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BUSINESS TRUSTS Nature and Classification of Trusts I. Definition and Essential Characteristic of Trust 1440.

A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. Trustlegal relationship between one person having an equitable ownership in property and another person owing the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter Characteristics of a trust or express trust: (Morales v. CA) a. It is a relationship b. It is a relationship of a fiduciary character c. It is a relationship with respect to property, not one involving merely personal duties d. It involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another e. It arises as a result of a manifestation of intention to create the relationship 1. Based on Equity 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and Special laws are hereby adopted. 2. Distinguished from Agency Agency Trust Fiduciary in nature Essentially revocable Essentially obligatory in its terms and period and can only be rescinded based on breach of trust Agent possesses property Trustee takes legal or naked title to under agency for and in the the subject matter of trust name of the owner
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Agent must act upon instructions of the owner Agent enters into contract in the name of the principal Agent cannot be sued

Trustee acts on his own business discretion Trustee enters into contracts in his own name Trustee is liable directly and may be sued in his trust capacity

II. Kinds of Trust 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law. A. Express Trusts 1. Essence and Definition of Express Trusts Express trustone created by the intention of the trustor or of the parties (Art. 1441) o Those created by direct and positive acts of the parties, by some writing or deed or will or by words evidencing an intention to create a trust Essential Characteristics of Express Trusts a. Nominate and Principalfor having been given particular name and essentially defined by the Civil Code, and not needing another contract to be valid and binding b. Unilateralonly the trustee assumes obligations to carry on the trust for the benefit of the beneficiary c. Primarily gratuitoussupported by the consideration of liberality, especially when Art. 1446 provides that beneficiarys acceptance is presumed d. Realan express trusts constitute a real contract, that is, it is not merely perfected by a mere meeting of minds between the trustor and trustee to constitute a trust. Indeed, no trust relationship exists, until and unless, the property constituting the res is conveyed to the trustee. e. Preparatorynot constituted for its own sake in that the trust relationship is essentially a medium established by the trustor to allow full authority and discretion on the party of the trustee to enter into various juridical acts on
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the corpus to earn income or achieve other goals given for the benefit of the beneficiary o An express trust may create a form of contract pour atrui f. Fiduciary a) Essentially Contractual in Nature; Need No Particular Wordings 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended. What important is whether the trustor manifested an intention to create the kind of relationship which in law is known as trust. (Julio v. Dalandan) A clear intention to create trust must be shown, and the proof of fiduciary relationship must be clear and convincing. (Canezo v. Rojas)

A trust must be proven by clear, satisfactory, and convincing evidence. It cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations. Rule: the burden of proving the existence of a trust is on the party asserting its existence The presence of the following elements must be proved: a) a trustor or settler who executes the instrument creating the trust b) a trustee, who is the person expressly designated to carry out the trust c) the trust res, constituting of duly identified and definite real properties d) the cestui que trust, or beneficiaries whose identity must be clear 3. Kinds of Express Trust A. Express Trust involving Immovable 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. The existence of express trusts concerning real property may not be established by parol evidence; thus, it must be proven by some writing or deed o However, if the parties to the action, during the trial, make no objection to the admissibility of the oral evidence to support the contract, there is deemed to be a waiver The requirement that express trust over immovable must be in writing should be added as being governed by the Statute of Frauds (Gamboa v. Gamboa) B. Contractual/Inter vivos Trust An inter vivos trusts are expressed trust pursued in the form of donation, and which therefore become solemn contracts which must comply with the solemnities mandated by the Law on Donations

b) Based on Property Relationship What distinguishes a trust from other relations is the separation of legal title and equitable ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable ownership is vested in a cestui que trust (Canezo) Trust, in its technical sense, is a right of property, real or personal, held by one party for the benefit of another. (Guy v. CA) c) Fiduciary The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of, a fiduciary relation between the trustee and the cestui que trust as regards certain propertyreal, personal, funds or money, or choses in actionmust not be confused with an action for specific performance. A trustee cannot invoke the statute of limitations to bar the action and defeat the rights of the cestuis que trustent. (Pacheco v. Arro) 2. Express Trust must be Proven An express trust cannot be proven by parol evidence.
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C. Testamentary Trust When an express trust is created under the terms of the last will and testament of the testator, it is a testamentary trust and is governed by the Law on Succession o Unless the will conforms with the solemnities and conditions set by law, it will be void together with the testamentary trust sought to be created therein A testamentary trust was created by a provision in the will whereby the testator proposed to create trust for the benefit of a secondary school to be established in the town of Tayabas, naming as trustee the ayutamiento of the town or if there be none, then the civil governor of the Province of Tayabas. (Govt of the Phil. Islands v. Abadilla) D. Pension or Retirement Trusts Publicly-regulated trusts would be those where the State provides the vehicle by which institutions are allowed to administer large funds for the benefit of the public. Among such funds created under the law would be the pension and benefits funds administered by the GSIS, the SSS and the Pag-Ibig Fund. Tax laws provide for incentives to the setting-up of retirement funds for employees. All such funds are really being administered for the beneficiaries thereof through the medium of trust. E. Charitable Trusts 4. Parties to an Express Trust a) Trustora person who establishes a trust (Art. 1440) b) Trusteeone in whom confidence is reposed as regards property for the benefit of another person (Art. 1440) i. Trustee must have legal capacity to accept the trust ii. Failure of Trustee to Assume the Position 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. In case of refusal to accept the trust by the trustee, the court will appoint a trustee
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But, if the appointment of the trustee is a material provision, the trustor can provide that a refusal of the trustee to accept the trust shall result in the failure or nullification of the same

iii. Obligations of the Trustee (Rule 98 of Rules of Court) Sec. 1. Where trustee appointed. - A trustee necessary to carry into effect the provisions of a will or written instrument shall be appointed by the Court of First Instance in which the will was allowed if it be a will allowed in the Philippines, otherwise by the Court of First Instance of the province in which the property, or some portion thereof, affected by the trust is situated. Sec. 2. Appointment and powers of trustee under will; Executor of former trustee need not administer trust. - If a testator has omitted in his will to appoint a trustee in the Philippines, and if such appointment is necessary to carry into effect the provisions of the will, the proper Court of First Instance may, after notice to all persons interested, appoint a trustee who shall have the same rights, powers, and duties, and in whom the estate shall vest, as if he had been appointed by the testator. No person succeeding to a trust as executor or administrator of a former trustee shall be required to accept such trust. Sec. 3. Appointment and powers of new trustee under written instrument. - When a trustee under a written instrument declines, resigns, dies, or is removed before the objects of the trust are accomplished, and no adequate provision is made in such instrument for supplying the vacancy, the proper Court of First Instance may, after due notice to all persons interested, appoint a new trustee to act alone or jointly with the others, as the case may be. Such new trustee shall have and exercise the same powers, rights, and duties as if he had been originally appointed, and the trust estate shall vest in him in like manner as it had vested or would have vested, in the trustee in whose place he is substituted; and the court may order such conveyance to be made by the former trustee or his representatives, or by the other remaining trustees, as may
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be necessary or proper to vest the trust estate in the new trustee, either alone or jointly with the others. Sec. 5. Trustee must file bond. Before entering on the duties of his trust, a trustee shall file with the clerk of the court having jurisdiction of the trust a bond in the amount fixed by the judge of said court, payable to the Government of the Philippines and sufficient and available for the protection of any party in interest, and a trustee who neglects to file such bond shall be considered to have declined or resigned the trust; but the court may until further order exempt a trustee under a will from giving a bond when the testator has directed or requested such exemption, and may so exempt any trustee when all persons beneficially interested in the trust, being of full age, request the exemption. Such exemption may be cancelled by the court at any time and the trustee required to forthwith file a bond. Sec. 6. Conditions included in bond. - The following conditions shall be deemed to be a part of the bond whether written therein or not: (a) That the trustee will make and return to the court, at such time as it may order, a true inventory of all the real and personal estate belonging to him as trustee, which at the time of the making of such inventory shall have come to his possession or knowledge; (b) That he will manage and dispose of all such estate, and faithfully discharge his trust in relation thereto, according to law and the will of the testator or the provisions of the instrument or order under which he is appointed; (c) That he will render upon oath at least once a year until his trust is fulfilled, unless he is excused therefrom in any year by the court, a true account of the property in his hands and of the management and disposition thereof, and will render such other accounts as the court may order; (d) That at the expiration of his trust he will settle his accounts in court and pay over and deliver all the estate remaining in his hands, or due from him on such settlement, to the person or persons entitled thereto.
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But when the trustee is appointed as a successor to a prior trustee, the court may dispense with the making and return of an inventory, if one has already been filed, and in such case the condition of the bond shall be deemed to be altered accordingly. iv. Generally, trustee does not assume personal liability on the trust as to properties outside the trust estate When the transaction at hand could have been entered into by a trustee either as such or in its individual capacity, then it must be clearly indicated that the liabilities arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee in his personal capacity (Senguan v. Phil. Trust Co.) v. Trustee generally entitled to receive a fair compensation for his services Under Section 7 of Rule 98 of the Rules of Court, if the compensation of the trustee is not determined in the instrument creating the trust, his compensation shall be fixed by the court that appointed him. c) Beneficiarythe person for whose benefit the trust has been created (Art. 1440) In regard to private trusts, it is not always necessary that the cestui que trust should be named, or even be in esse at the time the trust is created in his favor (Abadilla) Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of donations d) The Corpus or the Res The subject matter of the trust 5. How Express Trust Terminated A. Destruction of the Corpus When the entire trust estate is loss or destroyed, the trust is extinguished since the underlying proprietary basis no longer exists to warrant any legal relationship between the trustee and the beneficiary.
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B. Revocation by the Trustor In a revocable express trust, the trustee may simply invoke the revocation or termination clause found in the deed of trust thereby revoking the trust and conveying notice thereof to the trustee. Unless there is reserved power to revoke, the general rule is that an express trust is irrevocable. C. Achievement of Objective, or Happening of the Condition Provided for in the Trust Instrument When the trust instrument provides the objective or the condition upon which the trust shall be extinguished, say when the trust instrument provides that full ownership in the trust properties shall be consolidated in the person of the beneficiary once he reaches the age of majority, the happening of the condition shall terminate the trust D. Confusion or Merger of Legal Title and Beneficial Title in the Same Person When the trustee of an existing trust becomes the beneficiary thereof, or vice versa, the trust relation is ipso jure extinguished, for it is difficult to see how a person can owe fiduciary duties to himself. E. Breach of Trust When a trustee breaches his duty of loyalty, it would constitute legal basis by which to terminate the trust o This operates as a renunciation of the trust and the persons interested as beneficiaries in the property are entitled to maintain an action to declare their right and remove the unfaithful trustee. F. Upon the Death of Trustee Unless otherwise expressly stipulated in the trust instrument, the death, civil interdiction, insanity or insolvency of the trustee does not necessarily terminate the trust but a new trustee will be appointed o The reason why a trust does not fail for want of a trustee is that to permit it to fail for this reason would be
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contrary to the intention of the trustor in creating the trust. The trustor is primarily interested in the disposition of the beneficial interest in the property, and the matter of its administration is a subsidiary consideration. (Tolentino, at p. 676.) A trust terminates upon the death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no other person to administer it o After Crispulos death, the respondent had no right to retain possession of the property. At such point, a constructive trust would be created over the property by operation of law o Where one mistakenly retains property which rightfully belongs to another, a constructive trust is the proper remedial devise to correct the situation G. Generally Express Trusts Not Susceptible to Prescription When there exists an express trust, prescription and laches will run only from the time the express trust is repudiated The rule requires a clear repudiation of the trust duly communicated to the beneficiary For acquisitive prescription to bar the action of the beneficiary against the trustee, in an express trust, for the recovery of the property, it must be shown that: a) Trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust b) Such positive acts of repudiation have been made known to the cestui qui trust c) Evidence thereon is clear and conclusive III. Implied Trusts 1. Listing of Implied Trusts Not Exclusive; Founded on Equity 1447. The enumeration of the following cases of implied trust does not exclude other established by the general law of trust, but the limitation laid down in Art. 1442 shall be applicable. Implied trustsfrom the facts and circumstances of a given case, the existence of a trust relationship is inferred in order to
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effect the presumed intention of the parties or to satisfy the demands of justice or to protect against fraud o Those which are deducible from the nature of the transactions as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties a) Resulting Trusts A trust which is raised or created by the act or construction of law A trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is to be found in the nature of their transaction, but not expressed in the deed or instrument of conveyance Based on the equitable doctrine that valuable consideration and not legal title determines the equitable title or interest and are presumed always to have been contemplated by the parties b) Constructive Trusts A trust raised by construction of law, or arising by operation of law A trust not created by any words, either expressly or impliedly evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice A constructive trust is not a trust in technical sense There is neither promise nor fiduciary relations o The so-called trustee does not recognize any trust and has no intent to hold the property for the beneficiary Otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort, an involuntary trust, or an implied trust A trust by operation of law which arises contract to intention and in invitum, against on who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or
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who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy Constructive trusts are fictions of equity that the courts use as devices to remedy any situation in which the holder of the legal title may not, in good conscience, retain the beneficial interest

c) Distinction between Resulting and Constructive Trust Resulting Trust Constructive Trust Based on equitable doctrine Created by the construction of that valuable consideration, equity in order to satisfy the and not legal title, determines demands of justice and the equitable title or interest prevent unjust enrichment Presumed always to have been Arise contrary to intention contemplated by the parties against who [in bad faith] ought to hold the legal right to property d) How to Prove Implied Trust Must be proven by clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations May be proven by oral evidence, but the evidence must be trustworthy and received by the courts with extreme caution, and should not be made to rest on loose, equivocal or indefinite declarations e) Distinguished from Quasi-Contracts Both embody the principle of equity above strict legalism 2. Purchase of Property where Beneficial Title in One Person, but Price Paid by Another Person 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is
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implied by law, it being disputably presumed that there is a gift in favor of the child. Rationale: one who pays for something usually does so for his own benefit 3. Purchase of Property where Title is Placed in the Name of Person who Loaned the Purchase Price 1450. if the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him. It is only after the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance of the property from the latter 4. When Absolute Conveyance of Property Effected only as Means to Secure Performance of Obligation of the GrantorEquitable Mortgage 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. 5. Two or More Persons Purchase Property Jointly, but Places Title in One of Them 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. 6. Property Conveyed to Person Merely as Holder thereof 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor; there is an implied trust in favor of the person whose benefit is contemplated. Under this, the implied trust is enforceable even when the agreement is not in writing
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This article applies if the person conveying the property did not expressly state that he was establishing the trust but such is the intention

7. Donation of Property to a Donee who shall have No Beneficial Title 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof. 8. Land Passes by Succession but Heir Places Title in a Trustee 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. 9. When Trust Fund Used to Purchase Property which is Registered in Trustees Name 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. 10. When Property is Acquired through Mistake or Fraud 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. When a person through fraud succeeds in registering the property in his name, the law creates what is called a constructive or implied trust in favor of the defrauded party and grants the latter the right to recover the property fraudulently registered within a period of 10 years (Heirs of Patiwayon v. Martinez) o The period reckoned from the issuance of the adverse title to the property which operates as a constructive notice Public policy demands that a person guilty of fraud or, at least, of breach of trust, should not be allowed to use a Torrens title as a shield against the consequences of his wrongdoing
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11. Does Implied Trust Prescribe or may it be Defeated by Laches The prescriptive period of 10 years for an action of reconveyance applies only if there is an actual need to reconvey the property as when the plaintiff is not in possession thereof o Point of reference is the date of registration of the deed or the date of the issuance of the certificate of title of the property provided that the property has not been acquired by an innocent purchaser for value When plaintiff is in possession of the subject property, the action, being in effect that of quieting of title to the property, does not prescribe Prescription cannot apply when title of Trustee is Void due to Forgery In constructive trusts, prescription may supervene even if the trustee does not repudiate the relationship o Repudiation of the said trust is not a condition precedent to the running of the prescriptive period Close relationship and Continued recognition of Trust relationship o The doctrine of laches is not to be applied mechanically as between the near relatives which would tend to excuse what otherwise may be considered a long delay in taking action o Moreover, continued recognition of the existence of the trust precludes the defense of laches Though the Statute of Limitations does not run between the trustee and cestui que trust as long as the trust relations subsist, it does run between the trust and third persons Prescription cannot apply against a Minor Beneficiary in Implied Trust

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