Court Affirms Holding That A Trust Owns Stock That Was Issued To The Trustee In His Individual Capacity

Originally published by David Fowler Johnson.

In Dutcher v. Dutcher-Phipps Crane & Rigging, Inc., a trust owned twenty percent of a family limited partnership that in turn owned a family business. No. 08-15-00202-CV, 2016 Tex. App. LEXIS 3809 (Tex. App.—El Paso 2016, no pet. history). The family business was converted from a C Corp to an S Corp. Because a partnership cannot own stock in a S Corp, this required the family limited partnership to transfer shares of the S Corp stock to its partners. The family limited partnership issued shares to the trustee in his individual name, not in his capacity as trustee.  After the trustee died, the trustee’s wife alleged that the shares went to her under the residuary clause in his will, and that the trust did not own the shares. The trial court found that the trust did own the shares, and the widow appealed.

The court of appeals affirmed, holding that a stock certificate “is not synonymous with actual ownership of the shares represented by the certificate; it is merely some evidence of ownership.” Id. Rather, the court cited a previous opinion on the test for proving the ownership of stock:

As between transferor and transferee, it seems to be the rule that transfer of title may take place though there is no delivery of the certificates themselves, nor endorsement of them, nor transfer of them on the books of the corporation, and even though the sale be by parol. In each case the inquiry is whether the minds of transferor and transferee met, whether there was an intention that the stock should then and there be vested in the transferee, and whether there were acts in the nature of a symbolical delivery of the property. In this latter connection it is to be remembered that the certificates of stock are not in themselves property, but are only evidence of the interest of the stockholder in the corporation. It is possible under some circumstances for one to own stock in a corporation though no certificate has been issued to him or endorsed or delivered to him, and likewise it is possible under some circumstances for title to the stock to pass without delivery of the certificate of stock or without written assignment of it.

Thus, the court held that establishing ownership depends on the evidence presented, including the nature of the parties, the nature of their relationship, and their representations to each other. The court then reviewed the facts and determined that the trustee intended to transfer the stock to himself as trustee, not in his individual capacity. The court concluded that “The only capacity in which Paul was a partner in Dutcher FLP was in his capacity as Trustee of The Paul K. Dutcher Living Trust Three and Trustee of The Paul K. Dutcher Living Trust One. Therefore, we can only conclude that, despite the issuance of the stock certificate to Paul, individually, Dutcher FLP and Dutcher-Phipps intended the 400 shares in dispute to vest in Paul, as trustee.” The court also affirmed the trial court’s judgment on a claim of mutual mistake.

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