San Francisco, California

August 23, 1973

Re: Security Agreement for Prepaid Health Plans

Dear ________________:

This is in response to your letter of July 31, 1973. In that letter you requested a formal opinion regarding whether ________________ (hereinafter “____________”) would be considered as a corporate trustee under an agreement where __________________ would administer certain funds paid by the State of California for distribution to providers under, and the carriers of, prepaid health plans.

After having reviewed the applicable authorities and having given careful consideration to the matter, it is our conclusion that ______________ would be a trustee within the meaning of the Financial Code. The basic issue gives rise to two separate and distinct questions. First, is the agreement a trust agreement? Assuming the answer to the first question is “yes”, would _______________, as trustee of this trust, be engaged in a trust business within the meaning of the Financial Code? We would like to briefly explain our rationale for concluding the answer to both of these questions was “yes.”

Initially, we were faced with the problem of determining whether the agreement constitutes an agency or trust relationship. There is no doubt that the difference between these relationships is not always clear. In fact, in every agency, there is some element of trusteeship. Nevertheless, the words of the instrument are strictly trust language. These words at least evidence some intent on the part of the parties to create a trust. However, the language of the instrument is not wholly conclusive of the relationship created and the critical differentiation is the powers and duties conferred. Estate of Shaw, 198 Cal. 352, 360 (1926); Hayden Plan Company v. Wood, 97 Cal.App. 1, 9 (1929); Nichols v. Arthur Murray, Inc., 248 Cal.App. 2d 610, 612 (1967); Bogert, Trust and Trustees, 2d Ed., Section 15 at 76. The critical distinction appears to be that an agent undertakes to act on behalf of his principal and subject to his control; a trustee is not subject to the control of the beneficiary but rather is under a duty to deal with the trust property for the benefit of the beneficiary in accordance with the terms of the trust. Bogart, supra, Section 15 at 76; 3 Cal.Jur. 3d, “Agency”, Section 6 at 17; Hayden Plan Company v. Wood, supra.

The terms of the agreement indicate that _____________ is not acting for nor under the control of the carrier. The agreement states when and how the funds shall be disbursed. The document specifically states that the funds are being held for the benefit of the State of California. In order to assure that the State will receive this benefit, _____________ cannot go outside the terms of the agreement. Since the carrier exerts no control over _____________ and ________________ is obliged to deal with the funds for the benefit of the State, the agreement must be considered as a trust.

We now turn to the question of whether _______________ actions as trustee constitute the doing of a trust business. Section 106 of the Financial Code defines trust business as,

“the business of acting as executor, administrator, guardian or conservator of estates, assignee, receiver, depositor or trustee under the appointment of any court, or by authority of any law of this or any other state or of the United States, or as trustee for any purpose permitted by law.”

The phrase “or as trustee for any purpose permitted by law” appears to be all inclusive.

Moreover, it is clear that _______________ is in the business of acting as a trustee. Business may be defined “to be that which occupies the time, attention and labor of men for the purpose of livelihood or profit.” Long v. Anaheim, 255 Cal.App. 2d 191 (1967). There is no doubt that _______________ as trustee is expending time and effort for profit. Therefore, since _______________ is in the business of acting as trustee and the purpose for which it acts is permitted by law, _______________ would be doing a trust business within the meaning of Section 106 of the Financial Code.

Therefore it is our opinion that if _______________ should hold these funds, it would be violating Sections 1500 and 3390 of the Financial Code.

You may, if you wish, request that we reconsider our opinion, and you should feel free to submit comments and arguments in support of such a request.

However, the opinion expressed in this letter, unless and until it is formally withdrawn, represents this Department’s interpretation of the question raised in your letter.

If you have further questions concerning our interpretation, please feel free to contact us.

Very truly yours,

Superintendent of Banks


cc: Opinion File

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