Schumann-Heink v. Folsom

Supreme Court of Illinois · Corporations

CorporationsBusiness trustsPartnershipTrustee liabilityPublic policyMassachusetts trustcommon law trustbusiness trust

Facts

Plaintiff sued to hold Folsom personally liable on a 1920 contract with the Goodland Company under which money became due to her. The contract expressly stated that it was executed by the trustees "not individually but as such trustees, to bind the trust estate," and the Goodland Company operated under a Massachusetts declaration of trust giving trustees absolute control while denying shareholders any voice in management. Plaintiff argued that this arrangement unlawfully attempted to limit liability without complying with Illinois corporation or limited partnership law and was a fraudulent scheme. The chancellor found that Folsom was not active in managing the trust, did not negotiate or prepare the contract, and committed no fraud making him personally liable.

Issue

Whether Folsom could be held personally liable, individually or as a partner, on a contract made in the name of the Goodland Company despite an express provision limiting liability to the trust estate. The case also asked whether the Goodland Company's Massachusetts business trust arrangement was contrary to Illinois public policy.

Rule

Where a declaration of trust gives trustees full control of the business and certificate holders are not associated in carrying on the business and have no control over the trustees, the arrangement is a business trust and not a partnership. Because a trustee is not an agent and has no principal, a trustee's contract is ordinarily his personal undertaking, but he may avoid personal liability by expressly stipulating that the contract is made as trustee only and is enforceable solely against the trust estate. Such a limitation is not against public policy.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Red Mesa Orchard Trust operates from Santa Fe, New Mexico. Its declaration of trust gives the trustees sole authority to buy land, hire managers, borrow money, and declare distributions, while certificate holders may receive profits but have no vote, no power to remove trustees, and no authority over operations.

A fertilizer supplier sues several certificate holders as partners after the trust fails to pay an invoice. Under the majority rule, are the certificate holders most likely liable as partners?

Explanation. The majority held that when trustees have full control of management and certificate holders are not associated in carrying on the business and have no control over the trustees, the arrangement is a business trust, not a partnership. Mere participation in profits does not create a partnership. The wrong answers either ignore the control test or state an absolute immunity the opinion did not adopt. (Derived from Schumann-Heink v. Folsom (n.d.).)