At one of my recent Toronto seminars, a participant mentioned something about how a trust cannot enter into a contract. So I followed up by asking Amy Morris Hess about this. She teaches at the University of Tennessee College of Law and is a prominent authority on trusts and estates. (She’s the successor author of the leading treatise in trust and estates law, Bogert Trusts and Trustees.) Here’s what she said:
A trust is not a legal person, as a corporation is, and therefore it cannot be party to a contract or sign a contract. The trustee is the proper signatory. A trustee can and, indeed, should sign in his fiduciary capacity—not as an individual—and under modern law is not personally liable on a contract made in a fiduciary capacity unless he exceeded his authority.
One refinement, though: I am talking about private express trusts, that is, the kind of trusts that families use for wealth management. Various kinds of business trusts, such as land trusts and pension trusts, are often treated more like corporations than trusts for various legal purposes. It is possible that those types of trusts may have the capacity to enter into a contract. Those trusts are outside my area of expertise, so I cannot give a definitive answer as to those.
You can find on EDGAR examples of contacts with a trust included as a party. Two examples:
THIS OPERATING EXPENSES LIMITATION AND SECURITY AGREEMENT (the “Agreement”) is effective as of the 11th day of November, 2014, by and between NORTHERN LIGHTS FUND TRUST, a Delaware statutory trust (the “Trust”), on behalf of Anchor Tactical Municipal Fund (the “Fund”) a series of the Trust, and the Advisor of the Fund, Genesis Capital, LLC (the “Advisor”).
THIS TRUST SALE AGREEMENT is made as of December 17, 2014 between ALLY AUTO ASSETS LLC, a Delaware limited liability company (the “Depositor”), and ALLY AUTO RECEIVABLES TRUST 2014-3, a Delaware statutory trust (the “Issuing Entity”).
Is this a mistake, or are these trusts of a sort that can enter into contracts?
Here’s an example of an introductory clause that omits the trust and instead names the trustee:
AMENDED AND RESTATED TRUST AGREEMENT, dated as of ________, 20__ (this “Agreement”), between FORD CREDIT AUTO LEASE TWO LLC, a Delaware limited liability company, as Depositor, and U.S. BANK TRUST NATIONAL ASSOCIATION, a national banking association, not in its individual capacity but solely as trustee under this Agreement, to establish Ford Credit Auto Lease Trust 20__-_.
I might be inclined to introduce the “to establish [Trust]” concept in the recitals. Any views?
In a quick search on Westlaw, I was unable to find any sign people get into fights over including a trust, and not the trustee, as a party to a contract. If you know of any such disputes, I’d be pleased to hear about them.
And how does this play out internationally?
1. A Delaware statutory trust is an unincorporated association (Delaware Statutory Trust Act 12 Del. C. § 3801) that nevertheless appears to be able to contract as though it were incorporated.
2. National banking associations are incorporated under the National Bank Act 12 USC § 24, so presumably US Bank Trust National Association is required to act as a trustee for that particular transaction.
3. In common law jurisdictions trustees generally have to be incorporated as a board under statute to be able to contract as a trust.
Thanks. I’d be interested to get more information about how a Delaware statutory trusts appears to be able to contract. And excuse me for being dense, but I don’t know what “incorporated as a board” means.
“Any such association heretofore or hereafter organized shall be a statutory trust and a separate legal entity” (Delaware Statutory Trust Act 12 Del. C. § 3801(g)).
I mean the board (group) of trustees generally has to be incorporated as such to be recognised as a separate legal entity. The DSTA is an exception.
Still not getting you: is the ‘incorporated board of trustees’ itself a legal entity or is it the governing board of an incorporated legal entity?
The governing board, after it has been incorporated, is a separate legal entity.
Delaware, Maryland, and possibly a few other states have specific business trust statutes (Maryland has a general statutory trust act and real estate investment trust law). The statutes give more flexibility for structuring operations than corporate law while imposing duties on trustees and giving limitation of liability similar to that of directors of a corporation rather than trustees of a typical trust (although because of the flexibility given by the statutes, a trust can actually be structured with higher or lower standards). The ability to contract comes from the statute and the governing documents of the trust and typically these kinds of trusts sign contracts like corporations (i.e., by an officer of the company). It’s been a while since I dealt with these so I can’t give statutory references off the top of my head though. These forms of business entity are used very commonly for mutual funds and REITs.
In Australia and probably any ‘old’ common law country (i.e. no restatement etc) a trustee must enter into a contract in its capacity as trustee for the trust, even in the case of multi-billion dollar investment and trading trusts.
Not usually litigated because it would be a very very sloppy lawyer indeed who missed the point!
I believe there is occassionally litigation about whether a document is executed as trustee or in the signer’s own capacity, but whilst this kind of dispute would plainly be avoided by appropriate drafting, it is mainly about trust law than the meaning of the contract (i.e. does trust law mean that the contract has a different effect to that described in it?).
There is also the occassional tax case about whether a document is really entered into for the benefit of the beneficiaries or for the trustee’s own benefit, but again this is usually more about trust law than contract law.
“Any such association heretofore or hereafter organized shall be a statutory trust and a separate legal entity” (Delaware Statutory Trust Act 12 Del. C. § 3801(g)).
A board of trustees; ie. “a group of people constituted as the decision-making body of an organisation” according to the Oxford Dictionary.
Ken,
Be very careful lest this topic get you get sucked into the black hole of MERS litigation (Mortgage Electronic Registration Systems, Inc.) in the U.S.
MERS situations mostly involve transfers of interests in real property and so fall outside your neck of the forest, but mortgages, like leases, are hybrids of contracts and conveyances, so you may be called on to opine on how to draft matters of unknown consequence, involving MERS as ‘nominee’ (heh-heh-heh) for the non-record, ever-changing ‘beneficial’ owner of the mortgage debt and therefore of the mortgage interest in the mortgaged property. That much is but the iceberg’s tip, he said concisely.
As the sign at the entrance to the Haunted Forest said, ‘I’d Turn Back If I Were You’. The smart money adds, ‘And run away crying “Aieeee!”‘
Wright
In Canada at least, it’s very clear that trusts are not legal persons and cannot enter into contracts (although taxing statutes occasionally treat trusts as legal persons, that doesn’t affect trusts’ position for general private law purposes). Here are my authorities on this issue:
“The R.E.I.T. is structured as an unincorporated trust and as such is not a legal entity and cannot itself be a party to a contract. This does not imply that the contract itself was invalid, but merely that the person who can sue or be sued on the contract is not the R.E.I.T. but its trustee.” (Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1987] AJ 943 (QB))
Among other things, this has the consequence that if someone purports to sign a contract “in trust” for some third party (such as a corporation to be incorporated), this person is personally liable on the contract they signed: Farm Boy Inc v Mobius Corp, 2011 ONSC 2877 at paras 77-80, aff’d on the merits without discussion of this point but varied as to costs 2012 ONCA 69.
Thank you for this!
I am currently litigating this issue. A trust (not the trustee) is the seller in a real estate contract. The trustee (who was not trustee when the contract was executed) is arguing that the contract is not valid because the seller is identified as the trust, rather than the trustee. I too have found that there is not a lot of case law on the issue.
Thanks.
Thanks. I’d be interested to see your research.
Do you have an update on the resolution of the case?
The case settled before the court resolved the issue. So this will remain an open question.
Can a trust be registered as the holder of shares in a company in the name of the trust, bearing in mind that shareholders are regarded as party to a contract? I would think not, but it appears to happen often in practise. It would be convenient as trustees can change often, which would require transfers between trustees.
Thought it worth noting that South African trust law is based on English law and in Standard Bank v Swanepoel NO (20062/2014) [2015] ZASCA 71 (22 May 2015) it was accepted that a trust can be named as party to a contract where it is clear the trustees acted for the trust (ie in her capacity as trustee).
Thanks. I’ll look at this again at some point in the coming months.
Any update on this issue? Would be very interested. Thanks