Pacific Farms, Incorporated

October 28, 1985 Pacific Farms, Incorporated c/o Mr. Amancio R. Garcia Bo. Zaragosa, Bolinao Pangasinan Gentlemen : This relates to your letter, dated July 16, 1985, requesting anew the opinion of this Commission on the query posed therein. llcd The facts as stated in your letter appear as follows: "Under a Deed of Conveyance in Trust dated October 31, 1979, J. Antonio Araneta and his wife, Margarita R. de Araneta, as Trustors, executed trusteeship agreement involving 40,529 shares of stock in the Pacific Farms, Inc. and named their son, Antonio S. Araneta, Jr. as Trustee of his minor children with Gemma Cruz Araneta, Fatimah and Leon, both surnamed Araneta, with the minor children, Fatimah and Leon C. Araneta, as beneficiaries. It was stipulated among other terms and conditions of the Trust that the Trustee "shall not sell or encumber any of the Trust Property except for the purpose of acquiring, or investing in, another property which should at least be equal and has a stable and greater earning potential. Until said acquisition or investment is accomplished, the proceeds which he would receive from the sale or encumbrance should be deposited in any reputable bank or financial institution at the best obtainable interest and under such other terms as he may deem reasonable." Advised of the pending sale of the shares of stock of the minor children in the Pacific Farms, Inc., Gemma Cruz Araneta executed a Special Power of Attorney on May 22, 1985, naming her father-in-law, J. Antonio Araneta, as Attorney-in-fact, and authorized him to sell the shares of stock in the name of the minor children Fatimah and Leon C. Araneta, which document was duly authenticated by the Vice Consul of the Consular Section of the Philippine Embassy at Mexico City. Relying on the authority granted to him under the said Deed of Conveyance in Trust, supra, Antonio S. Araneta, Jr., as trustee, sold the 40,529 shares of stock of his minor children in the Pacific Farms, Inc., to Finetex Enterprises, Inc. on July 6, 1985 and endorsed the said certificates of stock as trustee and signed the Deed of Sale in the same capacity. In concurrence, J. Antonio Araneta, as attorney-in-fact or Gemma Cruz Araneta likewise signed the Deed of Sale in favor of Finetex Enterprises, Inc. The check covering the total consideration of the sale was made payable to Antonio S. Araneta, Jr. as trustee of the minor children, Fatimah and Leon C. Araneta and deposited with the Bank of the Philippine Islands in escrow." Your query is whether or not the sale of the shares of stock of the minor children, Fatimah and Leon C. Araneta by their father, Antonio S. Araneta, Jr. as Trustee, is valid and legal notwithstanding the absence of a Court Order appointing a legal guardian and approving the disposal by sale of the properties of the minor children. Whether a transferee of shares from a trustee acquires title as against the equitable rights of the cestui que trust depends upon the circumstances. If the trustee appears in the book of the corporation as the absolute owner of the shares, and the transferee has no notice, actual or constructive, that he holds the title in trust, he certainly acquires a good title. (12 Fletcher, Cyc. Corps., sec. 5545, p. 483, citing Lowry v. Commercial & Farmers' Bank, Taney 310, Fed. Cas No. 8,851). The general rule is that when the title and apparent unlimited power of disposition is vested in a person, the rights of a purchaser from him, for a valuable consideration, without notice of a secret trust upon which the property is held, are unaffected, the purchaser, in such case acquires an equity in dignity to the outstanding equity of which he has no notice. This principle is applicable to the sale and transfer of certificates of stock. (Fletcher, sec. 5545, p. 483) The rule is different where the transferee has actual or constructive notice that the shares are held in trust. In such a case, as a general rule, he takes subject to the trust and in subordination to the equitable rights of the cestui que trust, regardless of the character or sufficiency of the consideration passing between the transferor and the transferee. (Fletcher, sec. 5545, p. 483) The term trustee is a term of administration, and not of sale. A trustee ordinarily holds the property entrusted to his charge to collect rents, issues, dividends, or profits thereof, and to apply them to some specified use. Trustees commonly have no power to dispose of the property entrusted to their charge. Hence, the legal presumption is that a trustee has no power to sell or convey the property which he holds in his fiduciary capacity. (Fletcher, sec. 5546, p. 493, citing Geyser-Marion Gold-Min. Co. v. Stark, 106 F 558, 53 LRA 684). llcd According to the weight of authority, the fact that stock stands on the corporate books in the name of a person "as trustee" or that the holder is described as a trustee in the certificate, is notice to the corporation that he does not hold the shares in his own right, and is sufficient to put it on inquiry as to his authority to transfer them. (Fletcher, sec. 5546, p. 490, citing Marlbury v. Ehlen, 72 Md 206, 19A 648, 20 Am St Rep 467). Notice of the existence of a trust is by all the authorities held to impose the duty of inquiry as to its character and limitations. (Fletcher, sec. 5545, p. 483, citing Carter v. Manufacturers' Nat. Bank, 71 Me 448, 36 Am Rep 338). The transferee under such circumstances, takes the stock at his peril, for there is no presumption that the trustee has a right to sell it, since the common duty of a trustee is not administration or sale, but custody and management for his cestui que trust. (Fletcher, sec. 5545, pp. 483-484, citing Duncan v. Jaudon, 15 Wall 165, 21 L Ed 142). However, the legal presumption that a trustee has no power to sell or transfer stock held by him in his fiduciary capacity is negated if the power of disposition is specifically given by the instrument creating the trust . (Fletcher, sec. 5545, p. 489, citing Geyser-Marion Gold-Min. Co. v. Stark, Supra). If the trustee has power to dispose of the stock, the corporation is under no obligation to see to the application of the purchase money, and cannot be held responsible because the trustee misapplies it, at least unless it knows or has reasonable ground for believing that he intended to misapply it or by the very act of making the transfer was applying it in violation of the term of trust. (Fletcher, sec. 5546, p. 490). Likewise, if a trustee has authority to sell and transfer shares, the title to a bonafide purchaser is not affected by the fact that, unknown to him, the sale is made in violation of the trust. (Fletcher, sec. 5545, p. 484). Nor, under such circumstances, are purchasers from the trustees obliged to see to the application of the purchase money, and their title cannot be affected by a misapplication of the same in which they take part. (Fletcher, Supra, citing Hughes v. Draver Mechanics Nat. Bank, 86 Md 418 38A 936). In connection with your query, it appears that the Deed of Conveyance In Trust, executed on October 31, 1979 by J. Antonio Araneta (trustor) with the conformity of Margarita R. De Araneta, conveying unto Antonio S. Araneta as trustee 40,529 shares of stock of Pacific Farms, Inc. for the benefit of Fatimah C. Araneta and Leon Araneta (cestuis que trustent), incorporates by reference the terms and conditions of an earlier Deed of Conveyance executed on December 15, 1977. Conformably thereto, the trustee "shall not sell or encumber any of the Trust Property except for the purpose of acquiring, or investing in another property which should at least be of equal value and has a stable and greater earning potential. Until said acquisition or investment is accomplished, the proceeds which he would receive from the sale or encumbrance should be deposited in any reputable bank or financial institution at the best obtainable interest rate and under such other terms as he may deem reasonable". Hence, it is opined that the herein trustee may legally dispose of the trust property for the benefit of the cestuis que trustent subject to the above-quoted condition of the trust instrument. Said opinion holds true even in the absence of a court order appointing a legal guardian for the minor children and court approval of the sale. Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman