Untitled Texas Attorney General Opinion ( 1943 )

Honorable 0. P. Lockhart, Chairman
Board of Insurance Commissioners
Austin, Texas
Dear Slrt Opinion No. O-5182
Re: What is the extent of the trust
fund created by the reinsuranoe
agreement between the Ill'lnois
Bankers Life Assoclatlon and
the``IllinolsBankers Life~.'As-
surance Company? ,Ana related
matters.
Your letter of April 2, 1943, requesting the opln-
ion of this department on the matters stated therein reads
as follows:
"Enclosed in duplicate are photostatic copies of
"1. Relnsurance contract of November 19, 1929
by which the stock life Insurance company above named
reinsured and assumed the then existing business of
a mutual assessment life InsUrance company known as
Illinois Bankers Life Association.
"2 * Letter of March 24, 1943 to this Depart-
ment from our Examiner, Mr. Hunter McLean, who is
engaged in a convention examination of the above
named company at this time.
"The reinsurance agreement as a whole (and
especially paragraph 5 thereof) appears plainly to
create a trust; and we certify to you as facts all
of the statements made in Mr. McLean's letter in
so far as they purport to be factual in nature.
"'Thefacts stated by our Examiner seem to
raise the question as to the extent of the trust
fund created by the reinsurance agreement,and
to raise the issue as to whether the stated prac-
tices of the captioned company consti.tutebreaches
of trust under the agreemt, and if so wherein
and to what extent.
Honorable 0. P. Lockhart, Page 2 (o-5182)
"We request your oplnlon upon the matters
indicated in the paragraph next preceding, and if
possible your answers to the specific questions
propounded in our Examiner's letter.
"In oonnection with the use of the words
‘fund’ or ‘funds’ as embracing real estate as well
as increments of all kin& growing out of same,
as well as other classes or property whether real,
personal or mlxea: See Sims vs. McMullen, 22 SW
; X:, 318, modified on other grounds, 37 S, W,
11 .
'"werespectfully request that your Department
use the utmost possible expedition in giving us
your opinion upon the matters involved, not only
on account of the importance thereof, and the
amounts involved, but also because the present
convention examination of the company Is partlci-
pated in by the examlnlng authorities of several
states whereln the company does business, and we
need your opinion as early as possible to guide
us in framing the report of such examination which
will very soon come to a close."
Sections 2 and 5 of the contract of relnsurance be-
tween the Illinois Bankers Life Assoclatlon and the Illlnols
Bankers Life Assurance Company are atifollows:
"Section 2. IT IS AGREED that upon this con-
tract becoming effective, as hereinafter set forth,
the said Association shall, by proper deeds of as-
signment and transfer, convey and set over to the
said Company all of its assets, moneys, notes, bonds,
mortgages, securities, judgments, choses in action,
real property and property of every kind and charac-
ter and wheresoever situated, belonging to the said
Assoclatlon."
"Section 5. All the present funds of the
Association shall be considered as Trust Funds
for the benefit of the members of the Association,
and, with accretions thereto and deductions there-
from, shall be invested from time to tLme in ac-
cordance with the provisions of the statute as
to the investments of Legal Reserve Life Insurance
Companies; and the Company shall, at all times,
keep books of account of said funds.
Honorable 0. P. Lockhart, Page 3 (0-5182)
"Accretions shall consist of (A) the ass,ess-
ments and premiums to be paid 'by continuing mem-
bers, less contributions to expenses as set forth
in Section 4; (B) interest accumulations at the
rate of 4?t$per annum on the reserves accumulated
on the so-called Individual Reserve Policies, and
at the rate of 4% per annum on the accumulated sav-
ings contributed by holders of Savings Accumulation
policies, and at the rate of 3& per annum on the
remainder of such funds, but in no event at a rate
greater than the actual net rate of Interest earned
ownthe funds, nor less than;;33%; and (C) the sur-
plus earningsprovlaea in Section 6.
"Deductions shall include (D) all policy pag-
ments and claims to the said members on the assess-
mentplan and to their beneficiaries; and (E) any
amounts ~apportionedand paid or credited to poll-
cles or certificates which may be converted as :
hereinafter set forth.
'There shall be set up by the Company from
the aforesaid Trust Funds the legal reserve from
time to tFme required to be set up to the credit
of all policies or certificates assumed hereunder,
and the special funda created in connection with
policies on the Savings Plan and the reserves on
the so-called Individual Reserve policies as pro-
vided by the terms of such policies,;
"The Company shall have the power, as afore-
said, to invest said funds and to use the said funds,
or the income therefrom, for the purpose of maln-
taining, as far as possible, the sald present rates
of the said certificates, or for the benefit of the
members of the sala Association. NO dividends
shall ever be paid by the said Company out of the
funds of the Association or accretions thereto as
herein provided.':
Section 6 of said contract of reinsurance provides:
"In conslderatlon of said transfer of insurance
and of the contributions to expenses herein provided
and any excess interest earnings or otherwise, said
Company agrees that at the end of each calendar year
It will pay into the Trust Fund set apart for the
benefit of the members of said Association, that
proportion of the surplus earnings of the Company
Honorable 0. P. Lockhart, Page 4 (o-5182)
accumulated Uurlng the year, as set forth in the
Annual Statement made In conformity with the requlre-
ments of the Department of Trade and Commerce of
Illinois, exclusLve of dlvlden&spaid or apportioned
to participating legal reserve policy holders and
interest earned on the capital and unassigned sur-
plus, that the total assessment premium income of
the year bears to the total renewal premium income
of the Company, lnc,ludtngttieassessment premium
income.':
The letter of March 24, 1943, referred to in the
second paragraph of your letter as quoted above reads in
part as follows:
"There are submitted herewith,,severalques-
tions arising In the present examination of the
Illinois Bankers Life Assurance Company. The
amount of money involved to date is rather large
and could amount in the future to a very great
amount, and therefore, I seek the opinion of the
Attorney General of Texas to guide me in prepar-
ing the balance sheet of the examination report
and in making demands for performance upon the
officials of the company.
"The Illinois Bankers Life Assurance Company,
a stock company, was incorporated September 13,
1929 under and In accordance with the provisions
of the Illlnols legal reserve Act of 1869 and all
amendments thereto. It was organized to reinsure
the business of the Illinois Bankers Life Assocla-
tlon, an assessment life assooiatlon 0 eratlng
under the Illinois assessment Act of 18 93.
"The contract of relnsurance was approved by
the members of the Assoclatlon~on November 19,
1929 and by the Illinois Insurance Department on
the same date. The letter approval was given pur-
suant to the provisions of an Illinois statute
entitled 'An Act relating to the consolidation
and reinsurance of insurance Companies, Associa-
tions and Societies,' which was enacted July 1,
1919 *
n. . . .
"In the management of'the Trust Fund, the
Company has received all Income f%om Trust Fund
real estate and borne all real estate expenses.
Honorable 0. P. Lodkhart, Page 5 (0-5182,)
., i
At annual accounting dates the Company pays to
the Trust Fund 3s; or more, interest 'upon,
the
book value of the,,TrustFund assets,,includlng
Its real estate. In the sale of Trust Fund real
estate, profits and losses were considers&to ,be
the gain or loss of the TrustFund., Although the,
contract Is not specific in these matters, that
appears to be the implied method to be followed.
Also, there is no question concerning~the``posltion
of the Company as a Trustee of the,Assoclatlonls
Trust Funds, and, upon that point, there is no
arpmen t .
"The Trust Fund owns hundreds of farms in
Texas, Oklahoma and Kansas,and has owned these
farms since the depression years. It also owns
farms in other States, however we are principally
concerned with the Texas, Oklahoma and Kansas
farm properties and,,if given the law in those
States Can answer the questions arisingin the
remaining States without difficulty.
"The Texas, Oklahoma and Kansas farms have,
in many Instances, proven to be,in or near ~11
development? Thus, high prices have been offered
the Company for thenfarms, in'fee; high prices
have been offered for the mlneral rights; high
prices have beeh.offered and received for leases
and much money,in delay rentals has been received
under oil leases; and, high prices have been of-'
fered for royalty, producing and non-produo,ing.
"Until this time, the Company has taken the
position that all products of an.011 play are in-
come and therefore the property'of the Trustee
Company,,and not the property of the Trust Fund.
These products include lease bonuses, delay rentals,
income from producing royalty, proceeds from the
sale of mineral rights and non-produoingroyaltya
The Company now ooncedes,~after discussing the
distr,ibutlo,n
of these proceeds, that the laws of
Texas are such 8s to vest any of the above pro-
ceeds in the Trust Fund as receipts from the sale
of real estate,'be they lease bon~uses,delay rentals,
producing royalty, from the sale of mineral'interests
or non-producing royalty. However, the Trustee
Company argues that the laws of Oklahoma and
Kansas vary from'those of Texas and that In those
two States the proceeds of leases (bonuses and
delay rentals) as well 88 producing royalty are
Honorable 0. P. Lockhart, Page 6 (O-5182)
income and therefore the proper,ty:!or;thk
;L;,i:
Trustee Company and not the property of the Trust
Fund received as the proceeds of real estate sales,
or otherwise. The Company now concedes, also,
that proceeds from the sale of mineral rights and
non-producing royalty, In Oklahoma and Kansas, are
property of the Trust Fund as proceeds from the
sale of real estate.
"So far as we have been able to determine,
this Is the first time thebe questions have been
raised or considered by the Company officials.
"The Company has, until recently, consist-
ently refused to sell Trust Fund real estate, even
when offered a fair price. This speculation is
particularly true in the cases of farms within an
oil play area. Numerous offers have been made for
Trust Fund farms, where some 011 interest was ae-
veloping for amounts well in excess of the value
of the surface rights. In the vast majority of
such instances, the offer was refused and if the
play developed further, a lease was negotiated.
In only two or three instances has the Trustee
Company sold mineral rights or non-producing
royalty, thereby benefiting the Trust Fund, but,
to the contrary, the lands have been held and
leased, the proceeds going to the Trustee Com-
. Thus, the position of the Trustee Company,
``%ingly or unknowingly, has been to refuse offers
for the sale of real estate that would have benefited
the Trust Fund and hold out for leases and production
that would benefit the Trustee Company.
"In several Instances where the surface and
a portion of the minerals in Trust Fund lands
have been sold at a loss subsequent oil develop-
ment produces for the retained mineral interests,
substantial lease bonuses, lease delay rentals
and even producing royalty. These retained min-
eral interests are carried in the Trust Fund at
$1.00 book value, yet under the practice of the
Trustee Company heretOfQr-3, .?dl proceeds from
these mineral Interests (now admitted not to in-
clude proceeds from the sale of mineral rights
or non-producing royalty) have been credited as
Trustee Company income. Thus, although the as-
set was in the Trust Fund, all proceeds from it
went to the Trustee Company.
Honorable 0. P. Lockhart, Page 7 (,o-518?)., :
"Most of the mortgage loansj through which
this real estate was acquired, were,'madeby the
Illlnols Bankers Life,Assooiation, the,:assesament
association, prior to Its reinsurance with the
Illinois Bankers Life Assurance Company. It has
developedin ,thisexamination that W. H. Woods,
formerly President of the Association, ,recelved
a mineral,interest in most of the Oklahoma lands
mortgaged to the Associat,ioninconsideration
for the Association having made the,.l,oan.The
demand of ,these,min~eral
interests by Woods s,erves
to emphasize that some of the value assigned to
the land at the time of execution of the mort-
gages undoubtedly rested in the possibility of
oil development. Row that such a development has
taken place, the Trust Fund reaps a,negligible
part of the benefits.
As we understand your request one of the first ques-
tions presented Is vhether or not the real estate involved
constitutes a apart of the trust fund? It will be noted that
Section 5 of the relnsurance contract expressly provides in
part:
"All the present ~funds of the Assoblatlon
shall be considered as Trust Funds for the bene-
fit of the'members of the Association. e s *"
Considering Section 5 of the relnsuranoe contract in connec-
tion with the other provisions~of said contract, especially
provision No. 2 and provisionNo. 6, it is our ,opinion,that
the real estate Involved ,constitutesa part of the trust
funds of the association.
The wora."fund" has been defined,l.nseveral Texas
cases. In the case of Galveston, H. EbS. A. Railway Company
v. State, 13 S.W. 619, it is stated in effect that the word
"fund", as used ,in Vernon's Annotated State Constitution,
Article 7, Section 2, providing for the establishment of a
perpetual school fund, means the entire property from which
money Is to be derived for the maintenance o,fpublic free
schools, the foundatlon,on which rests the support of the
system of schools which it is made the duty of,the Legisla-
ture to establish and maintain.
In the case of Hayes v.'Gadner, 40'3. v. (2) 917,
it is stated in effect that the word"funds", as used in the
order directing paymentof compensation to a receiver and
Honorable 0. P. Lockhart, Page 8 (o-5182)
the receiver's attorney's fee means cash on hand or personal
assets acquired by receiver on account of, and during the
operation of the business of the corporation.
In the case of Etter v. Tuck, 91 S. W. (2) 875 it
is stated In effect that allegations of a petition by inde-
pendent executor to enjoin sale under deed of trust of real
property belonging to an estate that the estate had no funds
with which to pay first and second class claims held suffi-
cient to justify resort to secured real property and tempo-
rary restraining order enjoinlng its sale, since I'fund"in its
broad meaning includes property of every kind.
In view of the foregoing authorities it is our
opinion, as stated above, that the term "funds" as used in
the contract of reinsurance is broad enough to Include real
estate.
It is stated by Bogert in his Text on Trusts and
Trustees, Vol. 1, page 1, that
"A trust may be defined as a fiduciary rela-
tionship in which one person holds a property
interest, subject0 to an equitable obligation to
keep or use that interest for the benefit of
another. This statement is especially appropriate
to the most common type of the trust, namely, the
express private trust. . . ."
It is further stated by Bog&t in Vol. 1, page 3,
"The trust property is the Interest in a
thing, real or personal, which the trustee holds,
subject to the r,i.ghts
of another.
"It should first be noticed that an interest
in specific property, real or personal, is always
an element of the trust. . .'I
Generally speaking It Is stated in Texas Jurispru-
dence, Vol, 42, page 722, that
"In accounts with the cestul, the trustee
is chargeable with all proceeds of the sale of
and income from trust property. He is entitled
on such accounting to credit for outgoings, such
as taxes, insurance, necessary repairs also for
the expenses of any litlgatlon, reasonably under:
taken, for the protection of trust property. Lost
property must be accounted for--that is to say,
Honorable 0. P. LOCkhart,~Page 9 (!731@).. ,,, ,,
the trustee must,s.hoy.
that he,us~edqare and dill-
gence in the biistody'and,for the'prsservation
of the property which was lost. As to misappll-,
cationof funds,'the rule of equity is, that all
the gain made by the trustee, by a wrongful appro-
priation of;,t,be:trust.,f%ld,
shall go to the cestui
que trust',and all the losses borne by the trustee
himself."
Inthe case of Murphy-Bolanz Land and Loan Company
v.,McKibben, 236 3. W. 78, it Is stated among other things:
"There must be no speculation on then'partof
the trustee in dealing with the trust fund,.,The
law does not give to him the same freedom of choice
in making investments which may be and often is
exercised by prudent business men in the conduct
of their own affairs."
It Is stated by Bogert in his Text on Trusts and
Trustee$, Vol. 4, page 2393,
"It is, of course, common that a trustee who
has a power of sale, but no duty to sell, disposes
of trust property and makes a profit on the sale;
when the sale price is compared with the inventory
or cost price of the property. Such a profit Is
quite universally held to go to the capital of the
trust fund. . 0 .'
In view of the foregoing facts and 'authorities,as
heretofore stated, it is our opinion that all of'the real es-
tate situated in Texas assigned and transferred by the associa-
tion to the Illinois Bankers Life Assurance Company constitutes
a part of the trust fund of the association. It is our further
opinion that the proceeds from lease bonuses, delayed rentals
income from producing royalty, proceeds from sale of mineral
rights and non-producing royalty from Texas lands belong to
and should be credited to the trust fund of the association
and not to the trustee company. However, this opinion is not
to be construed as holding that the trustee company is not
entitled to such expenses as taxes, insurance, necessary
repairs, expenses of any litigation, or any other reasonable
expenses incurred for the protection of the trust property.
It will be noted that the examiner raises severkl
specific questions in his letter as quoted above. We believe
what has been said above answers his questions in a general
manner except to the law in other states pertaining to such
Honorable 0. P. Lockhart, Page 10, (0-5182)
questions. We express no opinion concerning the questions
regarding the laws of other states.
Yours very truly
ATTORNEY GENERAL OF TEXAS
By S/ Ardell Wlllls``s
Ax-dellWilllams
Assistant
Approved Apr. 19, 1943
S/Gerald C. Mann
AttQI?Iey General of Texas
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