75-3
75-3
November 18, 1975
Dear Mr. ________:
This is in reply to your letters of June 6 and September 24, 1975.
Initially, let me apologize for our delay in responding to your request for a written opinion relative to the below subject.
You have requested our opinion as to whether certain activities would constitute the doing of an unlicensed trust business under the Financial Code. It is our understanding that a trust will be established to own and lease a specific item of computer equipment. The trustee will be a Connecticut banking corporation and the beneficiary a New York corporation. The trust agreement will be negotiated in New York and executed either in New York or Connecticut. The trust agreement will be governed by New York law and all records or accounts will be maintained in Connecticut. The trustee will purchase the equipment outside of California and then lease the equipment to a California corporation. The lessee will in turn sublease the equipment to a subleasee who may or may not maintain the equipment in California. In addition, it is possible that at the end of the initial sublease, the equipment may be moved to California in the event that it is not already here. Further, rentals payable under the sublease will be paid directly by the subleasee to the trustee who, in turn, will disburse the same in predetermined amounts to the beneficiary, the lessee, and any lenders.
In regards to the above facts, you have requested our opinion as to whether the execution and in performance by the trustee of the trust agreement, lease and the sublease under the circumstances described above constitute “transacting trust business” in California within the meaning of Section 1503 and 106 of the California Financial Code.
Section 1503 in relevant parts states that, “no foreign corporation, . . . . , shall have or exercise the powers of a trust company nor directly or indirectly transact or conduct in this State a trust business as defined in Section 106 of this code;. . .”. Section 106 of the Financial Code states that, “‘trust business’ means the business of acting as executor, administrator, guardian or conservator of estates, assignee, receiver, depositary 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.”
It is our opinion that the activities described in fact situation A and B of your letter of June 6, 1975, and as summarized above, do not constitute the doing of a “trust business” as defined in Section 106 of the Financial Code. Insofar as contacts with this state and its citizens are concerned, it appears as if the transactions would be better characterized as engaging in the leasing business.
As you correctly pointed out, the “trust business” would appear to be done in Connecticut or perhaps in New York. Under the facts, the Connecticut trustee will act as a fiscal agent and have no “presence” in this state other than to enforce its rights under the lease or any security agreement. As a result, it appears as if whatever contacts the trustee will have in California would be in its capacity as a lessor rather than as a trustee. That is, the trustee is not engaging in any activity or having any contact with California beyond those which a non-trustee lessor would have. The above rational would apply irrespective of the number of leases involved.
We believe that our favorable opinion as to your questions 1, 2, and 3, do not necessitate any discussions of your questions 4 and 5.
Please understand that the opinion above is based on the facts contained in your letter of June 6, 1975. Any substantial departure from these facts would vitiate the efficacy of this opinion.
Once again, let me apologize for our delay in responding to you in this matter. We trust the information we have supplied is sufficient for your needs. If you have any further questions in regards to this matter, please do not hesitate to contact us.
Very truly yours,
CARL J. SCHMITT
Superintendent of Banks
By
JOHN F. STUART
Counsel
JFS:olj
June 6, 1975
Superintendent Of Banks
235 Montgomery Street, Suite 750
San Francisco, California 94104
Gentlemen:
This letter will constitute a request for an opinion from your office regarding the interpretation of those provisions of the California Financial Code which regulate the conduct or transaction by a foreign corporation of a trust business in the State of California.
This firm represents a California corporation with its principal place of business in California, which intends to enter into several agreements to lease computer equipment from foreign trusts owning the equipment. We have been asked to give certain opinions to the foreign banking corporation which will act as trustee-lessor with respect to the ability of the foreign trustee to execute the proposed leases and carry out its obligations with respect thereto. The leasing transactions will fall into one of the following fact situations:
Fact Situation A
A separate foreign trust will be established to own and lease a specific item of computer equipment (the “Equipment”). Each trust will be created by a separate trust agreement between a ________, as trustee (the “Trustee”), and a New York corporation with its principal place of business in Connecticut, as the beneficiary (the “Beneficiary”). Each trust agreement will be negotiated in New York and executed in New York or Connecticut. The Trustee, on behalf of the trust, will purchase the Equipment outside the State of California and will simultaneously lease the Equipment to a California corporation with its principal place of business in California (the “Lessee”) under an eight year lease. The lease will be a fully net lease which requires no action by the Trustee-lessor other than giving consents or approvals and enforcing the terms thereof in the event o£ a breach by the Lessee.
As an integral part of the transaction, the Lessee will in turn sublease the Equipment to the end user (the “Sublessee”) under a four or five year sublease. The Sublessee will normally be a foreign corporation, although on some occasions it may be an entity organized under or qualified to transact intrastate business pursuant to the laws of the Stare of California. The Sublessee will take delivery of the Equipment directly from. the manufacturer outside the State of California, and at no time during the term of the sublease will the Equipment be located in California. Subsequent to the expiration of the four or five year sublease with the initial Sublessee, the Lessee will attempt to re-lease the Equipment, and it is possible that the Equipment might be moved to California at that time.
Financing of the purchase price of the Equipment will be provided in part by the Beneficiary and in part by loans from institutional lenders (the “Lenders”) located outside of California. Under the terms of the trust agreement the Trustee will hold, and, if necessary, enforce a security interest in the Equipment, the lease and the sublease for the benefit of the Lenders
Rentals payable under the sublease will be paid directly by the Sublessee to the Trustee who will disburse the same in predetermined amounts to the Beneficiary, the Lessee and the Lenders. Other than acting as fiscal agent for receipt and disbursement of rental receipts, the Trustee’s activities as trustee under the trust agreement will be limited to the giving of consents and approvals at the direction of the Beneficiary and the Lenders, and possibly enforcing the terms of the lease and/or the Lender’s security interest in the equipment, the lease and the sublease. The Trustee is not required to exercise any discretion under the trust agreement and acts principally, at the direction of the Beneficiary or the Lenders.
The trust agreement, lease, sublease and the financing documents (except for UCC financing statements to be filed in California with respect to the Lessee’s interest as sublessor in the sublease) will all be executed outside the State of California and the closings of the purchase and financing of the Equipment will all take place outside California. The trust agreement, lease, sublease and financing documents will ail specify that the law of New York governs the rights and obligations of the parties thereunder.
Fact Situation B
The same facts as Situation A above, except that Equipment would be located in California under the initial sublease.
REQUESTED OPINION
In connection with the proposed transaction, we request your opinion as to the following:
1. Will the execution and performance by the Trustee of the trust agreement, the Lease and the sublease under the circumstances described in Fact Situation A constitute “transacting trust business” in California within the meaning of Sections 1503 and 106 of the California Financial Code?
2. Will the execution and performance by the Trustee of the trust agreement, the lease and the sublease under the circumstances described in Fact Situation B constitute “transacting trust business” in California within the meaning of Sections 1503 and 106 of the California Financial Code?
3. Will the answer to the questions posed in paragraphs 1 and 2 above be affected by the number of transactions which are concluded? If so, how, and how many?
4. What are the possible consequences and penalties to a foreign corporation which is found to be conducting a trust business in California, and what effect would such a determination have on the prior actions by the trustee? For example, would the acts of the trustee be void? voidable by the beneficiary? voidable by third parties with whom the trustee has dealt?
5. Is there a procedure under Section 1750 of the California Financial Code by which a foreign corporation can quality to transact or conduct a trust business in California? If so, what are the steps necessary to so qualify?
DISCUSSION
The California Financial Code, specifically Sections 106, 1503 and 1750, appear to effectively prohibit a foreign corporation from directly or indirectly transacting a trust business in California. While the transactions described above do not seem to be of the type which those sections of the Code were intended to cover, the broad language of the statutes has created some confusion as to whether the prohibitory provisions would apply to the situations described above.
We believe that the Code sections do not affect the transactions contemplated by our client and the various foreign entities. We assume the primary purpose of the California statute is to protect California domiciliaries from corporate trustees who have not given satisfactory evidence of their trustworthiness and their financial responsibility. Neither the Beneficiary of the proposed trusts nor the Trustee are domiciled in California, so that the primary purpose would not be served by the application of the statute to the fact situations described herein.
Moreover, while the Connecticut Trustee may be conducting a trust business, that business is being conducted in Connecticut (or arguably New York) but not in California. The trust agreement is negotiated and executed in Connecticut or New York and specifies that New York law will govern the obligations of the party thereunder. The activities of the Trustee in collecting the rent from the Sublessee and disbursing funds to the parties are performed solely in
Connecticut. The trust records and books of account are kept and maintained in Connecticut. California’s only connection with the transactions is that the “sandwich” Lessee is domiciled in California, the Equipment may at times be located in California, and the Trustee-lessor may on some occasion find it necessary to bring an action in the courts of California to enforce the lease, the sublease or security interests it holds on behalf of the Lenders. We do not think that those limited California connections are sufficient to constitute transacting or conducting trust business in California.
We will greatly appreciate your assistance in interpreting the relevant provisions of the California Financial Code in light of the facts described in this letter. If you desire any additional information we will, of course, be happy to provide the same.
Very truly yours,