shares and Ciass A Preferred shares in the ratio of fifteen (15) times as much per share on the Class A Preferred shares as is paid per share on the Preferred shares. The Common shares and the Class A Common shares shall, up to their respective dividends of six cents (6c) and ninety cents (90c) per share, respectively, provided for hereinafter under paragraph 19(c), share or prorate the total dividend paid upon all outstanding Common shares and Class A Common shares in the ratio of fifteen (15) times as much per share on the Class A Common shares as is paid per share on the Common shares.

Horn, Bland and Horn, original trustees, resigned, and thereafter in January, 1935, appellants, Bryan, Bostick and Sisk appointed as their successors by the state district court at Tulsa. On March 2, 1935, the newly appointed trustees amend-ed the declaration of trust, thus:

“This Trust shall be divided into Seven Million (7,000,000) Preferred shares of the Par value of $1.00 each, Three Plundred Thousand (300,000) Class A Preferred shares of no par value, Seven Million (7,-000,000) Common shares of no par value, and Three Hundred Thousand (300,000) Class A Common shares of no par value, such shares of each class to be issued fully paid and non-assessable. * * *

“All Preferred shares and Class A Preferred shares not heretofore issued shall be sold by the Trustees for the benefit of the Trust at such times and for such price, subject to the limitations hereinafter provided, as they shall deem beneficial to the Trust, * * *

, , , . , The amendment on the subject of exPenses of thc trust Provlded:

“As a part of such necessary expense there shall be paid to the Managing Trustee and each of the Co-Trustees, out of the funds of the trust estate, a reasonable compensation for services rendered to and °n behalf of the Trust Estafe, the amount thereof to be fixed by the District Court of Tulsa County, Oklahoma,

In the appointment of these trustees Bryan was designated as Managing Trustee and Bostick and Sisk as Co-Trustees. Bryan at the time of his appointment as trustee was receiver of the trust estate appointed as such by said state court in another class suit, and was in possession. The trust was also in litigation in the United States District Court for the Eastern District of Oklahoma in a proceeding under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, brought by its shareholders claiming as its creditors to obtain reorganization. Bryan v. Welsh, 10 Cir., 72 F.2d 618; Bryan v. Welch, 10 Cir., 74 F.2d 964.

This suit now under consideration was not instituted until April 14, 1937. It was brought as a class suit on behalf of certificate holders in the trust. The trust is rested on the statute of Oklahoma. See Oklahoma Statutes, 1931, Vol. 2, Article 5, particularly Sections 11820-11823, 60 Okl.St. Ann. §§ 171-174.

The class suit brought in the state court at Tulsa was entitled Alta L. Hamrick et al. v. Imperial Royalties Company et al. Curtis F. Bryan was appointed receiver of all the property of the trust in that suit. That court also appointed the three new trustees in that suit and fixed their compensation as such. It also found that it was necessary to the preservation of the trust estate and the interest of its shareholders that the amended declaration of trust made by the new trustees should be approved, and such an order was entered. Alta L. Hamrick sued as a shareholder in the trust, and other shareholders joined her as plaintiffs or intervenors. The state court found the number of shares of each class that had been issued, their relative rights, and the pro rata as between them in distribution of the corpus of the trust estate. It found:

“That there exists in the capital structure of said trust estate a deficit in excess of $4,000,000.00, and that during the existence of such capital deficit, in any amount, cash disbursements made to shareholders constitute and are distributions of capital; that such distributions of capital should, under the terms of said declaration of trust, amended declarations of trust and amendments thereto, be paid to the holders of each share of $1.00 par Preferred and Common in equal proportions and to the holders of each share of Class A Preferred and Class A Common in equal proportions; that the holder of each share of Class A Preferred or Class A Common should be paid an amount equal to fifteen times that paid the holder of each share of $1.00 par Preferred or Common.

“That the preference as to $1.00 par Preferred and Class A Preferred shares for which provision is made in said declaration of trust, amended declarations of trust and amendments thereto, are and were intended to be effective as to and only as to distributions payable from surplus created by net earnings of the trust estate.

“It is therefore, ordered, adjudged and decreed by this court that the trustees of Imperial Royalties Company be and they are hereby instructed and directed to pay out of the funds of said trust estate to shareholders at such time, or times, as the trustees may in their discretion deem proper and advisable and in the best interests of the trust estate and its shareholders distributions of capital as follows:

“(a) To the holders of each share of $1.00 par Preferred and each share of Common an equal amount;

“(b) To the holders of each share of Class A Preferred and each share of Class A Common an equal amount;

“(c) To the holders of each share of Class A Preferred or Class A Common an amount equal to fifteen times that paid to the holders of each share of $1.00 par Preferred or. Common.

“Done in open court this 8th day of November, 1935.

“S. J. Clendinning, Judge.”

It also appears in the Alta Hamrick suit that judgment was rendered in the state court against John E. Horn and the estate of E. S. Horn in the sum of $2,611,904.34, but is uncollectible. Circumstantially it seems clear that a great deficiency in assets of the trust came about while the two Horns were in control of the trust fund. In line with the decree of the state court, supra, and as in obedience thereto the new trustees made three separate disbursements to shareholders out of the capital structure of said trust estate in the total amount of $182,824.07. We think that decree should be taken as a direction and command to the trustees to liquidate the trust estate for the benefit of the shareholders, granting them a reasonable time to do so. We see no reason why the trustees should not-carry out those directions and report to that court. The value of all said property was appraised by a competent petroleum engineer at $582,-768.

After litigation against the trust subsided the newly appointed trustees became interested in the question as to what should be done with it or the remainder of the fund when the twenty year period of limitation would expire on December 1, 1940. It appears to have been suggested by some of the shareholders that it could be indefinitely continued for twenty or even twenty-one year periods by simply amending the declaration and having the trustees convey all the trust estate to new trustees, but that would' be a clear attempt to circumvent the statute. In Phillips v. Chambers, 174 Okl. 407, 51 P.2d 303, 308, the Supreme Court said: “Trusts in relation to real property, except as authorized by statute, are forbidden. Sections 11803 and 11821, O.S.1931, 60 Old.St.Ann. §§ 131, 172. Express trusts are authorized (section 11820, O.S.1931, 60 Okl.St.Ann. § 171), but their duration is limited. Section 11821, O.S.1931.”

The trustees decided to organize a corporation under the laws of Delaware and deed the trust property to it. They formulated a plan of dividing the shares in the corporation among the certificate holders in the trust on a basis of equality among them as to value, using the appraised value $582,-768 as the total corporate assets, and informed the shareholders fully of the plan. There was no serious contention that the basis for division of corporate shares among the holders of shares in the trust estate was or is not a fair and just one. After the plan was fully formed the trustees by circular letter to the shareholders in the trust informed them of its provisions. It set forth the number of shares in the trust, the number of shares to be provided for in the Delaware corporation, and among other things said:

“There is presented herewith a plan, which has been evolved by the trustees of Imperial Royalties Company, for the purpose of giving effect to the expressed desire of a substantial proportion of the beneficial interest shareholders of the trust estate for the perpetuation of its business beyon.d the term fixed by the provisions of the declaration of trust, through reorganization in corporate form. Provisions have been embodied therein which will protect the rights of those electing to be paid in cash, their distributive share of the value of the trust assets.”

It was testified by Mr. Bryan, trustee, that arrangement had been made in New York to pay any and every shareholder in the trust estate his proportionate share of the appraised value, $582,768, in cash if he should not desire to subscribe for stock in the corporation. The plan provided for its submission to a vote of the shareholders in the trust and that if there should not be 66% per cent of the shares voted in favor of the plan it would not be accepted. The holders of 76.54 per cent of the outstanding shares in the trust estate have signified their approval of the plan, and at the time of trial 56.75 per cent of the holders of those shares had subscribed for stock in the new corporation.

Each of the trustees testified as to the part he took in that capacity in preparing the plan, in procuring the Delaware corporate charter, and in presenting the whole plan to the Securities and Exchange Commission and that he approved the plan of transferring the trust estate to the corporation and believed it best for all beneficiaries. We see nothing in their testimony indicating in the slightest degree anything but an honest effort to faithfully serve all cestuis que trustent.

The court below perpetually enjoined the three trustees that had been appointed by the state court from conveying any of the property to the corporation, from doing anything to terminate the trust. It annulled and declared the plan void and of no effect. It removed the three trustees, Bryan, Bostick and Sisk, and appointed three new trustees and fixed their salaries as such. It ordered Bryan, Bostick and Sisk to pay to the trust fund all moneys of the trust used and expenses incurred in organizing the new corporation in an amount of several thousand dollars and to personally discharge all liabilities in connection therewith and to account to the trust fund therefor, and to turn over and deliver to the new trustees all books, records and funds that belonged to it within ten days.

Reverting to the state court’s findings and decree, a court of general jurisdiction, —It held that it was without power to compel shareholders in Imperial Royalties Company to take stock in a corporation in lieu of their shares in the trust estate. It ordered and decreed that the trustees of Imperial Royalties Company pay out the funds of said trust estate to its shareholders and specified the pro rata interest of holders of the four kinds of shares that had been issued by said trustees. That was a liquidation order. In substance the court below granted no other relief to appellees in the instant case who were plaintiffs below, and these plaintiffs-shareholders in the instant case stood in privity to the plaintiffs-shareholders in the Alta Hamrick case in the state court. In fact all shareholders in the trust were bound by the decree of the state court. Many hundred shares were owned by plaintiffs or intervenors there. Harmon et al. v. Auditor et al., 123 Ill. 122, 13 N.E. 161, 5 Am.St.Rep. 502; Dewey v. St. Albans Trust Co., 60 Vt. 1, 12 A. 224, 6 Am.St.Rep. 84; Willoughby et al. v. Chicago Junction Rys. & U. S. Co., 50 N.J.Eq. 656, 25 A. 277; Cromwell v. County of Sac, 94 U.S. 351, 24 L.Ed. 195; Johnson Steel Street Rail Co. v. Wharton, 152 U.S. 252, 14 S.Ct. 608, 38 L.Ed. 429.

Reversed with directions to vacate the decree and dismiss the bill and interventions.

BRATTON, Circuit Judge, concurs in the result.