Moreover, when one deals with a person acting in a _ _ trust capacity Ile is bound to inquire into the terms of _ the trust.
Tiability of the Mas sachusetts trust or business trust, title to property is held by trustees, and managed by them, for the bene fit of a large group of beneficiaries. The trustees really own the property but account to the benefi ciaries for the profits. These beneficiaries change from time to time thru the sale from one person to another of the certificates of beneficial interest. Are the beneficiaries, existing at any one time liable per sonally for the contracts of the trustees? In one of the earliest English cases describing this method of doing business, one of the lord justices described the situation as follows: In my opinion, what must be shown is that the associa tions by themselves or by their agents carry on a business. Now, here, what can be said? That the certificate holders do it by themselves, can, I think, hardly be contended. All the powers which the subscribers of tbis money had was to at tend sometimes at meetings. The only business done at them was to receive and consider a report from the trustees on the condition and affairs of the trust, to appoint auditors to audit the accounts and to elect new trustees to fill up vacancies. It is impossible, in my opinion, to say that the certificate holders are by themselves in any way carrying on any business by reason of what is done at these meetings. Then clause 20 says, that reinvestment must be sanctioned at a meeting of the certificate holders summoned for that purpose. . . . All that is here aiven to the certificate holders is the power to give such assent as cestuis que trust usually give for a change of securities when they are not in capacitated by infancy or otherwise. They meet as cestuis yue trust to give their assent, not as members of the partner ship joining to carry on and control the business of the partnership even if it were a business.' And another lord justice in the same case said that the certificate' holders were not liable for con tracts made by the trustees.
5. Purposes of trusts.—Tnists may be created for various purposes, such as holding property in order to give the income to one person during life and the remainder at his death to another; or to protect the principal of an estate against the foolish or incompe tent actions of a minor or a spendthrift. But these are private matters and do not come within the scope of :this work which is concerned with methods of con trolling property committed to business enterprise. Trusts of this kind are found in the so-called mort gages or deeds of trust, car trusts, the so-called Massa chusetts trusts and voting trusts.
6. Deed of trust.—When a corporation covers all its property with a large mortgage, the mortgage is made out to a trust company which acts as mortgagee for the benefit of the equitable mortgagees, the bond holders. This method has the advantage of requir ing but one mortgage, of permitting a transfer of the bondholders' interests without requiring a trans fer of the mortgage and of permitting the company to have all its dealings with one person instead of with many, perhaps thousands of persons. The trustee
is the legal mortgagee and has the primary right to see that all the mortgagor's covenants are observed and to foreclose the mortgage in case of default.
7. Car trusts.—Railroad mortgages cover all the property owned by the company at the time the mort gage is executed and delivered in addition to all prop erty which may subsequently be acquired. Suppose a road wishes to acquire new rolling stock. As soon as the company acquires title the cars become subject to the lien of the previously existing general mort gages under the so-called "after-acquired" clause. A lien placed on the rolling stock to acquire the money necessary to pay the purchase price would therefore be a second lien only. 3Ioney obtained in this way with the security of a subordinate lien would demand a relatively high rate of interest. Some -svay to cir cumvent the after-acquired clause must be found if the property itself is to be used as security in raising the money needed to purchase it at a fair rate of in terest. Consequently it is usual for the car -manu facturing company to sell the cars, not to the railroad but to a trust company which pays for thein out of the proceeds of equipment trust certificates. These certificates are the obligation of the railroad, they ma ture serially and are given in consideration of a lease of the cars in -which the trustee is the landlord and the railroad the tenant. When all the certificates are paid, the company pays a nominal sum and gets title to the cars. In the meantime the legal title rests in the trust company and if at any time the railroad is unwilling or unable to pay interest on the certificates or to pay the instalments of principal as they fall due, the trustee may declare the lease broken and regain possession of the cars. Until title filially vests in the railroad, the cars usually bear a plate somewhere on the gear stating, "This car is the property of the Trust Company."8. Massachusetts trusts.—Until 1912, the State of Massachusetts forbade corporations to deal in real estate. This occasioned the device known as the Mas sachusetts trust, an organization of trustees who hold title to property for the benefit of persons organized as a voluntary association, each member of which re ceives negotiable certificates of beneficial interest. Many large office buildings and hotels in Boston were controlled in this way. The agreement setting up the trust provides in every case an organization simu lating that of the corporation. Thus the certificates are given a par value, profits are divided on the basis of this par value and the trustees hold office for a stated period, being replaced by trustees elected by the beneficiaries who cast as many votes as they have units of beneficial interest. The trustees then agree to carry on the business' under a trade name, and to organize with a president, treasurer, secretary and other necessary officers.