Tamar Frankel

Boston University School of Law Working Paper 01-16


Business trusts have been around for over one hundred years. . . . Like their ancestor, the private trust, business trusts are established by trust instruments. . . . The Delaware Business Trust Act has addressed [certain prior] uncertainties. . . But the Delaware Act is far more ambitious. It contains highly permissive provisions, allowing promoters of business trusts a staggering degree of freedom to design their relationships with beneficiaries-investors. Moreover, the Act explicitly invites commercial and manufacturing enterprises (C&M Enterprises) to take advantage of this marvelous contract-like organizational form emphasizing its liberal contractarian approach and the freedom to write into or omit from the trust documents anything they wish, or almost anything. . . . Further, the rights of the beneficial owners in trust property, in section 3805, and the management of the trusts, in section 3806, are all couched in permissive terms. . . . One would assume that C&M Enterprises and their lawyers would jump at this golden opportunity. But they do not. Why has the Delaware Act failed to become the new modern corporate law? . . . I offer other [than inertia] answers. . . Essentially, the costs of adopting the Act as a substitute for corporate law exceed the benefits of change. . . . Delaware Act does not support the contractarian interpretation of the Act, unless it means based on consent (but not contract). Contrary to this interpretation, these business trusts cannot be designed in any form, and their promoters cannot apply any law they choose. Even though the Delaware Business Trust Act on its face seems to be a default rule with respect to both form and substance of trust law, the permissive provisions of the Act are far more limited. The Delaware Act has been interpreted by the business and lawyer communities to allow some relaxation of trust law, but not to substitute for it. Business trusts must be organized in trust form and be subject to trust principles (with some relaxation). Further, trust instruments constitute consensual arrangements, but are not governed by contract law, neither under trust law nor under the Delaware Act. In our context "contract" can be used only as a metaphor for consensual relationship, like the Republican Party's "Contract with America" in the 1990s, but not as a precise legal classification. Any other interpretation of the Delaware Act would lead to unacceptable results. Had the Delaware Act allowed a fully default trust law, which it does not, and had form and substance been emptied of their original meaning, leaving only the image of trust (and perhaps the word "trust"), a serious problem of misrepresentation to investors might arise.. . . the form and substance of trust law are not suitable for C&M Enterprises. . . .

Laws offering models for business organizations (corporations, partnerships, limited partnerships, and limited liability corporations) cover relationships between the interested parties within the organizations, and the representation of the organizations in their dealings with the outside world. None of these laws, however, regulates the businesses in which the organizations engage. Those commercial and manufacturing businesses are regulated by other laws, unrelated to the organizational structures of the businesses. . . . One set of laws offers organizational models from which the actors may choose, and a second set of laws, which are mandatory, regulates the businesses operated by whatever organization. . . . [Trust law is an exception]. Trust law offers an organizational form -- a model of relationship between the actors in the trust arrangement -- and rules that govern the business of trust services. . . . The trust form provides the model of relationship among the trustee and the beneficiaries. That relationship is the business and the purpose of the trust.. . . The dual nature of trust law is also evident in its application. . . . [Besides] there is a sufficient number of known legal forms of organizations that meet the needs of C&M Enterprises: corporations, partnerships, limited partnerships, and limited liability companies. . . . The Delaware Act does not offer any tax advantages. Further, the seemingly breathtaking sweep of the Delaware Act is far narrower in light of federal laws that preempt its application. Hence, this novel organizational form offers no significant benefits over the existing forms. . . .

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Tamar Frankel Contact Information
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
(617) 353-3773

Presentation and Publication Information:

Cardozo Law Review (forthcoming)

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